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~~2020



☐			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~~.

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,, Kentucky40202

(Address of principal executive offices, including zip code)

(~~502~~) (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

☐

~~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~~2020
$0.16 2/3 par value			~~132,426,045~~132,341,451 shares

Table of Contents

Humana Inc.

FORM 10-Q

SEPTEMBER 30, ~~2019~~2020

INDEX


				Page
Part I: Financial Information
Item 1.		Financial Statements (Unaudited)

			~~Page~~
~~Part I: Financial Information~~
~~Item 1.~~	~~Financial Statements (Unaudited)~~

	Condensed Consolidated Balance Sheets at September 30, ~~2019~~2020 and December 31, ~~2018~~2019		3

		Condensed Consolidated Statements of Income for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~2019		4

		Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~2019		5

		Condensed Consolidated Statements of Stockholders' Equity for the three and ninemonths ~~months~~ ended September 30, ~~2019~~2020 and ~~2018~~2019		6

		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2019~~2020 and ~~2018~~2019		8

		Notes to Condensed Consolidated Financial Statements		9

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		3835

Item 3.		Quantitative and Qualitative Disclosures about Market Risk		58

Item 4.		Controls and Procedures		58

Part II: Other Information

Item 1.		Legal Proceedings		59

Item 1A.		Risk Factors		59

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		5960

Item 3.		Defaults Upon Senior Securities		5961

Item 4.		Mine Safety Disclosures		6061

Item 5.		Other Information		6061

Item 6.		Exhibits		6162

		Signatures		6263

		Certifications

Humana Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	September 30, 2019			December 31, 2018				September 30, 2020		December 31, 2019
	(in millions, except share amounts)							(in millions, except share amounts)
ASSETS							ASSETS
Current assets:							Current assets:
Cash and cash equivalents	$	5,527		$	2,343		Cash and cash equivalents	$	7,985	$	4,054
Investment securities	10,430			10,026			Investment securities	12,741		10,972
Receivables, less allowance for doubtful accounts of $73 in 2019 and $79 in 2018	848			1,015
Receivables, less allowance for doubtful accounts of $78 in 2020 and $69 in 2019							Receivables, less allowance for doubtful accounts of $78 in 2020 and $69 in 2019	1,135		1,056
Other current assets	3,519			3,564			Other current assets	5,170		3,806
Total current assets	20,324			16,948			Total current assets	27,031		19,888
Property and equipment, net	1,864			1,735			Property and equipment, net	2,228		1,955
Long-term investment securities	404			411			Long-term investment securities	1,105		406
Equity method investment in Kindred at Home	1,061			1,047
Equity method investments							Equity method investments	1,160		1,063
Goodwill	3,922			3,897			Goodwill	4,443		3,928
Other long-term assets	1,605			1,375			Other long-term assets	2,510		1,834
Total assets	$	29,180		$	25,413		Total assets	$	38,477	$	29,074
LIABILITIES AND STOCKHOLDERS’ EQUITY							LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:							Current liabilities:
Benefits payable	$	6,220		$	4,862		Benefits payable	$	8,208	$	6,004
Trade accounts payable and accrued expenses	3,640			3,067			Trade accounts payable and accrued expenses	4,472		3,754
Book overdraft	273			171			Book overdraft	214		225
Unearned revenues	274			283			Unearned revenues	287		247
Short-term debt	699			1,694			Short-term debt	1,724		699
Total current liabilities	11,106			10,077			Total current liabilities	14,905		10,929
Long-term debt	5,365			4,375			Long-term debt	6,059		4,967
Future policy benefits payable	211			219			Future policy benefits payable	202		206
Other long-term liabilities	897			581			Other long-term liabilities	1,543		935
Total liabilities	17,579			15,252			Total liabilities	22,709		17,037
Commitments and contingencies (Note 14)

Stockholders’ equity:							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
Preferred stock, $1 par; 10,000,000 shares authorized; NaN issued							Preferred stock, $1 par; 10,000,000 shares authorized; NaN issued	0		0
Common stock, $0.16 2/3 par; 300,000,000 shares authorized; 198,648,742 shares issued at September 30, 2020 and 198,629,992 shares issued at December 31, 2019							Common stock, $0.16 2/3 par; 300,000,000 shares authorized; 198,648,742 shares issued at September 30, 2020 and 198,629,992 shares issued at December 31, 2019	33		33
Capital in excess of par value	2,608			2,535			Capital in excess of par value	2,940		2,820
Retained earnings	17,045			15,072			Retained earnings	20,872		17,483
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		)
Accumulated other comprehensive income							Accumulated other comprehensive income	370		156
Treasury stock, at cost, 66,307,291 shares at September 30, 2020 and 66,524,771 shares at December 31, 2019							Treasury stock, at cost, 66,307,291 shares at September 30, 2020 and 66,524,771 shares at December 31, 2019	(8,447)		(8,455)
Total stockholders’ equity	11,601			10,161			Total stockholders’ equity	15,768		12,037
Total liabilities and stockholders’ equity	$	29,180		$	25,413		Total liabilities and stockholders’ equity	$	38,477	$	29,074

See accompanying notes to condensed consolidated financial statements.

Humana Inc.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three months ended September 30,						Nine months ended September 30,						Three months ended September 30,				Nine months ended September 30,
	2019			2018			2019			2018			2020		2019		2020		2019
	(in millions, except per share results)												(in millions, except per share results)
Revenues:												Revenues:
Premiums	$	15,712		$	13,712		$	47,139		$	41,236	Premiums	$	18,904	$	15,712	$	55,822	$	47,139
Services	393			381			1,103			1,090		Services	457		393		1,331		1,103
Investment income	136			113			351			418		Investment income	714		136		940		351
Total revenues	16,241			14,206			48,593			42,744		Total revenues	20,075		16,241		58,093		48,593
Operating expenses:												Operating expenses:
Benefits	13,357			11,243			40,168			34,449		Benefits	15,611		13,357		45,415		40,168
Operating costs	1,889			1,900			5,252			5,410		Operating costs	2,513		1,889		6,984		5,252
Depreciation and amortization	127			102			343			302		Depreciation and amortization	128		127		362		343
Total operating expenses	15,373			13,245			45,763			40,161		Total operating expenses	18,252		15,373		52,761		45,763
Income from operations	868			961			2,830			2,583		Income from operations	1,823		868		5,332		2,830
(Gain) loss on sale of business	—			(4		)	—			786

Interest expense	62			53			184			159		Interest expense	75		62		211		184
Other (income) expense, net	(82		)	11			(217		)	11		Other (income) expense, net	(7)		(82)		63		(217)
Income before income taxes and equity in net earnings	888			901			2,863			1,627		Income before income taxes and equity in net earnings	1,755		888		5,058		2,863
Provision for income taxes	200			266			684			308		Provision for income taxes	450		200		1,485		684
Equity in net earnings of Kindred at Home	1			9			16			9
Equity in net earnings												Equity in net earnings	35		1		68		16
Net income	$	689		$	644		$	2,195		$	1,328	Net income	$	1,340	$	689	$	3,641	$	2,195
Basic earnings per common share	$	5.16		$	4.68		$	16.31		$	9.64	Basic earnings per common share	$	10.12	$	5.16	$	27.53	$	16.31
Diluted earnings per common share	$	5.14		$	4.65		$	16.24		$	9.58	Diluted earnings per common share	$	10.05	$	5.14	$	27.37	$	16.24

See accompanying notes to condensed consolidated financial statements.

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


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
	(in millions)
Net income	$	1,340	$	689	$	3,641	$	2,195
Other comprehensive income:
Change in gross unrealized investment gains/losses	66		87		332		452
Effect of income taxes	(15)		(20)		(78)		(105)
Total change in unrealized investment gains/losses, net of tax	51		67		254		347
Reclassification adjustment for net realized gains	(1)		(1)		(48)		(7)
Effect of income taxes	0		0		10		2
Total reclassification adjustment, net of tax	(1)		(1)		(38)		(5)
Other comprehensive income, net of tax	50		66		216		342
Comprehensive income (loss) attributable to equity method investments	3		(1)		(2)		(6)
Comprehensive income	$	1,393	$	754	$	3,855	$	2,531

See accompanying notes to condensed consolidated financial statements.

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
	Common Stock			Capital In Excess of Par Value			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Stockholders’ Equity				Issued Shares	Amount
	Issued Shares	Amount																		(dollars in millions, share amounts in thousands)
Three months ended September 30, 2020																			Three months ended September 30, 2020
Balances, June 30, 2020																			Balances, June 30, 2020	198,630	$	33	$	2,898	$	19,616	$	317	$	(8,448)	$	14,416
Net income																			Net income						1,340						1,340

Other comprehensive loss																			Other comprehensive loss								53				53
Common stock repurchases																			Common stock repurchases	19			0						(5)		(5)
Dividends and dividend equivalents																			Dividends and dividend equivalents						(84)						(84)
Stock-based compensation																			Stock-based compensation				47								47
Restricted stock unit vesting																			Restricted stock unit vesting	0			(6)						6		0
Stock option exercises																			Stock option exercises	0			1						0		1

Balances, September 30, 2020																			Balances, September 30, 2020	198,649	$	33	$	2,940	$	20,872	$	370	$	(8,447)	$	15,768
	(dollars in millions, share amounts in thousands)
Three months ended September 30, 2019	Three months ended September 30, 2019																		Three months ended September 30, 2019
Balances, June 30, 2019	198,628	$	33	$	2,763		$	16,429		$	112		$	(7,465	)	$	11,872		Balances, June 30, 2019	198,628	$	33	$	2,763	$	16,429	$	112	$	(7,465)	$	11,872
Net income							689									689			Net income						689						689
Other comprehensive income										65						65			Other comprehensive income								65				65
Common stock repurchases				(200		)							(800		)	(1,000		)	Common stock repurchases	—			(200)						(800)		(1,000)
Dividends and dividend equivalents				—			(73		)							(73		)	Dividends and dividend equivalents						(73)						(73)
Stock-based compensation				43												43			Stock-based compensation				43								43
Restricted stock unit vesting	—	—											—			—			Restricted stock unit vesting	0			0						0		0
Stock option exercises	1	—		2									3			5			Stock option exercises	1			2						3		5

Balances, September 30, 2019	198,629	$	33	$	2,608		$	17,045		$	177		$	(8,262	)	$	11,601		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.

Humana Inc.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY — (Continued)

(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, 2020
Balances, December 31, 2019	198,630	$	33	$	2,820	$	17,483	$	156	$	(8,455)	$	12,037
Net income						3,641						3,641
Impact of adopting ASC 326 - Current expected credit loss standard (CECL)						(2)						(2)
Other comprehensive income								214				214
Common stock repurchases	19			0						(30)		(30)
Dividends and dividend equivalents						(250)						(250)
Stock-based compensation				129								129
Restricted stock unit vesting	0			(21)						21		0
Stock option exercises	0			12						17		29

Balances, September 30, 2020	198,649	$	33	$	2,940	$	20,872	$	370	$	(8,447)	$	15,768

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 loss								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		0
Stock option exercises	2			7						15		22

Balances, September 30, 2019	198,629	$	33	$	2,608	$	17,045	$	177	$	(8,262)	$	11,601

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.~~

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


	For the nine months ended September 30,
	2020		2019
	(in millions)
Cash flows from operating activities
Net income	$	3,641	$	2,195
Adjustments to reconcile net income to net cash provided by operating activities:

Gains on investment securities, net	(696)		(23)
Equity in net earnings	(68)		(16)
Stock-based compensation	129		119
Depreciation	390		382
Amortization	66		53
Benefit for deferred income taxes	(3)		(21)
Changes in operating assets and liabilities, net of effect of businesses acquired and dispositions:
Receivables	(82)		179
Other assets	(1,547)		334
Benefits payable	2,204		1,358
Other liabilities	1,257		168
Unearned revenues	40		(9)
Other	25		53
Net cash provided by operating activities	5,356		4,772
Cash flows from investing activities

Acquisitions, net of cash acquired	(709)		0

Purchases of property and equipment	(668)		(506)
Purchases of investment securities	(7,230)		(4,130)
Maturities of investment securities	3,500		1,281
Proceeds from sales of investment securities	2,097		2,878
Net cash used in investing activities	(3,010)		(477)
Cash flows from financing activities
(Withdrawals) receipts from contract deposits, net	(274)		11
Proceeds from issuance of senior notes, net	1,088		987
Proceeds (repayments) from issuance of commercial paper, net	21		(358)
Proceeds from term loan	1,000		0
Repayment of term loan	0		(650)
Change in book overdraft	(11)		102
Common stock repurchases	(30)		(1,010)
Dividends paid	(239)		(216)

Proceeds from stock option exercises and other, net	30		23
Net cash provided by (used in) financing activities	1,585		(1,111)
Increase in cash and cash equivalents	3,931		3,184
Cash and cash equivalents at beginning of period	4,054		2,343
Cash and cash equivalents at end of period	$	7,985	$	5,527
Supplemental cash flow disclosures:
Interest payments	$	159	$	136
Income tax payments, net	$	778	$	578

See accompanying notes to condensed consolidated financial statements.

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,~~2019, that was filed with the Securities and Exchange Commission, or the SEC, on February ~~21, 2019.~~20, 2020. We refer to the Form 10-K as the ~~“2018~~“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 ~~2018~~2019 Form 10-K for information on accounting policies that we consider in preparing our consolidated financial statements. Since the filing of our 2019 Form 10-K we have received common stock, primarily in Oak Street Health, Inc., or OSH, as part of their initial public offering during the third quarter of 2020. We have updated our accounting policy for investment securities below.

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.

Investment Securities

Investment securities, which consist of debt and equity securities, are stated at fair value. Our debt securities have been categorized as available for sale. Debt securities available for current operations are classified as current assets and debt securities available for our long-term insurance products and professional liability funding requirements, as well as restricted statutory deposits and equity securities, are classified as long-term assets. For the purpose of determining realized gross gains and losses for debt securities sold, which are included as a component of investment income in the consolidated statements of income, the cost of investment securities sold is based upon specific identification. Unrealized holding gains and losses for debt securities, net of applicable deferred taxes, are included as a component of stockholders’ equity and comprehensive income until realized from a sale or other-than-temporary impairment. For the purpose of determining gross gains and losses for equity securities, changes in fair value at the reporting date are included as a component of investment income in the consolidated statements of income.

COVID-19

The temporary deferral of non-essential care resulting from stay-at-home and physical distancing orders and other restrictions on movement and economic activity implemented throughout the country beginning in the second half of March 2020 to reduce the spread of the novel coronavirus, or COVID-19, has impacted our business. Hospital admissions and utilization were significantly depressed in April and increased throughout May and June. Utilization continued to rebound throughout the third quarter of 2020, reaching approximately 95% of historic baseline levels at the close of the third quarter. The impact of the deferral of non-essential care was partially offset by COVID-19 testing and treatment costs, as well as our ongoing pandemic relief efforts.

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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~~2019 Form 10-K for information on accounting policies that we consider in preparing our consolidated financial statements. See Note 1514 for disaggregation of revenue by segment and type.

At September 30, ~~2019,~~2020, accounts receivable related to services were ~~$141~~$155 million. For the three and nine months ended September 30, ~~2019,~~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 September 30, ~~2019.~~2020.

For the three and nine months ended September 30, ~~2019,~~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.

~~Equity Method Investment~~Health Care Reform

In September 2020, we paid the ~~third quarter of 2018,~~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. On January 1 we ~~along with TPG Capital, or TPG,~~recorded a liability for this fee in trade accounts payable and ~~Welsh, Carson, Anderson & Stowe, or WCAS, completed~~accrued expenses which we carried until the ~~acquisitions of Kindred Healthcare, Inc., or Kindred, and privately-held Curo Health Services, or Curo, respectively, merging Curo with~~fee was paid. We also recorded a corresponding deferred cost in other current assets in our condensed consolidated financial statements which is amortized ratably to expense over the ~~hospice business~~calendar year. Amortization of the ~~Kindred at Home Division, or Kindred at Home. As part of these transactions, we acquired a 40% minority interest~~deferred cost was recorded in ~~Kindred at Home, a leading home health and hospice company, for total cash consideration~~operating cost expense of approximately ~~$1.1 billion.~~$292 million and $884 million for the three and nine months ended September 30, 2020, respectively, resulting from the amortization of the 2020 annual health insurance industry fee.

On November 2, 2017, we filed suit against the United States of America in the United States Court of Federal Claims, on behalf of our health plans seeking recovery from the federal government of approximately $611 million in payments under the risk corridor premium stabilization program established under Health Care Reform, for years 2014, 2015 and 2016. On April 27, 2020, the U.S. Supreme Court ruled that the government is obligated to pay the losses under this risk corridor program, and that Congress did not impliedly repeal the obligation under its appropriations riders. In September 2020, we received a $609 million payment from the U.S Government pursuant to the judgement issued by the Court of Federal Claims on July 7, 2020. The $609 million payment received from the U.S Government and approximately $31 million in related fees and expenses are reflected in "Premiums" revenue and "Operating costs", respectively, in our condensed consolidated statements of income for the three and nine months ended September 30, 2020 and reported in the Corporate segment.

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

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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 2023, with earlier adoption permitted, and requires retrospective application to previously issued annual and interim financial statements. We ~~account~~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

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 ~~40% investment~~Partners in ~~Kindred at Home using~~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. ~~This investment is reflected as "Equity method investment~~In addition, the agreement includes a series of put and call options through which WCAS may require us to purchase their interest in ~~Kindred at Home"~~the entity, and through which we may acquire WCAS’s interest, over the next 5 to 10 years.

During 2020 and 2019, we acquired other health and wellness related businesses which, individually or in the aggregate, have not had a material impact on our ~~condensed consolidated balance sheets, with our share~~results of ~~income~~operations, financial condition, or ~~loss reported as "Equity~~cash flows. The results of operations and financial condition of these businesses acquired in ~~net earnings of Kindred at Home"~~2020 and 2019 have been included in our condensed consolidated statements of ~~income.~~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.

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4. INVESTMENT SECURITIES

Investment securities classified as current and long-term were as follows at September 30, 2020 and December 31, 2019, respectively:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in millions)
September 30, 2020
U.S. Treasury and other U.S. government corporations and agencies:
U.S. Treasury and agency obligations	$	1,195	$	2	$	(1)	$	1,196
Mortgage-backed securities	3,511		183		(2)		3,692
Tax-exempt municipal securities	1,439		40		(3)		1,476


Commercial mortgage-backed securities	1,020		54		(1)		1,073
Asset-backed securities	1,278		8		(5)		1,281
Corporate debt securities	4,199		218		(2)		4,415
Total debt securities	$	12,642	$	505	$	(14)	13,133
Common stock							713
Total investment securities							$	13,846

December 31, 2019
U.S. Treasury and other U.S. government corporations and agencies:
U.S. Treasury and agency obligations	$	353	$	1	$	0	$	354
Mortgage-backed securities	3,628		85		(3)		3,710
Tax-exempt municipal securities	1,433		30		0		1,463


Commercial mortgage-backed securities	786		18		0		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
Common stock							7
Total investment securities							$	11,378

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(Unaudited)

Gross unrealized losses and fair values aggregated by investment category and length of time of individual debt securities that have been in a continuous unrealized loss position were as follows at September 30, 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)
September 30, 2020
U.S. Treasury and other U.S. government corporations and agencies:
U.S. Treasury and agency obligations	$	662	$	(1)	$	0	$	0	$	662	$	(1)
Mortgage-backed securities	450		(2)		0		0		450		(2)
Tax-exempt municipal securities	127		(3)		12		0		139		(3)


Commercial mortgage-backed securities	181		0		36		(1)		217		(1)
Asset-backed securities	121		(1)		537		(4)		658		(5)
Corporate debt securities	275		(1)		98		(1)		373		(2)
Total debt securities	$	1,816	$	(8)	$	683	$	(6)	$	2,499	$	(14)

December 31, 2019
U.S. Treasury and other U.S. government corporations and agencies:
U.S. Treasury and agency obligations	$	48	$	0	$	23	$	0	$	71	$	0
Mortgage-backed securities	315		(1)		204		(2)		519		(3)
Tax-exempt municipal securities	58		0		75		0		133		0


Commercial mortgage-backed securities	118		0		36		0		154		0
Asset-backed securities	20		0		607		(3)		627		(3)
Corporate debt securities	589		(2)		155		0		744		(2)
Total debt securities	$	1,148	$	(3)	$	1,100	$	(5)	$	2,248	$	(8)

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, 2020. Most of the debt securities that were below investment-grade were rated BB, the higher end of the below investment-grade rating scale. Tax-exempt municipal securities were diversified among general obligation bonds of states and local municipalities in the United States as well as special revenue bonds issued by municipalities to finance specific public works projects such as utilities, water and sewer, transportation, or education. Our general obligation bonds are diversified across the United States with no individual state exceeding 1% of our total debt securities. Our investment policy limits investments in a single issuer and requires diversification among various asset types.

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Our unrealized losses from all debt securities were generated from approximately 155 positions out of a total of approximately 1,530 positions at September 30, 2020. All issuers of debt securities we own that were trading at an unrealized loss at September 30, 2020 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 these debt securities were purchased. At September 30, 2020, we did not intend to sell any debt securities with an unrealized loss position in accumulated other comprehensive income, and it is not likely that we will be required to sell these debt securities before recovery of their amortized cost basis. Additionally, we did not record any material credit allowances for debt securities that were in an unrealized loss position for the three and nine months ended September 30, 2020.

The detail of gains (losses) related to investment securities and included within investment income was as follows for the three and nine months ended September 30, 2020 and 2019:


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
	(in millions)
Gross gains on investment securities	$	645	$	41	$	714	$	59
Gross losses on investment securities	0		(23)		(18)		(36)
Net gains on investment securities	$	645	$	18	$	696	$	23

Gross gain on investment securities includes both the gain resulting from the initial conversion of our prior ownership interest in certain privately held companies into common stock upon such companies' initial public offering, or IPO, during the three months ended September 30, 2020, and subsequent changes in the market value of such securities from the IPO through the end of the period, which combined to total $643 million for the three and nine months ended September 30, 2020.

All purchases of and proceeds from investment securities for the three and nine months ended September 30, 2020 and 2019 relate to debt securities.

There were no material other-than-temporary impairments for the three and nine months ended September 30, 2019.

The contractual maturities of debt securities available for sale at September 30, 2020, 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	$	1,487	$	1,490
Due after one year through five years	2,176		2,259
Due after five years through ten years	1,999		2,128
Due after ten years	1,171		1,210
Mortgage and asset-backed securities	5,809		6,046
Total debt securities	$	12,642	$	13,133

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5. FAIR VALUE

Financial Assets

The following table summarizes our fair value measurements at September 30, 2020 and December 31, 2019, 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, 2020
Cash equivalents	$	7,722	$	7,722	$	0	$	0
Debt securities:
U.S. Treasury and other U.S. government corporations and agencies:
U.S. Treasury and agency obligations	1,196		0		1,196		0
Mortgage-backed securities	3,692		0		3,692		0
Tax-exempt municipal securities	1,476		0		1,476		0


Commercial mortgage-backed securities	1,073		0		1,073		0
Asset-backed securities	1,281		0		1,281		0
Corporate debt securities	4,415		0		4,415		0
Total debt securities	13,133		0		13,133		0
Common stock	713		713		0		0
Total investment securities	$	21,568	$	8,435	$	13,133	$	0

December 31, 2019
Cash equivalents	$	3,660	$	3,660	$	0	$	0
Debt securities:
U.S. Treasury and other U.S. government corporations and agencies:
U.S. Treasury and agency obligations	354		0		354		0
Mortgage-backed securities	3,710		0		3,710		0
Tax-exempt municipal securities	1,463		0		1,463		0


Commercial mortgage-backed securities	804		0		804		0
Asset-backed securities	1,093		0		1,093		0
Corporate debt securities	3,947		0		3,947		0
Total debt securities	11,371		0		11,371		0
Common stock	7		7		0		0
Total investment securities	$	15,038	$	3,667	$	11,371	$	0

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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 $6,458 million at September 30, 2020 and $5,366 million at December 31, 2019. The fair value of our senior notes debt was $7,674 million at September 30, 2020 and $5,916 million at December 31, 2019. The fair value of our senior note 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 term note and commercial paper borrowings. The term loan outstanding and commercial paper borrowings were $1,325 million as of September 30, 2020. The commercial paper borrowings were $300 million as of December 31, 2019.

