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EX-32 - EXHIBIT 32 - HUMANA INChum-20170930xex32.htm
EX-31.2 - EXHIBIT 31.2 - HUMANA INChum-20170930xex31x2.htm
EX-31.1 - EXHIBIT 31.1 - HUMANA INChum-20170930xex31x1.htm
EX-12 - EXHIBIT 12 - HUMANA INChum-20170930xex12.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 1-5975
HUMANA INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
61-0647538
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
500 West Main Street
Louisville, Kentucky 40202
(Address of principal executive offices, including zip code)
(502) 580-1000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨
 
Smaller reporting company
¨
 
 
 
 
 
Emerging growth company
¨
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
Class of Common Stock
Outstanding at
September 30, 2017
$0.16 2/3 par value
142,860,096 shares



Humana Inc.
FORM 10-Q
SEPTEMBER 30, 2017
INDEX
 
 
Page
Part I: Financial Information
 
Item 1.
Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
 
 
Certifications
 





Humana Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30,
2017
 
December 31,
2016
 
(in millions, except share amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
9,865

 
$
3,877

Investment securities
8,622

 
7,595

Receivables, less allowance for doubtful accounts of $89 in 2017
and $118 in 2016
922

 
1,280

Other current assets
3,776

 
3,438

Total current assets
23,185

 
16,190

Property and equipment, net
1,560

 
1,505

Long-term investment securities
2,716

 
2,203

Goodwill
3,281

 
3,272

Other long-term assets
2,214

 
2,226

Total assets
$
32,956

 
$
25,396

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Benefits payable
$
4,959

 
$
4,563

Trade accounts payable and accrued expenses
4,888

 
2,467

Book overdraft
171

 
212

Unearned revenues
3,447

 
280

Short-term debt
953

 
300

Total current liabilities
14,418

 
7,822

Long-term debt
3,977

 
3,792

Future policy benefits payable
2,893

 
2,834

Other long-term liabilities
457

 
263

Total liabilities
21,745

 
14,711

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Preferred stock, $1 par; 10,000,000 shares authorized; none issued

 

Common stock, $0.16 2/3 par; 300,000,000 shares authorized;
198,572,158 shares issued at September 30, 2017 and 198,495,007 shares
issued at December 31, 2016
33

 
33

Capital in excess of par value
2,641

 
2,562

Retained earnings
13,542

 
11,454

Accumulated other comprehensive income (loss)
12

 
(66
)
Treasury stock, at cost, 55,712,062 shares at September 30, 2017 and
49,189,811 shares at December 31, 2016
(5,017
)
 
(3,298
)
Total stockholders’ equity
11,211

 
10,685

Total liabilities and stockholders’ equity
$
32,956

 
$
25,396

See accompanying notes to condensed consolidated financial statements.

3


Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(in millions, except per share results)
Revenues:
 
 
 
 
 
 
 
Premiums
$
12,955

 
$
13,371

 
$
39,556

 
$
40,461

Services
223

 
227

 
706

 
749

Investment income
104

 
96

 
316

 
291

Total revenues
13,282

 
13,694

 
40,578

 
41,501

Operating expenses:
 
 
 
 
 
 
 
Benefits
10,642

 
10,900

 
32,857

 
33,806

Operating costs
1,688

 
1,739

 
4,694

 
5,172

Merger termination fee and related costs, net

 
20

 
(947
)
 
81

Depreciation and amortization
94

 
86

 
278

 
263

Total operating expenses
12,424

 
12,745

 
36,882

 
39,322

Income from operations
858

 
949

 
3,696

 
2,179

Interest expense
59

 
47

 
166

 
141

Income before income taxes
799

 
902

 
3,530

 
2,038

Provision for income taxes
300

 
452

 
1,266

 
1,023

Net income
$
499

 
$
450

 
$
2,264

 
$
1,015

Basic earnings per common share
$
3.46

 
$
3.01

 
$
15.56

 
$
6.80

Diluted earnings per common share
$
3.44

 
$
2.98

 
$
15.44

 
$
6.73

Dividends declared per common share
$
0.40

 
$
0.29

 
$
1.20

 
$
0.87

See accompanying notes to condensed consolidated financial statements.

4


Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(in millions)
Net income
$
499

 
$
450

 
$
2,264

 
$
1,015

Other comprehensive income:
 
 
 
 
 
 
 
Change in gross unrealized investment
gains/losses
26

 
(9
)
 
152

 
150

Effect of income taxes
(9
)
 
3

 
(56
)
 
(55
)
Total change in unrealized
investment gains/losses, net of tax
17

 
(6
)
 
96

 
95

Reclassification adjustment for net
realized gains included in
investment income

 
(26
)
 
(28
)
 
(65
)
Effect of income taxes

 
10

 
10

 
24

Total reclassification adjustment, net
of tax

 
(16
)
 
(18
)
 
(41
)
Other comprehensive income (loss), net
of tax
17

 
(22
)
 
78

 
54

Comprehensive income
$
516

 
$
428

 
$
2,342

 
$
1,069

See accompanying notes to condensed consolidated financial statements.

5


Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
For the nine months ended
September 30,
 
2017
 
2016
 
(in millions)
Cash flows from operating activities
 
 
 
Net income
$
2,264

 
$
1,015

Adjustments to reconcile net income to net cash provided by
operating activities:
 
 
 
Net realized capital gains
(28
)
 
(65
)
Stock-based compensation
116

 
76

Depreciation
303

 
289

Other intangible amortization
54

 
59

(Benefit) provision for deferred income taxes
(54
)
 
54

Changes in operating assets and liabilities, net of effect of
businesses acquired and dispositions:
 
 
 
Receivables
358

 
396

Other assets
(369
)
 
(419
)
Benefits payable
396

 
73

Other liabilities
641

 
127

Unearned revenues
3,167

 
2,987

Other, net
114

 
117

Net cash provided by operating activities
6,962

 
4,709

Cash flows from investing activities
 
 
 
Acquisitions, net of cash acquired
(10
)
 
(7
)
Purchases of property and equipment
(376
)
 
(395
)
Purchases of investment securities
(4,337
)
 
