Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 8, 2017)
  • 10-Q (Aug 2, 2017)
  • 10-Q (May 3, 2017)
  • 10-Q (Nov 4, 2016)
  • 10-Q (Aug 3, 2016)
  • 10-Q (May 4, 2016)

 
8-K

 
Other

Humana 10-Q 2015

Documents found in this filing:

  1. 10-Q
  2. Ex-12
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32
  6. Ex-32
HUM-2015.06.30-10Q
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 June 30, 2015
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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨
 
Smaller reporting company
¨
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
June 30, 2015
$0.16 2/3 par value
148,143,674 shares



Humana Inc.
FORM 10-Q
JUNE 30, 2015
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)
 
June 30,
2015
 
December 31,
2014
 
(in millions, except share amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,250

 
$
1,935

Investment securities
7,041

 
7,598

Receivables, less allowance for doubtful accounts of $104 in 2015
and $98 in 2014:
2,129

 
1,053

Other current assets
5,555

 
4,007

Assets held-for-sale

 
943

Total current assets
16,975

 
15,536

Property and equipment, net
1,299

 
1,228

Long-term investment securities
1,839

 
1,949

Goodwill
3,266

 
3,231

Other long-term assets
2,005

 
1,583

Total assets
$
25,384

 
$
23,527

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Benefits payable
$
4,781

 
$
4,475

Trade accounts payable and accrued expenses
3,292

 
2,095

Book overdraft
309

 
334

Unearned revenues
291

 
361

Short-term borrowings
300

 

Liabilities held-for-sale

 
206

Total current liabilities
8,973

 
7,471

Long-term debt
3,823

 
3,825

Future policy benefits payable
2,148

 
2,349

Other long-term liabilities
357

 
236

Total liabilities
15,301

 
13,881

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;
198,272,668 shares issued at June 30, 2015 and 197,951,551 shares
issued at December 31, 2014
33

 
33

Capital in excess of par value
2,495

 
2,330

Retained earnings
10,689

 
9,916

Accumulated other comprehensive income
153

 
223

Treasury stock, at cost, 50,128,994 shares at June 30, 2015 and
48,347,541 shares at December 31, 2014
(3,287
)
 
(2,856
)
Total stockholders’ equity
10,083

 
9,646

Total liabilities and stockholders’ equity
$
25,384

 
$
23,527

See accompanying notes to condensed consolidated financial statements.

3


Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions, except per share results)
Revenues:
 
 
 
 
 
 
 
Premiums
$
13,212

 
$
11,584

 
$
26,460

 
$
22,667

Services
407

 
546

 
897

 
1,084

Investment income
113

 
92

 
208

 
183

Total revenues
13,732

 
12,222

 
27,565

 
23,934

Operating expenses:
 
 
 
 
 
 
 
Benefits
11,252

 
9,627

 
22,257

 
18,751

Operating costs
1,817

 
1,835

 
3,762

 
3,620

Depreciation and amortization
90

 
79

 
183

 
161

Total operating expenses
13,159

 
11,541

 
26,202

 
22,532

Income from operations
573

 
681

 
1,363

 
1,402

Gain on sale of business
267

 

 
267

 

Interest expense
47

 
35

 
93

 
70

Income before income taxes
793

 
646

 
1,537

 
1,332

Provision for income taxes
362

 
302

 
676

 
620

Net income
$
431

 
$
344

 
$
861

 
$
712

Basic earnings per common share
$
2.88

 
$
2.22

 
$
5.74

 
$
4.59

Diluted earnings per common share
$
2.85

 
$
2.19

 
$
5.67

 
$
4.54

Dividends declared per common share
$
0.29

 
$
0.28

 
$
0.57

 
$
0.55

See accompanying notes to condensed consolidated financial statements.

4


Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Net income
$
431

 
$
344

 
$
861

 
$
712

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Change in gross unrealized investment
gains/losses
(87
)
 
56

 
(73
)
 
164

Effect of income taxes
32

 
(21
)
 
27

 
(60
)
Total change in unrealized
investment gains/losses, net of tax
(55
)
 
35

 
(46
)
 
104

Reclassification adjustment for net
realized gains included in
investment income
(28
)
 
(2
)
 
(37
)
 
(3
)
Effect of income taxes
9

 
1

 
13

 
1

Total reclassification adjustment, net
of tax
(19
)
 
(1
)
 
(24
)
 
(2
)
Other comprehensive (loss) income, net
of tax
(74
)
 
34

 
(70
)
 
102

Comprehensive income
$
357

 
$
378

 
$
791

 
$
814

See accompanying notes to condensed consolidated financial statements.