Put and Call Options Measured at Fair Value

As part of our investment in Kindred at Home, we entered into a shareholders agreement with TPG Capital, or TPG, and Welsh, Carson, Anderson & Stowe, or 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~~$151 million and ~~$327~~$634 million, respectively, at September 30, 2020, and $28 million and $557 million, respectively, at December 31, 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.

~~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.

~~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.

~~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

~~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~~The significant unobservable inputs utilized 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

~~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 0 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

~~Humana Inc.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~(Unaudited)~~

~~5. FAIR VALUE~~

~~Financial Assets~~

~~The following table summarizes our~~Level 3 fair value measurements (and selected values) include the enterprise value of Kindred at ~~September 30, 2019~~Home, annualized volatility and ~~December 31, 2018, respectively,~~secured credit rate. Enterprise value was derived from a discounted cash flow model, which utilized significant unobservable inputs for ~~financial~~long-term net operating profit after tax margin, or NOPAT, to measure underlying cash flows, weighted average cost of capital and long term growth rate. The table below presents the assumptions used for each reporting period.


	September 30, 2020		December 31, 2019
Annualized volatility	44.9	%	19.8	%
Secured credit rate	0.4	%	2.2	%
NOPAT	12.0	%	12.0	%
Weighted average cost of capital	10.0	%	10.0	%
Long term growth rate	3.0	%	3.0	%

The calculation of NOPAT utilized net income plus after tax interest expense. We regularly evaluate each of the assumptions used in establishing these assets ~~measured at~~and liabilities. Significant changes in assumptions for weighted average cost of capital, long term growth rates, NOPAT, volatility, credit spreads, risk free rate, and underlying cash flow estimates, could result in significantly lower or higher fair value onmeasurements. A change in one of these assumptions is not necessarily accompanied by a ~~recurring basis:~~change in another assumption.

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
$ —

~~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~~Enclara during ~~2018.~~2020. 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 net tangible ~~assets acquired and~~ liabilities assumed were recorded at their carrying values as of the ~~respective dates~~date of acquisition, as their carrying values approximated their fair values due to their short-term nature. The fair values of goodwill and other intangible

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

assets acquired in ~~these acquisitions~~this acquisition 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,~~this acquisition, there were no other material assets or liabilities measured at fair value on a recurring or nonrecurring basis during ~~2019 or 2018.~~2020.

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~~2019 Form 10-K. The accompanying condensed consolidated balance sheets include the following amounts associated with Medicare Part D at September 30, ~~2019~~2020 and December 31, ~~2018.~~2019. 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, 2020				December 31, 2019
	Risk Corridor Settlement		CMS Subsidies/ Discounts		Risk Corridor Settlement		CMS Subsidies/ Discounts
	(in millions)
Other current assets	$	25	$	1,226	$	5	$	585
Trade accounts payable and accrued expenses	(101)		(714)		(120)		(356)
Net current (liability) asset	(76)		512		(115)		229
Other long-term assets	273		0		6		0
Other long-term liabilities	(176)		0		(61)		0
Net long-term asset (liability)	97		0		(55)		0
Total net asset (liability)	$	21	$	512	$	(170)	$	229

September 30, 2019 December 31, 2018
Risk
Corridor
Settlement CMS
Subsidies/
Discounts Risk
Corridor
Settlement CMS
Subsidies/
Discounts
(in millions)
Other current assets $ 11
$ 337
$ 15
$ 172
Trade accounts payable and accrued expenses (49 ) (781 ) (103 ) (503 )
Net current liability (38 ) (444 ) (88 ) (331 )
Other long-term assets 25
—
7
—
Other long-term liabilities (142 ) —
(89 ) —
Net long-term liability (117 ) —
(82 ) —
Total net liability $ (155 ) $ (444 ) $ (170 ) $ (331 )

~~Humana Inc.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~(Unaudited)~~

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of goodwill for our reportable segments for the nine months ended September 30, ~~2019~~2020 were as follows:


	Retail		Group and Specialty		Healthcare Services		Total
	(in millions)
Balance at January 1, 2020	$	1,535	$	261	$	2,132	$	3,928
Acquisitions	0		0		515		515


Balance at September 30, 2020	$	1,535	$	261	$	2,647	$	4,443

Retail Group and Specialty Healthcare
Services Total
(in millions)
Balance at January 1, 2019 $ 1,535
$ 261
$ 2,101
$ 3,897
Acquisitions —
—
25
25
Balance at September 30, 2019 $ 1,535
$ 261
$ 2,126
$ 3,922

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table presents details of our other intangible assets included in other long-term assets in the accompanying condensed consolidated balance sheets at September 30, ~~2019~~2020 and December 31, ~~2018.~~2019.

September 30, 2019 December 31, 2018
Weighted
Average
Life Cost Accumulated
Amortization Net Cost Accumulated
Amortization Net
($ in millions)
Other intangible assets:
Customer contracts/
relationships 8.7 years $ 647
$ 481
$ 166
$ 646
$ 434
$ 212
Trade names and
technology 6.4 years 84
84
—
84
83
1
Provider contracts 11.8 years 69
42
27
68
37
31
Noncompetes and
other 7.3 years 29
28
1
29
28
1
Total other intangible
assets 8.7 years $ 829
$ 635
$ 194
$ 827
$ 582
$ 245


		September 30, 2020						December 31, 2019
	Weighted Average Life	Cost		Accumulated Amortization		Net		Cost		Accumulated Amortization		Net
		($ in millions)
Other intangible assets:
Customer contracts/ relationships	9.5 years	$	849	$	553	$	296	$	646	$	496	$	150
Trade names and technology	7.0 years	122		87		35		84		84		0
Provider contracts	11.8 years	70		49		21		70		44		26
Noncompetes and other	7.3 years	29		29		0		29		28		1
Total other intangible assets	9.3 years	$	1,070	$	718	$	352	$	829	$	652	$	177

~~Amortization expense for other intangible assets was approximately $17 million for~~ For the three months ended September 30, ~~2019~~2020 and ~~$19 million for the three months ended September 30, 2018. For the nine months ended September 30,~~ 2019, ~~and 2018,~~ amortization expense for other intangible assets was approximately ~~$53~~$23 million and ~~$70~~$17 million, respectively. ~~Amortization expense for~~For the nine months ended September 30, ~~2018 included $12~~2020 and 2019, amortization expense for other intangible assets was approximately $66 million ~~associated with the write-off of a trade name value reflecting the re-branding of certain provider assets.~~and $53 million, respectively. The following table presents our estimate of amortization expense remaining for ~~2019~~2020 and each of the five next succeeding years:


	(in millions)
For the years ending December 31,
2020	$	22
2021	56
2022	53
2023	40
2024	33
2025	33

(in millions)
For the years ending December 31,
2019 $ 17
2020 67
2021 34
2022 31
2023 18
2024 11

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

8. ~~LEASES~~

~~2019~~

We determine if a contract contains a lease by evaluating the nature and substance of the agreement. We lease facilities, computer hardware, and other furniture and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. For new lease agreements, we combine lease and nonlease components for all of our asset classes. See Note 2 for further information.

When portions of the lease payments are not fixed or depend on an index or rate, we consider those payments to be variable in nature. These include, but are not limited to, common area maintenance, taxes and insurance. Variable lease payments are recorded in the period in which the obligation for the payment is incurred.

Most leases include options to renew, with renewal terms that can extend the lease term. The exercise of lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

At September 30, 2019, $404 million of operating ROU assets are included within other long-term assets in our condensed consolidated balance sheet. Additionally, at September 30, 2019, $120 million and $324 million of operating ROU lease liabilities are included within trade accounts payable and accrued expenses and other long-term liabilities, respectively, in our condensed consolidated balance sheet based on the remaining lease term.

For the three and nine months ended September 30, 2019, total fixed operating lease costs, excluding short-term lease costs, were $37 million and $115 million, respectively, and are included within operating costs in our condensed consolidated statement of income. Short-term lease costs were not material. In addition, for the three and nine months ended September 30, 2019, total variable operating lease costs were $21 million and $56 million, respectively and are included within operating costs in our condensed consolidated statement of income. We sublease facilities or partial facilities to third party tenants for space not used in our operations. For the three and nine months ended September 30, 2019, sublease rental income was $10 million and $29 million, respectively, and is included within operating costs in our condensed consolidated statement of income.

The weighted average remaining lease term is 4.8 years with a weighted average discount rate of 4.2% at September 30, 2019. For the nine months ended September 30, 2019, cash paid for amounts included in the measurement of lease liabilities included within our operating cash flows was $112 million.

Maturity of Lease Liabilities September 30, 2019
(in millions)
2019 (excluding the nine months ended September 30, 2019) $ 36
2020 128
2021 110
2022 89
2023 45
After 2023 82
Total lease payments 490
Less: Interest 46
Present value of ROU lease liabilities $ 444

~~Humana Inc.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~(Unaudited)~~

As most of our leases do not provide an implicit rate, we use our incremental borrowing rate, as adjusted for collateralized borrowings, based on the information available at date of adoption or commencement date in determining the present value of lease payments.

~~For the year ended 2018, under prior lease disclosure requirements~~

We lease facilities, computer hardware, and other furniture and equipment under long-term operating leases that are non-cancelable and expire on various dates through 2046. We sublease facilities or partial facilities to third party tenants for space not used in our operations. Rent with scheduled escalation terms are accounted for on a straight-line basis over the lease term. Rent expense and sublease rental income, which are recorded net as an operating cost, for all operating leases were as follows for the years ended December 31, 2018, 2017 and 2016:

2018 2017 2016
(in millions)
Rent expense $ 167
$ 204
$ 179
Sublease rental income (32 ) (33 ) (26 )
Net rent expense $ 135
$ 171
$ 153

~~Future annual minimum payments due subsequent to December 31, 2018 under all of our noncancelable operating leases with initial terms in excess of one year are as follows:~~

Minimum
Lease
Payments Sublease
Rental
Receipts Net Lease
Commitments
(in millions)
For the years ending December 31,:
2019 $ 147
$ (13 ) $ 134
2020 113
(12 ) 101
2021 96
(10 ) 86
2022 79
(9 ) 70
2023 34
(9 ) 25
Thereafter 50
(23 ) 27
Total $ 519
$ (76 ) $ 443

~~Humana Inc.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~(Unaudited)~~

9. BENEFITS PAYABLE

On a consolidated basis, activity in benefits payable, was as follows for the nine months ended September 30, ~~2019~~2020 and ~~2018:~~2019:

For the nine months ended September 30,
2019 2018
(in millions)
Balances, beginning of period $ 4,862
$ 4,668
Less: Reinsurance recoverables (95 ) (70 )
Balances, beginning of period, net 4,767
4,598
Incurred related to:
Current year 40,499
34,915
Prior years (331 ) (467 )
Total incurred 40,168
34,448
Paid related to:
Current year (34,625 ) (30,204 )
Prior years (4,158 ) (3,920 )
Total paid (38,783 ) (34,124 )
Reinsurance recoverable 68
98
Balances, end of period $ 6,220
$ 5,020


	For the nine months ended September 30,
		2020		2019
	(in millions)
Balances, beginning of period		$	6,004	$	4,862

Less: Reinsurance recoverables		(68)		(95)
Balances, beginning of period, net		5,936		4,767

Incurred related to:
Current year		45,693		40,499
Prior years		(278)		(331)
Total incurred		45,415		40,168
Paid related to:
Current year		(37,810)		(34,625)
Prior years		(5,334)		(4,158)
Total paid		(43,144)		(38,783)

Reinsurance recoverable		1		68
Balances, end of period		$	8,208	$	6,220

Amounts incurred related to prior periods vary from previously estimated liabilities as the claims ultimately are settled. Negative amounts reported for incurred related to prior years result from claims being ultimately settled for amounts less than originally estimated (favorable development).

Our reserving practice is to consistently recognize the actuarial best estimate of our ultimate liability for claims. Actuarial standards require the use of assumptions based on moderately adverse experience, which generally results in favorable reserve development, or reserves that are considered redundant.

Benefits expense excluded from the previous table related to our long duration policies was as follows for the nine months ended September 30, 2019 and 2018. The Other Businesses category was related to our closed-block of commercial long-term care insurance policies, which were sold in 2018. We also exited our Individual Commercial business beginning January 1, 2018.

For the nine months ended September 30,
2019 2018
(in millions)
Future policy benefits:
Individual Commercial $ —
$ (14 )
Other Businesses —
15
Total future policy benefits $ —
$ 1

~~Humana Inc.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~(Unaudited)~~

Incurred and Paid Claims Development

The following discussion provides information about incurred and paid claims development for our Retail and Group and Specialty segments as of September 30, ~~2019~~2020 and ~~2018,~~2019, net of reinsurance, and the total estimate of benefits payable for claims incurred but not reported, or IBNR, included within the net incurred claims amounts. ~~Our Individual Commercial segment incurred claims development was favorable by $58 million for the nine months ended September 30, 2018~~

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Retail Segment

Activity in benefits payable for our Retail segment was as follows for the nine months ended September 30, ~~2019~~2020 and ~~2018:~~2019:

For the nine months ended September 30,
2019 2018
(in millions)
Balances, beginning of period $ 4,338
$ 3,963
Less: Reinsurance recoverables (95 ) (70 )
Balances, beginning of period, net 4,243
3,893
Incurred related to:
Current year 36,762
31,209
Prior years (366 ) (367 )
Total incurred 36,396
30,842
Paid related to:
Current year (31,476 ) (27,062 )
Prior years (3,634 ) (3,334 )
Total paid (35,110 ) (30,396 )
Reinsurance recoverable 68
98
Balances, end of period $ 5,597
$ 4,437


	For the nine months ended September 30,
		2020		2019
	(in millions)
Balances, beginning of period		$	5,363	$	4,338

Less: Reinsurance recoverables		(68)		(95)
Balances, beginning of period, net		5,295		4,243

Incurred related to:
Current year		42,186		36,762
Prior years		(235)		(366)
Total incurred		41,951		36,396
Paid related to:
Current year		(34,946)		(31,476)
Prior years		(4,759)		(3,634)
Total paid		(39,705)		(35,110)

Reinsurance recoverable		1		68
Balances, end of period		$	7,542	$	5,597

At September 30, ~~2019,~~2020, benefits payable for our Retail segment included IBNR of approximately ~~$3.5~~$4.6 billion, primarily associated with claims incurred in ~~2019.~~

~~Humana Inc.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~(Unaudited)~~

2020.

Group and Specialty Segment

Activity in benefits payable for our Group and Specialty segment, was as follows for the nine months ended September 30, ~~2019~~2020 and ~~2018:~~2019:

For the nine months ended September 30,
2019 2018
(in millions)
Balances, beginning of period $ 517
$ 568
Incurred related to:
Current year 4,142
4,018
Prior years 35
(41 )
Total incurred 4,177
3,977
Paid related to:
Current year (3,547 ) (3,462 )
Prior years (524 ) (509 )
Total paid (4,071 ) (3,971 )
Balances, end of period $ 623
$ 574


	For the nine months ended September 30,
		2020		2019
	(in millions)
Balances, beginning of period		$	641	$	517




Incurred related to:
Current year		3,929		4,142
Prior years		(43)		35
Total incurred		3,886		4,177
Paid related to:
Current year		(3,286)		(3,547)
Prior years		(575)		(524)
Total paid		(3,861)		(4,071)


Balances, end of period		$	666	$	623

At September 30, ~~2019,~~2020, benefits payable for our Group and Specialty segment included IBNR of approximately ~~$530~~$576 million, primarily associated with claims incurred in ~~2019.~~2020.

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Reconciliation to Consolidated

The reconciliation of the net incurred and paid claims development tables to benefits payable in the consolidated

statement of financial position is as follows:


Reconciliation of the Disclosure of Incurred and Paid Claims Development to Benefits Payable, net of reinsurance

	September 30,
	2020
Net outstanding liabilities	(in millions)
Retail	$	7,541
Group and Specialty	666


Benefits payable, net of reinsurance	8,207

Reinsurance recoverable on unpaid claims
Retail	1









Total benefits payable, gross	$	8,208

Reconciliation of the Disclosure of Incurred and Paid Claims Development to Benefits Payable, net of reinsurance

September 30,
2019
Net outstanding liabilities (in millions)
Retail $ 5,529
Group and Specialty 623
Benefits payable, net of reinsurance 6,152

Reinsurance recoverable on unpaid claims
Retail 68
Total benefits payable, gross $ 6,220

~~Humana Inc.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~(Unaudited)~~

~~10.~~9. EARNINGS PER COMMON SHARE COMPUTATION

Detail supporting the computation of basic and diluted earnings per common share was as follows for the three and nine months ended September 30, ~~2019~~2020 and ~~2018:~~2019:


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
	(dollars in millions, except per common share results; number of shares in thousands)
Net income available for common stockholders	$	1,340	$	689	$	3,641	$	2,195
Weighted average outstanding shares of common stock used to compute basic earnings per common share	132,318		133,321		132,234		134,589
Dilutive effect of:
Employee stock options	105		101		95		99
Restricted stock	773		603		681		501
Shares used to compute diluted earnings per common share	133,196		134,025		133,010		135,189
Basic earnings per common share	$	10.12	$	5.16	$	27.53	$	16.31
Diluted earnings per common share	$	10.05	$	5.14	$	27.37	$	16.24
Number of antidilutive stock options and restricted stock excluded from computation	143		302		311		589

Three months ended September 30, Nine months ended September 30,
2019 2018 2019 2018
(dollars in millions, except per common share results; number of shares in thousands)
Net income available for common stockholders $ 689
$ 644
$ 2,195
$ 1,328
Weighted average outstanding shares of common stock
used to compute basic earnings per common share 133,321
137,709
134,589
137,792
Dilutive effect of:
Employee stock options 101
186
99
199
Restricted stock 603
783
501
704
Shares used to compute diluted earnings per common share 134,025
138,678
135,189
138,695
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
Number of antidilutive stock options and restricted stock
excluded from computation 302
36
589
284

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~~11.~~Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

10. STOCKHOLDERS’ EQUITY

Dividends

The following table provides details of dividend payments, excluding dividend equivalent rights for unvested stock awards, in ~~2018~~2019 and ~~2019~~2020 under our Board approved quarterly cash dividend policy:


Record Date	Payment Date	Amount per Share		Total Amount
				(in millions)
2019 payments
12/31/2018	1/25/2019	$	0.50	$	68
3/29/2019	4/26/2019	$	0.55	$	74
6/28/2019	7/26/2019	$	0.55	$	74
9/30/2019	10/25/2019	$	0.55	$	73
2020 payments
12/31/2019	1/31/2020	$	0.55	$	73
3/31/2020	4/24/2020	$	0.625	$	83
6/30/2020	7/31/2020	$	0.625	$	83
9/30/2020	10/30/2020	$	0.625	$	83

Record
Date Payment
Date Amount
per Share Total
Amount
(in millions)
2018 payments
12/29/2017 1/26/2018 $ 0.40
$ 55
3/30/2018 4/27/2018 $ 0.50
$ 69
6/29/2018 7/27/2018 $ 0.50
$ 69
9/28/2018 10/26/2018 $ 0.50
$ 69
2019 payments
12/31/2018 1/25/2019 $ 0.50
$ 68
3/29/2019 4/26/2019 $ 0.55
$ 74
6/28/2019 7/26/2019 $ 0.55
$ 74
9/30/2019 10/25/2019 $ 0.55
$ 73

~~On October 24, 2019,~~In November 2020, the Board declared a cash dividend of ~~$0.55~~$0.625 per share payable on January ~~31, 2020,~~29, 2021 to stockholders of record on December 31, ~~2019.~~

~~Humana Inc.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~(Unaudited)~~

2020.

Stock Repurchases

Our Board of Directors may authorize the purchase of our common stock shares. Under the share repurchase authorization, shares may be purchased from time to time at prevailing prices in the open market, by block purchases, through plans designed to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, or in privately-negotiated transactions, including pursuant to accelerated share repurchase agreements with investment banks, subject to certain regulatory restrictions on volume, pricing, and timing.

On December 14, 2017, our Board of Directors authorized the repurchase of up to $3.0 billion of our common shares expiring on December 31, 2020, exclusive of shares repurchased in connection with employee stock plans.

On November 28, 2018, we entered into an accelerated stock repurchase agreement, the November 2018 ASR, with Goldman Sachs to repurchase $750 million of our common stock as part of the $3.0 billion share repurchase program authorized by the Board of Directors on December 14, 2017. On November 29, 2018, we made a payment of $750 million to Goldman Sachs from available cash on hand and received an initial delivery of 1.94 million shares of our common stock from Goldman Sachs based on the then current price of our common stock. The payment to Goldman Sachs was recorded as a reduction to stockholders’ equity, consisting of a $600 million increase in treasury stock, which reflects the value of the initial 1.94 million shares received upon initial settlement, and a $150 million decrease in capital in excess of par value, which reflected the value of stock held back by Goldman Sachs pending final settlement of the November 2018 ASR. Upon final settlement of the November 2018 ASR on February 28, 2019, we received an additional 0.6 million shares as determined by the average daily volume weighted-averages share price of our common stock during the term of the agreement of $295.15, less a discount and subject to adjustments pursuant to the terms and conditions of the November 2018 ASR, bringing the total shares received under this program to 2.54 million. In addition, upon settlement we reclassified the $150 million value of stock initially held back by Goldman Sachs from capital in excess of par value to treasury stock.

On July 31, 2019, we entered into an accelerated stock repurchase agreement, the July 2019 ASR, with Citibank, N.A., or Citi, to repurchase $1 billion of our common stock. On August 2, 2019, we made a payment of $1 billion to Citi and received an initial delivery of 2.7 million shares of our common stock. We recorded the payment to Citi as a reduction to stockholders’ equity, consisting of an $800 million increase in treasury stock, which reflects the value of the initial 2.7 million shares received upon initial settlement, and a $200 million decrease in capital in excess of par value, which reflects the value of stock held back by Citi pending final settlement of the July 2019 ASR. ~~The~~Upon final ~~number~~settlement of the July 2019 ASR on December 26, 2019, we received an additional 0.7 million shares ~~that we may receive, or be required to remit, under~~as determined by the ~~agreement, will be determined based on the~~average daily ~~volume-weighted average~~volume weighted-averages share price of our common stock ~~over~~during the term of the agreement, less a discount, ~~and subject to adjustments pursuant to~~of $296.19, bringing the ~~terms and conditions of the July 2019 ASR. We expect final settlement~~total shares received under the July 2019 ASR to ~~occur during~~3.4 million. In addition, upon settlement we reclassified the ~~fourth quarter~~$200 million value of ~~2019. The agreement contains provisions customary for agreements~~stock initially held back by Citi from capital in excess of ~~this type, including provisions for adjustments~~par value to ~~the transaction terms upon certain specified events, the circumstances generally under which final settlement~~treasury stock.

Our remaining repurchase authorization was approximately $2 billion of the ~~agreement may be accelerated, extended, or terminated early by Citi or Humana~~$3 billion share repurchase program as ~~well as various acknowledgments and representations made by the parties to each other. At final settlement, under certain circumstances, we may be entitled to receive additional shares~~ of ~~our common stock from Citi or we may be required to make a payment. If we are obligated to make payment, we may elect to satisfy such obligation in cash or shares~~November 2, 2020.

Table of ~~our common stock.~~Contents

In connection with employee stock plans, we acquired 35,000 common shares for $10 million and 0.3 million common shares for $70 million during the nine months ended September 30, 2019 and 2018, respectively.

~~Treasury Stock Reissuance~~

~~We reissued 0.2 million shares of treasury stock during the nine months ended September 30, 2019 at a cost of $18.6 million associated with restricted stock unit vestings and option exercises.~~

Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

~~Accumulated Other Comprehensive Income~~

~~Accumulated other comprehensive income included net unrealized gains, net of tax, on our investment securities of $177~~In connection with employee stock plans, we acquired 0.08 million atcommon shares for $30 million and 0.03 million common shares for $10 million during the nine months ended September 30, 2020 and 2019, ~~and net unrealized losses, net of tax, on our investment securities of $159 million at December 31, 2018.~~respectively.

~~12.~~

11. INCOME TAXES

The effective income tax rate was 25.2% and 29.0% for the three and nine months ended September 30, 2020, respectively, compared to 22.5% and 23.8% for the three and nine months ended September 30, 2019, respectively, ~~compared to 29.1% and 18.8% for the three and nine months ended September 30, 2018, respectively,~~ primarily due to the ~~impact of the suspension~~reinstatement of the non-deductible health insurance industry fee in 2019 as well as the deferred tax benefit recognized in 2018 from the loss on sale of KMG. The effective income tax rate for the nine months ended September 30, 2018 reflected a $430 million deferred tax benefit, resulting from the loss on the sale of KMG attributable to its original tax basis and subsequent capital contributions to fund accumulated losses.2020.