(4,533
)
Maturities of investment securities
919

 
1,082

Proceeds from sales of investment securities
2,028

 
3,319

Net cash used in investing activities
(1,776
)
 
(534
)
Cash flows from financing activities
 
 
 
Receipts from contract deposits, net
1,931

 
350

Proceeds from issuance of senior notes, net
985

 

Repayment of commercial paper, net
(153
)
 
(1
)
Change in book overdraft
(41
)
 
(118
)
Common stock repurchases
(1,819
)
 
(75
)
Dividends paid
(162
)
 
(133
)
Proceeds from stock option exercises and other
61

 

Net cash provided by financing activities
802

 
23

Increase in cash and cash equivalents
5,988

 
4,198

Cash and cash equivalents at beginning of period
3,877

 
2,571

Cash and cash equivalents at end of period
$
9,865

 
$
6,769

Supplemental cash flow disclosures:
 
 
 
Interest payments
$
124

 
$
102

Income tax payments, net
$
1,206

 
$
851

See accompanying notes to condensed consolidated financial statements.

6



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1. BASIS OF PRESENTATION AND SIGNIFICANT EVENTS
The accompanying condensed consolidated financial statements are presented in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America, or GAAP, or those normally made in an Annual Report on Form 10-K. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. For further information, the reader of this Form 10-Q should refer to our Form 10-K for the year ended December 31, 2016, that was filed with the Securities and Exchange Commission, or the SEC, on February 17, 2017. We refer to the Form 10-K as the “2016 Form 10-K” in this document. References throughout this document to “we,” “us,” “our,” “Company,” and “Humana” mean Humana Inc. and its subsidiaries.
The preparation of our condensed consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The areas involving the most significant use of estimates are the estimation of benefits payable, future policy benefits payable, the impact of risk adjustment provisions related to our Medicare contracts, the valuation and related impairment recognition of investment securities, and the valuation and related impairment recognition of long-lived assets, including goodwill. These estimates are based on knowledge of current events and anticipated future events, and accordingly, actual results may ultimately differ materially from those estimates. Refer to Note 2 to the consolidated financial statements included in our 2016 Form 10-K for information on accounting policies that we consider in preparing our consolidated financial statements.
The financial information has been prepared in accordance with our customary accounting practices and has not been audited. In our opinion, the information presented reflects all adjustments necessary for a fair statement of interim results. All such adjustments are of a normal and recurring nature.
Sale of Closed Block of Commercial Long-Term Care Insurance Business
On November 6, 2017, we entered into a definitive agreement to sell the stock of our wholly-owned subsidiary, KMG America Corporation, or KMG, to Continental General Insurance Company, or CGIC, a Texas-based insurance company wholly owned by HC2 Holdings, Inc., a diversified holding company. KMG’s subsidiary, Kanawha Insurance Company, or KIC, includes our closed block of non-strategic commercial long-term care insurance policies. Based on the terms of the definitive agreement we expect to record a net loss associated with the sale of KMG of approximately $400 million. The estimated loss includes a pretax loss of approximately $900 million, offset by the expected tax benefit of approximately $500 million. We will fund the transaction with approximately $203 million of parent company cash contributed into KMG, subject to customary adjustments, in addition to the transfer of approximately$150 million of statutory capital with the sale, which together should be more than offset by the estimated $500 million cash savings associated with the expected tax treatment of the sale. The KMG transaction is anticipated to close by the third quarter of 2018 subject to customary closing conditions, including South Carolina Department of Insurance approval. There can be no assurance we will obtain regulatory approvals needed to sell the business or do so under terms acceptable to us.
Workforce Optimization
During the third quarter of 2017, we initiated a voluntary early retirement program and an involuntary workforce reduction program. These programs are expected to impact approximately 2,700 associates, or 5.7%, of our workforce. As a result, we recorded estimated charges of $124 million, or $0.54 per diluted common share. At October 31, 2017, we had approximately 47,200 employees. The estimated charges were recorded at the corporate level and not allocated to the segments. This charge is included with operating costs in the condensed consolidated statements of income for the three and nine month periods ended September 30, 2017. Payments under these programs are made upon termination during the early retirement or severance pay period, primarily starting as of the beginning of the first quarter of 2018. We expect this liability to be primarily paid within the next 12 months and classified it as a current liability, included in trade accounts payable and accrued expenses.

7



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Aetna Merger
On July 2, 2015, we entered into an Agreement and Plan of Merger, which we refer to in this report as the Merger Agreement, with Aetna Inc. and certain wholly owned subsidiaries of Aetna Inc., which we refer to collectively as Aetna, which set forth the terms and conditions under which we agreed to merge with, and become a wholly owned subsidiary of Aetna, a transaction we refer to in this report as the Merger.
The Merger was subject to customary closing conditions, including, among other things, (i) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of necessary approvals under state insurance and healthcare laws and regulations and pursuant to certain licenses of certain of Humana’s subsidiaries, and (ii) the absence of legal restraints and prohibitions on the consummation of the Merger.
On July 21, 2016, the U.S. Department of Justice and the attorneys general of certain U.S. jurisdictions filed a civil antitrust complaint in the U.S. District Court for the District of Columbia against us and Aetna, alleging that the Merger would violate Section 7 of the Clayton Antitrust Act and seeking a permanent injunction to prevent the Merger from being completed. On January 23, 2017, the Court ruled in favor of the DOJ and granted a permanent injunction of the proposed transaction. On February 14, 2017, we and Aetna agreed to mutually terminate the Merger Agreement, as our Board determined that an appeal of the Court's ruling would not be in the best interest of our stockholders. On February 16, 2017, under the terms of the Merger Agreement, we received a breakup fee of $1 billion from Aetna, which is included in our condensed consolidated statement of income in the line captioned Merger termination fee and related costs, net. Prior period Merger related transaction costs, previously included in operating costs, have been reclassified to conform to the 2017 presentation.
Business Segment Reclassifications
During the three months ended March 31, 2017, we realigned certain of our businesses among our reportable segments to correspond with internal management reporting changes and our previously announced planned exit from the Individual Commercial medical business on January 1, 2018. Additionally, we renamed our Group segment to the Group and Specialty segment, and began presenting the Individual Commercial business results as a separate segment rather than as part of the Retail segment. Specialty health insurance benefits, including dental, vision, other supplement health, and financial protection products, marketed to individuals are now included in the Group and Specialty segment. Specialty health insurance benefits marketed to employer groups continue to be included in the Group and Specialty segment. As a result of this realignment, our reportable segments now include Retail, Group and Specialty, Healthcare Services, and Individual Commercial. Prior period segment financial information has been recast to conform to the 2017 presentation. See Note 15 for segment financial information.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board, or FASB, issued new guidance that amends the accounting for revenue recognition. The amendments are intended to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices, and improve disclosure requirements. Insurance contracts are not included in the scope of this new guidance. Accordingly, our premiums revenue and investment income, collectively representing approximately 98% of our consolidated external revenues for 2016, are not included in the scope of the new guidance. We will adopt the guidance using the modified retrospective approach with a cumulative effect adjustment, if any, to retained earnings. We are analyzing how we may recognize revenue under the new guidance by reviewing selected sample contracts presently in place. While we expect revenue related to our Pharmacy, Provider Services, ASO and other services businesses to remain primarily unchanged, we are still reviewing the impact of the new guidance on the customer arrangements for these businesses. Accordingly, we continue to evaluate the impact of the new standard on our results of operations, financial condition, cash flows, and disclosures. The new guidance is effective for us beginning with annual and interim periods in 2018.
In February 2016, the FASB issued new guidance related to accounting for leases which requires lessees to record
assets and liabilities reflecting the leased assets and lease obligations, respectively, while following the dual model for recognition in statements of income requiring leases to be classified as either operating or finance. Operating leases