5


Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
For the six months ended
June 30,
 
2015
 
2014
 
(in millions)
Cash flows from operating activities
 
 
 
Net income
$
861

 
$
712

Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
 
 
 
Gain on sale of business
(267
)
 

Net realized capital gains
(37
)
 
(3
)
Stock-based compensation
69

 
55

Depreciation
178

 
157

Other intangible amortization
50

 
56

Benefit for deferred income taxes
(28
)
 
(39
)
Changes in operating assets and liabilities, net of effect of
businesses acquired and dispositions:
 
 
 
Receivables
(1,087
)
 
(1,137
)
Other assets
(1,437
)
 
(914
)
Benefits payable
306

 
885

Other liabilities
923

 
641

Unearned revenues
(70
)
 
42

Other, net
38

 
16

Net cash (used in) provided by operating activities
(501
)
 
471

Cash flows from investing activities
 
 
 
Proceeds from sale of business
1,055

 
72

Acquisitions, net of cash acquired
(38
)
 
(3
)
Purchases of property and equipment
(259
)
 
(216
)
Purchases of investment securities
(1,721
)
 
(968
)
Maturities of investment securities
615

 
512

Proceeds from sales of investment securities
1,570

 
1,007

Net cash provided by investing activities
1,222

 
404

Cash flows from financing activities
 
 
 
Receipts (withdrawals) from contract deposits, net
(259
)
 
(127
)
Proceeds from issuance of commercial paper, net
300

 

Change in book overdraft
(25
)
 
(109
)
Common stock repurchases
(371
)
 
(152
)
Dividends paid
(86
)
 
(86
)
Excess tax benefit from stock-based compensation
14

 
9

Proceeds from stock option exercises and other
21

 
45

Net cash used in financing activities
(406
)
 
(420
)
Increase in cash and cash equivalents
315

 
455

Cash and cash equivalents at beginning of period
1,935

 
1,138

Cash and cash equivalents at end of period
$
2,250

 
$
1,593

Supplemental cash flow disclosures:
 
 
 
Interest payments
$
95

 
$
73

Income tax payments, net
$
736

 
$
601

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, 2014, that was filed with the Securities and Exchange Commission, or the SEC, on February 18, 2015. We refer to the Form 10-K as the “2014 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 2014 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.
Proposed 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 sets forth the terms and conditions under which we will merge with, and become a wholly owned subsidiary of Aetna, a transaction we refer to in this report as the Merger. In the Merger, each outstanding share of our common stock will be converted into the right to receive (i) 0.8375 of a share of Aetna common stock and (ii) $125 in cash. The total transaction was estimated at approximately $37 billion including the assumption of Humana debt, based on the closing price of Aetna common shares on July 2, 2015. The Merger Agreement includes customary restrictions on the conduct of our business prior to the completion of the Merger, generally requiring us to conduct our business in the ordinary course and subjecting us to a variety of customary specified limitations absent Aetna’s prior written consent, including, for example, limitations on dividends and repurchases of our securities, restrictions on our ability to enter into material contracts, and negotiated thresholds for capital expenditures, capital contributions, acquisitions and divestitures of businesses.
The transaction is subject to customary closing conditions, including, among other things, (i) approval of the holders of our outstanding shares of common stock entitled to vote on the Merger, (ii) approval of the holders of Aetna outstanding shares to the issuance of Aetna common stock in the Merger, (iii) 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, (iv) the absence of legal restraints and prohibitions on the consummation of the Merger, (v) the effectiveness of the registration statement in respect of the Aetna common stock to be issued in the Merger, (vi) listing of the Aetna common stock to be issued in the Merger on the New York Stock Exchange, (vii) subject to the relevant standards set forth in the Merger Agreement, the accuracy of the representations and warranties made by each party, (viii) material compliance by each party with its covenants in the Merger Agreement, and (ix) no “Company Material Adverse Effect” with respect to us and no “Parent Material Adverse Effect” with respect to Aetna, in each case since the execution of and as defined in the Merger Agreement. In addition, Aetna’s obligation to consummate the Merger is subject to (a) the condition that the required regulatory approvals do not impose any condition that, individually or