~~13.~~

12. DEBT

The carrying value of debt outstanding, net of unamortized debt issuance costs, was as follows at September 30, ~~2019~~2020 and December 31, ~~2018~~:2019:

September 30, 2019 December 31, 2018
(in millions)
Short-term debt:
Commercial paper $ 299
$ 645
Term note —
650
Senior note:

$400 million, 2.625% due October 1, 2019 400
399
Total short-term debt $ 699
$ 1,694

Long-term debt:
Senior notes:
  $400 million, 2.50% due December 15, 2020 $ 399
$ 398
  $400 million, 2.90% due December 15, 2022 397
396
  $600 million, 3.15% due December 1, 2022 597
596
  $600 million, 3.85% due October 1, 2024 597
597
  $600 million, 3.95% due March 15, 2027 595
594
  $500 million, 3.125% due August 15, 2029 495
—
  $250 million, 8.15% due June 15, 2038 262
263
  $400 million, 4.625% due December 1, 2042 396
396
  $750 million, 4.95% due October 1, 2044 739
739
  $400 million, 4.80% due March 15, 2047 396
396
  $500 million, 3.95% due August 15, 2049 492
—
     Total long-term debt $ 5,365
$ 4,375

~~Humana Inc.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~(Unaudited)~~


	September 30, 2020		December 31, 2019
	(in millions)
Short-term debt:
Commercial paper	$	325	$	300
Term note	1,000		0
Senior notes:
$400 million, 2.50% due December 15, 2020	399		399
Total short-term debt	$	1,724	$	699

Long-term debt:
Senior notes:
$600 million, 3.15% due December 1, 2022	$	598	$	598
$400 million, 2.90% due December 15, 2022	398		397
$600 million, 3.85% due October 1, 2024	597		597
$600 million, 4.50% due April 1, 2025	595		0
$600 million, 3.95% due March 15, 2027	596		595
$500 million, 3.125% due August 15, 2029	495		495
$500 million, 4.875% due April 1, 2030	494		0
$250 million, 8.15% due June 15, 2038	262		262
$400 million, 4.625% due December 1, 2042	396		396
$750 million, 4.95% due October 1, 2044	739		739
$400 million, 4.80% due March 15, 2047	396		396
$500 million, 3.95% due August 15, 2049	493		492
Total long-term debt	$	6,059	$	4,967

Senior Notes

In ~~August 2019,~~March 2020, we issued ~~$500~~$600 million of ~~3.125%~~4.500% senior notes due ~~August 15, 2029~~April 1, 2025 and $500 million of ~~3.950%~~4.875% senior notes due ~~August 15, 2049.~~April 1, 2030. Our net proceeds, reduced for the underwriters' discount and commission and offering expenses paid, were approximately $1,088 million as of September 30, ~~2019 were $987 million.~~2020. We ~~used~~intend to use the net proceeds ~~from this offering, together with available cash, to repay~~for general corporate purposes, which may include the ~~$650 million outstanding amount due under our term note in August 2019, and the $400 million aggregate principal amount~~repayment of ~~our 2.625% senior notes due on its maturity date~~existing indebtedness.

Table of ~~October 1, 2019.~~Contents

Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Our senior notes, which are unsecured, may be redeemed at our option at any time at 100% of the principal amount plus accrued interest and a specified make-whole amount. The 8.15% senior notes are subject to an interest rate adjustment if the debt ratings assigned to the notes are downgraded (or subsequently upgraded). In addition, our senior notes contain a change of control provision that may require us to purchase the notes under certain circumstances.

Credit Agreement

Our 5-year, $2.0 billion unsecured revolving credit agreement expires May 2022. Under the credit agreement, at our option, we can borrow on either a competitive advance basis or a revolving credit basis. The revolving credit portion bears interest at either LIBOR plus a spread or the base rate plus a spread. If drawn upon, the revolving credit would revert to using the alternative base rate once LIBOR is discontinued. The LIBOR spread, currently 110.0 basis points, varies depending on our credit ratings ranging from 91.0 to 150.0 basis points. We also pay an annual facility fee regardless of utilization. This facility fee, currently 15.0 basis points, may fluctuate between 9.0 and 25.0 basis points, depending upon our credit ratings. The competitive advance portion of any borrowings will bear interest at market rates prevailing at the time of borrowing on either a fixed rate or a floating rate based on LIBOR, at our option.

The terms of the credit agreement include standard provisions related to conditions of borrowing which could limit our ability to borrow additional funds. In addition, the credit agreement contains customary restrictive covenants and a financial covenant regarding maximum debt to capitalization of 50%, as well as customary events of default. We are in compliance with this financial covenant, with actual debt to capitalization of ~~34%~~ 33% as measured in accordance with the credit agreement as of September 30, ~~2019.~~2020. Upon our agreement with one or more financial institutions, we may expand the aggregate commitments under the credit agreement to a maximum of $2.5 billion, through a $500 million incremental loan facility.

At September 30, ~~2019~~,2020, we had 0 borrowings and 0 letters of credit outstanding under the credit agreement. Accordingly, as of September 30, ~~2019~~,2020, we had $2.0 billion of remaining borrowing capacity (which excludes the uncommitted $500 million incremental loan facility under the credit agreement), none of which would be restricted by our financial covenant compliance requirement. We have other customary, arms-length relationships, including financial advisory and banking, with some parties to the credit agreement.

Commercial Paper

Under our commercial paper program we may issue short-term, unsecured commercial paper notes privately placed on a discount basis through certain broker dealers at any time not to exceed $2 billion. Amounts available under the program may be borrowed, repaid and re-borrowed from time to time. The net proceeds of issuances have been and are expected to be used for general corporate purposes. The maximum principal amount outstanding at any one time during the nine months ended September 30, ~~2019~~2020 was ~~$670~~$600 million, with ~~$299~~$325 million outstanding at September 30, ~~2019~~2020 compared to ~~$645~~$300 million outstanding at December 31, ~~2018.~~2019. The outstanding commercial paper at September 30, ~~2019~~2020 had a weighted average annual interest rate of ~~2.5%~~0.35%.

Term Note

In ~~November 2018,~~February 2020, we entered into a ~~$1.0~~new $1 billion term ~~note agreement~~loan commitment with a bank atthat matures 1 year after the first draw, subject to a ~~variable~~1 year extension. In March 2020, we made a draw on the entire term loan commitment of $1 billion. The facility fee, interest rate of interest due within one year. We may elect to incur interest at either the bank's base rate or LIBOR plus 115 basis points. The base rate is defined as the higher of the daily federal funds rate plus 50 basis points; or the bank's prime rate; or LIBOR plus 100 basis points. The term note shares the customary terms and ~~provisions as well as~~ financial covenants are consistent with those of our revolving credit agreement. There is no prepayment penalty.

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

~~Credit Agreement, as discussed above. The note was prepayable without penalty. We repaid $350 million prior to December 31, 2018 and repaid the outstanding balance of $650 million in August 2019.~~

~~14.~~13. COMMITMENTS, GUARANTEES AND CONTINGENCIES

Government Contracts

Our Medicare products, which accounted for approximately ~~80%~~82% of our total premiums and services revenue for the nine months ended September 30, ~~2019,~~2020, primarily ~~consisted~~consisted of products covered under the Medicare Advantage and Medicare Part D Prescription Drug Plan contracts with the federal government. These contracts are renewed generally for a calendar year term unless CMS notifies us of its decision not to renew by May 1 of the calendar year in which the contract would end, or we notify CMS of our decision not to renew by the first Monday in June of the calendar year in which the contract would end. All material contracts between Humana and CMS relating to our Medicare products have been renewed for ~~2020,~~2021 and all of our product offerings ~~for 2020~~ have been approved.

CMS uses a risk-adjustment model which adjusts premiums paid to Medicare Advantage, or MA, plans according to health status of covered members. The risk-adjustment model, which CMS implemented pursuant to the Balanced Budget Act of 1997 (BBA) and the Benefits Improvement and Protection Act of 2000 (BIPA), generally pays more where a plan's membership has higher expected costs. Under this model, rates paid to MA plans are based on actuarially determined bids, which include a process whereby our prospective payments are based on our estimated cost of providing standard Medicare-covered benefits to an enrollee with a "national average risk profile." That baseline payment amount is adjusted to reflect the health status of our enrolled membership. Under the risk-adjustment methodology, all MA plans must collect and submit the necessary diagnosis code information from hospital inpatient, hospital outpatient, and physician providers to CMS within prescribed deadlines. The CMS risk-adjustment model uses the diagnosis data to calculate the risk-adjusted premium payment to MA plans, which CMS adjusts for coding pattern differences between the health plans and the government fee-for-service program. We generally rely on providers, including certain providers in our network who are our employees, to code their claim submissions with appropriate diagnoses, which we send to CMS as the basis for our payment received from CMS under the actuarial risk-adjustment model. We also rely on these providers to document appropriately all medical data, including the diagnosis data submitted with claims. In addition, we conduct medical record reviews as part of our data and payment accuracy compliance efforts, to more accurately reflect diagnosis conditions under the risk adjustment model. These compliance efforts include the internal contract level audits described in more detail below, as well as ordinary course reviews of our internal business processes.

CMS is phasing-in the process of calculating risk scores using diagnoses data from the Risk Adjustment Processing System, or RAPS, to diagnoses data from the Encounter Data System, or EDS. The RAPS process requires MA plans to apply a filter logic based on CMS guidelines and only submit diagnoses that satisfy those guidelines. For submissions through EDS, CMS requires MA plans to submit all the encounter data and CMS will apply the risk adjustment filtering logic to determine the risk scores. For ~~2018, 15%~~2019, 25% of the risk score was calculated from claims data submitted through EDS. ~~In 2019~~CMS increased that percentage to 50% in 2020 and ~~2020 CMS~~ will increase that percentage to ~~25% and 50%, respectively.~~75% in 2021. For 2022, CMS has proposed to calculate risk scores for payment to MA organizations using only risk adjustment eligible diagnoses identified from EDS data completing the phased-in transition from RAPS to EDS. The phase-in from RAPS to EDS could result in different risk scores from each dataset as a result of plan processing issues, CMS processing issues, or filtering logic differences between RAPS and EDS, and could have a material adverse effect on our results of operations, financial position, or cash flows.

CMS and the Office of the Inspector General of Health and Human Services, or HHS-OIG, are continuing to perform audits of various companies’ selected MA contracts related to this risk adjustment diagnosis data. We refer to these audits as Risk-Adjustment Data Validation Audits, or RADV audits. RADV audits review medical records in an attempt to validate provider medical record documentation and coding practices which influence the calculation of premium payments to MA plans.

In 2012, CMS released a “Notice of Final Payment Error Calculation Methodology for Part C Medicare Advantage Risk Adjustment Data Validation (RADV) Contract-Level Audits.” The payment error calculation methodology provided that, in calculating the economic impact of audit results for an MA contract, if any, the results of the RADV audit sample would be extrapolated to the entire MA contract after a comparison of the audit results to a similar audit of the government’s traditional fee-for-service Medicare program, or Medicare FFS. We ~~refer to the process~~

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

refer to the process of accounting for errors in FFS claims as the "FFS Adjuster." This comparison of RADV audit results to the FFS error rate is necessary to determine the economic impact, if any, of RADV audit results because the government used the Medicare FFS program data set, including any attendant errors that are present in that data set, to estimate the costs of various health status conditions and to set the resulting adjustments to MA plans’ payment rates in order to establish actuarial equivalence in payment rates as required under the Medicare statute. CMS already makes other adjustments to payment rates based on a comparison of coding pattern differences between MA plans and Medicare FFS data (such as for frequency of coding for certain diagnoses in MA plan data versus the Medicare FFS program dataset).

The final RADV extrapolation methodology, including the first application of extrapolated audit results to determine audit settlements, is expected to be applied to CMS RADV contract level audits conducted for contract year 2011 and subsequent years. CMS is currently conducting RADV contract level audits for certain of our Medicare Advantage plans.

Estimated audit settlements are recorded as a reduction of premiums revenue in our consolidated statements of income, based upon available information. We perform internal contract level audits based on the RADV audit methodology prescribed by CMS. Included in these internal contract level audits is an audit of our Private Fee-For Service business which we used to represent a proxy of the FFS Adjuster which has not yet been finalized. We based our accrual of estimated audit settlements for each contract year on the results of these internal contract level audits and update our estimates as each audit is completed. Estimates derived from these results were not material to our results of operations, financial position, or cash flows. We report the results of these internal contract level audits to CMS, including identified overpayments, if any.

On October 26, 2018, CMS issued a proposed rule and accompanying materials (which we refer to as the “Proposed Rule”) related to, among other things, the RADV audit methodology described above. If implemented, the Proposed Rule would use extrapolation in RADV audits applicable to payment year 2011 contract-level audits and all subsequent audits, without the application of a FFS Adjuster to audit findings. We believe that the Proposed Rule fails to address adequately the statutory requirement of actuarial equivalence, and have provided substantive comments to CMS on the Proposed Rule as part of the notice-and-comment rulemaking process. Whether, and to what extent, CMS finalizes the Proposed Rule, and any related regulatory, industry or company reactions, could have a material adverse effect on our results of operations, financial position, or cash flows.

In addition, as part of our internal compliance efforts, we routinely perform ordinary course reviews of our internal business processes related to, among other things, our risk coding and data submissions in connection with the ~~risk-~~risk adjustment model. These reviews may also result in the identification of errors and the submission of corrections to CMS, that may, either individually or in the aggregate, be material. As such, the result of these reviews may have a material adverse effect on our results of operations, financial position, or cash flows.

We believe that CMS' statements and policies regarding the requirement to report and return identified overpayments received by MA plans are inconsistent with CMS' 2012 RADV audit methodology, and the Medicare statute's requirements. These statements and policies, such as certain statements contained in the preamble to CMS’ final rule release regarding Medicare Advantage and Part D prescription drug benefit program regulations for Contract Year 2015 (which we refer to as the "Overpayment Rule"), and the Proposed Rule, appear to equate each Medicare Advantage risk adjustment data error with an “overpayment” without addressing the principles underlying the FFS Adjuster referenced above. On September 7, 2018, the Federal District Court for the District of Columbia vacated CMS's Overpayment Rule, concluding that it violated the Medicare statute, including the requirement for actuarial equivalence, and that the Overpayment Rule was also arbitrary and capricious in departing from CMS's RADV methodology without adequate explanation (among other reasons). CMS has ~~filed a motion for reconsideration related to certain aspects of the Federal District Court's opinion and has simultaneously filed a notice to appeal~~appealed the decision to the Circuit Court of Appeals.

We will continue to work with CMS to ensure that MA plans are paid accurately and that payment model principles are in accordance with the requirements of the Social Security Act, which, if not implemented correctly could have a material adverse effect on our results of operations, financial position, or cash flows.

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

At September 30, ~~2019,~~2020, our military services business, which accounted for approximately 1% of our total premiums and services revenue for the nine months ended September 30, ~~2019,~~2020, primarily consisted of the TRICARE T2017 East Region contract. The T2017 East Region contract is a consolidation of the former T3 North and South Regions, comprising ~~thirty-two~~NaN states and approximately 6 million TRICARE beneficiaries, under which delivery of health care services commenced on January 1, 2018. The T2017 East Region contract is a 5-year contract set to expire on December 31, 2022 and is subject to renewals on January 1 of each year during its term at the government's option.

Our state-based Medicaid business accounted for approximately 4%5% of our total premiums and services revenue for the nine months ended September 30, ~~2019.~~2020. In addition to our state-based Temporary Assistance for Needy Families, or TANF, Medicaid contracts in Florida and Kentucky, we have contracts in Florida for Long Term Support Services (LTSS), and in Illinois for stand-alone dual eligible demonstration programs serving individuals dually eligible for both the federal Medicare program and the applicable state-based Medicaid program.

The loss of any of the contracts above or significant changes in these programs as a result of legislative or regulatory action, including reductions in premium payments to us, regulatory restrictions on profitability, including reviews by regulatory bodies that may compare our Medicare Advantage profitability to our non-Medicare Advantage business profitability, or compare the profitability of various products within our Medicare Advantage business, and require that they remain within certain ranges of each other, or increases in member benefits or member eligibility criteria without corresponding increases in premium payments to us, may have a material adverse effect on our results of operations, financial position, and cash flows.

~~Humana Inc.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~(Unaudited)~~

Legal Proceedings and Certain Regulatory Matters

As previously disclosed, the Civil Division of the United States Department of Justice provided us with an information request in December 2014, concerning our Medicare Part C risk adjustment practices. The request relates to our oversight and submission of risk adjustment data generated by providers in our Medicare Advantage network, as well as to our business and compliance practices related to risk adjustment data generated by our providers and by us, including medical record reviews conducted as part of our data and payment accuracy compliance efforts, the use of health and well-being assessments, and our fraud detection efforts. We believe that this request for information is in connection with a wider review of Medicare Risk Adjustment generally that includes a number of Medicare Advantage plans, providers and vendors. We continue to cooperate with ~~and voluntarily respond to the information requests from~~ the Department of Justice. These matters are expected to result in additional qui tam litigation.

As previously disclosed, on January 19, 2016, an individual filed a qui tam suit captioned United States of America ex rel. Steven Scott v. Humana, Inc.,in United States District Court, Central District of California, Western Division. The complaint alleges certain civil violations by us in connection with the actuarial equivalence of the plan benefits under Humana’s Basic PDP plan, a prescription drug plan offered by us under Medicare Part D. The action seeks damages and penalties on behalf of the United States under the False Claims Act. The court ordered the qui tam action unsealed on September 13, 2017, so that the relator could proceed, following notice from the U.S. Government that it was not intervening at that time. On January 29, 2018, the suit was transferred to the United States District Court, Western District of Kentucky, Louisville Division. We take seriously our obligations to comply with applicable CMS requirements and actuarial standards of practice, and continue to vigorously defend against these allegations since the transfer to the Western District of Kentucky. We have ~~engaged in active~~substantially completed discovery with the relator who has pursued the matter on behalf of the United States following its unsealing, and expect ~~that discovery process to conclude in the near future and for~~ the Court to consider our motion for summary judgment.

On November 2, 2017, we filed suit against the United States of America in the United States Court of Federal Claims, on behalf of our health plans seeking recovery from the federal government of approximately $611 million in payments under the risk corridor premium stabilization program established under Health Care Reform, for years 2014, 2015 and 2016. ~~Our case has been stayed by~~On April 27, 2020, the U.S. Supreme Court ~~pending resolution of similar cases filed by other insurers. We have not recognized revenue, nor have we recorded a receivable, for any amount due from~~ruled that the ~~federal~~ government ~~for unpaid risk corridor payments as of September 30, 2019. We have fully recognized all liabilities due~~is obligated to pay the ~~federal government that we have incurred~~losses under ~~the~~this risk corridor program, and ~~have paid all amounts due~~that Congress did not impliedly repeal the obligation under its appropriations riders. In September 2020, we received a $609 million payment from the U.S Government pursuant to the ~~federal government as required. There is no assurance that we will prevail~~judgement issued by the Court of Federal Claims on July 7, 2020. The $609 million payment received from

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the U.S Government and approximately $31 million in related fees and expenses are reflected in "Premiums" revenue and "Operating costs", respectively, in our condensed consolidated statements of income for the ~~lawsuit.~~three and nine months ended September 30, 2020.

Other Lawsuits and Regulatory Matters

Our current and past business practices are subject to review or other investigations by various state insurance and health care regulatory authorities and other state and federal regulatory authorities. These authorities regularly scrutinize the business practices of health insurance, health care delivery and benefits companies. These reviews focus on numerous facets of our business, including claims payment practices, statutory capital requirements, provider contracting, risk adjustment, competitive practices, commission payments, privacy issues, utilization management practices, pharmacy benefits, access to care, and sales practices, among others. Some of these reviews have historically resulted in fines imposed on us and some have required changes to some of our practices. We continue to be subject to these reviews, which could result in additional fines or other sanctions being imposed on us or additional changes in some of our practices.

We also are involved in various other lawsuits that arise, for the most part, in the ordinary course of our business

operations, certain of which may be styled as class-action lawsuits. Among other matters, this litigation may include employment matters, claims of medical malpractice, bad faith, nonacceptance or termination of providers, anticompetitive practices, improper rate setting, provider contract rate and payment disputes, including disputes over reimbursement rates required by statute, disputes arising from competitive procurement process, general contractual matters, intellectual property matters, and challenges to subrogation practices. Under state guaranty assessment laws, including those related to state cooperative failures in the industry, we may be assessed (up to prescribed limits) for certain obligations to the policyholders and claimants of insolvent insurance companies that write the same line or lines of business as we do.

~~Humana Inc.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~(Unaudited)~~

As a government contractor, we may also be subject to qui tam litigation brought by individuals who seek to sue on behalf of the government, alleging that the government contractor submitted false claims to the government including, among other allegations, those resulting from coding and review practices under the Medicare risk adjustment model. Qui tam litigation is filed under seal to allow the government an opportunity to investigate and to decide if it wishes to intervene and assume control of the litigation. If the government does not intervene, the individual may continue to prosecute the action on his or her own, on behalf of the government. We also are subject to other allegations of ~~non-performance~~nonperformance of contractual obligations to providers, members, and others, including failure to properly pay claims, improper policy terminations, challenges to our implementation of the Medicare Part D prescription drug program and other litigation.

A limited number of the claims asserted against us are subject to insurance coverage. Personal injury claims, claims for extra contractual damages, care delivery malpractice, and claims arising from medical benefit denials are covered by insurance from our wholly owned captive insurance subsidiary and excess carriers, except to the extent that claimants seek punitive damages, which may not be covered by insurance in certain states in which insurance coverage for punitive damages is not permitted. In addition, insurance coverage for all or certain forms of liability has become increasingly costly and may become unavailable or prohibitively expensive in the future.

We record accruals for the contingencies discussed in the sections above to the extent that we conclude it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time regarding the matters specifically described above because of the inherently unpredictable nature of legal proceedings, which also may be exacerbated by various factors, including: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants); or (vii) there is a wide range of potential outcomes.

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The outcome of any current or future litigation or governmental or internal investigations, including the matters described above, cannot be accurately predicted, nor can we predict any resulting judgments, penalties, fines or other sanctions that may be imposed at the discretion of federal or state regulatory authorities or as a result of actions by third parties. Nevertheless, it is reasonably possible that any such outcome of litigation, judgments, penalties, fines or other sanctions could be substantial, and the outcome of these matters may have a material adverse effect on our results of operations, financial position, and cash flows, and may also affect our reputation.

~~15.~~

14. SEGMENT INFORMATION

We manage our business with 3 reportable segments: Retail, Group and Specialty, and Healthcare Services. Beginning January 1, 2018, we exited the individual commercial fully-insured medical health insurance business, as well as certain other business, and therefore no longer report separately the Individual Commercial segment and the Other Business category in the current year. Previously, the Other Business category included businesses that were not individually reportable because they did not meet the quantitative thresholds required by generally accepted accounting principles, primarily our closed-block of commercial long-term care insurance policies which were sold in 2018. The reportable segments are based on a combination of the type of health plan customer and adjacent businesses centered on well-being solutions for our health plans and other customers, as described below. These segment groupings are consistent with information used by our Chief Executive Officer, the Chief Operating Decision Maker, to assess performance and allocate resources.

~~Humana Inc.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~(Unaudited)~~

our military services business, primarily our TRICARE T2017 East Region contract. The Healthcare Services segment includes our services offered to our health plan members as well as to third parties, including pharmacy solutions, provider services, and clinical care service, such as home health and other services and capabilities to promote wellness and advance population health, including our minority investment in Kindred at ~~Home. We reported under~~Home and the ~~category of Other Businesses those businesses that did not align~~strategic partnership with ~~the reportable segments described above, primarily our closed-block long-term~~WCAS to develop and operate senior-focused, payor-agnostic, primary care ~~insurance policies, which were sold in 2018.~~centers.

Our Healthcare Services intersegment revenues primarily relate to managing prescription drug coverage for members of our other segments through Humana Pharmacy Solutions®, or HPS, and includes the operations of Humana Pharmacy, Inc., our mail order pharmacy business. These revenues consist of the prescription price (ingredient cost plus dispensing fee), including the portion to be settled with the member (co-share) or with the government (subsidies), plus any associated administrative fees. Services revenues related to the distribution of prescriptions by third party retail pharmacies in our networks are recognized when the claim is processed and product revenues from dispensing prescriptions from our mail order pharmacies are recorded when the prescription or product is shipped. Our pharmacy operations, which are responsible for designing pharmacy benefits, including defining member co-share responsibilities, determining formulary listings, contracting with retail pharmacies, confirming member eligibility, reviewing drug utilization, and processing claims, act as a principal in the arrangement on behalf of members in our other segments. As principal, our Healthcare Services segment reports revenues on a gross basis, including co-share amounts from members collected by third party retail pharmacies at the point of service.

