Document
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 1-5975
HUMANA INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
61-0647538
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
500 West Main Street
Louisville, Kentucky 40202
(Address of principal executive offices, including zip code)
(502) 580-1000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically 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  ý    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. (Check one):
Large accelerated filer
ý
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨
 
Smaller reporting company
¨
 
 
 
 
 
Emerging growth company
¨
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards 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  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
Class of Common Stock
Outstanding at
September 30, 2018
$0.16 2/3 par value
137,186,880 shares

Table of Contents

Humana Inc.
FORM 10-Q
SEPTEMBER 30, 2018
INDEX
 
 
Page
Part I: Financial Information
 
Item 1.
Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
 
 
Certifications
 




Humana Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30,
2018
 
December 31,
2017
 
(in millions, except share amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
4,142

 
$
4,042

Investment securities
9,695

 
9,557

Receivables, less allowance for doubtful accounts of $92 in 2018
and $96 in 2017
1,062

 
854

Other current assets
4,178

 
2,949

Total current assets
19,077

 
17,402

Property and equipment, net
1,685

 
1,584

Long-term investment securities
405

 
2,745

Equity method investment in Kindred at Home
1,048

 
—

Goodwill
3,895

 
3,281

Other long-term assets
1,380

 
2,166

Total assets
$
27,490

 
$
27,178

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Benefits payable
$
5,020

 
$
4,668

Trade accounts payable and accrued expenses
5,413

 
4,069

Book overdraft
199

 
141

Unearned revenues
294

 
378

Short-term debt
398

 
150

Total current liabilities
11,324

 
9,406

Long-term debt
4,774

 
4,770

Future policy benefits payable
196

 
2,923

Other long-term liabilities
603

 
237

Total liabilities
16,897

 
17,336

Commitments and contingencies (Note 14)

 

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

 
—

Common stock, $0.16 2/3 par; 300,000,000 shares authorized;
198,593,361 shares issued at September 30, 2018 and 198,572,458 shares
issued at December 31, 2017
33

 
33

Capital in excess of par value
2,707

 
2,445

Retained earnings
14,786

 
13,670

Accumulated other comprehensive (loss) income
(206
)
 
19

Treasury stock, at cost, 61,406,481 shares at September 30, 2018 and
60,893,762 shares at December 31, 2017
(6,727
)
 
(6,325
)
Total stockholders’ equity
10,593

 
9,842

Total liabilities and stockholders’ equity
$
27,490

 
$
27,178

See accompanying notes to condensed consolidated financial statements.

3

Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions, except per share results)
Revenues:
 
 
 
 
 
 
 
Premiums
$
13,712

 
$
12,955

 
$
41,236

 
$
39,556

Services
381

 
223

 
1,090

 
706

Investment income
113

 
104

 
418

 
316

Total revenues
14,206

 
13,282

 
42,744

 
40,578

Operating expenses:
 
 
 
 
 
 
 
Benefits
11,243

 
10,642

 
34,449

 
32,857

Operating costs
1,900

 
1,688

 
5,410

 
4,694

Merger termination fee and related costs, net
—

 
—

 
—

 
(947
)
Depreciation and amortization
102

 
94

 
302

 
278

Total operating expenses
13,245

 
12,424

 
40,161

 
36,882

Income from operations
961

 
858

 
2,583

 
3,696

Loss on sale of business
(4
)
 
—

 
786

 
—

Interest expense
53

 
59

 
159

 
166

Other expense, net
11

 
—

 
11

 
—

Income before income taxes and equity in net earnings
901

 
799

 
1,627

 
3,530

Provision for income taxes
266

 
300

 
308

 
1,266

Equity in net earnings of Kindred at Home
9

 
—

 
9

 
—

Net income
$
644

 
$
499

 
$
1,328

 
$
2,264

Basic earnings per common share
$
4.68

 
$
3.46

 
$
9.64

 
$
15.56

Diluted earnings per common share
$
4.65

 
$
3.44

 
$
9.58

 
$
15.44

Dividends declared per common share
$
0.50

 
$
0.40

 
$
1.50

 
$
1.20

See accompanying notes to condensed consolidated financial statements.

