Document
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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
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 No.)
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)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common stock, $0.16 2/3 par value
HUM
New York Stock Exchange

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      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  
Indicate by check mark 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.
Large accelerated filer
 
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 provided 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  
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, 2019
$0.16 2/3 par value
132,426,045 shares


Table of Contents

Humana Inc.
FORM 10-Q
SEPTEMBER 30, 2019
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,
2019
 
December 31,
2018
 
(in millions, except share amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
5,527

 
$
2,343

Investment securities
10,430

 
10,026

Receivables, less allowance for doubtful accounts of $73 in 2019
and $79 in 2018
848

 
1,015

Other current assets
3,519

 
3,564

Total current assets
20,324

 
16,948

Property and equipment, net
1,864

 
1,735

Long-term investment securities
404

 
411

Equity method investment in Kindred at Home
1,061

 
1,047

Goodwill
3,922

 
3,897

Other long-term assets
1,605

 
1,375

Total assets
$
29,180

 
$
25,413

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Benefits payable
$
6,220

 
$
4,862

Trade accounts payable and accrued expenses
3,640

 
3,067

Book overdraft
273

 
171

Unearned revenues
274

 
283

Short-term debt
699

 
1,694

Total current liabilities
11,106

 
10,077

Long-term debt
5,365

 
4,375

Future policy benefits payable
211

 
219

Other long-term liabilities
897

 
581

Total liabilities
17,579

 
15,252

Commitments and contingencies (Note 14)

 

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;
198,628,992 shares issued at September 30, 2019 and 198,594,841 shares
issued at December 31, 2018
33

 
33

Capital in excess of par value
2,608

 
2,535

Retained earnings
17,045

 
15,072

Accumulated other comprehensive income (loss)
177

 
(159
)
Treasury stock, at cost, 66,202,947 shares at September 30, 2019 and
63,028,169 shares at December 31, 2018
(8,262
)
 
(7,320
)
Total stockholders’ equity
11,601

 
10,161

Total liabilities and stockholders’ equity
$
29,180

 
$
25,413

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,
 
2019
 
2018
 
2019
 
2018
 
(in millions, except per share results)
Revenues:
 
 
 
 
 
 
 
Premiums
$
15,712

 
$
13,712

 
$
47,139

 
$
41,236

Services
393

 
381

 
1,103

 
1,090

Investment income
136

 
113

 
351

 
418

Total revenues
16,241

 
14,206

 
48,593

 
42,744

Operating expenses:
 
 
 
 
 
 
 
Benefits
13,357

 
11,243

 
40,168

 
34,449

Operating costs
1,889

 
1,900

 
5,252

 
5,410

Depreciation and amortization
127

 
102

 
343

 
302

Total operating expenses
15,373

 
13,245

 
45,763

 
40,161

Income from operations
868

 
961

 
2,830

 
2,583

(Gain) loss on sale of business

 
(4
)
 

 
786

Interest expense
62

 
53

 
184

 
159

Other (income) expense, net
(82
)
 
11

 
(217
)
 
11

Income before income taxes and equity in net earnings
888

 
901

 
2,863

 
1,627

Provision for income taxes
200

 
266

 
684

 
308

Equity in net earnings of Kindred at Home
1

 
9

 
16

 
9

Net income
$
689

 
$
644

 
$
2,195

 
$
1,328

Basic earnings per common share
$
5.16

 
$
4.68

 
$
16.31

 
$
9.64

Diluted earnings per common share
$
5.14

 
$
4.65

 
$
16.24

 
$
9.58

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,
 
2019
 
2018
 
2019
 
2018
 
(in millions)
Net income
$
689

 
$
644

 
$
2,195

 
$
1,328

Other comprehensive income:
 
 
 
 
 
 
 
Change in gross unrealized investment
gains/losses
87

 
(42
)
 
452

 
(254
)
Effect of income taxes
(20
)
 
10

 
(105
)
 
64

Total change in unrealized
investment gains/losses, net of tax
67

 
(32
)
 
347

 
(190
)
Reclassification adjustment for net
realized gains
(1
)
 
3

 
(7
)
 
(49
)
Effect of income taxes

 
(1
)
 
2

 
14

Total reclassification adjustment, net
of tax
(1
)
 
2

 
(5
)
 
(35
)
Other comprehensive income (loss), net
of tax
66

 
(30
)
 
342

 
(225
)
Comprehensive loss attributable to equity method investment in Kindred at Home
(1
)
 

 
(6
)
 

Comprehensive income
$
754

 
$
614

 
$
2,531

 
$
1,103



See accompanying notes to condensed consolidated financial statements.