In addition, our Healthcare Services intersegment revenues include revenues earned by certain owned providers derived from risk-based and non-risk-based managed care agreements with our health plans. Under risk-based agreements, the provider receives a monthly capitated fee that varies depending on the demographics and health status of the member, for each member assigned to these owned providers by our health plans. The owned provider assumes the economic risk of funding the assigned members’ healthcare services. Under non risk-based agreements, our health plans retain the economic risk of funding the assigned members' healthcare services. Our Healthcare Services segment reports provider services revenues associated with risk-based agreements on a gross basis, whereby capitation fee revenue is recognized in the period in which the assigned members are entitled to receive healthcare services. Provider services revenues associated with non-risk-based agreements are presented net of associated healthcare costs.

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We present our condensed consolidated results of operations from the perspective of the health plans. As a result, the cost of providing benefits to our members, whether provided via a third party provider or internally through a stand-alone subsidiary, is classified as benefits expense and excludes the portion of the cost for which the health plans do not bear responsibility, including member co-share amounts and government subsidies of ~~$4.0~~$4.4 billion and ~~$3.5~~$4.0 billion for the three months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively. For the nine months ended September 30, ~~2019~~2020 and ~~2018~~2019 these amounts were ~~$10.7~~$11.9 billion and ~~$9.7~~$10.7 billion, respectively. In addition, depreciation and amortization expense associated with certain businesses in our Healthcare Services segment delivering benefits to our members, primarily associated with our provider services and pharmacy operations, are included with benefits expense. The amount of this expense was ~~$32~~$33 million and ~~$29~~$32 million for the three months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively. For the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, the amount of this expense was ~~$92~~$94 million and ~~$98~~$92 million, respectively.

Other than those described previously, the accounting policies of each segment are the same and are described in Note 2 to the consolidated financial statements included in our ~~2018~~2019 Form 10-K. Transactions between reportable segments primarily consist of sales of services rendered by our Healthcare Services segment, primarily pharmacy, provider, and clinical care services, to our Retail and Group and Specialty segment customers. Intersegment sales and expenses are recorded at fair value and eliminated in consolidation. Members served by our segments often use the same provider networks, enabling us in some instances to obtain more favorable contract terms with providers. Our segments also share indirect costs and assets. As a result, the profitability of each segment is interdependent. We allocate most operating expenses to our segments. Assets and certain corporate income and expenses are not allocated to the segments, including the portion of investment income not supporting segment operations, interest expense on corporate debt, and certain other corporate expenses. These items are managed at a corporate level. These corporate amounts are reported separately from our reportable segments and are included with intersegment eliminations in the tables presenting segment results below.

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(Unaudited)

Our segment results were as follows for the three and nine months ended September 30, ~~2019~~2020 and ~~2018:~~2019:



	Retail		Group and Specialty		Healthcare Services		Eliminations/ Corporate		Consolidated
Three months ended September 30, 2020	(in millions)
External revenues
Premiums:
Individual Medicare Advantage	$	12,949	$	0	$	0	$	0	$	12,949
Group Medicare Advantage	1,880		0		0		0		1,880
Medicare stand-alone PDP	622		0		0		0		622
Total Medicare	15,451		0		0		0		15,451
Fully-insured	177		1,169		0		602		1,948
Specialty	0		424		0		0		424
Medicaid and other	1,081		0		0		0		1,081
Total premiums	16,709		1,593		0		602		18,904
Services revenue:
Provider	0		0		107		0		107
ASO and other	4		189		0		0		193
Pharmacy	0		0		157		0		157
Total services revenue	4		189		264		0		457
Total external revenues	16,713		1,782		264		602		19,361
Intersegment revenues
Services	0		9		4,852		(4,861)		0
Products	0		0		2,013		(2,013)		0
Total intersegment revenues	0		9		6,865		(6,874)		0
Investment income	28		3		2		681		714
Total revenues	16,741		1,794		7,131		(5,591)		20,075
Operating expenses:
Benefits	14,224		1,481		0		(94)		15,611
Operating costs	1,877		452		6,871		(6,687)		2,513

Depreciation and amortization	87		21		46		(26)		128
Total operating expenses	16,188		1,954		6,917		(6,807)		18,252
Income (loss) from operations	553		(160)		214		1,216		1,823

Interest expense	0		0		0		75		75
Other income, net	0		0		0		(7)		(7)
Income (loss) before income taxes and equity in net earnings	553		(160)		214		1,148		1,755
Equity in net earnings	0		0		35		0		35
Segment earnings (loss)	$	553	$	(160)	$	249	$	1,148	$	1,790

Retail Group and Specialty Healthcare
Services Eliminations/
Corporate Consolidated
Three months ended September 30, 2019 (in millions)
External revenues
Premiums:
Individual Medicare Advantage $ 10,752
$ —
$ —
$ —
$ 10,752
Group Medicare Advantage 1,609
—
—
—
1,609
Medicare stand-alone PDP 781
—
—
—
781
Total Medicare 13,142
—
—
—
13,142
Fully-insured 150
1,278
—
—
1,428
Specialty —
400
—
—
400
Medicaid and other 742
—
—
—
742
Total premiums 14,034
1,678
—
—
15,712
Services revenue:
Provider —
—
136
—
136
ASO and other 4
200
—
—
204
Pharmacy —
—
53
—
53
Total services revenue 4
200
189
—
393
Total external revenues 14,038
1,878
189
—
16,105
Intersegment revenues
Services —
4
4,654
(4,658 ) —
Products —
—
1,759
(1,759 ) —
Total intersegment revenues —
4
6,413
(6,417 ) —
Investment income 50
7
—
79
136
Total revenues 14,088
1,889
6,602
(6,338 ) 16,241
Operating expenses:
Benefits 12,050
1,448
—
(141 ) 13,357
Operating costs 1,310
413
6,348
(6,182 ) 1,889
Depreciation and amortization 89
24
43
(29 ) 127
Total operating expenses 13,449
1,885
6,391
(6,352 ) 15,373
Income from operations 639
4
211
14
868
Interest expense —
—
—
62
62
Other income, net —
—
—
(82 ) (82 )
Income before income taxes and equity in net earnings 639
4
211
34
888
Equity in net earnings of Kindred at Home —
—
1
—
1
Segment earnings $ 639
$ 4
$ 212
$ 34
$ 889

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(Unaudited)




	Retail		Group and Specialty		Healthcare Services		Eliminations/ Corporate		Consolidated
Three months ended September 30, 2019	(in millions)
External revenues
Premiums:
Individual Medicare Advantage	$	10,752	$	0	$	0	$	0	$	10,752
Group Medicare Advantage	1,609		0		0		0		1,609
Medicare stand-alone PDP	781		0		0		0		781
Total Medicare	13,142		0		0		0		13,142
Fully-insured	150		1,278		0		0		1,428
Specialty	0		400		0		0		400
Medicaid and other	742		0		0		0		742
Total premiums	14,034		1,678		0		0		15,712
Services revenue:
Provider	0		0		136		0		136
ASO and other	4		200		0		0		204
Pharmacy	0		0		53		0		53
Total services revenue	4		200		189		0		393
Total external revenues	14,038		1,878		189		0		16,105
Intersegment revenues
Services	0		4		4,654		(4,658)		0
Products	0		0		1,759		(1,759)		0
Total intersegment revenues	0		4		6,413		(6,417)		0
Investment income	50		7		0		79		136
Total revenues	14,088		1,889		6,602		(6,338)		16,241
Operating expenses:
Benefits	12,050		1,448		0		(141)		13,357
Operating costs	1,310		413		6,348		(6,182)		1,889

Depreciation and amortization	89		24		43		(29)		127
Total operating expenses	13,449		1,885		6,391		(6,352)		15,373
Income from operations	639		4		211		14		868

Interest expense	0		0		0		62		62
Other income, net	0		0		0		(82)		(82)
Income before income taxes and equity in net earnings	639		4		211		34		888
Equity in net earnings	0		0		1		0		1
Segment earnings	$	639	$	4	$	212	$	34	$	889

Retail Group and Specialty Healthcare
Services Individual Commercial Other
Businesses Eliminations/
Corporate Consolidated
(in millions)
Three months ended September 30, 2018
External revenues
Premiums:
Individual Medicare Advantage $ 8,912
$ —
$ —
$ —
$ —
$ —
$ 8,912
Group Medicare Advantage 1,542
—
—
—
—
—
1,542
Medicare stand-alone PDP 893
—
—
—
—
—
893
Total Medicare 11,347
—
—
—
—
—
11,347
Fully-insured 129
1,345
—
1
—
—
1,475
Specialty —
325
—
—
—
—
325
Medicaid and other 561
—
—
—
4
—
565
Total premiums 12,037
1,670
—
1
4
—
13,712
Services revenue:
Provider —
—
113
—
—
—
113
ASO and other 1
215
—
—
—
—
216
Pharmacy —
—
52
—
—
—
52
Total services revenue 1
215
165
—
—
—
381
Total external revenues 12,038
1,885
165
1
4
—
14,093
Intersegment revenues
Services —
4
4,214
—
—
(4,218 ) —
Products —
—
1,576
—
—
(1,576 ) —
Total intersegment revenues —
4
5,790
—
—
(5,794 ) —
Investment income 35
5
11
—
10
52
113
Total revenues 12,073
1,894
5,966
1
14
(5,742 ) 14,206
Operating expenses:
Benefits 10,020
1,347
—
(4 ) 12
(132 ) 11,243
Operating costs 1,352
445
5,720
—
2
(5,619 ) 1,900
Depreciation and amortization 67
21
40
—
—
(26 ) 102
Total operating expenses 11,439
1,813
5,760
(4 ) 14
(5,777 ) 13,245
Income from operations 634
81
206
5
—
35
961
Gain on sale of business —
—
—
—
—
(4 ) (4 )
Interest expense —
—
—
—
—
53
53
Other expense, net —
—
—
—
—
11
11
Income (loss) before income taxes and equity in net earnings 634
81
206
5
—
(25 ) 901
Equity in net earnings of Kindred at Home —
—
9
—
—
—
9
Segment earnings (loss) $ 634
$ 81
$ 215
$ 5
$ —
$ (25 ) $ 910

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(Unaudited)



	Retail		Group and Specialty		Healthcare Services		Eliminations/ Corporate		Consolidated
Nine months ended September 30, 2020	(in millions)
External revenues
Premiums:
Individual Medicare Advantage	$	38,748	$	0	$	0	$	0	$	38,748
Group Medicare Advantage	5,867		0		0		0		5,867
Medicare stand-alone PDP	2,108		0		0		0		2,108
Total Medicare	46,723		0		0		0		46,723
Fully-insured	509		3,606		0		602		4,717
Specialty	0		1,278		0		0		1,278
Medicaid and other	3,104		0		0		0		3,104
Total premiums	50,336		4,884		0		602		55,822
Services revenue:
Provider	0		0		316		0		316
ASO and other	14		576		0		0		590
Pharmacy	0		0		425		0		425
Total services revenue	14		576		741		0		1,331
Total external revenues	50,350		5,460		741		602		57,153
Intersegment revenues
Services	0		22		14,514		(14,536)		0
Products	0		0		5,900		(5,900)		0
Total intersegment revenues	0		22		20,414		(20,436)		0
Investment income	114		12		2		812		940
Total revenues	50,464		5,494		21,157		(19,022)		58,093
Operating expenses:
Benefits	41,939		3,886		0		(410)		45,415
Operating costs	5,047		1,316		20,274		(19,653)		6,984

Depreciation and amortization	251		60		135		(84)		362
Total operating expenses	47,237		5,262		20,409		(20,147)		52,761
Income from operations	3,227		232		748		1,125		5,332

Interest expense	0		0		0		211		211
Other expense, net	0		0		0		63		63
Income before income taxes and equity in net earnings	3,227		232		748		851		5,058
Equity in net earnings	0		0		68		0		68
Segment earnings	$	3,227	$	232	$	816	$	851	$	5,126

Retail Group and Specialty Healthcare
Services Eliminations/
Corporate Consolidated
(in millions)
Nine months ended September 30, 2019
External revenues
Premiums:
Individual Medicare Advantage $ 32,254
$ —
$ —
$ —
$ 32,254
Group Medicare Advantage 4,867
—
—
—
4,867
Medicare stand-alone PDP 2,408
—
—
—
2,408
Total Medicare 39,529
—
—
—
39,529
Fully-insured 434
3,873
—
—
4,307
Specialty —
1,160
—
—
1,160
Medicaid and other 2,143
—
—
—
2,143
Total premiums 42,106
5,033
—
—
47,139
Services revenue:
Provider —
—
367
—
367
ASO and other 14
587
—
—
601
Pharmacy —
—
135
—
135
Total services revenue 14
587
502
—
1,103
Total external revenues 42,120
5,620
502
—
48,242
Intersegment revenues
Services —
13
13,456
(13,469 ) —
Products —
—
5,128
(5,128 ) —
Total intersegment revenues —
13
18,584
(18,597 ) —
Investment income 139
17
1
194
351
Total revenues 42,259
5,650
19,087
(18,403 ) 48,593
Operating expenses:
Benefits 36,396
4,177
—
(405 ) 40,168
Operating costs 3,664
1,232
18,371
(18,015 ) 5,252
Depreciation and amortization 239
67
121
(84 ) 343
Total operating expenses 40,299
5,476
18,492
(18,504 ) 45,763
Income from operations 1,960
174
595
101
2,830
Interest expense —
—
—
184
184
Other income, net —
—
—
(217 ) (217 )
Income before income taxes and equity in net earnings 1,960
174
595
134
2,863
Equity in net earnings of Kindred at Home —
—
16
—
16
Segment earnings $ 1,960
$ 174
$ 611
$ 134
$ 2,879

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(Unaudited)



	Retail		Group and Specialty		Healthcare Services		Eliminations/ Corporate		Consolidated
Nine months ended September 30, 2019	(in millions)
External Revenues
Premiums:
Individual Medicare Advantage	$	32,254	$	0	$	0	$	0	$	32,254
Group Medicare Advantage	4,867		0		0		0		4,867
Medicare stand-alone PDP	2,408		0		0		0		2,408
Total Medicare	39,529		0		0		0		39,529
Fully-insured	434		3,873		0		0		4,307
Specialty	0		1,160		0		0		1,160
Medicaid and other	2,143		0		0		0		2,143
Total premiums	42,106		5,033		0		0		47,139
Services revenue:
Provider	0		0		367		0		367
ASO and other	14		587		0		0		601
Pharmacy	0		0		135		0		135
Total services revenue	14		587		502		0		1,103
Total external revenues	42,120		5,620		502		0		48,242
Intersegment revenues
Services	0		13		13,456		(13,469)		0
Products	0		0		5,128		(5,128)		0
Total intersegment revenues	0		13		18,584		(18,597)		0
Investment income	139		17		1		194		351
Total revenues	42,259		5,650		19,087		(18,403)		48,593
Operating expenses:
Benefits	36,396		4,177		0		(405)		40,168
Operating costs	3,664		1,232		18,371		(18,015)		5,252

Depreciation and amortization	239		67		121		(84)		343
Total operating expenses	40,299		5,476		18,492		(18,504)		45,763
Income from operations	1,960		174		595		101		2,830

Interest expense	0		0		0		184		184
Other income, net	0		0		0		(217)		(217)
Income before income taxes and equity in net earnings	1,960		174		595		134		2,863
Equity in net earnings	0		0		16		0		16
Segment earnings	$	1,960	$	174	$	611	$	134	$	2,879

Retail Group and Specialty Healthcare
Services Individual Commercial Other
Businesses Eliminations/
Corporate Consolidated
(in millions)
Nine months ended September 30, 2018
External Revenues
Premiums:
Individual Medicare Advantage $ 26,790
$ —
$ —
$ —
$ —
$ —
$ 26,790
Group Medicare Advantage 4,575
—
—
—
—
—
4,575
Medicare stand-alone PDP 2,703
—
—
—
—
—
2,703
Total Medicare 34,068
—
—
—
—
—
34,068
Fully-insured 379
4,083
—
6
—
—
4,468
Specialty —
1,014
—
—
—
—
1,014
Medicaid and other 1,664
—
—
—
22
—
1,686
Total premiums 36,111
5,097
—
6
22
—
41,236
Services revenue:
Provider —
—
290
—
—
—
290
ASO and other 6
642
—
—
4
—
652
Pharmacy —
—
148
—
—
—
148
Total services revenue 6
642
438
—
4
—
1,090
Total external revenues 36,117
5,739
438
6
26
—
42,326
Intersegment revenues
Services —
13
12,426
—
—
(12,439 ) —
Products —
—
4,722
—
—
(4,722 ) —
Total intersegment revenues —
13
17,148
—
—
(17,161 ) —
Investment income 102
18
34
—
110
154
418
Total revenues 36,219
5,770
17,620
6
136
(17,007 ) 42,744
Operating expenses:
Benefits 30,842
3,977
—
(73 ) 77
(374 ) 34,449
Operating costs 3,784
1,355
16,910
3
6
(16,648 ) 5,410
Depreciation and amortization 199
66
125
—
—
(88 ) 302
Total operating expenses 34,825
5,398
17,035
(70 ) 83
(17,110 ) 40,161
Income from operations 1,394
372
585
76
53
103
2,583
Loss on sale of business —
—
—
—
—
786
786
Interest expense —
—
—
—
—
159
159
Other expense, net —
—
—
—
—
11
11
Income (loss) before income taxes and equity in net earnings 1,394
372
585
76
53
(853 ) 1,627
Equity in net earnings of Kindred at Home —
—
9
—
—
—
9
Segment earnings (loss) $ 1,394
$ 372
$ 594
$ 76
$ 53
$ (853 ) $ 1,636

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Humana Inc.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The condensed consolidated financial statements of Humana Inc. in this document present the Company’s financial position, results of operations and cash flows, and should be read in conjunction with the following discussion and analysis. References to “we,” “us,” “our,” “Company,” and “Humana” mean Humana Inc. and its subsidiaries. This discussion includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in filings with the Securities and Exchange Commission, or SEC, in our press releases, investor presentations, and in oral statements made by or with the approval of one of our executive officers, the words or phrases like “believes,” “expects,” “anticipates,” “intends,” “likely will result,” “estimates,” “projects” or variations of such words and similar expressions are intended to identify such forward–looking statements. These forward–looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, including, among other things, information set forth in Item 1A. – Risk Factors in our ~~2018~~2019 Form 10-K, as modified by any changes to those risk factors included in this document including the potential impacts of risks related to the spread of, and response to, the COVID-19 pandemic as further discussed in Part II of this report and in other reports we filed subsequent to February ~~21, 2019,~~20, 2020, in each case incorporated by reference herein. In making these statements, we are not undertaking to address or update such forward-looking statements in future filings or communications regarding our business or results. In light of these risks, uncertainties and assumptions, the forward–looking events discussed in this document might not occur. There may also be other risks that we are unable to predict at this time. Any of these risks and uncertainties may cause actual results to differ materially from the results discussed in the forward–looking statements.

Executive Overview

General

Humana Inc., headquartered in Louisville, Kentucky, is a leading health and well-being company committed to helping our millions of medical and specialty members achieve their best health. Our successful history in care delivery and health plan administration is helping us create a new kind of integrated care with the power to improve health and well being and lower costs. Our efforts are leading to a better quality of life for people with Medicare, families, individuals, military service personnel, and communities at large. To accomplish that, we support physicians and other health care professionals as they work to deliver the right care in the right place for their patients, our members. Our range of clinical capabilities, resources and tools, such as in home care, behavioral health, pharmacy services, data analytics and wellness solutions, combine to produce a simplified experience that makes health care easier to navigate and more effective.

Our industry relies on two key statistics to measure performance. The benefit ratio, which is computed by taking

total benefits expense as a percentage of premiums revenue, represents a statistic used to measure underwriting profitability. The operating cost ratio, which is computed by taking total operating costs, excluding depreciation and amortization, as a percentage of total revenue less investment income, represents a statistic used to measure administrative spending efficiency.

~~Acquisitions~~COVID-19

We have continued to take actions to protect, inform, and ~~Divestitures~~care for our members, providers, employees, and other stakeholders associated with the outbreak of the novel coronavirus, or COVID-19. Specifically, we have taken the following actions to support our members:

•waiving all cost sharing for in-network primary care, outpatient behavioral health, and telehealth visits for the remainder of 2020 for our Medicare Advantage members, to reduce financial barriers to members seeking to re-engage with their providers, while continuing to encourage the use of telehealth;

•delivering meals to our senior members in need;

•making it easier for members to be tested for COVID-19 by offering at-home testing, as well as collaborating with other providers to deploy drive-thru testing at hundreds of sites throughout the country;

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•mailing in-home screening kits to members, to encourage members to seek preventative care that may have been delayed during the pandemic;

•proactively delivering safety kits, including face masks, to members and employee homes to facilitate access to care and support visits to providers safely;

•continuing to extend grace periods for premium payments for our fully-insured commercial group members, to ensure continuity of coverage during times of financial stress; and

•establishing a clinical outreach team to proactively engage with our most vulnerable members.

In addition, we took steps to support our provider partners and boost system viability:

•increasing provider funding, simplifying and expanding claims processing and releasing advanced funding to providers, to get reimbursement payments to providers as quickly as possible and ease financial concerns so that members are able to continue to access the care and information they need; and

•expanding modifications to certain utilization management processes, to ease administrative stress and make sure providers are able to most efficiently care for their patients.

Finally, we continued to support the communities we serve by donating $200 million during the first half of 2020 to the Humana Foundation to address social determinants of health in an effort to promote more health days and encourage greater health equity.

The temporary deferral of non-essential care resulting from stay-at-home and physical distancing orders and other restrictions on movement and economic activity implemented throughout the country beginning in the second half of March 2020 to reduce the spread of the novel coronavirus, or COVID-19, has impacted our business. Hospital admissions and utilization were significantly depressed in April and increased throughout May and June. Utilization continued to rebound throughout the third quarter of ~~2018,~~2020, reaching approximately 95% of historic baseline levels at the close of the third quarter. The impact of the deferral of non-essential care was partially offset by COVID-19 testing and treatment costs, as well as our ongoing pandemic relief efforts.

We significantly increased our liquidity position during March 2020 with the issuance of $1.1 billion in senior notes and a $1 billion draw under the prior one-year term loan bank commitment. At September 30, 2020, we ~~completed~~held $2.4 billion of cash and short-term investments at our parent company and access to an additional $2.0 billion under our credit agreement.

For the ~~sale~~remainder of 2020, we expect our year to date 2020 performance will be further offset by the impact of increasing utilization, COVID-19 testing and treatment costs and the continued support for our constituents. A number of significant variables and uncertainties will impact these trends including, among others, the severity and duration of the pandemic, continued actions taken to mitigate the spread of COVID-19 and in turn, relax those restrictions, the timing and degree in resumption of demand for deferred health care services, the ability of our ~~wholly-owned subsidiary KMG~~commercial members to ~~CGIC. KMG's subsidiary, KIC, included~~pay their premium, the nature, level and cost of diagnostic testing, the cost and timing of new therapeutic treatments and vaccines, all of which are difficult to predict.As such, our ~~closed block~~response to this global health crisis and the subsequent recovery will continue to evolve over the coming months to support the needs 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.our stakeholders.

Also in the third quarter of 2018, we, along with TPG and WCAS, completed the acquisitions of Kindred and Curo, respectively, merging Curo with the hospice business of 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.

In the second quarter of 2018, we acquired FPG for cash consideration of approximately $185 million, net of cash received. FPG is one of the largest at-risk providers serving 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. The acquisition of FPG advances our strategy of helping physicians and clinicians evolve from treating health episodically to managing health holistically.

Recent Transactions

In the first quarter of ~~2018,~~2020, we ~~acquired the remaining equity interest in MCCI, a~~purchased privately held Enclara, one of the nation’s largest hospice pharmacy and benefit management ~~service organization headquartered~~providers, for cash consideration of approximately $709 million, net of cash received.

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We have entered into a strategic partnership with 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 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.2020.

These transactions are more fully discussed in ~~Note 1 and~~ Note 3 to the condensed consolidated financial statements.