7



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

in the aggregate, would reasonably be expected to have a “Regulatory Material Adverse Effect” (as such term is defined in the Merger Agreement), and (b) the Centers for Medicare and Medicaid Services, or CMS, has not imposed any sanctions with respect to our Medicare Advantage, or MA, business that, individually or in the aggregate, is or would reasonably be expected to be material and adverse to us and our subsidiaries, taken as a whole. The Merger is expected to close in the second half of 2016.
Business Segment Reclassifications
On January 1, 2015, we realigned certain of our businesses among our reportable segments to correspond with internal management reporting changes and renamed our Employer Group segment to the Group segment. Our three reportable segments remain Retail, Group, and Healthcare Services. The more significant realignments included reclassifying Medicare benefits offered to groups to the Retail segment from the Group segment, bringing all of our Medicare offerings, which are now managed collectively, together in one segment, recognizing that in some instances we market directly to individuals that are part of a group Medicare account. In addition, we realigned our military services business, primarily consisting of our TRICARE South Region contract previously included in the Other Businesses category, to our Group segment as we consider this contract with the government to be a group account. Prior period segment financial information has been recast to conform to the 2015 presentation. See Note 14 for segment financial information.

2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2015, the Financial Accounting Standards Board, or FASB, issued new guidance requiring insurance entities to provide additional disclosures about claim liabilities including paid claims development information by accident year and claim frequency data and related methodologies. The guidance is effective for us beginning with the 2016 annual reporting period and interim periods beginning in 2017. We are currently evaluating the impact the new guidance will have on our disclosures.
In April 2015, the FASB issued new guidance to help entities determine whether a cloud computing arrangement contains a software license that should be accounted for as internal-use software or as a service contract. The guidance is effective for us beginning with interim and annual reporting periods in 2016, with early adoption permitted. Upon adoption, an entity has the option to apply the provisions either prospectively to all arrangements entered into or materially modified, or retrospectively. We are currently evaluating the impact, if any, on our results of operations, financial position, and cash flows.
In March 2015, the FASB issued new guidance which changes the presentation of debt issuance costs from an asset to a direct reduction of the related debt liability. The new guidance is effective for us beginning with annual and interim periods in 2016 with early adoption permitted. The adoption of the new guidance will not have a material impact on our results of operations, financial condition, or cash flows.
In February 2015, the FASB issued an amendment to current consolidation guidance that modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities, eliminating the presumption that a general partner should consolidate a limited partnership, and affects the consolidation analysis of reporting entities that are involved with variable interest entities. The new guidance is effective for us beginning with interim and annual reporting periods in 2016, with early adoption permitted. All legal entities are subject to reevaluation under the revised consolidation model. We are currently evaluating the impact, if any, on our results of operations, financial position, and cash flows.
In May 2014, the 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. In July 2015, the FASB decided to defer the effective date provided in the new revenue guidance by one year. Giving effect to this deferral, the new guidance is effective for us beginning with annual and interim periods in 2018. We are currently evaluating the 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.

8



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

3. ACQUISITIONS AND DIVESTITURES
On June 1, 2015, we completed the sale of our wholly owned subsidiary, Concentra Inc., or Concentra, to MJ Acquisition Corporation, a joint venture between Select Medical Holdings Corporation and Welsh, Carson, Anderson & Stowe XII, L.P., a private equity fund, for approximately $1,055 million in cash, excluding approximately $25 million of transaction costs. In connection with the sale, we recognized a pre-tax gain, net of transaction costs, of $267 million which is reported as gain on sale of business in the accompanying condensed consolidated statements of income for the three and six months ended June 30, 2015.
In March 2015, we classified Concentra as held-for-sale and aggregated Concentra's assets and liabilities separately on the balance sheet, including a reclassification of the December 31, 2014 balance sheet for comparative purposes. The assets and liabilities of Concentra that were disposed of on June 1, 2015 and classified as held-for-sale as of December 31, 2014 were as follows:
 
