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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 March 31, 2020
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 March 31, 2020
$0.16 2/3 par value
132,206,069 shares



Humana Inc.
FORM 10-Q
MARCH 31, 2020
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)
 
March 31,
2020
 
December 31,
2019
 
(in millions, except share amounts)
A SSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
6,054

 
$
4,054

Investment securities
11,104

 
10,972

Receivables, less allowance for doubtful accounts of $73 in 2020
and $69 in 2019
2,009

 
1,056

Other current assets
5,384

 
3,806

Total current assets
24,551

 
19,888

Property and equipment, net
2,023

 
1,955

Long-term investment securities
393

 
406

Equity method investments
1,093

 
1,063

Goodwill
4,443

 
3,928

Other long-term assets
2,130

 
1,834

Total assets
$
34,633

 
$
29,074

L IABILITIES   AND  S TOCKHOLDERS ’ E QUITY
 
 
 
Current liabilities:
 
 
 
Benefits payable
$
7,090

 
$
6,004

Trade accounts payable and accrued expenses
5,399

 
3,754

Book overdraft
169

 
225

Unearned revenues
274

 
247

Short-term debt
1,898

 
699

Total current liabilities
14,830

 
10,929

Long-term debt
6,057

 
4,967

Future policy benefits payable
205

 
206

Other long-term liabilities
1,186

 
935

Total liabilities
22,278

 
17,037

Commitments and contingencies (Note 13)

 

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;
198,629,992 shares issued at March 31, 2020 and December 31, 2019
33

 
33

Capital in excess of par value
2,857

 
2,820

Retained earnings
17,871

 
17,483

Accumulated other comprehensive income
48

 
156

Treasury stock, at cost, 66,423,923 shares at March 31, 2020 and
66,524,771 shares at December 31, 2019
( 8,454
)
 
( 8,455
)
Total stockholders’ equity
12,355

 
12,037

Total liabilities and stockholders’ equity
$
34,633

 
$
29,074

See accompanying notes to condensed consolidated financial statements.

3


Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three months ended
March 31,
 
2020
 
2019
 
(in millions, except per share results)
Revenues:
 
 
 
Premiums
$
18,362

 
$
15,651

Services
424

 
355

Investment income
149

 
101

Total revenues
18,935

 
16,107

Operating expenses:
 
 
 
Benefits
15,629

 
13,493

Operating costs
2,117

 
1,660

Depreciation and amortization
115

 
107

Total operating expenses
17,861

 
15,260

Income from operations
1,074

 
847

Interest expense
60

 
62

Other expense, net
297

 
39

Income before income taxes and equity in net earnings
717

 
746

Provision for income taxes
252

 
183

Equity in net earnings
8

 
3

Net income
$
473

 
$
566

Basic earnings per common share
$
3.58

 
$
4.18

Diluted earnings per common share
$
3.56

 
$
4.16

See accompanying notes to condensed consolidated financial statements.

4


Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three months ended
March 31,
 
2020
 
2019
 
(in millions)
Net income
$
473

 
$
566

Other comprehensive income:
 
 
 
Change in gross unrealized investment
gains/losses
( 92
)
 
196

Effect of income taxes
22

 
( 45
)
Total change in unrealized
investment gains/losses, net of tax
( 70
)
 
151

Reclassification adjustment for net
realized gains
( 45
)
 

Effect of income taxes
10

 

Total reclassification adjustment, net
of tax
( 35
)
 

Other comprehensive (loss) income, net of tax
( 105
)
 
151

Comprehensive loss attributable to equity method investments
( 3
)
 
( 2
)
Comprehensive income
$
365

 
$
715


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 March 31, 2020
Balances, December 31, 2019
198,630

 
$
33

 
$
2,820

 
$
17,483

 
$
156

 
$
( 8,455
)
 
$
12,037

Net income

 

 

 
473

 

 

 
473

Impact of adopting ASC 326 -
Current expected credit loss
standard (CECL)
 
 
 
 
 
 
( 2
)
 
 
 
 
 
( 2
)
Other comprehensive loss


 


 


 


 
( 108
)
 


 
( 108
)
Common stock repurchases

 

 

 


 

 
( 17
)
 
( 17
)
Dividends and dividend
equivalents

 

 

 
( 83
)
 


 

 
( 83
)
Stock-based compensation

 

 
36

 

 

 


 
36

Restricted stock unit vesting

 

 
( 6
)
 


 

 
6

 