Business Segments

We manage our business with three reportable segments: Retail, Group and Specialty, and Healthcare Services. Beginning January 1, 2018, we exited the individual commercial fully-insured medical health insurance business, as well as certain other business, and therefore no longer report separately the Individual Commercial segment and the Other Business category in the current year. Previously, the Other Business category included businesses that were not individually reportable because they did not meet the quantitative thresholds required by generally accepted accounting principles, primarily our closed-block of commercial long-term care insurance policies which were sold in 2018. The reportable segments are based on a combination of the type of health plan customer and adjacent businesses centered on well-being solutions for our health plans and other customers, as described below. These segment groupings are consistent with information used by our Chief Executive Officer, the Chief Operating Decision Maker, to assess performance and allocate resources.

The Retail segment consists of Medicare benefits, marketed to individuals or directly via group Medicare accounts. In addition, the Retail segment also includes our contract with CMS to administer the Limited Income Newly Eligible Transition, or LI-NET, prescription drug plan program and contracts with various states to provide Medicaid, dual eligible, and Long-Term Support Services benefits, which we refer to collectively as our state-based contracts. The Group and Specialty segment consists of employer group commercial fully-insured medical and specialty health insurance benefits marketed to individuals and employer groups, including dental, vision, and other supplemental health benefits, as well as administrative services only, or ASO products. In addition, our Group and Specialty segment includes our military services business, primarily our TRICARE T2017 East Region contract. The Healthcare Services segment includes our services offered to our health plan members as well as to third parties, including pharmacy solutions, provider services, and clinical care service, such as home health and other services and capabilities to promote wellness and advance population health, including our minority investment in Kindred at ~~Home. We reported under~~Home and the ~~category of Other Businesses those businesses that did not align~~strategic partnership with ~~the reportable segments described above, primarily our closed-block long-term~~WCAS to develop and operate senior-focused, payor-agnostic, primary care ~~insurance policies, which were sold in 2018.~~centers.

The results of each segment are measured by segment earnings, and for our Healthcare Services Segment, also include ~~the~~ equity in net earnings ~~of Kindred at Home.~~from our equity method investees. Transactions between reportable segments primarily consist of sales of services rendered by our Healthcare Services segment, primarily pharmacy, provider, and clinical care services, to our Retail and Group and Specialty segment customers. Intersegment sales and expenses are recorded at fair value and eliminated in consolidation. Members served by our segments often use the same provider networks, enabling us in some instances to obtain more favorable contract terms with providers. Our segments also share indirect costs and assets. As a result, the profitability of each segment is interdependent. We allocate most operating expenses to our segments. Assets and certain corporate income and expenses are not allocated to the segments, including the portion of investment income not supporting segment operations, interest expense on corporate debt, and certain other corporate expenses. These items are managed at a corporate level. These corporate amounts are reported separately from our reportable segments and are included with intersegment eliminations.

Seasonality

One of the product offerings of our Retail segment is Medicare stand-alone prescription drug plans, or PDPs, under the Medicare Part D program. Our quarterly Retail segment earnings and operating cash flows are impacted by the Medicare Part D benefit design and changes in the composition of our membership. The Medicare Part D benefit design results in coverage that varies as a member’s cumulative out-of-pocket costs pass through successive stages of a member’s plan period, which begins annually on January 1 for renewals. These plan designs generally result in us sharing a greater portion of the responsibility for total prescription drug costs in the early stages and less in the latter stages. As a result, the PDP benefit ratio generally decreases as the year progresses. In addition, the number of ~~low-~~

low income senior members as well as year-over-year changes in the mix of membership in our stand-alone PDP products affects the quarterly benefit ratio pattern.

In addition, the Retail segment also experiences seasonality in the operating cost ratio as a result of costs incurred in the second half of the year associated with the Medicare marketing season.

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Our Group and Specialty segment also experiences seasonality in the benefit ratio pattern. However, the effect is opposite of Medicare stand-alone PDP in the Retail segment, with the Group and Specialty segment’s benefit ratio increasing as fully-insured members progress through their annual deductible and maximum out-of-pocket expenses.

~~2019~~2020 Highlights

•Our strategy offers our members affordable health care combined with a positive consumer experience in growing markets. At the core of this strategy is our integrated care delivery model, which unites quality care, high member engagement, and sophisticated data analytics. Our approach to primary, physician-directed care for our members aims to provide quality care that is consistent, integrated, cost-effective, and member-focused, provided by both employed physicians and physicians with network contract arrangements. The model is designed to improve health outcomes and affordability for individuals and for the health system as a whole, while offering our members a simple, seamless healthcare experience. We believe this strategy is positioning us for long-term growth in both membership and earnings. We offer providers a continuum of opportunities to increase the integration of care and offer assistance to providers in transitioning from a fee-for-service to a value-based arrangement. These include performance bonuses, shared savings and shared risk relationships. At September 30, ~~2019,~~2020, approximately ~~2,340,600~~2,605,900 members, or 66%, of our individual Medicare Advantage members were in value-based relationships under our integrated care delivery model, as compared to ~~2,010,800~~2,340,600 members, or 66%, at September 30, ~~2018.~~2019. Medicare Advantage and dual demonstration program membership enrolled in a Humana chronic care management program was 917,200 at September 30, 2020, an increase of 4% from 882,800 at September 30, ~~2019, an increase of 23.8% from 713,300 at September 30, 2018.~~2019. These members may not be unique to each program since members have the ability to enroll in multiple programs. The increase is driven by our improved process for identifying and enrolling members in the appropriate program at the right time, coupled with growth in Special Needs Plans, or SNP, membership.

•In October, ~~2019,~~2020, the Centers for Medicare and Medicaid Services, or CMS, issued its preliminary 2022 Medicare Advantage and Part D payment rates and proposed policy changes, collectively, the Advance Notice. CMS has invited public comment on the Advance Notice before publishing final rates on or before April 5, 2021, or the Final Notice, and indicated that the Final Notice may be published early in light of the challenges posed by the uncertainty associated with the COVID-19 pandemic. In the Advance Notice, CMS estimates Medicare Advantage plans across the sector will, on average, experience a 2.82 percent increase in benchmark funding based on proposals included therein. As indicated by CMS, its estimate excludes the impact of fee-for-service county rebasing/re-pricing since the related impact is dependent upon finalization of certain data, which will be available with the publication of the Final Notice. Based on our preliminary analysis using the same factors CMS included in its estimate, the components of which are detailed on CMS’ website, we anticipate the proposals in the Advance Notice would result in a change generally in line with CMS’ estimate, with the exception of our Medicare Star Ratings for bonus year 2022, as more fully described below, that led our peers. We will be drawing upon our program expertise to provide CMS formal commentary on the impact of the Advance Notice and the related impact upon Medicare beneficiaries’ quality of care and service to our members through the Medicare Advantage program.

•In October 2020, CMS published its updated Medicare Star Ratings for bonus year ~~2021. We~~2022.We have ~~3.7~~4.1 million members, or ~~92%~~approximately 92 percent of our Medicare Advantage membership as of ~~August 2019,~~September 2020, enrolled in 1815 contracts that received a 4-star rating or above. In addition, we received a 5 out of 5-star rating for our CarePlus Health Plans, Inc. contract in Florida for the third consecutive year and received a 4.5-star rating for ~~six~~three Medicare Advantage contracts offered in 197 states, which cover approximately ~~1.2 million~~796,000 members. ~~The continued improvement~~Additionally, over 99 percent of retirees in our group Medicare Advantage plans remain in 4-star or above contracts for bonus year 2022. Our Star ~~ratings reflects~~Ratings continue to reflect our ~~enterprise-wide~~ focus on ~~driving~~ quality in both member experience and ~~improved health~~clinical outcomes.

•Net income ~~increased $867 million from~~was $1.3 billion, ~~in 2018 to $2.2 billion in 2019 and earnings~~or $10.05 per diluted common share, ~~increased $6.66 from $9.58 earnings~~for the three months ended September 30, 2020, or the 2020 quarter, compared to $689 million, or $5.14 per diluted common share, for the three months ended September 30, 2019, or the 2019 quarter, and was $3.6 billion, or $27.37 per diluted

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common share, for the nine months ended September 30, 2020, or the 2020 period, compared to $2.2 billion, or $16.24 per diluted common share, for the nine months ended September 30, 2019, or the 2019 period. These comparisons were significantly impacted by the change in ~~2018~~the fair value of publicly-traded equity securities, the net receipt of commercial risk corridor receivables previously written off, and the put/call valuation adjustments associated with certain equity method investments. The change in the fair value of our publicly-traded equity securities relates primarily to ~~$16.24~~our common stock holdings, including both the gain resulting from the initial conversion of our prior ownership interest in certain privately held companies, primarily in Oak Street Health, Inc., or OSH, into common stock upon such companies' initial public offering, or IPO, during the third quarter of 2020, and the subsequent changes in the market value of such securities from their IPO through the end of the period. In September 2020, we received $578 million, net of related fees and expenses pursuant to the U.S. Supreme Court ruling that the government is obligated to pay the losses under the risk corridor program. The receipt of the risk corridor payments was associated with losses incurred under the Health Care Reform business in 2014 to 2016. The receipt of these risk corridor payments accounted for less than half of our accumulated losses before income taxes from this business during that time period. The impact of these adjustments to our consolidated income before income taxes and equity in net earnings and diluted earnings per ~~diluted~~ common share ~~in 2019. This comparison~~ was ~~primarily~~as follows for the 2020 quarter and period.


	For the three months ended September 30,				For the nine months ended September 30,
	2020		2019		2020		2019
Consolidated income before income taxes and equity in net earnings:
Change in the fair value of publicly-traded equity securities	$	643	$	—	$	643	$	—
Receipt of commercial risk corridor receivables previously written off, net	578		—		578		—
Put/call valuation adjustments	7		82		(63)		217
Total	$	1,228	$	82	$	1,158	$	217

	For the three months ended September 30,				For the nine months ended September 30,
	2020		2019		2020		2019
Diluted earnings per common share:
Change in the fair value of publicly-traded equity securities	$	3.72	$	—	$	3.73	$	—
Receipt of commercial risk corridor receivables previously written off, net	3.35		—		3.35		—
Put/call valuation adjustments	0.03		0.47		(0.37)		1.23
Total	$	7.10	$	0.47	$	6.71	$	1.23

Excluding these adjustments, our results of operations reflect the impact of the ongoing COVID-19 pandemic. Utilization continued to rebound throughout the 2020 quarter, reaching approximately 95% of historic baseline levels by end of the third quarter. As such, our 2020 quarter results of operations comparisons were impacted by ~~our Medicare Advantage business~~increasing utilization, COVID-19 testing and ~~Healthcare Services segment,~~treatment costs, as well as by previously implemented productivity initiatives that led to significant operating cost efficiencies in 2019. These impacts were partially offset by strategic investments in our integrated care delivery model, the financial impact of ~~higher compensation accruals for~~our ongoing crisis relief efforts. Our 2020 period results reflect historically low utilization levels in the ~~Annual Incentive Plan, or AIP, offered to employees across all levels~~first six months of the ~~company, lower Group and Specialty segment earnings, and~~year from the ~~impact~~temporary deferral of ~~workforce optimization.~~ non-essential care amid the COVID-19 pandemic.

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These changes were ~~further~~also favorably impacted ~~by the suspension of the health industry insurance fee in 2019 and~~ by a lower number of shares used to compute dilutive earnings per common share, primarily reflecting share ~~repurchases. In addition,~~repurchases completed during 2019, partially offset by a higher tax rate resulting from the ~~2019 period was impacted by~~return of the ~~loss on the sale of KMG recognized~~non-deductible health insurance industry free in ~~2018.~~2020.

•Contributing to our Retail segment revenue growth was our individual Medicare Advantage membership, which increased ~~508,700~~382,600 members, or ~~16.7%~~10.8%, from September 30, ~~2018~~2019 to September 30, ~~2019.~~2020.

•Our operating cash ~~flow~~flows for the 2020 period of $5.4 billion increased from the 2019 period of $4.8 billion ~~for 2019 improved~~ primarily due primarily to higher income from the timing of working capital changes, higher earnings, and the impact of an approximately $245 million payment related to reinsuring certain voluntary benefit and financial protection products to a third party in connection with the sale of KMG in 2018.

During the third quarter of 2019, we initiated an involuntary workforce optimization program that will allow us to promote operational excellence, accelerate our strategy, fund critical initiatives and advance our growth objectives. As a result we recorded estimated charges of $46 million, or $0.26 per diluted common share, on the corporate level, included with operating costs in the condensed consolidated statements of income. We expect this liability to be primarily paid within 12 months and classified it as a current liability, included in trade accounts payable and accrued expenses.

operations.

Health Care Reform

The Health Care Reform Law enacted significant reforms to various aspects of the U.S. health insurance industry. Certain significant provisions of the Health Care Reform Law include, among others, mandated coverage requirements, mandated benefits and guarantee issuance associated with commercial medical insurance, rebates to policyholders based on minimum benefit ratios, adjustments to Medicare Advantage premiums, the establishment of federally facilitated or state-based exchanges coupled with programs designed to spread risk among insurers, and the introduction of plan designs based on set actuarial values. In addition, the Health Care Reform Law established insurance industry assessments, including an annual health insurance industry fee. The annual health insurance industry fee, ~~levied on the insurance industry~~which was ~~$14.3 billion~~suspended in ~~2018 and was~~2019, but has resumed for calendar year 2020, is not deductible for income tax purposes ~~which~~and significantly increased our effective income tax rate. A one year suspension of the health insurance industry fee, as we experienced in 2017 and are experiencing in 2019, significantly impacts our trend in key operating metrics including our operating cost and medical expense ratios, as well asincreases our effective tax rate. ~~The annual~~We paid the federal government $1.2 billion in September 2020 for this fee. Under current law, the health ~~insurance~~ industry fee ~~is scheduled to resume for~~will be permanently repealed beginning in calendar year ~~2020 under current law.~~2021.

It is reasonably possible that the Health Care Reform Law and related regulations, as well as other current or future legislative, judicial or regulatory changes, such as legislative and regulatory changes associated with COVID-19, including restrictions on our ability to manage our provider network or otherwise operate our business, or restrictions on profitability, including reviews by regulatory bodies that may compare our Medicare Advantage profitability to our non-Medicare Advantage business profitability, or compare the profitability of various products within our Medicare Advantage business, and require that they remain within certain ranges of each other, increases in member benefits or changes to member eligibility criteria without corresponding increases in premium payments to us, or increases in regulation of our prescription drug benefit businesses, in the aggregate may have a material adverse effect on our results of operations (including restricting revenue, enrollment and premium growth in certain products and market segments, restricting our ability to expand into new markets, increasing our medical and operating costs, further lowering our Medicare payment rates and increasing our expenses associated with ~~the non-deductible health insurance industry fee and other~~ assessments); our financial position (including our ability to maintain the value of our goodwill); and our cash flows.

We intend for the discussion of our financial condition and results of operations that follows to assist in the understanding of our financial statements and related changes in certain key items in those financial statements from year to year, including the primary factors that accounted for those changes. Transactions between reportable segments primarily consist of sales of services rendered by our Healthcare Services segment, primarily pharmacy, provider, and clinical care services, to our Retail and Group and Specialty segment customers and are described in Note 1514 to the condensed consolidated financial statements included in this report.

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Comparison of Results of Operations for ~~2019~~2020 and ~~2018~~2019

The following discussion primarily deals with our results of operations for the three months ended September 30, 2020, or the 2020 quarter, and the three months ended September 30, 2019, or the 2019 quarter, the ~~three~~nine months ended September 30, ~~2018,~~2020, or the ~~2018 quarter,~~2020 period, and the nine months ended September 30, 2019, or the 2019 ~~period, and the nine months ended September 30, 2018, or the 2018~~ period.

Consolidated


	For the three months ended September 30,						Change
	2020			2019			Dollars		Percentage
	(dollars in millions, except per common share results)
Revenues:
Premiums:
Retail	$	16,709		$	14,034		$	2,675	19.1	%
Group and Specialty	1,593			1,678			(85)		(5.1)	%
Corporate	602			—			602		100.0	%
Total premiums	18,904			15,712			3,192		20.3	%
Services:
Retail	4			4			—		—	%
Group and Specialty	189			200			(11)		(5.5)	%
Healthcare Services	264			189			75		39.7	%
Total services	457			393			64		16.3	%
Investment income	714			136			578		425.0	%
Total revenues	20,075			16,241			3,834		23.6	%
Operating expenses:
Benefits	15,611			13,357			2,254		16.9	%
Operating costs	2,513			1,889			624		33.0	%
Depreciation and amortization	128			127			1		0.8	%
Total operating expenses	18,252			15,373			2,879		18.7	%
Income from operations	1,823			868			955		110.0	%
Interest expense	75			62			13		21.0	%
Other income, net	(7)			(82)			(75)		(91.5)	%
Income before income taxes and equity in net earnings	1,755			888			867		97.6	%
Provision for income taxes	450			200			250		125.0	%
Equity in net earnings	35			1			34		3,400.0	%
Net income	$	1,340		$	689		$	651	94.5	%
Diluted earnings per common share	$	10.05		$	5.14		$	4.91	95.5	%
Benefit ratio (a)	82.6		%	85.0		%			(2.4)	%
Operating cost ratio (b)	13.0		%	11.7		%			1.3	%
Effective tax rate	25.2		%	22.5		%			2.7	%

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	For the nine months ended September 30,						Change
	2020			2019			Dollars		Percentage
	(dollars in millions, except per common share results)
Revenues:
Premiums:
Retail	$	50,336		$	42,106		$	8,230	19.5	%
Group and Specialty	4,884			5,033			(149)		(3.0)	%
Corporate	602			—			602		100.0	%
Total premiums	55,822			47,139			8,683		18.4	%
Services:
Retail	14			14			—		—	%
Group and Specialty	576			587			(11)		(1.9)	%
Healthcare Services	741			502			239		47.6	%
Total services	1,331			1,103			228		20.7	%
Investment income	940			351			589		167.8	%
Total revenues	58,093			48,593			9,500		19.6	%
Operating expenses:
Benefits	45,415			40,168			5,247		13.1	%
Operating costs	6,984			5,252			1,732		33.0	%
Depreciation and amortization	362			343			19		5.5	%
Total operating expenses	52,761			45,763			6,998		15.3	%
Income from operations	5,332			2,830			2,502		88.4	%
Interest expense	211			184			27		14.7	%
Other expense (income), net	63			(217)			280		129.0	%
Income before income taxes and equity in net earnings	5,058			2,863			2,195		76.7	%
Provision for income taxes	1,485			684			801		117.1	%
Equity in net earnings	68			16			52		325.0	%
Net income	$	3,641		$	2,195		$	1,446	65.9	%
Diluted earnings per common share	$	27.37		$	16.24		$	11.13	68.5	%
Benefit ratio (a)	81.4		%	85.2		%			(3.8)	%
Operating cost ratio (b)	12.2		%	10.9		%			1.3	%
Effective tax rate	29.0		%	23.8		%			5.2	%

(a)Represents benefits expense as a percentage of premiums revenue.

(b)Represents operating costs as a percentage of total revenues less investment income.

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Premiums Revenue

Consolidated

For the three months ended September 30, Change
2019 2018 Dollars Percentage
(dollars in millions, except per common share results)
Revenues:
Premiums:
Retail $ 14,034
$ 12,037
$ 1,997
16.6 %
Group and Specialty 1,678
1,670
8
0.5 %
Individual Commercial —
1
(1 ) (100.0 )%
Other Businesses —
4
(4 ) (100.0 )%
Total premiums 15,712
13,712
2,000
14.6 %
Services:
Retail 4
1
3
300.0 %
Group and Specialty 200
215
(15 ) (7.0 )%
Healthcare Services 189
165
24
14.5 %
Total services 393
381
12
3.1 %
Investment income 136
113
23
20.4 %
Total revenues 16,241
14,206
2,035
14.3 %
Operating expenses:
Benefits 13,357
11,243
2,114
18.8 %
Operating costs 1,889
1,900
(11 ) (0.6 )%
Depreciation and amortization 127
102
25
24.5 %
Total operating expenses 15,373
13,245
2,128
16.1 %
Income from operations 868
961
(93 ) (9.7 )%
Gain on sale of business —
(4 ) 4
(100.0 )%
Interest expense 62
53
9
17.0 %
Other (income) expense, net (82 ) 11
(93 ) (845.5 )%
Income before income taxes and equity in net earnings 888
901
(13 ) (1.4 )%
Provision for income taxes 200
266
(66 ) (24.8 )%
Equity in net earnings of Kindred at Home 1
9
(8 ) (88.9 )%
Net income $ 689
$ 644
$ 45
7.0 %
Diluted earnings per common share $ 5.14
$ 4.65
$ 0.49
10.5 %
Benefit ratio (a)
85.0 % 82.0 % 3.0 %
Operating cost ratio (b)
11.7 % 13.5 % (1.8 )%
Effective tax rate 22.5 % 29.1 % (6.6 )%


~~(a)~~	~~Represents benefits expense as a percentage of premiums revenue.~~


~~(b)~~	~~Represents operating costs as a percentage of total revenues less investment income.~~

For the nine months ended
September 30, Change
2019 2018 Dollars Percentage
(dollars in millions, except per common share results)
Revenues:
Premiums:
Retail $ 42,106
$ 36,111
$ 5,995
16.6 %
Group and Specialty 5,033
5,097
(64 ) (1.3 )%
Individual Commercial —
6
(6 ) (100.0 )%
Other Businesses —
22
(22 ) (100.0 )%
Total premiums 47,139
41,236
5,903
14.3 %
Services:
Retail 14
6
8
133.3 %
Group and Specialty 587
642
(55 ) (8.6 )%
Healthcare Services 502
438
64
14.6 %
Other Businesses —
4
(4 ) (100.0 )%
Total services 1,103
1,090
13
1.2 %
Investment income 351
418
(67 ) (16.0 )%
Total revenues 48,593
42,744
5,849
13.7 %
Operating expenses:
Benefits 40,168
34,449
5,719
16.6 %
Operating costs 5,252
5,410
(158 ) (2.9 )%
Depreciation and amortization 343
302
41
13.6 %
Total operating expenses 45,763
40,161
5,602
13.9 %
Income from operations 2,830
2,583
247
9.6 %
Loss on sale of business —
786
(786 ) (100.0 )%
Interest expense 184
159
25
15.7 %
Other (income) expense, net (217 ) 11
(228 ) (2,072.7 )%
Income before income taxes and equity in net earnings 2,863
1,627
1,236
76.0 %
Provision for income taxes 684
308
376
122.1 %
Equity in net earnings of Kindred at Home 16
9
7
77.8 %
Net income $ 2,195
$ 1,328
$ 867
65.3 %
Diluted earnings per common share $ 16.24
$ 9.58
$ 6.66
69.5 %
Benefit ratio (a)
85.2 % 83.5 % 1.7 %
Operating cost ratio (b)
10.9 % 12.8 % (1.9 )%
Effective tax rate 23.8 % 18.8 % 5.0 %


~~(a)~~	~~Represents benefits expense as a percentage of premiums revenue.~~


~~(b)~~	~~Represents operating costs as a percentage of total revenues less investment income.~~

~~Summary~~

~~Net income was $689 million,~~ premiums increased $3.2 billion, or ~~$5.14 per diluted common share,~~20.3%, from $15.7 billion in the 2019 quarter ~~compared~~ to ~~$644 million, or $4.65 per diluted common share,~~$18.9 billion in the ~~2018 quarter. Net income was $2.2~~2020 quarter and increased $8.7 billion, or ~~$16.24 per diluted common share,~~18.4%, from $47.1 billion in the 2019 period ~~compared~~ to ~~$1.3~~$55.8 billion ~~or $9.58 per diluted common share,~~ in the ~~2018~~2020 period. These increases were primarily impacted by our Medicare Advantage business and Healthcare Services segment, as well as by previously implemented productivity initiatives that led to significant operating cost efficiencies in 2019. These impacts were partially offset by strategic investments in our integrated care delivery model, the impact of higher compensation accruals for the AIP offered to employees across all levels of the company, lower Group and Specialty segment earnings, and the impact of workforce optimization. These changes were further favorably impacted by the suspension of the health industry insurance fee in 2019 and by a lower number of shares used to compute dilutive earnings per share, primarily reflecting share repurchases. In addition, the 2019 period was impacted by the loss on the sale of KMG recognized in 2018.