June 1, 2015
 
December 31, 2014
Assets
(in millions)
Receivables, net
$
130

 
$
115

Property and equipment, net
197

 
191

Goodwill
480

 
480

Other intangible assets, net
124

 
131

Other assets
27

 
26

Total assets disposed/held-for-sale
$
958

 
$
943

Liabilities
 
 
 
Trade accounts payable and accrued expenses
$
81

 
$
90

Other liabilities
114

 
116

Total liabilities disposed/held-for-sale
$
195

 
$
206

Net assets disposed
$
763

 
$
737

The accompanying condensed consolidated statements of income include revenues related to Concentra of $166 million and $411 million for the three and six months ended June 30, 2015, respectively, and income before income taxes of $8 million and $15 million, respectively.
During 2015 and 2014, 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 acquisition dates. Acquisition-related costs recognized in 2015 and 2014 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 June 30, 2015 and December 31, 2014, respectively:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(in millions)
June 30, 2015
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
$
336

 
$
1

 
$

 
$
337

Mortgage-backed securities
1,345

 
34

 
(17
)
 
1,362

Tax-exempt municipal securities
2,563

 
92

 
(14
)
 
2,641

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
14

 

 

 
14

Commercial
965

 
9

 
(30
)
 
944

Asset-backed securities
162

 
1

 

 
163

Corporate debt securities
3,239

 
211

 
(31
)
 
3,419

Total debt securities
$
8,624

 
$
348

 
$
(92
)
 
$
8,880

December 31, 2014
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
$
365

 
$
10

 
$
(1
)
 
$
374

Mortgage-backed securities
1,453

 
50

 
(5
)
 
1,498

Tax-exempt municipal securities
2,931

 
140

 
(3
)
 
3,068

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
17

 

 

 
17

Commercial
846

 
16

 
(19
)
 
843

Asset-backed securities
28

 
1

 

 
29

Corporate debt securities
3,432

 
299

 
(13
)
 
3,718

Total debt securities
$
9,072

 
$
516

 
$
(41
)
 
$
9,547


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 June 30, 2015 and December 31, 2014, 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)
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and other U.S.
government corporations
and agencies:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
obligations
$
86

 
$

 
$
19

 
$

 
$
105

 
$

Mortgage-backed
securities
710

 
(14
)
 
91

 
(3
)
 
801

 
(17
)
Tax-exempt municipal
securities
685

 
(12
)
 
38

 
(2
)
 
723

 
(14
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential

 

 
5

 

 
5

 

Commercial
383

 
(8
)
 
271

 
(22
)
 
654

 
(30
)
Asset-backed securities
149

 

 

 

 
149

 

Corporate debt securities
708

 
(28
)
 
38

 
(3
)
 
746

 
(31
)
Total debt securities
$
2,721

 
$
(62
)
 
$
462

 
$
(30
)
 
$
3,183

 
$
(92
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and other U.S.
government corporations
and agencies:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
obligations
$
79

 
$

 
$
80

 
$
(1
)
 
$
159

 
$
(1
)
Mortgage-backed
securities
22

 

 
320

 
(5
)
 
342

 
(5
)
Tax-exempt municipal
securities
131

 
(1
)
 
118

 
(2
)
 
249

 
(3
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
1

 

 
4

 

 
5

 

Commercial
31

 
(1
)
 
267

 
(18
)
 
298

 
(19
)
Asset-backed securities
13

 

 

 

 
13

 

Corporate debt securities
219

 
(6
)
 
128

 
(7
)
 
347

 
(13
)
Total debt securities
$
496

 
$
(8
)
 
$
917

 
$
(33
)
 
$
1,413

 
$
(41
)
Approximately 97% of our debt securities were investment-grade quality, with a weighted average credit rating of AA- by S&P at June 30, 2015. Most of the debt securities that were below investment-grade were rated BB, the higher end of the below investment-grade rating scale. At June 30, 2015, 7% of our tax-exempt municipal securities were pre-refunded, generally with U.S. government and agency securities. Tax-exempt municipal securities that were not pre-refunded were diversified among general obligation bonds of U.S. states and local municipalities as well as special revenue bonds. General obligation bonds, which are backed by the taxing power and full faith of the issuer, accounted for 35% of the tax-exempt municipals that were not pre-refunded in the portfolio. Special revenue bonds,