8



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). The new guidance is effective for us beginning with annual and interim periods in 2019, with earlier adoption permitted, and requires retrospective application to previously issued annual and interim financial statements. We have begun the process of identifying the population of lease agreements and other arrangements that may contain embedded leases for purposes of adopting the new standard. While we expect to record significant leased assets and corresponding lease obligations based on our existing population of individual leases, we continue to evaluate the impact on our results of operations, financial position and cash flows.
In June 2016, the FASB issued guidance introducing a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The guidance is effective for us beginning January 1, 2020. The new current expected credit losses (CECL) model generally calls for the immediate recognition of all expected credit losses and applies to loans, accounts and trade receivables as well as other financial assets measured at amortized cost, loan commitments and off-balance sheet credit exposures, debt securities and other financial assets measured at fair value through other comprehensive income, and beneficial interests in securitized financial assets. The
new guidance replaces the current incurred loss model for measuring expected credit losses, requires expected losses
on available-for-sale debt securities to be recognized through an allowance for credit losses rather than as reductions
in the amortized cost of the securities, and provides for additional disclosure requirements. Our investment portfolio consists of available-for-sale debt securities. We are currently evaluating the impact on our results of operations, financial condition, or cash flows.
In January 2017, the FASB issued guidance which simplifies the accounting for goodwill impairment. The new guidance eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. A goodwill impairment charge would be recognized if the carrying amount of a reporting unit exceeds the estimated fair value of the reporting unit. The new guidance is effective for us beginning with annual and interim periods in 2020, with early adoption permitted, and is to be applied prospectively. The adoption of this new guidance is not expected to have a material impact on our financial position or operating results.

In March 2017, the FASB issued new guidance that amends the accounting for premium amortization on purchased callable debt securities by shortening the amortization period. This amended guidance requires the premium to be amortized to the earliest call date instead of maturity date. The new guidance is effective for us beginning with annual and interim periods in 2019. We do not expect adoption of this guidance will have a material impact on our results of operations, financial condition and cash flows.
There are no other recently issued accounting standards that apply to us or that are expected to have a material impact on our results of operations, financial condition, or cash flows.
3. ACQUISITIONS AND DIVESTITURES
During 2017 and 2016, we acquired health and wellness related businesses which, individually or in the aggregate, have not had a material impact on our results of operations, financial condition, or cash flows. The results of operations and financial condition of these businesses have been included in our condensed consolidated statements of income and condensed consolidated balance sheets from the respective acquisition dates. Acquisition-related costs recognized in 2017 and 2016 were not material to our results of operations. The pro forma financial information assuming the acquisitions had occurred as of the beginning of the calendar year prior to the year of acquisition, as well as the revenues and earnings generated during the year of acquisition, were not material for disclosure purposes.

9



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

4. INVESTMENT SECURITIES
Investment securities classified as current and long-term were as follows at September 30, 2017 and December 31, 2016, respectively:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(in millions)
September 30, 2017
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
$
821

 
$
1

 
$
(8
)
 
$
814

Mortgage-backed securities
1,423

 
5

 
(19
)
 
1,409

Tax-exempt municipal securities
3,457

 
28

 
(16
)
 
3,469

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
7

 

 

 
7

Commercial
399

 
3

 
(2
)
 
400

Asset-backed securities
140

 

 

 
140

Corporate debt securities
4,921

 
215

 
(37
)
 
5,099

Total debt securities
$
11,168

 
$
252

 
$
(82
)
 
$
11,338

 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
$
800

 
$
1

 
$
(15
)
 
$
786

Mortgage-backed securities
1,662

 
6

 
(31
)
 
1,637

Tax-exempt municipal securities
3,358

 
15

 
(68
)
 
3,305

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
9

 

 

 
9

Commercial
307

 
1

 
(4
)
 
304

Asset-backed securities
160

 

 

 
160

Corporate debt securities
3,530

 
145

 
(78
)
 
3,597

Total debt securities
$
9,826

 
$
168

 
$
(196
)
 
$
9,798


10



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows at September 30, 2017 and December 31, 2016, respectively:
 
Less than 12 months
 
12 months or more
 
Total
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
(in millions)
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and other U.S.
government corporations
and agencies:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
obligations
$
522

 
$
(5
)
 
$
137

 
$
(3
)
 
$
659

 
$
(8
)
Mortgage-backed
securities
986

 
(17
)
 
82

 
(2
)
 
1,068

 
(19
)
Tax-exempt municipal
securities
1,320

 
(9
)
 
460

 
(7
)
 
1,780

 
(16
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential

 

 
4

 

 
4

 

Commercial
115

 
(2
)
 