~~Premiums Revenue~~

Consolidated premiums increased $2.0 billion, or 14.6%, from the 2018 quarter to $15.7 billion for the 2019 quarter and increased $5.9 billion, or 14.3%, from the 2018 period to $47.1 billion for the 2019 period primarily due to higher premiums in the Retail segment, ~~driven by higher premium revenues~~mainly resulting from ~~out~~ Medicare Advantage ~~business resulting from~~and state-based contracts membership growth, ~~and~~ higher per member ~~premiums. These increases were~~Medicare Advantage premiums, and the receipt of commercial risk corridor receivables previously written off, partially offset by the impact of declining stand-alone PDP membership ~~year-over-year,~~ as ~~well as lower premiums in the Group and Specialty segment in the 2019 period as discussed~~more fully described in the detailed segment results discussion that follows.

~~Services Revenue~~

Consolidated services revenue increased ~~$12~~$64 million, or ~~3.1%~~16.3%, from ~~the 2018 quarter to~~ $393 million ~~for~~in the 2019 quarter to $457 million in the 2020 quarter and increased $228 million, or 20.7%, from $1.1 billion in the 2019 period to $1.3 billion in the 2020 period. These increases were primarily due to an increase in services revenue in the Healthcare Services segment ~~partially offset by a decline~~associated with higher external pharmacy revenues resulting from the Enclara acquisition in the ~~Group and Specialty segment as detailed~~first quarter of 2020.

Investment Income

Investment income increased $578 million, or 425.0%, from $136 million in the ~~segment results discussion that follows. Consolidated services revenue was relatively unchanged at $1.10 billion for~~2019 quarter to $714 million in the 2020 quarter and increased $589 million, or 167.8%, from $351 million in the 2019 period ~~increasing $13 million, or 1.2%, from the 2018 period due~~ to ~~increased services revenue in the Healthcare Services segment, partially offset by a decline in the Group and Specialty segment as detailed in the segment results discussion that follows.~~

~~Investment Income~~

Investment income totaled $136 million for the 2019 quarter, increasing $23 million, or 20.4%, from $113 million for the 2018 quarter. This increase primarily reflects higher realized capital gains, higher average invested capital balances, and higher interest rates. For the 2019 period, investment income totaled $351 million, decreasing $67 million, or 16.0%, from $418$940 million in the ~~2018 period. This decrease primarily reflects lower realized capital gains and lower average invested balances, partially offset by higher interest rates.~~

~~Benefits Expense~~

Consolidated benefits expense was $13.4 billion for the 2019 quarter, an increase of $2.1 billion from the 2018 quarter. For the 2019 period, benefits expense was $40.2 billion, an increase of $5.7 billion from the 2018 period. The consolidated benefit ratio for the 2019 quarter of 85.0% increased 300 basis points from 82.0% in the 2018 quarter. The consolidated benefit ratio for the 2019 period increased 170 basis points to 85.2% from 83.5% in the 20182020 period. These increases were primarily due to the ~~suspension~~$643 million change in fair value of publicly-traded equity securities during the 2020 quarter.

Benefit Expense

Consolidated benefits expense increased $2.3 billion, or 16.9%, from $13.4 billion in the 2019 quarter to $15.6 billion in the 2020 quarter and increased $5.2 billion, or 13.1%, from $40.2 billion in the 2019 period to $45.4 billion in the 2020 period. The consolidated benefit ratio decreased 240 basis points from 85.0% for the 2019 quarter to 82.6% for the 2020 quarter and decreased 380 basis points from 85.2% for the 2019 period to 81.4% for the 2020 period. These comparisons reflect the receipt of the commercial risk corridor receivables previously written off, the change in quarterly utilization patterns from the COVID-19 pandemic and the reinstatement of the non-deductible health insurance industry fee in ~~2019, which~~2020 that was contemplated in the pricing and benefit design of our products, lower favorable prior-period medical claims reserve development, an increase in the Group and Specialty benefit ratio as discussed in the detailed segment results discussion that follows, and the shift in Medicare membership mix, due to the loss of stand-alone PDP members and significant growth in Medicare Advantage members. These increasesproducts.These factors were were partially offset by ~~engaging~~COVID-19 testing and treatment costs along with our Medicare Advantage members in clinical programs, as well as ensuring they are appropriately documented under the CMS risk-adjustment model, and lower than expected medical costs as compared to the assumptions used in the pricing of our individual Medicare Advantage business for 2019. In addition, the 2019 quarter was significantly negatively impacted by weekday seasonality.ongoing pandemic relief efforts.

The favorable prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 20 basis points in the 2020 quarter versus approximately 40 basis points in the 2019 ~~quarter versus approximately 90 basis points in the 2018~~ quarter. The favorable prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 50 basis points in the 2020 period versus approximately 70 basis points ~~to 85.2% for~~in the 2019 ~~period compared to approximately 110 basis points to 83.5% for the 2018~~ period.

Operating Costs

Our segments incur both direct and shared indirect operating costs. We allocate the indirect costs shared by the segments primarily as a function of revenues. As a result, the profitability of each segment is interdependent.

Consolidated operating costs ~~decreased $11~~increased $624 million, or ~~0.6%~~33.0%, ~~during~~from $1.9 billion in the 2019 quarter ~~compared~~ to $2.5 billion in the ~~2018~~2020 quarter and ~~decreased $158 million,~~increased $1.7 billion, or ~~2.9%, during~~33.0% from $5.3 billion in the 2019 period ~~compared~~ to ~~the 2018 period. These decreases were primarily due to a decrease in operating costs~~$7.0 billion in the ~~Retail and the Group and Specialty segments as discussed in the detailed segment results discussion that follows.~~2020 period.

The consolidated operating cost ratio increased 130 basis points from 11.7% for the 2019 quarter ~~of 11.7% decreased 180~~to 13.0% for the 2020 quarter and increased 130 basis points from ~~13.5% in the 2018 quarter and~~10.9% for the 2019 period ~~decreased 190 basis points~~ to ~~10.9% from 12.8% in~~12.2% for the ~~2018~~2020 period. These ~~decreases~~increases were primarily due to the ~~suspension~~reinstatement of the non-deductible health insurance industry fee in ~~2019,~~2020 and COVID-19 related administrative costs, including those associated with purchasing personal protective equipment for our clinicians, member response efforts, and the build-out of infrastructure necessary to support employees working remotely. These increases were partially offset by scale efficiencies associated with growth in our Medicare Advantage membership, ~~and~~ significant operating cost efficiencies in ~~2019~~the 2020 quarter driven by previously ~~implemented~~ disclosed

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productivity ~~initiatives. These improvements were partially offset by strategic investments in our integrated care delivery model, the impact of higher compensation expense accruals~~initiatives, charges associated with workforce optimization in the 2019 quarter ~~for~~that did not recur in the ~~AIP offered to employees across all levels,~~2020 quarter, and ~~charges associated with workforce optimization. The higher compensation accruals resulted from our continued strong performance, including customer satisfaction as measured by~~ the net ~~promoter score, along~~impact of the receipt of the commercial risk corridor receivables previously written off. The 2020 period was further impacted by a $200 million contribution during the first half of 2020 to the Humana Foundation to support the communities served by us, particularly those with ~~higher than anticipated individual Medicare Advantage membership growth.~~social and health disparities. The non-deductible health insurance industry fee impacted the operating cost ratio by ~~180~~150 basis points in ~~both~~ the ~~2018~~2020 quarter and ~~period.~~ period.

Depreciation and Amortization

Depreciation and amortization ~~for the 2019 quarter totaled~~increased $1 million, or 0.8%, from $127 million compared to $102 million for the 2018 quarter. For the 2019 period, depreciation and amortization totaled $343 million compared to $302 million for the 2018 period. We accelerated the depreciation related to certain capitalized software of $19 million in the 2019 quarter to $128 million in the 2020 quarter and increased $19 million, or 5.5%, from $343 million in the 2019 period to $362 million in the 2020 period.

Interest Expense

Interest expense ~~for~~increased $13 million, or 21.0%, from $62 million in the 2019 quarter ~~of $62~~to $75 million in the 2020 quarter and increased $9$27 million, ~~compared to $53~~or 14.7%, from $184 million ~~for the 2018 quarter. Interest expense for~~in the 2019 period ~~of $184~~to $211 million ~~increased $25 million, compared to $159 million for~~in the ~~2018~~2020 period. These increases were primarily due to the higher average borrowings outstanding including the impact of the borrowings under the November 2018 term loan agreement and senior notes issued in August 2019.

Income Taxes

The effective income tax rate was 25.2% and 29.0% for the three and nine months ended September 30, 2020, respectively, compared to 22.5% and 23.8% for the three and nine months ended September 30, 2019, ~~respectively, compared~~respectively. These increases were primarily due to ~~29.1% and 18.8% for~~ the ~~three and nine months ended September 30, 2018, respectively. These changes primarily reflect the impact of the suspension~~reinstatement of the non-deductible health insurance industry fee in 2019 as well as the deferred tax benefit recognized in 2018 from the loss on sale of KMG. The effective income tax rate for the nine months ended September 30, 2018 reflected a $430 million deferred tax benefit, resulting from the loss on the sale of KMG attributable to its original tax basis and subsequent capital contributions to fund accumulated losses.

2020.

Retail Segment


	September 30,		Change
	2020	2019	Members	Percentage
Membership:
Medical membership:
Individual Medicare Advantage	3,935,100	3,552,500	382,600	10.8	%
Group Medicare Advantage	612,000	523,900	88,100	16.8	%
Medicare stand-alone PDP	3,892,200	4,379,800	(487,600)	(11.1)	%
Total Retail Medicare	8,439,300	8,456,200	(16,900)	(0.2)	%

State-based Medicaid	730,100	469,000	261,100	55.7	%
Medicare Supplement	331,300	286,600	44,700	15.6	%
Total Retail medical members	9,500,700	9,211,800	288,900	3.1	%

Table of Contents


	September 30,		Change					For the three months ended September 30,						Change
	2019	2018	Members		Percentage			2020			2019			Dollars		Percentage
Membership:
Medical membership:
								(in millions)
Premiums and Services Revenue:							Premiums and Services Revenue:
Premiums:							Premiums:
Individual Medicare Advantage	3,552,500	3,043,800	508,700		16.7	%	Individual Medicare Advantage	$	12,949		$	10,752		$	2,197	20.4	%
Group Medicare Advantage	523,900	496,800	27,100		5.5	%	Group Medicare Advantage	1,880			1,609			271		16.8	%
Medicare stand-alone PDP	4,379,800	5,015,900	(636,100	)	(12.7	)%	Medicare stand-alone PDP	622			781			(159)		(20.4)	%
Total Retail Medicare	8,456,200	8,556,500	(100,300	)	(1.2	)%	Total Retail Medicare	15,451			13,142			2,309		17.6	%
State-based Medicaid	469,000	323,800	145,200		44.8	%	State-based Medicaid	1,081			742			339		45.7	%
Medicare Supplement	286,600	246,600	40,000		16.2	%	Medicare Supplement	177			150			27		18.0	%
Total Retail medical members	9,211,800	9,126,900	84,900		0.9	%
Total premiums							Total premiums	16,709			14,034			2,675		19.1	%
Services							Services	4			4			—		—	%
Total premiums and services revenue							Total premiums and services revenue	16,713			$	14,038		$	2,675	19.1	%
Segment earnings							Segment earnings	$	553		$	639		$	(86)	(13.5)	%
Benefit ratio							Benefit ratio	85.1		%	85.9		%			(0.8)	%
Operating cost ratio							Operating cost ratio	11.2		%	9.3		%			1.9	%



	For the three months ended September 30,						Change						For the nine months ended September 30,						Change
	2019			2018			Dollars			Percentage			2020			2019			Dollars		Percentage
	(in millions)												(in millions)
Premiums and Services Revenue:												Premiums and Services Revenue:
Premiums:												Premiums:
Individual Medicare Advantage	$	10,752		$	8,912		$	1,840		20.6	%	Individual Medicare Advantage	$	38,748		$	32,254		$	6,494	20.1	%
Group Medicare Advantage	1,609			1,542			67			4.3	%	Group Medicare Advantage	5,867			4,867			1,000		20.5	%
Medicare stand-alone PDP	781			893			(112		)	(12.5	)%	Medicare stand-alone PDP	2,108			2,408			(300)		(12.5)	%
Total Retail Medicare	13,142			11,347			1,795			15.8	%	Total Retail Medicare	46,723			39,529			7,194		18.2	%
State-based Medicaid	742			561			181			32.3	%	State-based Medicaid	3,104			2,143			961		44.8	%
Medicare Supplement	150			129			21			16.3	%	Medicare Supplement	509			434			75		17.3	%

Total premiums	14,034			12,037			1,997			16.6	%	Total premiums	50,336			42,106			8,230		19.5	%
Services	4			1			3			300.0	%	Services	14			14			—		—	%
Total premiums and services revenue	$	14,038		$	12,038		$	2,000		16.6	%	Total premiums and services revenue	$	50,350		$	42,120		$	8,230	19.5	%
Segment earnings	$	639		$	634		$	5		0.8	%	Segment earnings	$	3,227		$	1,960		$	1,267	64.6	%
Benefit ratio	85.9		%	83.2		%				2.7	%	Benefit ratio	83.3		%	86.4		%			(3.1)	%
Operating cost ratio	9.3		%	11.2		%				(1.9	)%	Operating cost ratio	10.0		%	8.7		%			1.3	%

For the nine months ended
September 30, Change
2019 2018 Dollars Percentage
(in millions)
Premiums and Services Revenue:
Premiums:
Individual Medicare Advantage $ 32,254
$ 26,790
$ 5,464
20.4 %
Group Medicare Advantage 4,867
4,575
292
6.4 %
Medicare stand-alone PDP 2,408
2,703
(295 ) (10.9 )%
Total Retail Medicare 39,529
34,068
5,461
16.0 %
State-based Medicaid 2,143
1,664
479
28.8 %
Medicare Supplement 434
379
55
14.5 %
Total premiums 42,106
36,111
5,995
16.6 %
Services 14
6
8
133.3 %
Total premiums and services revenue $ 42,120
$ 36,117
$ 6,003
16.6 %
Segment earnings $ 1,960
$ 1,394
$ 566
40.6 %
Benefit ratio 86.4 % 85.4 % 1.0 %
Operating cost ratio 8.7 % 10.5 % (1.8 )%

Segment Earnings

•Retail segment earnings ~~increased $5~~decreased $86 million, or ~~0.8%~~13.5%, from ~~$634 million in the 2018 quarter to~~ $639 million in the 2019 ~~quarter. Retail segment earnings increased $566~~quarter to $553 million ~~or 40.6%, from $1.4 billion~~ in the ~~2018 period~~2020 quarter primarily due to ~~$2.0 billion in the 2019 period. These increases primarily reflect the lower~~a higher operating cost ratio, partially offset by ~~the higher~~a lower benefit ratio as more fully described below. ~~As expected, the higher-than-anticipated individual Medicare Advantage membership growth during the previous Annual Election Period,~~Retail segment earnings increased $1.3 billion, or ~~AEP, had a muted impact on the segment's earnings~~64.6%, from $2.0 billion in the 2019 ~~period. While new Medicare Advantage members increase revenue, on average, they have a break even impact on segment earnings~~period to $3.2 billion in the ~~first year as they were not previously engaged in~~2020 period, primarily due to the net favorable impact of a ~~clinical programs or appropriately documented under the CMS risk-adjustment model, and accordingly, carry~~lower benefit ratio, partially offset by a higher ~~benefit ratio.~~operating cost ratio as more fully described below.

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Enrollment

•Individual Medicare Advantage membership increased ~~508,700~~382,600 members, or ~~16.7%~~10.8%, from September 30, ~~2018~~2019 to September 30, ~~2019,~~2020, primarily due to membership additions associated with the previous Annual Election Period, or AEP, and Open Election Period, or OEP, for Medicare beneficiaries. The OEP sales period, which ran from January 1 to March 31, 2020 added approximately ~~43,700~~30,000 members. Since ~~March 31, 2019,~~the conclusion of the 2020 OEP, enrollment ~~has~~ continued to increase due to ~~strong sales to~~special elections, age-ins, and ~~those eligible for~~ Dual Eligible Special Need Plans, or ~~D-SNP.~~D-SNP, members. Individual Medicare Advantage membership includes ~~280,700~~391,100 D-SNP members as of September 30, ~~2019,~~2020, a net increase of ~~69,300,~~110,400, or ~~32.8%~~39.3%, from ~~211,400~~280,700 as of September 30, ~~2018.~~2019.

•Group Medicare Advantage membership increased ~~27,100,~~88,100, or ~~5.5%~~16.8%, from September 30, ~~2018~~2019 to September 30, ~~2019,~~2020, primarily due to the addition of a large account in January 2020, along with net membership additions associated with the previous AEP for Medicare beneficiaries.

•Medicare stand-alone PDP membership decreased ~~636,100~~487,600 members, or ~~12.7%~~11.1%, from September 30, ~~2018~~2019 to September 30, ~~2019~~2020 primarily reflecting net declines during the previous AEP for Medicare beneficiaries. ~~These~~The anticipated ~~declines~~decline primarily resulted from terminations driven by premium and benefit adjustments experienced by members that were ~~primarily due to the competitive nature of the industry~~previously enrolled in our 2019 Humana Walmart Rx plan and the ~~pricing discipline we have employed,~~2019 Humana Enhanced plan, which ~~resulted in us no longer being~~were consolidated into the ~~low cost~~Premier Rx plan in ~~any market for 2019.~~2020. The expected PDP losses were partially offset by growth in the new low-price Humana Walmart Value Rx plan, driven by both new sales and plan to plan changes.

•State-based Medicaid membership increased ~~145,200~~ 261,100 members, or ~~44.8%~~55.7%, from September 30, ~~2018~~2019 to September 30, ~~2019,~~2020. This increase primarily ~~driven by~~reflects the ~~statewide award~~impact of ~~a comprehensive~~discontinuing the reinsurance agreement with CareSource and the assumption of full financial risk for the existing Kentucky Medicaid contract ~~under~~as of January 1, 2020, as well as additional enrollment, particularly in Florida, resulting from the ~~Managed Medical Assistance, or MMA, program in Florida.~~current economic downturn due to the COVID-19 pandemic.

Premiums Revenue

•Retail segment premiums increased ~~$2.0~~$2.7 billion, or ~~16.6%~~19.1%, from ~~the 2018 quarter to~~$14.0 billion in the 2019 quarter to $16.7 billion in the 2020 quarter and increased ~~$6.0~~$8.2 billion, or ~~16.6%~~19.5%, from ~~the 2018 period to~~$42.1 billion in the 2019 period to $50.3 billion in the 2020 period. These increasesprimarily ~~due to~~reflect higher premiums as a result of Medicare Advantage and state-based contracts membership growth and higher per member ~~premiums, as well as increased state-based contracts membership.~~Medicare Advantage premiums. These favorable items were partially offset by the decline in membership in our stand-alone PDP offerings.

Benefits Expense

•The Retail segment benefit ratio ~~increased 270~~decreased 80 basis points from ~~83.2% in the 2018 quarter to~~ 85.9% infor the 2019 quarter to 85.1% for the 2020 quarter primarily due to the ~~suspension~~impact of the temporary deferral of non-essential care amid the COVID-19 pandemic, and the reinstatement of the non-deductible health insurance industry fee in ~~2019~~2020 which was contemplated in the pricing and benefit design of our ~~products, the significant unfavorable impact in the 2019 quarter of weekday seasonality, lower favorable prior-period medical claims reserve development,~~products. These were partially offset by COVID-19 testing and treatment costs, as well as our ongoing pandemic relief efforts, including the waiver of all cost sharing for in-network primary care, outpatient behavioral health, and telehealth visits for our Medicare Advantage members, continued delivery of meals to senior members in need, the distribution of in-home preventative screening kits to members, establishment of a clinical outreach team to proactively engage with our most vulnerable members, and various provider initiatives. The 2020 quarter was further impacted by a shift in Medicare membership mix due to the loss of stand-alone PDP members and ~~the~~ significant growth in the Medicare Advantage ~~members. These increases were partially offset by engaging our Medicare Advantage members in clinical programs~~membership as well as ~~ensuring they are appropriately documented under~~lower favorable prior-period medical claims reserve development. The benefit ratio for stand-alone PDP members generally decreases as the ~~CMS risk-adjustment model, and lower than expected medical costs as compared to the assumptions used in the pricing of our individual Medicare Advantage business for 2019.~~year progresses. The Retail segment benefit ratio ~~increased 100~~decreased 310 basis points from ~~85.4% in the 2018 period to~~ 86.4% infor the 2019 period to 83.3% for the 2020 periodprimarily reflecting significantly depressed utilization experienced in the first

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half of 2020 as well as the same factors ~~that affected~~as discussed above with the ~~2019 quarter described above, but excluding~~exception of the impact ~~of weekday seasonality. These factors were partially offset by the impact of~~from a ~~less severe flu season~~shift in ~~the 2019 period.~~Medicare membership mix.

•The Retail segment's benefits expense for the ~~2019~~2020 quarter included $30 million in favorable prior-period medical claims reserve development versus $55 million in the 2019 quarter. For the 2020 period, the Retail segment’s benefit expense included the beneficial effect of $235 million in favorable prior-period medical claims reserve development versus ~~$120~~$366 million in the ~~2018 quarter. For the~~ 2019 period ~~the benefits expense includes the beneficial effect of $366 million in favorable prior-period medical claims reserve development versus $367 million in the 2018 period.~~. Prior-period medical claims reserve development decreased the Retail segment benefit ratio by approximately 20 basis points in the 2020 quarter versus approximately 40 basis points in the 2019 ~~quarter versus approximately 100 basis points in the 2018~~ quarter. Favorable prior-period medical claims reserve development decreased the Retail segment benefit ratio by approximately 50 basis points in the 2020 period versus approximately 90 basis points in the 2019 ~~period versus approximately 100 basis points in the 2018~~ period.

Operating Costs

•The Retail segment operating cost ratio ofincreased 190 basis points from 9.3% for the 2019 quarter ~~decreased 190~~to 11.2% for the 2020 quarter and increased 130 basis points from ~~11.2% for the 2018 quarter. The Retail segment operating cost ratio of~~ 8.7% for the 2019 period ~~decreased 180 basis points from 10.5%~~to 10.0% for the ~~2018~~2020 period. These ~~decreases~~increases were primarily ~~were~~ due to the ~~suspension~~reinstatement of the non-deductible health insurance industry fee in ~~2019,~~2020 and COVID-19 related administrative costs as ~~well as~~previously discussed, partially offset by scale efficiencies associated with growth in our Medicare Advantage membership and significant operating ~~costs~~cost efficiencies ~~in 2019~~ driven by previously ~~implemented~~disclosed productivity initiatives. These decreases were partially offset by the strategic investments in our integrated care delivery model and the impact of higher compensation expense accruals in 2019 for the AIP as a result of our continued strong performance. The non-deductible health insurance industry fee impacted the operating cost ratio by ~~190~~160 basis points in the ~~2018~~2020 quarter and period.

Group and Specialty Segment


	September 30,		Change
	2020	2019	Members	Percentage
Membership:
Medical membership:
Fully-insured commercial group	799,500	927,400	(127,900)	(13.8)	%
ASO	502,100	516,800	(14,700)	(2.8)	%
Military services	6,016,400	5,998,700	17,700	0.3	%
Total group medical members	7,318,000	7,442,900	(124,900)	(1.7)	%
Specialty membership (a)	5,325,600	5,411,400	(85,800)	(1.6)	%

(a)Specialty products include dental, vision, and other supplemental health. Members included in these products may not be unique to each product since members have the ability to enroll in multiple products.

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September 30, Change
2019 2018 Members Percentage
Membership:
Medical membership:
Fully-insured commercial group 927,400
1,029,100
(101,700 ) (9.9 )%
ASO 516,800
449,900
66,900
14.9 %
Military services 5,998,700
5,927,400

71,300

1.2 %
Total group and specialty medical members 7,442,900
7,406,400
36,500
0.5 %
Specialty membership (a) 5,411,400
6,116,300
(704,900 ) (11.5 )%


~~(a)~~	Specialty products include dental, vision, voluntary benefit products and other supplemental health. Members included in these products may not be unique to each product since members have the ability to enroll in multiple products.