11



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

issued by a municipality to finance a specific public works project such as utilities, water and sewer, transportation, or education, and supported by the revenues of that project, accounted for the remaining 65% of these municipals. Our general obligation bonds are diversified across the United States with no individual state exceeding 11%. In addition, 17% of our tax-exempt securities were insured by bond insurers and had an 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.
The recoverability of our non-agency commercial mortgage-backed securities is supported by factors such as seniority, underlying collateral characteristics and credit enhancements. At June 30, 2015, these commercial mortgage-backed securities primarily were composed of senior tranches having high credit support. The weighted average credit rating of all commercial mortgage-backed securities was AA+ at June 30, 2015.
The percentage of corporate securities associated with the financial services industry was 23% at June 30, 2015 and 21% at December 31, 2014.
All issuers of securities we own that were trading at an unrealized loss at June 30, 2015 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 June 30, 2015, 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 June 30, 2015.
The detail of realized gains (losses) related to investment securities and included within investment income was as follows for the three and six months ended June 30, 2015 and 2014:
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Gross realized gains
$
30

 
$
6

 
$
47

 
$
7

Gross realized losses
(2
)
 
(4
)
 
(10
)
 
(4
)
Net realized capital gains
$
28

 
$
2


$
37


$
3

There were no material other-than-temporary impairments for the three months ended June 30, 2015 or 2014.
The contractual maturities of debt securities available for sale at June 30, 2015, 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
$
454

 
$
456

Due after one year through five years
1,859

 
1,953

Due after five years through ten years
1,805

 
1,861

Due after ten years
2,020

 
2,127

Mortgage and asset-backed securities
2,486

 
2,483

Total debt securities
$
8,624

 
$
8,880


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 June 30, 2015 and December 31, 2014, 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)
June 30, 2015
 
 
 
 
 
 
 
Cash equivalents
$
1,619

 
$
1,619

 
$

 
$

Debt securities:
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
337

 

 
337

 

Mortgage-backed securities
1,362

 

 
1,362

 

Tax-exempt municipal securities
2,641

 

 
2,636

 
5

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
14

 

 
14

 

Commercial
944

 

 
944

 

Asset-backed securities
163

 

 
162

 
1

Corporate debt securities
3,419

 

 
3,414

 
5

Total debt securities
8,880

 

 
8,869

 
11

Total invested assets
$
10,499

 
$
1,619

 
$
8,869

 
$
11

 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
Cash equivalents
$
1,712

 
$
1,712

 
$

 
$

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

 

 
374

 

Mortgage-backed securities
1,498

 

 
1,498

 

Tax-exempt municipal securities
3,068

 

 
3,060

 
8

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
17

 

 
17

 

Commercial
843

 

 
843

 

Asset-backed securities
29

 

 
28

 
1

Corporate debt securities
3,718

 

 
3,695

 
23

Total debt securities
9,547

 

 
9,515

 
32

Total invested assets
$
11,259

 
$
1,712

 
$
9,515

 
$
32


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 six months ended June 30, 2015 or June 30, 2014.
Our Level 3 assets had a fair value of $11 million at June 30, 2015, or 0.1% of our total invested assets. During the three and six months ended June 30, 2015 and 2014, 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 June 30,
 
2015
 
2014
 
Private
Placements
 
Auction
Rate
Securities
 
Total
 
Private
Placements
 
Auction
Rate
Securities
 
Total
 
(in millions)
Beginning balance at April 1
$
6

 
$
6

 
$
12

 
$
24

 
$
13

 
$
37

Total gains or losses:
 
 
 
 
 
 
 
 
 
 
 
Realized in earnings

 

 

 

 

 

Unrealized in other
comprehensive income

 

 

 

 

 

Purchases

 

 

 

 

 

Sales

 
(1
)
 
(1
)
 

 

 

Settlements

 

 

 

 

 

Balance at June 30
$
6

 
$
5

 
$
11

 
$
24

 
$
13

 
$
37

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the six months ended June 30,
 
2015
 
2014
 
Private
Placements
 
Auction
Rate
Securities
 
Total
 
Private
Placements
 
Auction
Rate
Securities
 
Total
 
(in millions)
Beginning balance at January 1
$
24

 
$
8

 
$
32

 
$
24

 
$
13

 
$
37

Total gains or losses:
 
 
 
 
 
 
 
 
 
 
 