5



Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
 
Common Stock

Capital In
Excess of
Par Value

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Treasury
Stock

Total
Stockholders’
Equity
 
Issued
Shares

Amount


(dollars in millions, share amounts in thousands)
Three months ended September 30, 2019
Balances, June 30, 2019
198,628


$
33


$
2,763


$
16,429


$
112


$
(7,465
)

$
11,872

Net income






689






689

Other comprehensive income












65





65

Common stock repurchases




(200
)






(800
)

(1,000
)
Dividends and dividend
equivalents






(73
)






(73
)
Stock-based compensation




43









43

Restricted stock unit vesting















Stock option exercises
1




2






3


5

Balances, September 30, 2019
198,629


$
33


$
2,608


$
17,045


$
177


$
(8,262
)

$
11,601

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2018
Balances, June 30, 2018
198,591


$
33


$
2,672


$
14,211


$
(176
)

$
(6,529
)

$
10,211

Net income






644






644

Other comprehensive loss












(30
)




(30
)
Common stock repurchases











(201
)

(201
)
Dividends and dividend
equivalents






(69
)






(69
)
Stock-based compensation




35









35

Restricted stock unit vesting




(3
)






3



Stock option exercises
2




3








3

Balances, September 30, 2018
198,593


$
33


$
2,707


$
14,786


$
(206
)

$
(6,727
)

$
10,593

See accompanying notes to condensed consolidated financial statements.


















6



Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)

 
Common Stock
 
Capital In
Excess of
Par Value
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 
Total
Stockholders’
Equity
 
Issued
Shares
 
Amount
 
 
(dollars in millions, share amounts in thousands)
Nine months ended September 30, 2019
Balances, December 31, 2018
198,595

 
$
33

 
$
2,535

 
$
15,072

 
$
(159
)
 
$
(7,320
)
 
$
10,161

Net income

 

 

 
2,195

 

 

 
2,195

Other comprehensive income


 


 


 

 
336

 


 
336

Common stock repurchases

 

 
(50
)
 


 

 
(960
)
 
(1,010
)
Dividends and dividend
equivalents

 

 

 
(222
)
 


 
.
 
(222
)
Stock-based compensation

 

 
119

 

 

 


 
119

Restricted stock unit vesting
32

 

 
(3
)
 


 

 
3

 

Stock option exercises
2

 

 
7

 

 

 
15

 
22

Balances, September 30, 2019
198,629

 
$
33

 
$
2,608

 
$
17,045

 
$
177

 
$
(8,262
)
 
$
11,601

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2018
Balances, December 31, 2017
198,572

 
$
33

 
$
2,445

 
$
13,670

 
$
19

 
$
(6,325
)
 
$
9,842

Net income

 

 

 
1,328

 

 

 
1,328

Other comprehensive loss


 


 


 
(4
)
 
(225
)
 


 
(229
)
Common stock repurchases

 

 
200

 


 

 
(494
)
 
(294
)
Dividends and dividend
equivalents

 

 

 
(208
)
 


 

 
(208
)
Stock-based compensation

 

 
105

 

 

 


 
105

Restricted stock unit vesting

 

 
(92
)
 


 

 
92

 

Stock option exercises
21

 

 
49

 

 

 

 
49

Balances, September 30, 2018
198,593

 
$
33

 
$
2,707

 
$
14,786

 
$
(206
)
 
$
(6,727
)
 
$
10,593

See accompanying notes to condensed consolidated financial statements.