	For the three months ended September 30,						Change
	2020			2019			Dollars		Percentage
	(in millions)
Premiums and Services Revenue:
Premiums:
Fully-insured commercial group	$	1,169		$	1,278		$	(109)	(8.5)	%
Group specialty	424			400			24		6.0	%
Total premiums	1,593			1,678			(85)		(5.1)	%
Services	189			200			(11)		(5.5)	%
Total premiums and services revenue	$	1,782		$	1,878		$	(96)	(5.1)	%
Segment (losses) earnings	$	(160)		$	4		$	(164)	(4100.0)	%
Benefit ratio	93.0		%	86.3		%			6.7	%
Operating cost ratio	25.2		%	21.9		%			3.3	%

For the three months ended September 30, Change
2019 2018 Dollars Percentage
(in millions)
Premiums and Services Revenue:
Premiums:
Fully-insured commercial group $ 1,278
$ 1,345
$ (67 ) (5.0 )%
Group specialty 400
325
75
23.1 %
Total premiums 1,678
1,670
8
0.5 %
Services 200
215
(15 ) (7.0 )%
Total premiums and services revenue $ 1,878
$ 1,885
$ (7 ) (0.4 )%
Segment earnings $ 4
$ 81
$ (77 ) (95.1 )%
Benefit ratio 86.3 % 80.7 % 5.6 %
Operating cost ratio 21.9 % 23.6 % (1.7 )%



	For the nine months ended September 30,						Change						For the nine months ended September 30,						Change
	2019			2018			Dollars			Percentage			2020			2019			Dollars		Percentage
	(in millions)												(in millions)
Premiums and Services Revenue:												Premiums and Services Revenue:
Premiums:												Premiums:
Fully-insured commercial group	$	3,873		$	4,083		$	(210	)	(5.1	)%	Fully-insured commercial group	$	3,606		$	3,873		$	(267)	(6.9)	%
Group specialty	1,160			1,014			146			14.4	%	Group specialty	1,278			1,160			118		10.2	%

Total premiums	5,033			5,097			(64		)	(1.3	)%	Total premiums	4,884			5,033			(149)		(3.0)	%
Services	587			642			(55		)	(8.6	)%	Services	576			587			(11)		(1.9)	%
Total premiums and services revenue	$	5,620		$	5,739		$	(119	)	(2.1	)%	Total premiums and services revenue	$	5,460		$	5,620		$	(160)	(2.8)	%
Segment earnings	$	174		$	372		$	(198	)	(53.2	)%	Segment earnings	$	232		$	174		$	58	33.3	%
Benefit ratio	83.0		%	78.0		%				5.0	%	Benefit ratio	79.6		%	83.0		%			(3.4)	%
Operating cost ratio	21.9		%	23.6		%				(1.7	)%	Operating cost ratio	24.0		%	21.9		%			2.1	%

Segment Earnings

•Group and Specialty segment earnings decreased ~~$77~~$164 million, ~~or 95.1%,~~ from ~~$81 million in the 2018 quarter to~~ $4 million segment earnings in the 2019 ~~quarter.~~quarter to $160 million segment loss in the 2020 quarter primarily due to higher benefit and operating cost ratios as more fully described below. Group and Specialty segment earnings ~~decreased $198~~increased $58 million, or ~~53.2%~~33.3%, from ~~$372 million in the 2018 period to~~ $174 million in the 2019 ~~period. These decreases were~~period to $232 million in the 2020 period primarily due to the net favorable impact of a ~~higher~~lower benefit ratio, along with lower military services business earnings. Earnings comparisons related to the military services business were unfavorably impacted by the receipt of certain contractual incentives and adjustments in 2018 related to the previous TRICARE contract which did not recur in 2019. These decreases were partially offset by ~~the improvement in the~~a higher operating cost ratio as more fully described below.

Enrollment

•Fully-insured commercial group medical membership decreased ~~101,700~~127,900 members, or ~~9.9%~~13.8%, from September 30, ~~2018~~2019 to September 30, ~~2019~~2020. These anticipated declines primarily ~~reflecting~~reflect lower membership in small group accounts due in part to more small group accounts selecting level-funded ASO products, ~~in 2019,~~ as well as the loss of certain large group accounts due to disciplined pricing in the competitive ~~pricing~~ environment. Additionally, the declines in membership were impacted by the current economic downturn driven by the COVID-19 pandemic resulting in higher unemployment rates and loss of coverage for fully-insured commercial group members. The portion of group fully-insured commercial medical membership in small group accounts was approximately 56% at September 30, 2020 and 60% at September 30, ~~2019 and 62% at September 30, 2018.~~2019.

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•Group ASO commercial medical ~~membership increased 66,900~~membership decreased 14,700 members, or ~~14.9%~~2.8%, from September 30, ~~2018~~2019 to September 30, ~~2019~~2020 primarily reflecting ~~more small group accounts selecting level-funded ASO products in 2019, partially offset by~~ the loss of certain large group accounts ~~as a result of~~due to continued discipline in pricing of services for self-funded accounts amid a highly competitive ~~environment.~~environment and the impact of the current economic downturn driven by the COVID-19 pandemic as previously discussed, partially offset by more small group accounts selecting level-funded ASO products. Small group membership comprised 45% of group ASO medical membership at September 30, 2020 versus 39% at September 30, 2019.

•Military services membership increased ~~71,300~~17,700 members, or ~~1.2%~~0.3%, from September 30, ~~2018~~2019 to September 30, ~~2019.~~2020. Membership includes military service members, retirees, and their families to whom ~~the company provides~~we are providing healthcare services under the current ~~T2017~~ TRICARE East Region contract. ~~The current contract, which covers 32 states, became effective on January 1, 2018.~~

~~Specialty~~•Specialty membership decreased ~~704,900~~85,800 members, or ~~11.5%~~1.6%, from September 30, ~~2018~~2019 to September 30, ~~2019~~2020 primarily due to the loss of certain group accounts ~~including one jumbo account,~~ offering stand-alone dental and vision ~~products.~~

products, as well as the impact of the current economic downturn driven by the COVID-19 pandemic as previously discussed.

Premiums Revenue

~~Group and Specialty segment premiums were relatively unchanged increasing $8 million, or 0.5%, from the 2018 quarter to $1.7 billion for the 2019 quarter.~~ •Group and Specialty segment premiums decreased ~~$64~~$85 million, or ~~1.3%~~5.1%, from $1.7 billion in the ~~2018 period~~2019 quarter to $1.6 billion in the 2020 quarter and decreased $149 million, or 3.0%, from $5.0 billion ~~for~~in the 2019 period to $4.9 billion in the 2020 period. These decreases were primarily due to athe decline in our fully-insured group commercial ~~and specialty membership. This decrease was~~membership, partially offset by higher stop-loss revenues related to our level-funded ASO accounts resulting from membership growth in this product and higher per member premiums across the fully-insured ~~business, and lower unfavorable~~ commercial risk adjustment, or CRA, payable estimate in 2019 as compared to 2018, which resulted in higher small group fully-insured commercial revenues. The 2019 period was further negatively impacted by the exit of our voluntary benefit and financial protection products in connection with the sale of KMG in 2018.business.

Services Revenue

•Group and Specialty segment services revenue decreased ~~$15~~$11 million, or ~~7.0%~~5.5%, from ~~the 2018 quarter to~~ $200 million ~~for~~in the 2019 quarter to $189 million in the 2020 quarter and decreased ~~$55~~$11 million, or ~~8.6%~~1.9%, from ~~the 2018 period to~~ $587 million ~~for~~in the 2019 period to $576 million the 2020 period. These decreases were primarily due to ~~the impact of certain contractual incentives and adjustments related to the previous TRICARE contract received in 2018, which did not recur in 2019.~~lower ASO membership described previously.

Benefits Expense

•The Group and Specialty segment benefit ratio increased ~~560~~670 basis points from ~~80.7% in the 2018 quarter to~~ 86.3% in the 2019 quarter to 93.0% in the 2020 quarter primarily due to ongoing pandemic relief efforts, primarily surrounding initiatives to ease administrative and financial stress for providers and employers, including premium rate relief for select employer groups and the payment of monthly stipends to support participating dental providers, and meaningful COVID-19 testing and treatment costs for fully-insured commercial group medical members as several of our key commercial markets were located in areas more significantly impacted by COVID-19. These items were partially offset by the reinstatement of the non-deductible health insurance industry fee in 2020 which was contemplated in the pricing and benefit design of our products, the temporary deferral of non-essential care as previously discussed, and higher favorable prior-period medical claims reserve development. Utilization returned faster for fully-insured commercial group members as compared to members in the Retail segment, but remained below historic baseline levels at the close of the 2020 quarter.

•The Group and Specialty segment benefit ratio ~~increased 500~~decreased 340 basis points from ~~78.0% in the 2018 period to~~ 83.0% in the 2019 ~~period. These increases primarily were due~~period to ~~the significant unfavorable impact~~79.6% in the ~~2019 quarter~~2020 period primarily as the result of ~~weekday seasonality,~~significantly depressed utilization levels experienced during the ~~suspension~~first half of 2020 as previously discussed, the reinstatement of the non-deductible health insurance industry fee in ~~2019~~2020 which was contemplated in the pricing and benefit design of our products, as well as the meaningful impact of the continued migration of fully-insured group members to level-funded ASO products in 2019 resulting in a membership mix transformation. In addition, the impact of adjustments to dental network contracted rates resulting from dental network re-contracting and expansion to position the business for the future, and lowerhigher favorable prior-period medical claims ~~reserve development unfavorably impacted the 2019 quarter and period ratio.~~development. These items were partially offset by ~~the smaller unfavorable premium adjustment in 2019~~COVID-19 testing and treatments costs, and our ongoing pandemic relief efforts as ~~compared to 2018 related to our CRA accrual associated with the ACA-compliant business as a result~~previously described.

Table of ~~the release of CMS's final 2018 CRA data.~~Contents

•The Group and Specialty segment's benefits expense included $1$13 million in favorable prior-period medical claims reserve development in the ~~2019~~2020 quarter versus $7$1 million in the ~~2018~~2019 quarter. This favorable prior-period medical claims reserve development decreased the Group and Specialty segment benefit ratio by approximately 80 basis points in the 2020 quarter and by approximately 10 basis points in the 2019 ~~quarter and approximately 40 basis points in the 2018~~ quarter. The Group and Specialty segment's benefits expense included the effect of a favorable prior-period medical claims reserve development of $43 million in the 2020 period versus an unfavorable prior-period medical claims reserve development of $35 million in the 2019 ~~period versus~~period. The favorable prior-period medical claims reserve development ~~of $41 million in~~for the ~~2018 period. The~~2020 period decreased the Group and Specialty segment benefit ratio by approximately 90 basis points and the unfavorable ~~prior-period medical claims reserve~~ development for the 2019 period increased the Group and Specialty segment benefit ratio ~~by approximately~~ 70 basis ~~points and the favorable prior-period medical claims reserve development for the 2018 period decreased the Group and Specialty segment benefit ratio 80 basis~~ points.

Operating Costs

•The Group and Specialty segment operating cost ratio ofincreased 330 basis points from 21.9% for the 2019 quarter ~~decreased 170~~to 25.2% for the 2020 quarter and increased 210 basis points from ~~23.6%~~21.9% for ~~the 2018 quarter. For~~ the 2019 period ~~the Group and Specialty segment operating cost ratio of 21.9% decreased 170 basis points from 23.6%~~to 24.0% for the ~~2018~~2020 period. These ~~decreases~~increases were primarily ~~were~~ due to the ~~suspension~~reinstatement of the non-deductible health insurance industry fee in ~~2019,~~2020 and COVID-19 related administrative costs as ~~well as~~previously discussed.These increases were partially offset by significant operating cost efficiencies ~~in the 2019 quarter~~ driven by previously ~~implemented~~disclosed productivity initiatives. ~~These improvements were offset by the higher compensation expense accruals in 2019 for the AIP as a result of our continued strong performance.~~ The 2019 period was further impacted by the exit of our voluntary benefit and financial protection products in connection with the sale of KMG in 2018, which carried a higher operating cost ratio. The non-

~~deductible~~non-deductible health insurance industry fee impacted the operating cost ratio by ~~160~~130 basis points in the ~~2018~~2020 quarter and period.

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Healthcare Services Segment




	For the three months ended September 30,						Change
	2020			2019			Dollars		Percentage
	(in millions)
Revenues:
Services:
Provider services	$	81		$	104		$	(23)	(22.1)	%
Pharmacy solutions	157			53			104		196.2	%
Clinical care services	26			32			(6)		(18.8)	%
Total services revenues	264			189			75		39.7	%
Intersegment revenues:
Pharmacy solutions	6,158			5,673			485		8.5	%
Provider services	573			591			(18)		(3.0)	%

Clinical care services	134			149			(15)		(10.1)	%
Total intersegment revenues	6,865			6,413			452		7.0	%
Total services and intersegment revenues	$	7,129		$	6,602		$	527	8.0	%
Segment earnings	$	249		$	212		$	37	17.5	%
Operating cost ratio	96.4		%	96.2		%			0.2	%



	For the three months ended September 30,						Change						For the nine months ended September 30,						Change
	2019			2018			Dollars			Percentage			2020			2019			Dollars		Percentage
	(in millions)												(in millions)
Revenues:												Revenues:
Services:												Services:
Pharmacy solutions												Pharmacy solutions	$	425		$	134		$	291	217.2	%
Provider services	$	104		$	70		$	34		48.6	%	Provider services	236			265			(29)		(10.9)	%
Pharmacy solutions	53			52			1			1.9	%
Clinical care services	32			43			(11		)	(25.6	)%	Clinical care services	80			103			(23)		(22.3)	%
Total services revenues	189			165			24			14.5	%	Total services revenues	741			502			239		47.6	%
Intersegment revenues:												Intersegment revenues:
Pharmacy solutions	5,673			5,092			581			11.4	%	Pharmacy solutions	18,275			16,335			1,940		11.9	%
Provider services	591			537			54			10.1	%	Provider services	1,724			1,792			(68)		(3.8)	%
Clinical care services	149			161			(12		)	(7.5	)%	Clinical care services	415			457			(42)		(9.2)	%
Total intersegment revenues	6,413			5,790			623			10.8	%	Total intersegment revenues	20,414			18,584			1,830		9.8	%
Total services and intersegment revenues	$	6,602		$	5,955		$	647		10.9	%	Total services and intersegment revenues	$	21,155		$	19,086		$	2,069	10.8	%
Segment earnings	$	212		$	215		$	(3	)	(1.4	)%	Segment earnings	$	816		$	611		$	205	33.6	%
Operating cost ratio	96.2		%	96.1		%				0.1	%	Operating cost ratio	95.8		%	96.3		%			(0.5)	%

For the nine months ended
September 30, Change
2019 2018 Dollars Percentage
(in millions)
Revenues:
Services:
Provider services $ 265
$ 158
$ 107
67.7 %
Pharmacy solutions 134
148
(14 ) (9.5 )%
Clinical care services 103
132
(29 ) (22.0 )%
Total services revenues 502
438
64
14.6 %
Intersegment revenues:

Pharmacy solutions 16,335
15,181
1,154
7.6 %
Provider services 1,792
1,456
336
23.1 %
Clinical care services 457
511
(54 ) (10.6 )%
Total intersegment revenues 18,584
17,148
1,436
8.4 %
Total services and intersegment revenues $ 19,086
$ 17,586
$ 1,500
8.5 %
Segment earnings $ 611
$ 594
$ 17
2.9 %
Operating cost ratio 96.3 % 96.2 % 0.1 %

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Segment Earnings

•Healthcare Services segment earnings ofincreased $37 million, or 17.5%, from $212 million ~~for~~in the 2019 quarter ~~was relatively unchanged, decreasing $3 million, or 1.4%, from $215~~to $249 million in the ~~2018 quarter. The decrease~~2020 quarter and increased $205 million, or 33.6%, from $611 million in the 2019 period to $816 million in the 2020 period. These increases were primarily ~~resulted~~due to operational improvements and reduced utilization resulting from

~~additional investments~~ COVID-19 in ~~clinical assets associated with~~ our provider services ~~business and slightly lower earnings from Kindred at Home operations.~~business. These ~~declines~~improvements were partially offset by COVID-19 administrative related costs, including expenses associated with additional safety measures for our provider and clinical teams who have continued to provide services to members during the COVID-19 pandemic. The 2020 period was further impacted by higher earnings from our pharmacy operations and the improvement in core operating results from the provider services business year over year. For the 2019 period, the Healthcare Services segment earnings of $611 million increased $17 million, or 2.9%, from $594 million in the 2018 period. This increase was primarily due to higher earnings from our pharmacy and clinical care services operations and 2019 earnings from Kindred at Home operations. ~~These factors were partially offset by additional investments in new clinical assets associated with our provider services business.~~

Script Volume

•Humana Pharmacy Solutions script volumes on an adjusted 30-day equivalent basis increased to approximately 119 million in the 2020 quarter, up 3%, versus scripts of approximately 116 million in the 2019 ~~quarter,~~quarter. For the 2020 period, script volumes increased to approximately 356 million, up ~~5.5%~~5%, versus scripts of approximately ~~110~~339 million in the ~~2018 quarter. For the~~ 2019 ~~period, script volumes increased to approximately 339 million, up 3.4%, versus scripts of approximately 328 million in the 2018~~ period. These increases were primarily ~~reflect~~due to the growth associated with higher individual Medicare Advantage and state-based contracts membership along with the impact of early prescription refills as members prepared for extended supply needs in response to COVID-19. These increases were partially offset by the decline in stand-alone PDP membership.

Services Revenues

•Services revenues increased ~~$24~~$75 million, or ~~14.5%~~39.7%, from ~~the 2018 quarter to~~ $189 million ~~for~~in the 2019 quarter to $264 million in the 2020 quarter and increased ~~$64~~$239 million, or ~~14.6%~~47.6%, from ~~the 2018 period to~~ $502 million ~~for~~in the 2019 period to $741 million in the 2020 period. These increases were primarily due to ~~revenue growth from our provider services business.~~the additional pharmacy revenues associated with the acquisition of Enclara in the 2020 period.

Intersegment Revenues

~~Intersegment~~•Intersegment revenues increased ~~$623~~$452 million, or ~~10.8%~~7.0%, from ~~the 2018 quarter to~~ $6.4 billion ~~for~~in the 2019 quarter to $6.9 billion in the 2020 quarter and increased ~~$1.4~~$1.8 billion, or ~~8.4%~~9.8%, from $18.6 billion in the ~~2018~~2019 period to ~~$18.6~~$20.4 billion ~~for~~in the ~~2019~~2020 period. These increases were primarily ~~were~~ due to strong Medicare Advantage membership growth, partially offset by the loss of intersegment revenues associated with the decline in stand-alone PDP membership. The ~~2019~~2020 period was ~~further~~also impacted by ~~higher~~the modest increase in pharmacy revenues ~~associated with our provider services business reflecting the previously disclosed acquisition~~as a result of ~~MCCI~~us allowing early prescription refills to permit members to prepare for extended supply needs in response to COVID-19 and ~~FPG.~~a slight shift by members to 90-day mail supply.

Operating Costs

•The Healthcare Services segment operating cost ratio increased 20 basis points from 96.2% for the 2019 quarter to 96.4% for the 2020 quarter primarily due to COVID-19 administrative related costs, including expenses associated with additional safety measures taken for our pharmacy, provider, and clinical teams who have continued to provide services to members during the COVID-19 pandemic. The increase further reflects higher costs incurred in the pharmacy business to ensure timely delivery of ~~96.2%~~prescriptions amid the COVID-19 pandemic. These costs were partially offset by operational improvements and reduced utilization resulting from COVID-19 in our provider services business, as well as significant operating cost efficiencies in the 2020 quarter driven by previously disclosed productivity initiatives. The Healthcare Services segment operating cost ratio decreased 50 basis points from 96.3% for the 2019 ~~quarter and~~ period ~~respectively, were relatively unchanged from 96.1% and 96.2% in~~to 95.8% for the ~~2018 quarter and~~2020 period ~~respectively.~~as a result of the net favorable impact of the same factors affecting the 2020 quarter.

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Liquidity

Historically, our primary sources of cash have included receipts of premiums, services revenue, and investment and other income, as well as proceeds from the sale or maturity of our investment securities, and borrowings. Our primary uses of cash historically have included disbursements for claims payments, operating costs, interest on borrowings, taxes, purchases of investment securities, acquisitions, capital expenditures, repayments on borrowings, dividends, and share repurchases. Because premiums generally are collected in advance of claim payments by a period of up to several months, our business normally should produce positive cash flows during periods of increasing premiums and enrollment. Conversely, cash flows would be negatively impacted during periods of decreasing premiums and enrollment. From period to period, our cash flows may also be affected by the timing of working capital items including premiums receivable, benefits payable, and other receivables and payables. Our cash flows are impacted by the timing of payments to and receipts from CMS associated with Medicare Part D subsidies for which we do not assume risk. The use of cash flows may be limited by regulatory requirements of state departments of insurance (or comparable state regulators) which require, among other items, that our regulated subsidiaries maintain minimum levels of capital and seek approval before paying dividends from the subsidiaries to the parent. Our use of cash flows derived from our non-insurance subsidiaries, such as in our Healthcare Services segment, is generally not restricted by state departments of insurance (or comparable state regulators).

For additional information on our liquidity risk, please refer to the section entitled “Risk Factors” in our ~~2018~~2019 Form ~~10-K.~~10-K and Item 1A of Part II of this document.

Cash and cash equivalents increased to approximately ~~$5.5~~$8.0 billion at September 30, ~~2019~~2020 from ~~$2.3~~$4.1 billion at December 31, ~~2018.~~2019. The change in cash and cash equivalents for the nine months ended September 30, ~~2019~~2020 and ~~2018~~2019 is summarized as follows:


	Nine Months Ended							Nine Months Ended
	2019			2018				2020		2019
	(in millions)							(in millions)
Net cash provided by operating activities	$	4,772		$	2,506		Net cash provided by operating activities	$	5,356	$	4,772
Net cash used in investing activities	(477		)	(2,640		)	Net cash used in investing activities	(3,010)		(477)
Net cash (used in) provided by financing activities	(1,111		)	234
Net cash provided by (used in) financing activities							Net cash provided by (used in) financing activities	1,585		(1,111)
Increase in cash and cash equivalents	$	3,184		$	100		Increase in cash and cash equivalents	$	3,931	$	3,184

Cash Flow from Operating Activities

Our operating cash ~~flow~~flows for the 2020 period increased from the 2019 period ~~reflects the significant impact of increasing premiums and enrollment, as premiums generally are collected in advance of claim payments by a period of up~~due primarily to ~~several months. Our operating cash flow for the 2019 period further improved~~higher income from the 2018 period from the timing of working capital changes, higher earnings, and the impact of an approximately $245 million payment related to reinsuring certain voluntary benefit and financial protection products to a third party in connection with the sale of KMG in 2018. operations.

The most significant drivers of changes in our working capital are typically the timing of payments of benefits expense and receipts for premiums. We illustrate these changes with the following summaries of benefits payable and receivables.

The detail of benefits payable was as follows at September 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


	September 30, 2020		December 31, 2019		2020 Period Change		2019 Period Change
	(in millions)
IBNR (1)	$	5,149	$	4,150	$	999	$	656
Reported claims in process (2)	1,167		628		539		467

Other benefits payable (3)	1,892		1,226		666		235
Total benefits payable	$	8,208	$	6,004	$	2,204	$	1,358

(1)IBNR represents an estimate of benefits payable for claims incurred but not reported (IBNR) at the balance sheet date and includes unprocessed claim inventories. The level of IBNR is primarily impacted by membership levels,

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September 30, 2019 December 31, 2018 2019
Period
Change 2018
Period
Change
(in millions)
IBNR (1) $ 4,017
$ 3,361
$ 656
$ 145
Reported claims in process (2) 1,084
617
467
169
Other benefits payable (3) 1,119
884
235
38
Total benefits payable $ 6,220
$ 4,862
$ 1,358
$ 352
Payables from divestiture —
58
Change in benefits payable per cash flow
statement resulting in cash from
operations $ 1,358
$ 410
medical claim trends and the receipt cycle time, which represents the length of time between when a claim is initially incurred and when the claim form is received and processed (i.e. a shorter time span results in a lower IBNR).

~~(1)~~

IBNR represents an estimate of benefits payable for claims incurred but not reported (IBNR) at the balance sheet date and includes unprocessed claim inventories. The level of IBNR is primarily impacted by membership levels, medical claim trends and the receipt cycle time, which represents the length of time between when a claim is initially incurred and when the claim form is received and processed (i.e. a shorter time span results in a lower IBNR). IBNR includes unprocessed claims inventories.


~~(2)~~	Reported claims in process represents the estimated valuation of processed claims that are in the post claim adjudication process, which consists of administrative functions such as audit and check batching and handling, as well as amounts owed to our pharmacy benefit administrator which fluctuate due to bi-weekly payments and the month-end cutoff.