 

 
115

 
(2
)
Asset-backed securities
64

 

 

 

 
64

 

Corporate debt securities
999

 
(15
)
 
469

 
(22
)
 
1,468

 
(37
)
Total debt securities
$
4,006

 
$
(48
)
 
$
1,152

 
$
(34
)
 
$
5,158

 
$
(82
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and other U.S.
government corporations
and agencies:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
obligations
$
697

 
$
(15
)
 
$
3

 
$

 
$
700

 
$
(15
)
Mortgage-backed
securities
1,528

 
(31
)
 
3

 

 
1,531

 
(31
)
Tax-exempt municipal
securities
2,756

 
(67
)
 
43

 
(1
)
 
2,799

 
(68
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential

 

 
4

 

 
4

 

Commercial
182

 
(3
)
 
24

 
(1
)
 
206

 
(4
)
Asset-backed securities
51

 

 
63

 

 
114

 

Corporate debt securities
1,544

 
(71
)
 
69

 
(7
)
 
1,613

 
(78
)
Total debt securities
$
6,758

 
$
(187
)
 
$
209

 
$
(9
)
 
$
6,967

 
$
(196
)
Approximately 98% of our debt securities were investment-grade quality, with a weighted average credit rating of AA by Standard & Poor's Rating Service, or S&P, at September 30, 2017. Most of the debt securities that were below investment-grade were rated BB, the higher end of the below investment-grade rating scale. Tax-exempt municipal securities were diversified among general obligation bonds of states and local municipalities in the United States as well as special revenue bonds issued by municipalities to finance specific public works projects such as utilities, water and sewer, transportation, or education. Our general obligation bonds are diversified across the United States with no individual state exceeding 9%. In addition, 2% of our tax-exempt securities were insured by bond insurers and had an

11



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

equivalent weighted average S&P credit rating of AA exclusive of the bond insurers’ guarantee. Our investment policy limits investments in a single issuer and requires diversification among various asset types.
Our unrealized losses from all securities were generated from approximately 680 positions out of a total of approximately 2,320 positions at September 30, 2017. All issuers of securities we own that were trading at an unrealized loss at September 30, 2017 remain current on all contractual payments. After taking into account these and other factors previously described, we believe these unrealized losses primarily were caused by an increase in market interest rates in the current markets since the time the securities were purchased. At September 30, 2017, we did not intend to sell the securities with an unrealized loss position in accumulated other comprehensive income, and it is not likely that we will be required to sell these securities before recovery of their amortized cost basis. As a result, we believe that the securities with an unrealized loss were not other-than-temporarily impaired at September 30, 2017.
The detail of realized gains (losses) related to investment securities and included within investment income was as follows for the three and nine months ended September 30, 2017 and 2016:
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(in millions)
Gross realized gains
$
3

 
$
37

 
$
34

 
$
88

Gross realized losses
(3
)
 
(11
)
 
(6
)
 
(23
)
Net realized capital gains
$

 
$
26


$
28


$
65

There were no material other-than-temporary impairments for the three and nine months ended September 30, 2017 or 2016.
The contractual maturities of debt securities available for sale at September 30, 2017, regardless of their balance sheet classification, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
Amortized
Cost
 
Fair
Value
 
(in millions)
Due within one year
$
501

 
$
502

Due after one year through five years
2,999

 
3,014

Due after five years through ten years
2,555

 
2,561

Due after ten years
3,144

 
3,305

Mortgage and asset-backed securities
1,969

 
1,956

Total debt securities
$
11,168

 
$
11,338


12



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

5. FAIR VALUE
Financial Assets
The following table summarizes our fair value measurements at September 30, 2017 and December 31, 2016, respectively, for financial assets measured at fair value on a recurring basis:
 
Fair Value Measurements Using
 
Fair
Value
 
Quoted Prices
in Active
Markets
(Level 1)
 
Other
Observable
Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
(in millions)
September 30, 2017
 
 
 
 
 
 
 
Cash equivalents
$
9,368

 
$
9,368

 
$

 
$

Debt securities:
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
814

 

 
814

 

Mortgage-backed securities
1,409

 

 
1,409

 

Tax-exempt municipal securities
3,469

 

 
3,469

 

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
7

 

 
7

 

Commercial
400

 

 
400

 

Asset-backed securities
140

 

 
140

 

Corporate debt securities
5,099

 

 
5,098

 
1

Total debt securities
11,338

 

 
11,337

 
1

Total invested assets
$
20,706

 
$
9,368

 
$
11,337

 
$
1

 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
Cash equivalents
$
3,654

 
$
3,654

 
$

 
$

Debt securities:
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
786

 

 
786

 

Mortgage-backed securities
1,637

 

 
1,637

 

Tax-exempt municipal securities
3,305

 

 
3,302

 
3

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
9

 

 
9

 

Commercial
304

 

 
304

 

Asset-backed securities
160

 

 
160

 

Corporate debt securities
3,597

 

 
3,593

 
4

Total debt securities
9,798

 

 
9,791

 
7

Total invested assets
$
13,452

 
$
3,654

 
$
9,791

 
$
7


13



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

There were no material transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2017 or 2016.
Our Level 3 assets had a fair value of $1 million at September 30, 2017, less than 0.01% of our total invested assets. During the three and nine months ended September 30, 2017 and 2016, the changes in the fair value of the assets measured using significant unobservable inputs (Level 3) were comprised of the following:
 
For the three months ended September 30,
 
2017
 
2016
 
Private
Placements
 
Auction
Rate
Securities
 
Total
 
Private
Placements
 
Auction
Rate
Securities
 
Total
 
(in millions)
Beginning balance at July 1
$
4

 
$

 
$
4

 
$
6

 
$
3

 
$
9

Sales
(3
)
 

 
(3
)
 

 

 

Balance at September 30
$
1

 
$

 
$
1

 
$
6

 
$
3

 
$
9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the nine months ended September 30,
 
2017
 
2016
 
Private
Placements
 
Auction
Rate
Securities
 
Total
 
Private
Placements
 
Auction
Rate
Securities
 
Total
 
(in millions)
Beginning balance at January 1
$
4

 
$
3

 
$
7

 
$
6

 
$
5

 
$
11

Sales
(3
)
 