7



Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
For the nine months ended
September 30,
 
2019
 
2018
 
(in millions)
Cash flows from operating activities
 
 
 
Net income
$
2,195

 
$
1,328

Adjustments to reconcile net income to net cash provided by
operating activities:
 
 
 
Loss on sale of business

 
786

Net realized capital gains
(23
)
 
(90
)
Equity in net earnings of Kindred at Home
(16
)
 
(9
)
Stock-based compensation
119

 
105

Depreciation
382

 
330

Amortization
53

 
70

(Benefit) provision for deferred income taxes
(21
)
 
165

Changes in operating assets and liabilities, net of effect of
businesses acquired and dispositions:
 
 
 
Receivables
179

 
(211
)
Other assets
334

 
(939
)
Benefits payable
1,358

 
410

Other liabilities
168

 
548

Unearned revenues
(9
)
 
(84
)
Other
53

 
97

Net cash provided by operating activities
4,772

 
2,506

Cash flows from investing activities
 
 
 
Cash transferred in sale of business

 
(805
)
Acquisitions, net of cash acquired

 
(354
)
Acquisition, equity method investment in Kindred at Home

 
(1,095
)
Purchases of property and equipment
(506
)
 
(436
)
Purchases of investment securities
(4,130
)
 
(3,379
)
Maturities of investment securities
1,281

 
815

Proceeds from sales of investment securities
2,878

 
2,614

Net cash used in investing activities
(477
)
 
(2,640
)
Cash flows from financing activities
 
 
 
Receipts from contract deposits, net
11

 
378

Proceeds from issuance of senior notes, net
987

 

(Repayments) proceeds from issuance of commercial paper, net
(358
)
 
240

Repayment of term loan
(650
)
 

Change in book overdraft
102

 
58

Common stock repurchases
(1,010
)
 
(294
)
Dividends paid
(216
)
 
(195
)
Proceeds from stock option exercises and other, net
23

 
47

Net cash (used in) provided by financing activities
(1,111
)
 
234

Increase in cash and cash equivalents
3,184

 
100

Cash and cash equivalents at beginning of period
2,343

 
4,042

Cash and cash equivalents at end of period
$
5,527

 
$
4,142

Supplemental cash flow disclosures:
 
 
 
Interest payments
$
136

 
$
120

Income tax payments, net
$
578

 
$
511


See accompanying notes to condensed consolidated financial statements.

8

Table of Contents


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, 2018, that was filed with the Securities and Exchange Commission, or the SEC, on February 21, 2019. We refer to the Form 10-K as the “2018 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, 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 2018 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.
Revenue Recognition
Our revenues include premium and service revenues. Service revenues include administrative service fees that are recorded based upon established per member per month rates and the number of members for the month and are recognized as services are provided for the month. Additionally, service revenues include net patient service revenues that are recorded based upon established billing rates, less allowances for contractual adjustments, and are recognized as services are provided. For more information about our revenues, refer to Note 2 to the consolidated financial statements included in our 2018 Form 10-K for information on accounting policies that we consider in preparing our consolidated financial statements. See Note 15 for disaggregation of revenue by segment and type.
At September 30, 2019, accounts receivable related to services were $141 million. For the three and nine months ended September 30, 2019, we had no material bad-debt expense and there were no material contract assets, contract liabilities or deferred contract costs recorded on the condensed consolidated balance sheet at September 30, 2019.
For the three and nine months ended September 30, 2019, services revenue recognized from performance obligations related to prior periods (for example, due to changes in transaction price), was not material. Further, services revenue expected to be recognized in any future year related to remaining performance obligations was not material.
Equity Method Investment in Kindred at Home
In the third quarter of 2018, we, along with TPG Capital, or TPG, and Welsh, Carson, Anderson & Stowe, or WCAS, completed the acquisitions of Kindred Healthcare, Inc., or Kindred, and privately-held Curo Health Services, or Curo, respectively, merging Curo with the hospice business of the Kindred at Home Division, or Kindred at Home. As part of these transactions, we acquired a 40% minority interest in Kindred at Home, a leading home health and hospice company, for total cash consideration of approximately $1.1 billion.


9

Table of Contents


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

We account for our 40% investment in Kindred at Home using the equity method of accounting. This investment is reflected as "Equity method investment in Kindred at Home" in our condensed consolidated balance sheets, with our share of income or loss reported as "Equity in net earnings of Kindred at Home" in our condensed consolidated statements of income.