~~(3)~~	~~Other benefits payable primarily include amounts owed to providers under capitated and risk sharing arrangements.~~

(2)Reported claims in process represents the estimated valuation of processed claims that are in the post claim adjudication process, which consists of administrative functions such as audit and check batching and handling, as well as amounts owed to our pharmacy benefit administrator which fluctuate due to bi-weekly payments and the month-end cutoff.

(3)Other benefits payable primarily include amounts owed to providers under capitated and risk sharing arrangements.

The increase in benefits payable from December 31, ~~2018~~2019 to September 30, ~~2019 and from December 31, 2017 to September 30, 2018~~2020 was primarily ~~was~~ due to an increase in IBNR primarily as a result of Medicare Advantage membership growth, as well as increases in amounts owed to providers under the capitated and risk sharing arrangements, which were affected by the response to COVID-19 and resulting deferral of care impact on medical claims reserves, and an increase in the amount of processed but unpaid claims which fluctuate due to month-end cutoff. The ~~increase~~increases in benefits payable from December 31, 2018 to September 30, 2019 ~~was also impacted by~~were due to an increase in IBNR primarily as a result of Medicare Advantage membership growth and an increase in the ~~amounts owed~~amount of processed but unpaid claims which fluctuate due to ~~providers under the capitated and risk sharing arrangements.~~month-end cutoff.

The detail of total net receivables was as follows at September 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


	September 30, 2020		December 31, 2019		2020 Period Change		2019 Period Change
	(in millions)
Medicare	$	863	$	835	$	28	$	(198)
Commercial and other	209		162		47		17
Military services	141		128		13		8
Allowance for doubtful accounts	(78)		(69)		(9)		6
Total net receivables	$	1,135	$	1,056	$	79	$	(167)
Reconciliation to cash flow statement:
Receivables from disposition (acquisition) of business					3		(12)
Change in receivables per cash flow statement resulting in cash from operations					$	82	$	(179)

September 30, 2019 December 31, 2018 2019
Period
Change 2018
Period
Change
(in millions)
Medicare $ 638
$ 836
$ (198 ) $ 233
Commercial and other 152
135
17
19
Military services 131
123
8
(48 )
Allowance for doubtful accounts (73 ) (79 ) 6
4
Total net receivables $ 848
$ 1,015
$ (167 ) $ 208
Reconciliation to cash flow statement:
Receivables from acquisition of business (12 ) 3
Change in receivables per cash flow
statement resulting in cash from operations $ (179 ) $ 211

The changes in Commercial and other receivables for the 2020 period were primarily as a result of Medicaid membership growth. The changes in Medicare receivables for both the ~~2019~~2020 period and the ~~2018~~2019 period ~~reflects~~reflect the typical pattern caused by the timing of accruals and related collections associated with the CMS risk-adjustment model. Significant collections occur with the mid-year and final settlements with CMS in the second and third quarter.

Cash Flow from Investing Activities

In the first quarter of 2020, we acquired privately held Enclara for cash consideration of approximately $709 million, net of cash received as discussed in Note 3 to the condensed consolidated financial statements.

Our ongoing capital expenditures primarily relate to our information technology initiatives, support of services in our provider services operations including medical and administrative facility improvements necessary for activities such as the provision of care to members, claims processing, billing and collections, wellness solutions,

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care coordination, regulatory compliance and customer service. Total capital expenditures, excluding acquisitions, were $668 million in the 2020 period and $506 million in the 2019 ~~period and $436 million~~period.

Net purchases of investment securities in the ~~2018 period.~~

~~Net~~2020 period were $1.6 billion as compared to net proceeds from investment securities sales and maturities of $29 million in the 2019 ~~period were $29 million and $50 million in the 2018~~ period.

In the third quarter of 2018, we completed the sale of our wholly-owned subsidiary KMG to CGIC. 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. Total cash and cash equivalents, including parent company funding, disposed at September 30, 2018 was $805 million. See Note 3 to our condensed consolidated financial statements.

Also, in the third quarter of 2018, we paid cash consideration of approximately $1.1 billion as part of the Consortium's investment in Kindred, which includes both the Kindred at Home Division and Curo Health Services businesses.

During the 2018 period, we acquired the remaining equity interest in MCCI and acquired FPG for cash consideration of $169 million and $185 million, respectively, as discussed in Note 3 to the condensed consolidated financial statements.

Cash Flow from Financing Activities

~~Receipts~~Claims payments were $283 million higher than receipts from CMS associated with Medicare Part D claim subsidies for which we do not assume risk in the 2020 period and receipts from CMS associated with Medicare Part D claim subsidies for which we do not assume risk were higher than claims payments by $113 million in the 2019 ~~period and $436 million in the 2018~~ period.

Under our administrative services only TRICARE contracts, reimbursements from the federal government exceeded health care cost payments for which we do not assume risk by $9 million in the 2020 period and health care cost payments for which we do not assume risk exceeded reimbursements from the federal government by $102 million in the 2019 ~~period~~period.

In March 2020, we issued $600 million of 4.500% senior notes due April 1, 2025 and ~~by $33~~$500 million inof 4.875% senior notes due April 1, 2030. Our net proceeds, reduced for the ~~2018 period.~~underwriters' discount and commission and offering expenses paid as of September 30, 2020 were $1,088 million.

In August 2019, we issued $500 million of 3.125% senior notes due August 15, 2029 and $500 million of 3.950% senior notes due August 15, 2049. Our net proceeds, reduced for the underwriters' discount and commission and offering expenses paid as of September 30, 2019 were $987 ~~million.We~~million. We used the net proceeds from this offering, together with available cash, to repay the $650 million outstanding amount due under our term note in August 2019, and the $400 million aggregate principal amount of our 2.625% senior notes due on its maturity date of October 1, 2019.

Under a share repurchase plan authorized by the Board of Directors, we repurchased 0.68 million shares during the 2018 period for $224 million. There were no other share repurchases under share repurchase plans authorized by the Board of Directors in the 2019 period with the exception of the July 2019 ASR. We also acquired common shares in connection with employee stock plans for an aggregate cost of $30 million in the 2020 period and $10 million in the 2019 ~~period and $70~~period.

In March 2020, we drew $1 billion on our existing term loan commitment.

Net proceeds from the issuance of commercial paper were $21 million in the ~~2018 period.~~

~~Net~~2020 period and net repayments from the issuance of commercial paper were $358 million in the 2019 ~~period and net proceeds from the issuance of commercial paper were $240 million in the 2018~~ period. The maximum principal amount outstanding at any one time during the ~~2019 quarter~~2020 period was ~~$670~~$600 million.

We paid dividends to stockholders of $239 million during the 2020 period and $216 million during the 2019 ~~period and $195 million during the 2018~~ period.

Future Sources and Uses of Liquidity

Dividends

For a detailed discussion of dividends to stockholders, please refer to Note 1110 to the condensed consolidated financial statements.

Stock Repurchases

For a detailed discussion of stock repurchases, please refer to Note 1110 to the condensed consolidated financial statements.

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Debt

For a detailed discussion of our debt, including our senior notes, term loan, credit agreement and commercial paper program, please refer to Note 1312 to the condensed consolidated financial statements.

Acquisitions and Divestitures

During the ~~2018~~2020 period, we completed the ~~acquisitions~~acquisition of ~~MCCI~~privately held Enclara, one of the nation’s largest hospice pharmacy and ~~FPG~~benefit management providers for ~~total~~ cash consideration of ~~$354 million.~~approximately $709 million, net of cash received. For a detailed discussion of ~~these transactions,~~this transaction, please refer to Note 3 to the condensed consolidated financial statements.

Liquidity Requirements

We believe our cash balances, investment securities, operating cash flows, and funds available under our credit agreement and our commercial paper program or from other public or private financing sources, taken together, provide adequate resources to fund ongoing operating and regulatory requirements, acquisitions, future expansion opportunities, and capital expenditures for at least the next twelve months, as well as to refinance or repay debt, and repurchase shares.

Adverse changes in our credit rating may increase the rate of interest we pay and may impact the amount of credit available to us in the future. Our investment-grade credit rating at September 30, ~~2019~~2020 was BBB+ according to Standard & Poor’s Rating Services, or S&P, and Baa3 according to Moody’s Investors Services, Inc., or Moody’s. A downgrade by S&P to BB+ or by Moody’s to Ba1 triggers an interest rate increase of 25 basis points with respect to $250 million of our senior notes. Successive one notch downgrades increase the interest rate an additional 25 basis points, or annual interest expense by less than $1 million, up to a maximum 100 basis points, or annual interest expense by $3 million.

In addition, we operate as a holding company in a highly regulated industry. Humana Inc., our parent company, is dependent upon dividends and administrative expense reimbursements from our subsidiaries, most of which are subject to regulatory restrictions. We continue to maintain significant levels of aggregate excess statutory capital and surplus in our state-regulated operating subsidiaries. Cash, cash equivalents, and short-term investments at the parent company were ~~$1.7~~$2.4 billion at September 30, ~~2019~~2020 compared to ~~$578 million~~$1.4 billion at December 31, ~~2018.~~2019. This increase primarily was due to ~~insurance~~the net proceeds from the issuance of senior notes, proceeds from a term loan, and commercial paper issuance. The increase was further impacted by regulated subsidiary dividends ~~in excess of capital contributions from our parent company as well as operating cash derived from our non-insurance~~and non-regulated subsidiary earnings ~~borrowings under senior notes, and other working capital changes.~~in our Healthcare Services segment. These increases were partially offset by the ~~net repayment of commercial paper borrowings, repayment of short term debt and senior notes, share repurchases,~~Enclara acquisition, capital expenditures, ~~subsidiaries capital contributions, and~~ cash dividends to ~~shareholders.~~shareholders, and other working capital changes. Our use of operating cash derived from our non-insurance subsidiaries, such as our Healthcare Services segment, is generally not restricted by departments of insurance (or comparable state ~~regulator)~~regulators).

Regulatory Requirements

Certain of our subsidiaries operate in states that regulate the payment of dividends, loans, or other cash transfers to Humana Inc., our parent company, and require minimum levels of equity as well as limit investments to approved securities. The amount of dividends that may be paid to Humana Inc. by these subsidiaries, without prior approval by state regulatory authorities, or ordinary dividends, is limited based on the entity’s level of statutory income and statutory capital and surplus. If the dividend, together with other dividends paid within the preceding twelve months, exceeds a specified statutory limit or is paid from sources other than earned surplus, it is generally considered an extraordinary dividend requiring prior regulatory approval. In most states, prior notification is provided before paying a dividend even if approval is not required.

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Although minimum required levels of equity are largely based on premium volume, product mix, and the quality of assets held, minimum requirements vary significantly at the state level. Based on the most recently filed statutory financial statements as of June 30, ~~2019,~~2020, our state regulated subsidiaries had aggregate statutory capital and surplus of approximately ~~$7.6~~$9.3 billion, which exceeded aggregate minimum regulatory requirements of ~~$5.7~~$6.4 billion. The amount of dividends paid to our parent company was approximately $360 million during the nine months ended September 30, 2020 compared to $1.4 billion during the nine months ended September 30, ~~2019 compared to $1.9 billion during the nine months ended September 30, 2018.~~2019. Actual dividends paid may vary year over year due to consideration of excess statutory capital and surplus and expected future surplus requirements related to, for example, premium volume and product mix.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our earnings and financial position are exposed to financial market risk, including those resulting from changes in interest rates.

Interest rate risk also represents a market risk factor affecting our consolidated financial position due to our significant investment portfolio, consisting primarily of fixed maturity securities of investment-grade quality with a weighted average S&P credit rating of AA at September 30, ~~2019.~~2020. Our net unrealized position increased ~~$447~~$280 million from a net unrealized ~~loss~~gain position of ~~$204~~$211 million at December 31, ~~2018~~2019 to a net unrealized gain position of ~~$243~~$491 million at September 30, ~~2019.~~2020. At September 30, ~~2019,~~2020, we had gross unrealized losses of ~~$10~~$14 million on our investment portfolio primarily due to an increase in market interest rates since the time the securities were purchased. There ~~were~~were no material ~~other-than-temporary impairments during~~credit allowances during the nine months ended September 30, ~~2019.~~2020. While we believe that these ~~impairments are temporary~~securities in an unrealized loss will recover in value over time and we currently do not have the intent to sell such securities, given the current market conditions and the significant judgments involved, there is a continuing risk that future declines in fair value may occur and material realized losses from sales or ~~other-than-temporary impairments~~credit allowances may be recorded in future periods.

Duration is the time-weighted average of the present value of the bond portfolio’s cash flow. Duration is indicative of the relationship between changes in fair value and changes in interest rates, providing a general indication of the sensitivity of the fair values of our fixed maturity securities to changes in interest rates. However, actual fair values may differ significantly from estimates based on duration. The average duration of our investment portfolio, including cash and cash equivalents, was approximately ~~2.3~~2.1 years as of September 30, ~~2019~~2020 and approximately ~~2.9~~2.5 years as of December 31, ~~2018.~~2019. The decline in the average duration is reflective of the ~~longer duration securities associated~~increased holdings of cash and cash equivalents, along with ~~the sale of KMG.~~other portfolio management activities. Based on the duration, including cash equivalents, a 1% increase in interest rates would generally decrease the fair value of our securities by approximately ~~$356~~$452 million at September 30, ~~2019.~~2020.

Item 4. Controls and Procedures

Under the supervision and with the participation of our Chief Executive Officer, or CEO, our Chief Financial Officer, or CFO, and our Principal Accounting Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures for the quarter ended September 30, ~~2019.~~2020.

Based on our evaluation, our CEO, CFO, and our Principal Accounting Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information the Company is required to disclose in its reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, including, without limitation, ensuring that such information is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II. Other Information

Item 1. Legal Proceedings

For a description of the legal proceedings pending against us and certain other pending or threatened litigation, investigations, or other matters, see “Legal Proceedings and Certain Regulatory Matters” in Note 1413 to the condensed consolidated financial statements beginning on page 3127 of this Form 10-Q.

Item 1A. Risk Factors

~~There~~In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, and the risk factor set forth below.

The spread of, and response to, the novel coronavirus, or COVID-19, underscores certain risks we face, including those discussed in our Form 10-K for the fiscal year ended December 31, 2019, and the rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact to us of COVID-19.

In December 2019, a novel strain of coronavirus (COVID-19) emerged which was declared a pandemic by the World Health Organization on March 11, 2020, and has now spread globally including throughout the United States. The spread of COVID-19 underscores certain risks we face in our business, including those discussed in our Form 10-K for the fiscal year ended December 31, 2019.

Governmental and non-governmental organizations may not effectively combat the spread and severity of COVID-19, increasing the potential for harm for our members. If the spread of COVID-19 is not contained, the premiums we charge may prove to be insufficient to cover the cost of health care services delivered to our members, which may increase significantly as a result of higher utilization rates of medical facilities and services and other increases in associated hospital and pharmaceutical costs. Over time, we may also experience increased costs or decreased revenues if, as a result of our members being unable to see their providers due to actions taken to mitigate the spread of COVID-19, we are unable to implement clinical initiatives to manage health care costs and chronic conditions of our members, and appropriately document their risk profiles. In addition, we are offering our members expanded benefit coverage, such as waiving out of pocket costs for COVID-19 diagnostic testing and treatment, certain additional coverages have been nomandated by governmental action and we are taking actions designed to help provide financial and administrative relief for the health care provider community. Such measures and any further steps taken by us, or governmental action, to continue to respond to and to address the ongoing impact of COVID-19, including further expansion or modification of the services delivered to our members, the adoption or modification of regulatory requirements associated with those services and the costs and challenges associated with ensuring timely compliance with such requirements, to provide further relief for the health care provider community, or in connection with the relaxation of stay-at-home and physical distancing orders and other restrictions on movement and economic activity, including the potential for widespread testing and therapeutic treatments and a vaccine, once available, as a component of lifting these measures, could adversely impact our profitability.

The spread and impact of COVID-19, or actions taken to mitigate this spread, could have material and adverse effects on our ability to operate effectively, including as a result of the complete or partial closure of facilities or labor shortages. Disruptions in public and private infrastructure, including communications, availability of in-person sales and marketing channels, financial services and supply chains, could materially and adversely disrupt our normal business operations. We have transitioned a significant subset of our employee population to a remote work environment in an effort to mitigate the spread of COVID-19, as have a number of our third-party service providers, which may exacerbate

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certain risks to our business, including an increased demand for information technology resources, increased risk of phishing and other cybersecurity attacks, and increased risk of unauthorized dissemination of sensitive personal information or proprietary or confidential information about us or our members or other third-parties. The outbreak of COVID-19 has severely impacted global economic activity, including the businesses of some of our commercial customers, and caused significant volatility and negative pressure in the financial markets. In addition to disrupting our operations, these developments may adversely affect the timing of commercial customer premium collections and corresponding claim payments, the value of our investment portfolio, or future liquidity needs.

The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact to us of COVID-19. We are continuing to monitor the spread of COVID-19, changes to our benefit coverages, the ~~risk factors included in~~ongoing costs and business impacts of dealing with COVID-19, including the potential costs and impacts associated with lifting, or reimposing restrictions on movement and economic activity and related risks. The magnitude and duration of the pandemic and its ultimate impact on our ~~2018 Form 10-K.~~business, results of operations, financial position, and cash flows is uncertain as this continues to evolve globally, but such impacts could be material to our business, results of operations, financial position and cash flows.

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Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

(a)None.

(b)N/A

(c)The following table provides information about our purchases of equity securities that are registered by us pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, during the three months ended September 30, 2020:

~~Item 2:~~Period

~~Unregistered Sales~~ Total Number
of ~~Equity Securities and Use~~Shares
Purchased (1)(2)

Average
Price Paid
per Share

Total Number of ~~Proceeds~~
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)(2)

Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans
or Programs (1)

July 2020

—

~~(a)~~August 2020

~~None.~~—

—

~~(b)~~September 2020

~~N/A~~—

—

~~(c)~~Total

The following table provides information about our purchases of equity securities that are registered by us pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, during the three months ended September 30, 2019:—

Period Total Number
of Shares
Purchased (1)(2) Average
Price Paid
per Share Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)(2) Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans
or Programs (1)
July 2019 —
$ —
—
$ 3,000,000,000
August 2019 2,695,872
296.75
2,695,872
2,000,000,000
September 2019 —
—
—
2,000,000,000
Total 2,695,872
$ —
2,695,872

—

~~(1)~~

On July 30, 2019, the Board of Directors replaced a previous share repurchase authorization of up to $3 billion (of which approximately $1.03 billion remained unused) with a new authorization for repurchases of up to $3 billion of our common shares exclusive of shares repurchased in connection with employee stock plans, expiring on June 30, 2022. On July 31, 2019, we entered into an accelerated stock repurchase agreement, the July 2019 ASR, with Citibank, N.A., or Citi, to repurchase $1 billion of our common stock. On August 2, 2019, we made a payment of $1 billion to Citi and received an initial delivery of 2.7 million shares of our common stock. We recorded the payment to Citi as a reduction to stockholders’ equity, consisting of an $800 million increase in treasury stock, which reflects the value of the initial 2.7 million shares received upon initial settlement, and a $200 million decrease in capital in excess of par value, which reflects the value of stock held back by Citi pending final settlement of the agreement. The final number of shares that we may receive, or be required to remit, under the agreement, will be determined based on the daily volume-weighted average share price of our common stock over the term of the July 2019 ASR, less a discount and subject to adjustments pursuant to the terms and conditions of the July 2019 ASR. We expect final settlement under the July 2019 ASR to occur during the fourth quarter of 2019.


~~(2)~~	~~Excludes 35,000 shares repurchased in connection with employee stock plans.~~

(1)On July 30, 2019, the Board of Directors replaced a previous share repurchase authorization of up to $3 billion with a new authorization for repurchases of up to $3 billion of our common shares exclusive of shares repurchased in connection with employee stock plans, expiring on June 30, 2022. Under our share repurchase authorization, shares may be purchased from time to time at prevailing prices in the open market, by block purchases, through plans designed to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, or in privately-negotiated transactions (including pursuant to accelerated share repurchase agreements with investment banks), subject to certain regulatory restrictions on volume, pricing, and timing. Our remaining repurchase authorization was approximately $2 billion as of November 2, 2020.

(2)Excludes 80,000 shares repurchased in connection with employee stock plans.


~~Item 3:~~	~~Defaults Upon Senior Securities~~

Item 3: Defaults Upon Senior Securities

None.


~~Item 4:~~	~~Mine Safety Disclosures~~

Item 4: Mine Safety Disclosures

Not applicable.


~~Item 5:~~	~~Other Information~~

Item 5: Other Information

None.

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Item 6: Exhibits



3(i)		Restated Certificate of Incorporation of Humana Inc. filed with the Secretary of State of Delaware on November 9, 1989, as restated to incorporate the amendment of January 9, 1992, and the correction of March 23, 1992 (incorporated herein by reference to Exhibit 4(i) to Humana Inc.’s Post-Effective Amendment No. 1 to the Registration Statement on Form S-8 (Reg. No. 33-49305) filed February 2, 1994).
3(ii)		By-Laws of Humana Inc., as amended on December 14, 2017 (incorporated herein by reference to Exhibit 3(b) to Humana Inc.’s Current Report on Form 8-K, filed December 14, 2017).
~~10.1~~31.1		~~Amended and Restated Humana Inc. Executive Incentive Compensation Plan, effective January 1, 2020.~~
~~31.1~~	Principal Executive Officer certification pursuant to Section 302 of Sarbanes–Oxley Act of 2002.
31.2		Principal Financial Officer certification pursuant to Section 302 of Sarbanes–Oxley Act of 2002.
32		Principal Executive Officer and Principal Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		The following materials from Humana Inc.'s Quarterly Report on Form 10-Q formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at September 30, ~~2019~~2020 and December 31, ~~2018;~~2019; (ii) the Condensed Consolidated Statements of Income for the three months and nine months ended September 30, ~~2019~~2020 and ~~2018;~~2019; (iii) the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, ~~2019~~2020 and ~~2018;~~2019; (iv) the Consolidated Statements of Equity for the three and nine months ended September 30, ~~2019~~2020 and ~~2018;~~2019; (v) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2019~~2020 and ~~2018;~~2019; and (vi) Notes to Condensed Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
104		Cover Page Interactive Data File formatted in Inline XBRL and contained in Exhibit 101.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


						HUMANA INC.
						(Registrant)

Date:			November 3, 2020		~~HUMANA INC.~~
By:				~~(Registrant)~~

~~Date:~~	~~November 6, 2019~~	~~By:~~	/s/ CYNTHIA H. ZIPPERLE
						Cynthia H. Zipperle
						Senior Vice President, Chief Accounting Officer and Controller (Principal Accounting Officer)

6263



	September 30, 2019						December 31, 2018
	Risk Corridor Settlement			CMS Subsidies/ Discounts			Risk Corridor Settlement			CMS Subsidies/ Discounts
	(in millions)
Other current assets	$	11		$	337		$	15		$	172
Trade accounts payable and accrued expenses	(49		)	(781		)	(103		)	(503		)
Net current liability	(38		)	(444		)	(88		)	(331		)
Other long-term assets	25			—			7			—
Other long-term liabilities	(142		)	—			(89		)	—
Net long-term liability	(117		)	—			(82		)	—
Total net liability	$	(155	)	$	(444	)	$	(170	)	$	(331	)



Maturity of Lease Liabilities	September 30, 2019
	(in millions)
2019 (excluding the nine months ended September 30, 2019)	$	36
2020	128
2021	110
2022	89
2023	45
After 2023	82
Total lease payments	490
Less: Interest	46
Present value of ROU lease liabilities	$	444



	2018			2017			2016
	(in millions)
Rent expense	$	167		$	204		$	179
Sublease rental income	(32		)	(33		)	(26		)
Net rent expense	$	135		$	171		$	153



	Minimum Lease Payments		Sublease Rental Receipts			Net Lease Commitments
	(in millions)
For the years ending December 31,:
2019	$	147	$	(13	)	$	134
2020	113		(12		)	101
2021	96		(10		)	86
2022	79		(9		)	70
2023	34		(9		)	25
Thereafter	50		(23		)	27
Total	$	519	$	(76	)	$	443



Period	Total Number of Shares Purchased (1)(2)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)(2)	Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
July 2019	—	$	—	—	$	3,000,000,000
August 2019	2,695,872	296.75		2,695,872	2,000,000,000
September 2019	—	—		—	2,000,000,000
Total	2,695,872	$	—	2,695,872