 
(3
)
 

 

 

Settlements

 
(3
)
 
(3
)
 

 
(2
)
 
(2
)
Balance at September 30
$
1

 
$

 
$
1

 
$
6

 
$
3

 
$
9

Financial Liabilities
Our debt is recorded at carrying value in our consolidated balance sheets. The carrying value of our senior notes debt outstanding, including the current portion, net of unamortized debt issuance costs, was $4,780 million at September 30, 2017 and $3,792 million at December 31, 2016. The fair value of our senior notes debt, including the current portion, was $5,185 million at September 30, 2017 and $4,004 million at December 31, 2016. The fair value of our long-term debt is determined based on Level 2 inputs, including quoted market prices for the same or similar debt, or if no quoted market prices are available, on the current prices estimated to be available to us for debt with similar terms and remaining maturities.
Due to the short-term nature, carrying value approximates fair value for our commercial paper borrowings. There were outstanding commercial paper borrowings of $150 million as of September 30, 2017 and $300 million as of December 31, 2016.


14



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
As disclosed in Note 3, we completed the acquisition of certain health and wellness related businesses during 2017 and 2016. The values of net tangible assets acquired and the resulting goodwill and other intangible assets were recorded at fair value using Level 3 inputs. The majority of the tangible assets acquired and liabilities assumed were recorded at their carrying values as of the respective dates of acquisition, as their carrying values approximated their fair values due to their short-term nature. The fair values of goodwill and other intangible assets acquired in these acquisitions were internally estimated primarily based on the income approach. The income approach estimates fair value based on the present value of the cash flows that the assets are expected to generate in the future. We developed internal estimates for the expected cash flows and discount rates used in the present value calculations. Other than assets acquired and liabilities assumed in these acquisitions, there were no material assets or liabilities measured at fair value on a nonrecurring basis during 2017 or 2016.
6. MEDICARE PART D
We cover prescription drug benefits in accordance with Medicare Part D under multiple contracts with the Centers for Medicare and Medicaid Services, or CMS, as described further in Note 2 to the consolidated financial statements included in our 2016 Form 10-K. The accompanying condensed consolidated balance sheets include the following amounts associated with Medicare Part D at September 30, 2017 and December 31, 2016. CMS subsidies/discounts in the table below include the reinsurance and low-income cost subsidies funded by CMS for which we assume no risk as well as brand name prescription drug discounts for Part D plan participants in the coverage gap funded by CMS and pharmaceutical manufacturers.
 
September 30, 2017
 
December 31, 2016
Risk
Corridor
Settlement
 
CMS
Subsidies/
Discounts
 
Risk
Corridor
Settlement
 
CMS
Subsidies/
Discounts
 
(in millions)
Other current assets
$
9

 
$
1,058

 
$
8

 
$
1,001

Trade accounts payable and accrued expenses
(118
)
 
(2,134
)
 
(158
)
 
(128
)
Net current (liability) asset
(109
)
 
(1,076
)
 
(150
)
 
873

Other long-term assets
3

 

 

 

Other long-term liabilities
(180
)
 

 

 

Net long-term liability
(177
)
 

 

 

Total net (liability) asset
$
(286
)
 
$
(1,076
)
 
$
(150
)
 
$
873

7. HEALTH CARE REFORM
The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (which we collectively refer to as the Health Care Reform Law) established risk spreading premium stabilization programs effective January 1, 2014, including a permanent risk adjustment program and temporary risk corridor and reinsurance programs, which we collectively refer to as the 3Rs. The 3Rs are applicable to certain of our commercial medical insurance products as further discussed in Note 2 to our 2016 Form 10-K. Operating results for our Individual Commercial medical business compliant with the Health Care Reform Law have been challenged primarily due to unanticipated modifications in the program subsequent to the passing of the Health Care Reform Law, resulting in higher covered population morbidity and the ensuing enrollment and claims issues causing volatility in claims experience. We took a number of actions in 2015 to improve the profitability of our Individual Commercial medical business in 2016. These actions were subject to regulatory restrictions in certain geographies and included premium increases for the 2016 coverage year related generally to the first half of 2015 claims experience, the discontinuation of certain products as well as exit of certain markets for 2016, network improvements, enhancements to claims and clinical processes and administrative cost control. Despite these actions, the deterioration in the second half of 2015 claims experience together with 2016 open enrollment results indicating the retention of many high-utilizing members

15



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

for 2016 resulted in a probable future loss. As a result of our then assessment of the profitability of our individual medical policies compliant with the Health Care Reform Law, in the fourth quarter of 2015, we recorded a provision for probable future losses (premium deficiency reserve, or PDR) for the 2016 coverage year of $176 million in benefits payable in our consolidated balance sheet with a corresponding increase in benefits expense in our consolidated statement of income. During the second quarter of 2016 we increased the premium deficiency reserve for the 2016 coverage year and recorded a change in estimate of $208 million with a corresponding increase in benefits expense in our condensed consolidated statement of income for the three months ended June 30, 2016.
On November 10, 2016, the U.S. Court of Federal Claims ruled in favor of the government in one of a series of cases filed by insurers, unrelated to us, against the U.S. Department of Health and Human Services, or HHS, to collect risk corridor payments, rejecting all of the insurer’s statutory, contract and Constitutional claims for payment. On November 18, 2016, HHS issued a memorandum indicating a significant funding shortfall for the 2015 coverage year, the second consecutive year of significant shortfalls. Given the successful challenge of the risk corridor provisions in court, Congressional inquiries into the funding of the risk corridor program, and significant funding shortfalls under the first two years of the program, during the fourth quarter of 2016 we wrote-off $583 million in risk corridor receivables outstanding as of September 30, 2016, including $415 million associated with the 2014 and 2015 coverage years. From inception of the risk corridor program through September 30, 2017, we collected approximately $39 million from CMS for risk corridor receivables associated with the 2014 coverage year funded by HHS in accordance with previous guidance, utilizing funds HHS collected from us and other carriers under the risk corridor program. On November 2, 2017, we filed suit against the United States of America in the United States Court of Federal Claims, on behalf of our health plans seeking recovery from the federal government of approximately $611 million in payments under the risk corridor premium stabilization program established under Health Care Reform, for years 2014, 2015 and 2016.