We entered into a shareholders agreement with TPG and WCAS, the Sponsors, that provides for certain rights and obligations of each party. The shareholders agreement with the Sponsors includes a put option under which they have the right to require us to purchase their interest in the joint venture beginning on July 2, 2021 and ending on July 1, 2022. Likewise, we have a call option under which we have the right to require the Sponsors to sell their interest in the joint venture to Humana beginning on July 2, 2022 and ending on July 1, 2023. The put and call options, which are exercisable at a fixed EBITDA multiple and provide a minimum return on the Sponsor's investment if exercised, are measured at fair value each period using a Monte Carlo simulation. The simulation relies on assumptions around Kindred at Home's equity value, risk free interest rates, volatility, and the details specific to the put and call options. The final purchase price allocation resulted in approximately $1 billion being allocated to the investment and $236 million and $291 million allocated to the put and call options, respectively. The fair values of the put option and call option were $90 million and $327 million, respectively, at September 30, 2019. The put option is included within other long-term liabilities and the call option is included within other long-term assets. The change in fair value of the put and call options is reflected as "Other (income) expense, net" in our condensed consolidated statements of income.
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) enacted significant reforms to various aspects of the U.S. health insurance industry. Certain of these reforms became effective January 1, 2014, including an annual insurance industry premium-based fee. The Continuing Resolution bill, H.R. 195, enacted on January 22, 2018, included a one year suspension in 2019 of the health insurance industry fee, but under current law, the fee is scheduled to resume in calendar year 2020. In October 2018, we paid the federal government $1.04 billion for the annual health insurance industry fee attributed to calendar year 2018. This fee, fixed in amount by law and apportioned to insurance carriers based on market share, was not deductible for tax purposes. Each year on January 1, except when suspended, 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 $258 million and $778 million for the three and nine months ended September 30, 2018, respectively, resulting from the amortization of the 2018 annual health insurance industry fee.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 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). We adopted the new standard effective January 1, 2019, as allowed, using the modified retrospective approach. We elected the practical expedients of not reassessing whether any expired or existing contracts are or contain leases, not reassessing the lease classification for any expired or existing leases and not reassessing any initial direct costs for existing leases. In addition, we elected the practical expedient to not separate lease and nonlease components for all of our asset classes. We made a permitted accounting policy election to not apply the new guidance to leases with an initial term of 12 months or less. We recognize those lease payments in the condensed consolidated statement of income on a straight-line basis over the lease term. As of January 1, 2019, the adoption of the standard resulted in recognition of right-of-use, or ROU, liabilities of approximately $470 million and ROU assets of $436 million, which equals the ROU liabilities net of accrued rent and lease incentives. The standard does not materially affect our results of operations, cash flows and liquidity. See Note 8 for further information.

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

10

Table of Contents


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

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 have identified and are analyzing our financial assets measured at amortized cost that are in scope of the new CECL model. We continue to consider the impact of the modified impairment model as it relates to our available for sale debt securities. We continue to analyze and evaluate these impacts on our results of operations, financial condition, and cash flows.

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. This guidance did not have a material impact on our results of operations, financial condition or cash flows.

In September 2018, the FASB issued new guidance related to accounting for long-duration contracts of insurers which revises key elements of the measurement models and disclosure requirements for long-duration contracts issued by insurers and reinsurers. The new guidance is effective for us beginning with annual and interim periods in 2021, with earlier adoption permitted, and requires retrospective application to previously issued annual and interim financial statements. The FASB has recently proposed delaying the effective date beginning with annual and interim periods in 2022. We are currently evaluating the impact on our results of operations, financial position 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
Sale of Closed Block of Commercial Long-Term Care Insurance Business

In the third quarter of 2018, we completed the sale 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, included our closed block of non-strategic commercial long-term care policies. Upon closing, we funded the transaction with approximately $190 million of parent company cash contributed into KMG, subject to customary adjustments, in addition to the transfer of approximately $160 million of statutory capital with the sale.
In connection with the sale of KMG, we recognized a pretax loss, including transaction costs, of $786 million and a corresponding $452 million income tax benefit.  
Also, in the third quarter of 2018, we entered into reinsurance contracts to transfer the risk associated with certain voluntary benefit and financial protection products previously issued primarily by KIC to a third party. We transferred approximately $245 million of cash to the third party and recorded a commensurate reinsurance recoverable as a result of these transactions. The reinsurance recoverable was included as part of the net assets disposed. There was no material impact to operating results from these reinsurance transactions.
KMG revenues and pretax income for the nine months ended September 30, 2018 were $182 million and $47 million, respectively. KMG revenues and pretax loss for the three months ended September 30, 2018 were not material.