4

Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Net income
$
644

 
$
499

 
$
1,328

 
$
2,264

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Change in gross unrealized investment
gains/losses
(42
)
 
26

 
(254
)
 
152

Effect of income taxes
10

 
(9
)
 
64

 
(56
)
Total change in unrealized
investment gains/losses, net of tax
(32
)
 
17

 
(190
)
 
96

Reclassification adjustment for net
realized losses (gains)
3

 
—

 
(49
)
 
(28
)
Effect of income taxes
(1
)
 
—

 
14

 
10

Total reclassification adjustment, net
of tax
2

 
—

 
(35
)
 
(18
)
Other comprehensive (loss) income, net
of tax
(30
)
 
17

 
(225
)
 
78

Comprehensive income
$
614

 
$
516

 
$
1,103

 
$
2,342


See accompanying notes to condensed consolidated financial statements.

5

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

Capital In
Excess of
Par Value

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Treasury
Stock

Total
Stockholders’
Equity
 
Issued
Shares

Amount


(dollars in millions, share amounts in thousands)
Three months ended September 30, 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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2017
Balances, June 30, 2017
198,570


$
33


$
2,306


$
13,101


$
(5
)

$
(4,482
)

$
10,953

Net income






499






499

Other comprehensive income












17





17

Common stock repurchases




300







(541
)

(241
)
Dividends and dividend
equivalents




—


(58
)






(58
)
Stock-based compensation




33









33

Restricted stock unit vesting
—


—


(6
)






6


—

Stock option exercises
2


—


8








8

Balances, September 30, 2017
198,572


$
33


$
2,641


$
13,542


$
12


$
(5,017
)

$
11,211

See accompanying notes to condensed consolidated financial statements.














6


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

Capital In
Excess of
Par Value

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Treasury
Stock

Total
Stockholders’
Equity
 
Issued
Shares

Amount


(dollars in millions, share amounts in thousands)
Nine months ended September 30, 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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2017
Balances, December 31, 2016
198,495


$
33


$
2,562


$
11,454


$
(66
)

$
(3,298
)

$
10,685

Net income






2,264






2,264

Other comprehensive income












78





78

Common stock repurchases




—







(1,819
)

(1,819
)
Dividends and dividend
equivalents




—


(176
)






(176
)
Stock-based compensation




116









116

Restricted stock unit vesting
—


—


(100
)






100


—

Stock option exercises
77


—


63








63

Balances, September 30, 2017
198,572


$
33


$
2,641


$
13,542


$
12


$
(5,017
)

$
11,211


See accompanying notes to condensed consolidated financial statements.










7

Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
For the nine months ended
September 30,
 
2018
 
2017
 
(in millions)
Cash flows from operating activities
 
 
 
Net income
$
1,328

 
$
2,264

Adjustments to reconcile net income to net cash provided by
operating activities:
 
 
 
Loss on sale of business
786

 
—

Net realized capital gains
(90
)
 
(28
)
Equity in net earnings of Kindred at Home
(9
)
 
—

Stock-based compensation
105

 
116

Depreciation
330

 
303

Other intangible amortization
70

 
54

Provision (benefit) for deferred income taxes
165

 
(54
)
Changes in operating assets and liabilities, net of effect of
businesses acquired and dispositions:
 
 
 
Receivables
(211
)
 
358

Other assets
(939
)
 
(369
)
Benefits payable
410

 
396

Other liabilities
548

 
641

Unearned revenues
(84
)
 
3,167

Other, net
97

 
114

Net cash provided by operating activities
2,506

 
6,962

Cash flows from investing activities
 
 
 
Cash transferred in sale of business
(805
)
 
—

Acquisitions, net of cash acquired
(354
)
 
(10
)
Acquisition, equity method investment in Kindred at Home
(1,095
)
 
—

Purchases of property and equipment, net
(436
)
 
(376
)
Purchases of investment securities
(3,379
)
 
(4,337
)
Maturities of investment securities
815

 
919

Proceeds from sales of investment securities
2,614

 
2,028

Net cash used in investing activities
(2,640
)
 
(1,776
)
Cash flows from financing activities
 
 
 
Receipts from contract deposits, net
378

 
1,931

Proceeds from issuance of senior notes, net
—

 
985

Proceeds (repayment) from issuance of commercial paper, net
240

 
(153
)
Change in book overdraft
58

 
(41
)
Common stock repurchases
(294
)
 
(1,819
)
Dividends paid
(195
)
 
(162
)
Proceeds from stock option exercises and other
47

 
61

Net cash provided by financing activities
234

 
802

Increase in cash and cash equivalents
100

 
5,988

Cash and cash equivalents at beginning of period
4,042

 
3,877

Cash and cash equivalents at end of period
$
4,142

 
$
9,865

Supplemental cash flow disclosures:
 
 
 
Interest payments
$
120

 
$
124

Income tax payments, net
$
511

 
$
1,206


See accompanying notes to condensed consolidated financial statements.