On February 14, 2017, we announced we are exiting our Individual Commercial medical business commencing January 1, 2018. As discussed previously, we have worked over the past several years to address market and programmatic challenges in order to keep coverage options available wherever we could offer a viable product. This has included pursuing business changes, such as modifying networks, restructuring product offerings, reducing the company’s geographic footprint and increasing premiums. All of these actions were taken with the expectation that our Individual Commercial medical business would stabilize to the point where we could continue to participate in the program. However, based on our analysis of data associated with our healthcare exchange membership following the 2017 open enrollment period, we saw further signs of an unbalanced risk pool. Therefore, we decided that we cannot continue to offer this coverage and will exit this business commencing January 1, 2018.


16



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

The accompanying condensed consolidated balance sheets include the following amounts associated with the 3Rs at September 30, 2017 and December 31, 2016.
 
September 30, 2017
 
December 31, 2016
 
Risk Adjustment
Settlement
 
Reinsurance
Recoverables
 
Risk Adjustment
Settlement
 
Reinsurance
Recoverables
 
(in millions)
Prior Coverage Years
 
 
 
 
 
 
 
Premiums receivable
$
127
 
 
$

 
$
307
 
 
$

Other current assets
 
 
44

 
 
 
260

Trade accounts payable and
accrued expenses
 
 

 
(117
)
 

Net current asset
127
 
 
44

 
190
 
 
260

Other long-term assets
 
 

 
6
 
 

Total prior coverage years' net
asset
127
 
 
44

 
196
 
 
260

Current Coverage Year
 
 
 
 
 
 
 
Premiums receivable
30
 
 

 
 
 

Trade accounts payable and
accrued expenses
(57
)
 

 
 
 

Net current liability
(27
)
 

 
 
 

Other long-term assets
29
 
 

 
 
 

Other long-term liabilities
 
 

 
 
 

Net long-term asset
29
 
 

 
 
 

Total 2017 coverage year net
asset
2
 
 

 
 
 

Total net asset
$
129
 
 
$
44

 
$
196
 
 
$
260

During the nine months ended September 30, 2017, we received $283 million for reinsurance recoverables and $176 million for risk adjustment and risk corridor settlements, and paid $152 million in risk adjustment charges, in each case associated with prior coverage years. During the nine months ended September 30, 2016, we received $471 million for reinsurance recoverables as well as $88 million for risk adjustment and risk corridor settlements, and paid $240 million in risk adjustment charges, in each case associated with prior coverage years.
To the extent certain provisions of the Health Care Reform Law are successfully challenged in court or there are changes in legislation or the application of legislation, there can be no guarantee that receivables established under the reinsurance or risk adjustment provisions of the Health Care Reform Law will ultimately be collected. Potential legislative changes, including activities to repeal or replace the Health Care Reform Law, creates uncertainty for our business, and we cannot predict when, or in what form, such legislative changes may occur.
The annual health insurance industry fee has been suspended for calendar year 2017, but is scheduled to resume in calendar year 2018. In September 2016, we paid the federal government $916 million for our portion of the annual health insurance industry fee attributed to calendar year 2016 in accordance with the Health Care Reform Law. This fee, fixed in amount by law and apportioned to insurance carriers based on market share, is not deductible for tax purposes. Each year on January 1, except for 2017, we record a liability for this fee in trade accounts payable and accrued expenses which we carry until the fee is paid. We record a corresponding deferred cost in other current assets in our condensed consolidated financial statements which is amortized ratably to expense over the calendar year. Amortization of the deferred cost was recorded in operating cost expense of approximately $231 million and $687 million for the three and nine months ended September 30, 2016, respectively, resulting from the amortization of the 2016 annual health insurance industry fee.

17



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

8. GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying amount of goodwill for our reportable segments has been retrospectively adjusted to conform to the 2017 business segment reclassifications as discussed in Note 1. There was no impairment. Changes in the carrying amount of goodwill for our reportable segments for the nine months ended September 30, 2017 were as follows:
 
Retail
 
Group and Specialty
 
Healthcare
Services
 
Total
 
(in millions)
Balance at January 1, 2017
$
1,059

 
$
261

 
$
1,952

 
$
3,272

Acquisitions

 

 
9

 
9

Balance at September 30, 2017
$
1,059

 
$
261

 
$
1,961

 
$
3,281

The following table presents details of our other intangible assets included in other long-term assets in the accompanying condensed consolidated balance sheets at September 30, 2017 and December 31, 2016.
 
 
 
September 30, 2017
 
December 31, 2016
 
Weighted
Average
Life
 
Cost
 
Accumulated
Amortization
 
Net
 
Cost
 
Accumulated
Amortization
 
Net
 
 
 
($ in millions)
Other intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer contracts/
relationships
9.8 years
 
$
566

 
$
388

 
$
178

 
$
566

 
$
347

 
$
219

Trade names and
technology
8.2 years
 
104

 
77

 
27

 
104

 
69

 
35

Provider contracts
14.1 years
 
51

 
33

 
18

 
51

 
29

 
22

Noncompetes and
other
8.1 years
 
33

 
29

 
4

 
32

 
28

 
4

Total other intangible
assets
9.8 years
 
$
754

 
$
527

 
$
227

 
$
753

 
$
473

 
$
280

Amortization expense for other intangible assets was approximately $18 million for the three months ended September 30, 2017 and 2016. For the nine months ended September 30, 2017 and 2016, amortization expense for other intangible assets was approximately $54 million and $59 million, respectively. The following table presents our estimate of amortization expense for 2017 and each of the five next succeeding years:
 
(in millions)
For the years ending December 31,
 
2017
$
71

2018
63

2019
52

2020
48

2021
14

2022
11



18



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

9. BENEFITS PAYABLE
On a consolidated basis, activity in benefits payable, excluding military services, was as follows for the nine months ended September 30, 2017 and 2016:
 
 
For the nine months ended September 30,
 
 
2017
 
2016
 
 
(in millions)
Balances, beginning of period
 
$
4,563

 
$
4,976

Less: Premium deficiency reserve
 

 
(176
)
Less: Reinsurance recoverables
 
(76
)
 