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

Other Acquisitions and Divestitures
In the first quarter of 2018, we acquired the remaining equity interest in MCCI Holdings, LLC, or MCCI, a privately held management service organization headquartered in Miami, Florida, that primarily coordinates medical care for Medicare Advantage beneficiaries in Florida and Texas. The purchase price consisted primarily of $169 million cash, as well as our existing investment in MCCI and a note receivable and a revolving note with an aggregate balance of $383 million. This resulted in a purchase price allocation to goodwill of $483 million, other intangible assets of $80 million, and net tangible assets of $24 million. The goodwill was assigned to the Retail and Healthcare Services segments. The other intangible assets, which primarily consist of customer contracts, have an estimated weighted average useful life of 8 years. Goodwill and other intangible assets are amortizable as deductible expenses for tax purposes.
In the second quarter of 2018, we acquired Family Physicians Group, or FPG, for cash consideration of approximately $185 million, net of cash received. FPG serves Medicare Advantage and Managed Medicaid HMO patients in Greater Orlando, Florida with a footprint that includes clinics located in Lake, Orange, Osceola and Seminole counties. This resulted in a purchase price allocation to goodwill of $133 million, other intangible assets of $38 million and net tangible assets of $14 million. The goodwill was assigned to the Retail and Healthcare Services segments. The other intangible assets, which primarily consist of customer contracts, have an estimated weighted average useful life of 4.9 years. The purchase price allocations for MCCI and FPG are final.
During 2019 and 2018, we acquired other 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 2019 and 2018 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.

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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, 2019 and December 31, 2018, respectively:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(in millions)
September 30, 2019
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
$
373

 
$
2

 
$
(1
)
 
$
374

Mortgage-backed securities
3,543

 
101

 
(3
)
 
3,641

Tax-exempt municipal securities
1,465

 
36

 

 
1,501

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential

 

 

 

Commercial
641

 
27

 

 
668

Asset-backed securities
1,030

 
3

 
(3
)
 
1,030

Corporate debt securities
3,509

 
84

 
(3
)
 
3,590

Total debt securities
$
10,561

 
$
253

 
$
(10
)
 
$
10,804

 
 
 
 
 
 
 
 
   We held $30 million of equity securities as of September 30, 2019 consisting of common stock.
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
$
419

 
$
1

 
$
(3
)
 
$
417

Mortgage-backed securities
2,595

 
3

 
(54
)
 
2,544

Tax-exempt municipal securities
2,805

 
3

 
(37
)
 
2,771

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
55

 

 

 
55

Commercial
537

 

 
(14
)
 
523

Asset-backed securities
991

 
1

 
(7
)
 
985

Corporate debt securities
3,239

 
1

 
(98
)
 
3,142

Total debt securities
$
10,641

 
$
9

 
$
(213
)
 
$
10,437



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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, 2019 and December 31, 2018, 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, 2019
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and other U.S.
government corporations
and agencies:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
obligations
$
31

 
$

 
$
21

 
$
(1
)
 
$
52

 
$
(1
)
Mortgage-backed
securities
122

 
(1
)
 
269

 
(2
)
 
391

 
(3
)
Tax-exempt municipal
securities

 

 
207

 

 
207

 

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential

 

 

 

 

 

Commercial
24

 

 
55

 

 
79

 

Asset-backed securities
196

 
(1
)
 
420

 
(2
)
 
616

 
(3
)
Corporate debt securities
261

 
(1
)
 
191

 
(2
)
 
452

 
(3
)
Total debt securities
$
634

 
$
(3
)
 
$
1,163

 
$
(7
)
 
$
1,797

 
$
(10
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and other U.S.
government corporations
and agencies:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
obligations
$
179

 
$
(1
)
 
$
153

 
$
(2
)
 
$
332

 
$
(3
)
Mortgage-backed
securities
956

 
(16
)
 
1,019

 
(38
)
 
1,975

 
(54
)
Tax-exempt municipal
securities
809

 
(9
)
 
1,648

 
(28
)
 