8
Table of Contents


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


1. BASIS OF PRESENTATION AND SIGNIFICANT EVENTS
The accompanying condensed consolidated financial statements are presented in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America, or GAAP, or those normally made in an Annual Report on Form 10-K. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. For further information, the reader of this Form 10-Q should refer to our Form 10-K for the year ended December 31, 2017, that was filed with the Securities and Exchange Commission, or the SEC, on February 16, 2018. We refer to the Form 10-K as the “2017 Form 10-K” in this document. References throughout this document to “we,” “us,” “our,” “Company,” and “Humana” mean Humana Inc. and its subsidiaries.
The preparation of our condensed consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The areas involving the most significant use of estimates are the estimation of benefits payable, future policy benefits payable, the impact of risk adjustment provisions related to our Medicare contracts, the valuation and related impairment recognition of investment securities, and the valuation and related impairment recognition of long-lived assets, including goodwill. These estimates are based on knowledge of current events and anticipated future events, and accordingly, actual results may ultimately differ materially from those estimates. Refer to Note 2 to the consolidated financial statements included in our 2017 Form 10-K for information on accounting policies that we consider in preparing our consolidated financial statements.
The financial information has been prepared in accordance with our customary accounting practices and has not been audited. In our opinion, the information presented reflects all adjustments necessary for a fair statement of interim results. All such adjustments are of a normal and recurring nature.
Workforce Optimization
During the third quarter of 2017, we initiated a voluntary early retirement program and an involuntary workforce reduction program. These programs impacted approximately 3,600 associates, or 7.8%, of our workforce in 2017. As a result, in 2017 we recorded charges of $148 million, or $0.64 per diluted common share. At December 31, 2017, $140 million was classified as a current liability, included in our condensed consolidated balance sheet in the trade accounts payable and accrued expenses line. Payments under these programs are being made upon termination during the early retirement or severance pay period. The remaining workforce optimization liability at September 30, 2018 was $29 million and is expected to be substantially paid in 2018.
Aetna Merger
On February 16, 2017, under the terms of the Agreement and Plan of Merger, or Merger Agreement, with Aetna Inc., and certain wholly owned subsidiaries of Aetna Inc., which we collectively refer to as Aetna, we received a breakup fee of $1 billion from Aetna, which is included in our consolidated statement of income in the line captioned "Merger termination fee and related costs, net."
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 2017 Form 10-K for information on accounting policies that we consider in preparing our consolidated financial statements. See Note 15 for disaggregation of revenue by segment and type.

9
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Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

At September 30, 2018, accounts receivable related to services were $148 million. For the three and nine months ended September 30, 2018, 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, 2018.
For the three and nine months ended September 30, 2018, revenue recognized from performance obligations related to prior periods (for example, due to changes in transaction price), was not material. Further, revenue expected to be recognized in any future year related to remaining performance obligations was not material.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board, or FASB, issued new guidance that amends the accounting for revenue recognition. The amendments are intended to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices, and improve disclosure requirements. Insurance contracts are not included in the scope of this new guidance. Accordingly, our premiums revenue and investment income, collectively representing approximately 97% of our consolidated external revenues for the three and nine months ended September 30, 2018, are not included in the scope of the new guidance. We adopted the new standard effective January 1, 2018, using the modified retrospective approach. As the majority of our revenues are not subject to the new guidance and the remaining revenues’ accounting treatment did not materially differ from pre-existing accounting treatment, the adoption of the new standard did not have a material impact on our consolidated results of operations, financial condition, cash flows, or related disclosures.
 