(85
)
Balances, beginning of period, net
 
4,487

 
4,715

Incurred related to:
 
 
 
 
Current year
 
33,318

 
34,340

Prior years
 
(430
)
 
(525
)
Total incurred
 
32,888

 
33,815

Paid related to:
 
 
 
 
Current year
 
(28,741
)
 
(29,768
)
Prior years
 
(3,745
)
 
(3,996
)
Total paid
 
(32,486
)
 
(33,764
)
Premium deficiency reserve
 

 
206

Reinsurance recoverable
 
70

 
77

Balances, end of period
 
$
4,959

 
$
5,049

Amounts incurred related to prior periods vary from previously estimated liabilities as the claims ultimately are settled. Negative amounts reported for incurred related to prior years result from claims being ultimately settled for amounts less than originally estimated (favorable development).
Our reserving practice is to consistently recognize the actuarial best estimate of our ultimate liability for claims. Actuarial standards require the use of assumptions based on moderately adverse experience, which generally results in favorable reserve development, or reserves that are considered redundant.
Benefits expense excluded from the previous table was as follows for the nine months ended September 30, 2017 and 2016.
 
 
For the nine months ended September 30,
 
 
2017
 
2016
 
 
(in millions)
Premium deficiency reserve - Individual Commercial
 
$

 
$
30

Military services
 

 
7

Future policy benefits:
 
 
 
 
Individual Commercial
 
(67
)
 
(82
)
Other Businesses
 
36

 
36

Total future policy benefits
 
(31
)
 
(46
)
Total
 
$
(31
)
 
$
(9
)

19



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Military services benefits expense in the tables above reflect expenses associated with our contracts with the Veterans Administration.
Incurred and Paid Claims Development
The following discussion provides information about incurred and paid claims development for our Retail, Group and Specialty, and Individual Commercial segments as of September 30, 2017 and 2016, net of reinsurance and the total of IBNR included within the net incurred claims amounts.
Retail Segment
Activity in benefits payable for our Retail segment was as follows for the nine months ended September 30, 2017 and 2016:
 
 
For the nine months ended September 30,
 
 
2017
 
2016
 
 
(in millions)
Balances, beginning of period
 
$
3,507

 
$
3,600

Less: Reinsurance recoverables
 
(76
)
 
(85
)
Balances, beginning of period, net
 
3,431

 
3,515

Incurred related to:
 
 
 
 
Current year
 
29,356

 
28,369

Prior years
 
(339
)
 
(378
)
Total incurred
 
29,017

 
27,991

Paid related to:
 
 
 
 
Current year
 
(25,460
)
 
(24,822
)
Prior years
 
(2,822
)
 
(2,990
)
Total paid
 
(28,282
)
 
(27,812
)
Reinsurance recoverable
 
70

 
77

Balances, end of period
 
$
4,236

 
$
3,771

At September 30, 2017, benefits payable for our Retail segment included IBNR of approximately $2.7 billion, primarily associated with claims incurred in 2017.











20



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Group and Specialty Segment
Activity in benefits payable for our Group and Specialty segment, excluding military services, was as follows for the nine months ended September 30, 2017 and 2016:
 
 
For the nine months ended September 30,
 
 
2017
 
2016
 
 
(in millions)
Balances, beginning of period
 
$
578

 
$
616

Incurred related to:
 
 
 
 
Current year
 
3,996

 
3,918

Prior years
 
(44
)
 
(42
)
Total incurred
 
3,952

 
3,876

Paid related to:
 
 
 
 
Current year
 
(3,452
)
 
(3,337
)
Prior years
 
(517
)
 
(557
)
Total paid
 
(3,969
)
 
(3,894
)
Balances, end of period
 
$
561

 
$
598

At September 30, 2017, benefits payable for our Group and Specialty segment included IBNR of approximately $490 million, primarily associated with claims incurred in 2017.

Individual Commercial Segment
Activity in benefits payable for our Individual Commercial segment was as follows for the nine months ended September 30, 2017 and 2016:
 
 
For the nine months ended September 30,
 
 
2017
 
2016
 
 
(in millions)
Balances, beginning of period
 
$
454

 
$
740

Less: Premium deficiency reserve
 

 
(176
)
Balances, beginning of period, net
 
454

 
564

Incurred related to:
 
 
 
 
Current year
 
502

 
2,694

Prior years
 
(46
)
 
(104
)
Total incurred
 
456

 
2,590

Paid related to:
 
 
 
 
Current year
 
(393
)
 
(2,273
)
Prior years
 
(383
)
 
(430
)
Total paid
 
(776
)
 
(2,703
)
Premium deficiency reserve
 

 
206

Balance, end of period
 
$
134

 
$
657


At September 30, 2017, benefits payable for our Individual Commercial segment included IBNR of approximately $120 million, primarily associated with claims incurred in 2017.

21



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Reconciliation to Consolidated

The reconciliation of the net incurred and paid claims development tables to benefits payable in the consolidated
statement of financial position is as follows:
 
Reconciliation of the Disclosure of Incurred and Paid Claims Development to Benefits Payable, net of reinsurance
 
 
 
September 30,
 
 
2017
 
Net outstanding liabilities
 
 
Retail
$
4,166

 
Group and Specialty
561

 
Individual Commercial
134

 
Other Businesses
28

 
    Benefits payable, net of reinsurance
4,889

 
 
 
 
Reinsurance recoverable on unpaid claims
 
 
Retail
70

 
     Total reinsurance recoverable on unpaid claims
70

 
 
 
 
     Total benefits payable, gross
$
4,959

10. EARNINGS PER COMMON SHARE COMPUTATION
Detail supporting the computation of basic and diluted earnings per common share was as follows for the three and nine months ended September 30, 2017 and 2016:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(dollars in millions, except per common share results; number of shares in thousands)
Net income available for common stockholders
$
499

 
$
450

 
$
2,264

 
$
1,015

Weighted average outstanding shares of common stock
used to compute basic earnings per common share
144,215

 
149,417

 
145,546

 
149,321

Dilutive effect of:
 
 
 
 
 
 
 