2,457

 
(37
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential

 

 
15

 

 
15

 

Commercial
372

 
(8
)
 
133

 
(6
)
 
505

 
(14
)
Asset-backed securities
824

 
(7
)
 
40

 

 
864

 
(7
)
Corporate debt securities
1,434

 
(35
)
 
1,439

 
(63
)
 
2,873

 
(98
)
Total debt securities
$
4,574

 
$
(76
)
 
$
4,447

 
$
(137
)
 
$
9,021

 
$
(213
)

Approximately 96% 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, 2019. 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

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

individual state exceeding 1% of our total debt securities. 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 250 positions out of a total of approximately 1,530 positions at September 30, 2019. All issuers of securities we own that were trading at an unrealized loss at September 30, 2019 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, 2019, 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, 2019.
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, 2019 and 2018:
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2019
 
2018
 
2019
 
2018
 
(in millions)
Gross realized gains
$
41

 
$
10

 
$
59

 
$
105

Gross realized losses
(23
)
 
(2
)
 
(36
)
 
(15
)
Net realized capital (losses) gains
$
18

 
$
8

 
$
23


$
90


There were no material other-than-temporary impairments for the three and nine months ended September 30, 2019 or 2018.
The contractual maturities of debt securities available for sale at September 30, 2019, 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
$
839

 
$
840

Due after one year through five years
2,277

 
2,312

Due after five years through ten years
1,730

 
1,789

Due after ten years
501

 
524

Mortgage and asset-backed securities
5,214

 
5,339

Total debt securities
$
10,561

 
$
10,804



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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, 2019 and December 31, 2018, 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, 2019
 
 
 
 
 
 
 
Cash equivalents
$
5,015

 
$
5,015

 
$

 
$

Debt securities:
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
374

 

 
374

 

Mortgage-backed securities
3,641

 

 
3,641

 

Tax-exempt municipal securities
1,501

 

 
1,501

 

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential

 

 

 

Commercial
668

 

 
668

 

Asset-backed securities
1,030

 

 
1,030

 

Corporate debt securities
3,590

 

 
3,590

 

Total debt securities
10,804

 

 
10,804

 

Common stock
30

 
30

 

 

Total invested assets
$
15,849

 
$
5,045

 
$
10,804

 
$

 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
Cash equivalents
$
2,024

 
$
2,024

 
$

 
$

Debt securities:
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
417

 

 
417

 

Mortgage-backed securities
2,544

 

 
2,544

 

Tax-exempt municipal securities
2,771

 

 
2,771

 

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
55

 

 
55

 

Commercial
523

 

 
523

 

Asset-backed securities
985

 

 
985

 

Corporate debt securities
3,142

 

 
3,142

 

Total debt securities
10,437

 

 
10,437

 

Total invested assets
$
12,461

 
$
2,024

 
$
10,437

 
$



16

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

Financial Liabilities
Our debt is recorded at carrying value in our consolidated balance sheets. The carrying value of our senior notes debt outstanding, net of unamortized debt issuance costs, was $5,765 million at September 30, 2019 and $4,774 million at December 31, 2018. The fair value of our senior notes debt was $6,246 million at September 30, 2019 and $5,191 million at December 31, 2018. 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 and term note. The outstanding commercial paper borrowings were $299 million as of September 30, 2019 and we repaid the term note balance in August 2019. The term loan outstanding and commercial paper borrowings were $1,295 million as of December 31, 2018.
Other Assets and Liabilities Measured at Fair Value
As disclosed in Note 3, we acquired MCCI and FPG during 2018. 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 future cash flows and discount rates used in the present value calculations. Other than assets acquired and liabilities assumed in these acquisitions, and the put option liability and call option asset associated with our investment in Kindred at Home as detailed in Note 1, there were no other material assets or liabilities measured at fair value on a recurring or nonrecurring basis during 2019 or 2018.
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 2018 Form 10-K. The accompanying condensed consolidated balance sheets include the following amounts associated with Medicare Part D at September 30, 2019 and December 31, 2018. 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, 2019
 
December 31, 2018
Risk
Corridor
Settlement
 
CMS
Subsidies/
Discounts
 
Risk
Corridor
Settlement
 
CMS
Subsidies/
Discounts