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). The new guidance is effective for us beginning with annual and interim periods in 2019, with earlier adoption permitted. We expect to adopt the guidance that allows us not to adjust comparative periods and record a cumulative effect adjustment, if any, to retained earnings. We are in the process of implementing a new lease accounting system and expect to record significant leased assets and corresponding lease obligations based on our existing population of individual leases. We do not expect a material impact on our results of operations or cash flows.
In June 2016, the FASB issued guidance introducing a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The guidance is effective for us beginning January 1, 2020. The new current expected credit losses (CECL) model generally calls for the immediate recognition of all expected credit losses and applies to loans, accounts and trade receivables as well as other financial assets measured at amortized cost, loan commitments and off-balance sheet credit exposures, debt securities and other financial assets measured at fair value through other comprehensive income, and beneficial interests in securitized financial assets. The
new guidance replaces the current incurred loss model for measuring expected credit losses, requires expected losses
on available-for-sale debt securities to be recognized through an allowance for credit losses rather than as reductions
in the amortized cost of the securities, and provides for additional disclosure requirements. Our investment portfolio consists of available-for-sale debt securities. We are currently evaluating the impact on our results of operations, financial condition, 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. We do not expect adoption of this guidance will have a material impact on our results of operations, financial condition and cash flows.
In February 2018, the FASB issued guidance which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the December 22, 2017 enactment of the Tax Cuts and Jobs Act.  The new guidance is effective for us beginning January 1, 2019, with early adoption permitted.  We early

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

adopted this guidance in the first quarter of 2018 and it 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. 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
Acquisition of a 40% Minority Interest in Kindred’s Homecare Business and Curo Health Services

On July 2, 2018, we completed the acquisition of a 40% minority interest in the Kindred at Home Division, or Kindred at Home, of Kindred Healthcare, Inc., or Kindred, for cash consideration of approximately $850 million, including our share of transaction and related expenses. TPG Capital, or TPG, and Welsh, Carson, Anderson & Stowe, or WCAS, collectively, the Sponsors, along with us jointly created a consortium to purchase all of the outstanding and issued securities of Kindred. Immediately following the closing of that transaction, Kindred at Home and the Specialty Hospital company were separated, with the result being that the Long Term Acute Care and Rehabilitation businesses (the Specialty Hospital Company) is owned by the Sponsors and Kindred at Home is owned by a joint venture owned by the Sponsors and us.
On July 11, 2018, we, along with the same Kindred at Home Sponsors, TPG and WCAS, collectively referred to as the "Consortium," completed the acquisition of privately-held Curo Health Services, or Curo, one of the nation's leading hospice operators providing care to patients at 245 locations in 22 states. The transaction was structured as a merger of Curo with the hospice business of Kindred at Home, and we thereby purchased a 40% minority interest in Curo for cash consideration of approximately $250 million.
We account for our 40% investment in Kindred at Home using the equity method of accounting. Investments accounted for under the equity method are initially recorded at cost and subsequently adjusted to our share of the net income or loss from Kindred at Home. This investment is reflected as "Equity method investment in Kindred at Home" in our condensed consolidated balance sheets, and our share of income or loss is included in our condensed consolidated statements of income in the line captioned "Equity in net earnings of Kindred at Home."
We entered into a shareholders agreement with the Sponsors that provide 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 starting at the end of year three and ending at the end of year four following the closing. 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 at the end of year four and ending at the end of year five following the closing. The put and call options, which 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. Both options are exercisable at a fixed EBITDA multiple. 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 $221 million and $265 million, respectively, at September 30, 2018. 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 expense, net" in our condensed consolidated statements of income.




11
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Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


Sale of Closed Block of Commercial Long-Term Care Insurance Business

On August 9, 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, includes 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 which is reported as loss on sale of business in the accompanying condensed consolidated statements of income for the nine months ended September 30, 2018. We recorded a $430 million income tax benefit resulting from the loss which is included in the accompanying condensed consolidated statements of income for the nine months ended September 30, 2018.
During the nine months ended September 30, 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 for the nine months ended September 30, 2018 and 2017 were $182 million and $199 million, respectively. For the nine months ended September 30, 2018 and 2017 KMG pretax income was $47 million and pretax loss was $15 million, respectively. KMG revenues and pretax loss for the three months ended September 30, 2017 were $66 million and $5 million, respectively, and were not material for the three months ended September 30, 2018.
The assets and liabilities of KMG that were disposed of on August 9, 2018 were as follows:
 