Employee stock options
165

 
210

 
174

 
216

Restricted stock
980

 
1,277

 
902

 
1,332

Shares used to compute diluted earnings per common share
145,360

 
150,904

 
146,622

 
150,869

Basic earnings per common share
$
3.46

 
$
3.01

 
$
15.56

 
$
6.80

Diluted earnings per common share
$
3.44

 
$
2.98

 
$
15.44

 
$
6.73

Number of antidilutive stock options and restricted stock
excluded from computation
399

 
658

 
595

 
873


22



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

11. STOCKHOLDERS’ EQUITY
Dividends
The following table provides details of dividend payments, excluding dividend equivalent rights for unvested stock awards, in 2016 and 2017 under our Board approved quarterly cash dividend policy:
Record
Date
 
Payment
Date
 
Amount
per Share
 
Total
Amount
 
 
 
 
 
 
(in millions)
2016 payments
 
 
 
 
 
 
12/30/2015
 
1/29/2016
 
$
0.29

 
$
43

3/31/2016
 
4/29/2016
 
$
0.29

 
$
43

6/30/2016
 
7/29/2016
 
$
0.29

 
$
43

10/13/2016
 
10/28/2016
 
$
0.29

 
$
43

2017 payments
 
 
 
 
 
 
1/12/2017
 
1/27/2017
 
$
0.29

 
$
43

3/31/2017
 
4/28/2017
 
$
0.40

 
$
58

6/30/2017
 
7/31/2017
 
$
0.40

 
$
58

9/29/2017
 
10/27/2017
 
$
0.40

 
$
57

On November 2, 2017, the Board declared a cash dividend of $0.40 per share payable on January 26, 2018, to stockholders of record on December 29, 2017.
Stock Repurchases
On February 14, 2017, our Board of Directors replaced a previous share repurchase authorization of up to $2 billion, of which $1.04 billion remained unused, with a new authorization for repurchases of up to $2.25 billion of our common shares expiring on December 31, 2017, exclusive of shares repurchased in connection with employee stock plans. Under the share repurchase authorization, shares may be purchased from time to time at prevailing prices in the open market, by block purchases, through plans designed to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, or in privately-negotiated transactions, including pursuant to accelerated share repurchase agreements with investment banks, subject to certain regulatory restrictions on volume, pricing, and timing.
On February 16, 2017, we entered into an accelerated share repurchase agreement, or ASR Agreement, with Goldman, Sachs & Co. LLC, or Goldman Sachs, to repurchase $1.5 billion of our common stock as part of the $2.25 billion share repurchase program referred to above. Under the ASR Agreement, on February 22, 2017, we made a payment of $1.5 billion to Goldman Sachs from available cash on hand and received an initial delivery of 5.83 million shares of our common stock from Goldman Sachs based on the then current market price of Humana common stock. The payment to Goldman Sachs was recorded as a reduction to stockholders’ equity, consisting of a $1.2 billion increase in treasury stock, which reflected the value of the initial 5.83 million shares received upon initial settlement, and a $300 million decrease in capital in excess of par value, which reflected the value of stock held back by Goldman Sachs pending final settlement of the ASR Agreement. Upon settlement of the ASR on August 28, 2017, we received an additional 0.84 million shares as determined by the average daily volume weighted-average share price of our common stock during the term of the ASR Agreement of $224.81, bringing the total shares received under this program to 6.67 million. In addition, upon settlement we reclassified the $300 million value of stock initially held back by Goldman Sachs from capital in excess of par value to treasury stock.
Our remaining repurchase authorization was approximately $239 million as of November 3, 2017.
In connection with employee stock plans, we acquired 0.37 million common shares for $79 million and 0.45 million common shares for $75 million during the nine months ended September 30, 2017 and 2016, respectively.

23



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Treasury Stock Reissuance
We reissued 1.40 million shares of treasury stock during the nine months ended September 30, 2017 at a cost of $99 million associated with restricted stock unit vestings and option exercises.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income included net unrealized gains, net of tax, on our investment securities of $107 million at September 30, 2017 and net unrealized losses, net of tax, of $17 million at December 31, 2016. In addition, accumulated other comprehensive income included $95 million, net of tax, at September 30, 2017 and $49 million, net of tax, at December 31, 2016 for an additional liability that would exist on our closed block of long-term care insurance policies if unrealized gains on the sale of the investments backing such products had been realized and the proceeds reinvested at then current yields. Refer to Note 18 to the consolidated financial statements in our 2016 Form 10-K for further discussion of our long-term care insurance policies.
12. INCOME TAXES
The effective income tax rate was 37.5% for the three months ended September 30, 2017, compared to 50.1% for the three months ended September 30, 2016 and was 35.9% for the nine months ended September 30, 2017, compared to 50.2% for the nine months ended September 30, 2016, primarily due to the 2017 temporary suspension of the non-deductible health insurance industry fee as well as previously non-deductible transaction costs that, as a result of termination of the Merger Agreement, became deductible for tax purposes and were recorded as such in the three months ended March 31, 2017.

24



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

13.  DEBT
The carrying value of debt outstanding, net of unamortized debt issuance costs, was as follows at September 30, 2017 and December 31, 2016:
 
September 30, 2017
 
December 31, 2016
 
(in millions)
Short-term:
 
 
 
Commercial paper
$
150

 
$
300

$500 million, 7.20% Senior notes due June 15, 2018
501

 

  $300 million, 6.30% Senior notes due August 1, 2018
302

 

 Total short-term debt
953

 
300

 
 
 
 
Long-term:
 
 
 
Senior notes:
 
 
 
  $500 million, 7.20% due June 15, 2018

 
501

  $300 million, 6.30% due August 1, 2018

 
304

  $400 million, 2.625% due October 1, 2019
399

 
398

  $600 million, 3.15% due December 1, 2022
596

 
595

  $600 million, 3.85% due October 1, 2024
595

 
595

  $600 million, 3.95% due March 15, 2027
594

 

  $250 million, 8.15% due June 15, 2038
263

 
264

  $400 million, 4.625% due December 1, 2042
396

 
396

  $750 million, 4.95% due October 1, 2044
739

 
739

  $400 million, 4.80% due March 15, 2047
395

 

     Total long-term debt
3,977