Stock option exercises

 

 
7

 

 

 
12

 
19

Balances, March 31, 2020
198,630

 
$
33

 
$
2,857

 
$
17,871

 
$
48

 
$
( 8,454
)
 
$
12,355

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2019
Balances, December 31, 2018
198,595

 
$
33

 
$
2,535

 
$
15,072

 
$
( 159
)
 
$
( 7,320
)
 
$
10,161

Net income

 

 

 
566

 

 

 
566

Other comprehensive income


 


 


 


 
149

 


 
149

Common stock repurchases

 

 
150

 


 

 
( 160
)
 
( 10
)
Dividends and dividend
equivalents

 

 

 
( 75
)
 


 

 
( 75
)
Stock-based compensation

 

 
33

 

 

 


 
33

Restricted stock unit vesting

 

 
( 13
)
 


 

 
13

 

Stock option exercises

 

 
17

 

 

 

 
17

Balances, March 31, 2019
198,595

 
$
33

 
$
2,722

 
$
15,563

 
$
( 10
)
 
$
( 7,467
)
 
$
10,841

See accompanying notes to condensed consolidated financial statements.


 
 
 
 
 
 
 
 
 
 
 
 
 
 


6



Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
For the three months ended
March 31,
 
2020
 
2019
 
(in millions)
Cash flows from operating activities
 
 
 
Net income
$
473

 
$
566

Adjustments to reconcile net income to net cash provided by
operating activities:
 
 
 
Net realized capital (gains) losses
( 49
)
 
2

Equity in net earnings
( 8
)
 
( 3
)
Stock-based compensation
36

 
33

Depreciation
124

 
118

Amortization
21

 
18

Benefit for deferred income taxes
( 3
)
 
( 21
)
Changes in operating assets and liabilities, net of effect of
businesses acquired and dispositions:
 
 
 
Receivables
( 953
)
 
( 940
)
Other assets
( 1,470
)
 
( 102
)
Benefits payable
1,086

 
1,162

Other liabilities
1,203

 
16

Unearned revenues
27

 
29

Other
( 13
)
 
18

Net cash provided by operating activities
474

 
896

Cash flows from investing activities
 
 
 
Acquisitions, net of cash acquired
( 709
)
 

Purchases of property and equipment
( 192
)
 
( 139
)
Purchases of investment securities
( 2,459
)
 
( 2,175
)
Maturities of investment securities
735

 
397

Proceeds from sales of investment securities
1,415

 
2,062

Net cash (used in) provided by investing activities
( 1,210
)
 
145

Cash flows from financing activities
 
 
 
Receipts from contract deposits, net
574

 
554

Proceeds from issuance of senior notes, net
1,090

 

Proceeds from issuance of commercial paper, net
198

 
17

Proceeds from term loan
1,000

 

Change in book overdraft
( 55
)
 
( 17
)
Common stock repurchases
( 17
)
 
( 10
)
Dividends paid
( 73
)
 
( 68
)
Proceeds from stock option exercises and other, net
19

 
17

Net cash provided by financing activities
2,736

 
493

Increase in cash and cash equivalents
2,000

 
1,534

Cash and cash equivalents at beginning of period
4,054

 
2,343

Cash and cash equivalents at end of period
$
6,054

 
$
3,877

Supplemental cash flow disclosures:
 
 
 
Interest payments
$
40

 
$
29

Income tax refunds, net
$
( 6
)
 
$
( 22
)

See accompanying notes to condensed consolidated financial statements.

7



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, 2019 , that was filed with the Securities and Exchange Commission, or the SEC, on February 20, 2020 . We refer to the Form 10-K as the “ 2019 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 2019 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.
COVID-19
The emergence of stay-at-home and physical distancing orders and other restrictions on movement and economic activity intended to reduce the spread of the novel coronavirus, or COVID-19, during the second half of March 2020 has impacted our business. During this short period of time, we experienced lower hospital admissions and utilization as members and providers began to defer non-essential procedures. We also saw an increase in pharmacy costs as a result of us allowing early prescription refills to permit members to prepare for extended supply needs as well as COVID-19 specific administrative costs, including a $ 50 million contribution to the Humana Foundation to promote its COVID-19 relief efforts in the communities served by Humana. Taken together, the net impact of COVID-19 was not material to the results of our operations during the first quarter of 2020.
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 2019 Form 10-K for information on accounting policies that we consider in preparing our consolidated financial statements. See Note 14 for disaggregation of revenue by segment and type.
At March 31, 2020 , accounts receivable related to services were $ 141 million . For the three months ended March 31, 2020 , 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 March 31, 2020 .
For the three months ended March 31, 2020 , 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.