Realized in earnings
(1
)
 

 
(1
)
 

 

 

Unrealized in other
comprehensive income

 

 

 

 

 

Purchases

 

 

 

 

 

Sales
(17
)
 
(3
)
 
(20
)
 

 

 

Settlements

 

 

 

 

 

Balance at June 30
$
6

 
$
5

 
$
11

 
$
24

 
$
13

 
$
37

Financial Liabilities
Our long-term debt is recorded at carrying value in our consolidated balance sheets. The carrying value of our long-term debt outstanding was $3,823 million at June 30, 2015 and $3,825 million at December 31, 2014. The fair value of our long-term debt was $3,967 million at June 30, 2015 and $4,102 million at December 31, 2014. 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.

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 2015 and 2014. 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 the three and six months ended June 30, 2015 or 2014.
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 in Note 2 to the consolidated financial statements included in our 2014 Form 10-K. The accompanying condensed consolidated balance sheets include the following amounts associated with Medicare Part D at June 30, 2015 and December 31, 2014. 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. The risk corridor settlement includes amounts classified as long-term because settlement associated with the 2015 provision will exceed 12 months at June 30, 2015.
 
June 30, 2015
 
December 31, 2014
Risk
Corridor
Settlement
 
CMS
Subsidies/
Discounts
 
Risk
Corridor
Settlement
 
CMS
Subsidies/
Discounts
 
(in millions)
Other current assets
$
105

 
$
2,104

 
$
105

 
$
1,690

Trade accounts payable and accrued expenses
(23
)
 
(176
)
 
(36
)
 
(32
)
Net current asset
82

 
1,928

 
69

 
1,658

Other long-term assets
121

 

 

 

Other long-term liabilities
(18
)
 

 

 

Net long-term asset
103

 

 

 

Total net asset
$
185

 
$
1,928

 
$
69

 
$
1,658

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 including a permanent risk adjustment program and temporary risk corridor and reinsurance programs, which we collectively refer to as the 3Rs, effective January 1, 2014. The 3Rs are applicable to certain of our commercial medical insurance products as further discussed in Note 2 to our 2014 Form 10-K. On June 30, 2015 we received notification from CMS of risk adjustment and reinsurance settlement amounts for 2014. We were also notified that settlement of receivables and payables under the risk adjustment and risk corridor programs will be aggregated by legal entity as opposed to by state and legal entity. We revised our 2014 estimates to reflect actual amounts and also made a corresponding adjustment to our risk corridor estimate based on these results. As expected, the change in estimate for risk adjustment was substantially offset by the corresponding change in estimate for risk corridor, both of which are reflected as changes in premiums revenue in our condensed consolidated statements of income. The change in estimate related to the 3Rs for the 2014 coverage year was a decline in the estimated net receivable of approximately $29 million for the three months ended June 30, 2015 and $40 million for the six months ended June 30, 2015, primarily

15



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

reflecting impact of the June 30, 2015 notification. In addition, we revised our 3Rs estimates for the 2015 coverage year based on the data from CMS for 2014. The accompanying condensed consolidated balance sheets include the following amounts associated with the 3Rs at June 30, 2015 and December 31, 2014. Amounts related to the 2015 coverage year are classified as long-term because settlement will exceed 12 months at June 30, 2015.
 
June 30, 2015
 
December 31, 2014
 
Risk Adjustment
Settlement
 
Reinsurance
Recoverables
 
Risk
Corridor
Settlement
 
Risk Adjustment
Settlement
 
Reinsurance
Recoverables
 
Risk
Corridor
Settlement
 
(in millions)
Premiums receivable
$
44
 
 
$

 
$

 
$
131
 
 
$

 
$

Other current assets
 
 
521

 
243

 
 
 
586

 
55

Trade accounts payable and
accrued expenses
(169
)
 

 

 
(89
)
 

 
(4
)
Net current (liability) asset
(125
)
 
521

 
243

 
42
 
 
586

 
51

Other long-term assets
65
 
 
168

 
133

 
 
 

 

Other long-term liabilities
(106
)
 

 

 
 
 

 

Net long-term (liability) asset
(41
)
 
168

 
133

 
 
 

 

Total net asset
$
(166
)
 
$
689

 
$
376

 
$
42
 
 
$
586

 
$
51