8



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

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 the fee resumed in calendar year 2020. The Further Consolidated Appropriations Act, 2020, enacted on December 20, 2019, permanently repealed the health insurance industry fee beginning in calendar year 2021.
In September 2020, we expect to pay the federal government $ 1.2 billion for the annual health insurance industry fee attributed to calendar year 2020. 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 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 $ 306 million for the three months ended March 31, 2020 resulting from the amortization of the 2020 annual health insurance industry fee.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 was 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 primarily of available for sale debt securities. We adopted the new standard effective January 1, 2020. Due to the high concentration of our financial assets measured at amortized cost being with the federal government resulting in zero nonpayment risk as well as our available for sale debt securities primarily being in an unrealized gain position, the adoption of the new standard 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 2022, with earlier adoption permitted, and requires retrospective application to previously issued annual and interim financial statements. 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.

9



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

3. ACQUISITIONS AND DIVESTITURES
On January 31, 2020, we purchased privately held Enclara Healthcare, or Enclara, one of the nation’s largest hospice pharmacy and benefit management providers for cash consideration of approximately $ 709 million , net of cash received. This resulted in a preliminary purchase price allocation to goodwill of $ 515 million , other intangible assets of $ 240 million , and net tangible liabilities assumed of $ 11 million . The goodwill was assigned to the Healthcare Services segment. The other intangible assets, which primarily consist of customer contracts, have an estimated weighted average useful life of 11.4 years . The purchase price allocation is preliminary, subject to completion of valuation analysis, including for example, refining assumptions used to calculate the fair value of intangible assets.
On February 1, 2020, our Partners in Primary Care wholly-owned subsidiary entered into a strategic partnership with Welsh, Carson, Anderson & Stowe, or WCAS, to accelerate the expansion of our primary care model. The WCAS partnership is expected to open approximately 50 payor-agnostic, senior-focused primary care centers over 3 years beginning in 2020. Partners in Primary Care committed to the acquisition of a non-controlling interest in the approximately $ 600 million entity accounted for under the equity method of accounting. In addition, the agreement includes a series of put and call options through which WCAS may require us to purchase their interest in the entity, and through which we may acquire WCAS’s interest, over the next 5 to 10 years .
During 2019 , 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 acquired in 2020 and 2019 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 2020 and 2019 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.

10



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 March 31, 2020 and December 31, 2019 , respectively:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(in millions)
March 31, 2020
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
$
394

 
$
4

 
$

 
$
398

Mortgage-backed securities
3,438

 
160

 
( 1
)
 
3,597

Tax-exempt municipal securities
1,549

 
16

 
( 12
)
 
1,553

Mortgage-backed securities:
 
 
 
 
 
 
 
Commercial
834

 
16

 
( 28
)
 
822

Asset-backed securities
1,126

 
1

 
( 46
)
 
1,081

Corporate debt securities
4,082

 
48

 
( 84
)
 
4,046

Total debt securities
$
11,423

 
$
245

 
$
( 171
)
 
$
11,497

 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
$
353

 
$
1

 
$

 
$
354

Mortgage-backed securities
3,628

 
85

 
( 3
)
 
3,710

Tax-exempt municipal securities
1,433

 
30

 

 
1,463

Mortgage-backed securities:
 
 
 
 
 
 
 
Commercial
786

 
18

 

 
804

Asset-backed securities
1,093

 
3

 
( 3
)
 
1,093

Corporate debt securities
3,867

 
82

 
( 2
)
 
3,947

Total debt securities
$
11,160

 
$
219

 
$
( 8
)
 
$
11,371


We also held  $ 7 million  of equity securities consisting of common stock carried at fair value as of December 31, 2019.

11



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 March 31, 2020 and December 31, 2019 , 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)
March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and other U.S.
government corporations
and agencies:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
obligations
$
2

 
$

 
$

 
$

 
$
2

 
$

Mortgage-backed
securities
67

 
( 1
)
 
1

 

 
68

 
( 1
)
Tax-exempt municipal
securities
309

 
( 10
)
 
176

 
( 2
)
 
485

 
( 12
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Commercial
198

 
( 15
)
 
131

 
( 13
)
 
329

 
( 28
)
Asset-backed securities
144

 
(