August 9, 2018
Assets
(in millions)
Cash and cash equivalents
$
805

Receivables, net
3

Investment securities
1,576

Other assets
1,085

Total assets disposed
$
3,469

Liabilities
 
Benefits payable
$
58

Trade accounts payable and accrued expenses
70

Future policy benefits payable
2,573

Total liabilities disposed
$
2,701








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

Other Acquisitions and Divestitures
On March 1, 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 preliminary purchase price allocation to goodwill of $479 million, other intangible assets of $80 million, and net tangible assets of $27 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.
On April 10, 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 preliminary purchase price allocation to goodwill of $135 million, other intangible assets of $38 million and net tangible assets of $17 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 preliminary, subject to completion of valuation analysis, including for example, refining assumptions used to calculate the fair value of intangible assets.
During 2018 and 2017, we also 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 2018 and 2017 were not material to our results of operations. The pro forma financial information assuming the acquisitions had occurred as of the beginning of the calendar year prior to the year of acquisition, as well as the revenues and earnings generated during the year of acquisition, were not material for disclosure purposes.

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

4. INVESTMENT SECURITIES
Investment securities classified as current and long-term were as follows at September 30, 2018 and December 31, 2017, respectively:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(in millions)
September 30, 2018
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
$
649

 
$
—

 
$
(5
)
 
$
644

Mortgage-backed securities
2,418

 
—

 
(89
)
 
2,329

Tax-exempt municipal securities
2,920

 
2

 
(65
)
 
2,857

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
57

 
—

 
(1
)
 
56

Commercial
528

 
—

 
(18
)
 
510

Asset-backed securities
686

 
—

 
(2
)
 
684

Corporate debt securities
3,111

 
2

 
(93
)
 
3,020

Total debt securities
$
10,369

 
$
4

 
$
(273
)
 
$
10,100

 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
$
532

 
$
1

 
$
(2
)
 
$
531

Mortgage-backed securities
1,625

 
4

 
(19
)
 
1,610

Tax-exempt municipal securities
3,884

 
33

 
(28
)
 
3,889

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
26

 
—

 
—

 
26

Commercial
455

 
3

 
(2
)
 
456

Asset-backed securities
407

 
1

 
—

 
408

Corporate debt securities
5,175

 
244

 
(37
)
 
5,382

Total debt securities
$
12,104

 
$
286

 
$
(88
)
 
$
12,302


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

Gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows at September 30, 2018 and December 31, 2017, 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, 2018
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and other U.S.
government corporations
and agencies:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
obligations
$
476

 
$
(1
)
 
$
143

 
$
(4
)
 
$
619

 
$
(5
)
Mortgage-backed
securities
1,661

 
(52
)
 
642

 
(37
)
 
2,303

 
(89
)
Tax-exempt municipal
securities
1,578

 
(29
)
 
1,120

 
(36
)
 
2,698

 
(65
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
56

 
(1
)
 
1

 
—

 
57

 
(1
)
Commercial
407

 
(13
)
 
74

 
(5
)
 
481

 
(18
)
Asset-backed securities
480

 
(2
)
 
15

 
—

 
495

 
(2
)
Corporate debt securities
1,835

 
(43
)
 
882

 
(50
)
 
2,717

 
(93
)
Total debt securities
$
6,493

 
$
(141
)
 
$
2,877

 
$
(132
)
 
$
9,370

 
$
(273
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and other U.S.
government corporations
and agencies:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
obligations
$
273

 
$
(1
)
 
$
130

 
$
(1
)
 
$
403

 
$
(2
)
Mortgage-backed
securities
581

 
(2
)
 
672

 
(17
)
 
1,253

 
(19
)
Tax-exempt municipal
securities
1,590

 
(16
)
 
661

 
(12
)
 
2,251

 
(28
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
20

 
—

 
3

 
—

 
23

 
—

Commercial
131

 
(1
)
 
28

 
(1
)
 
159

 
(2
)
Asset-backed securities
107

 
—

 
10

 
—

 
117

 
—

Corporate debt securities
1,297

 
(10
)
 
804

 
(27
)
 
2,101

 
(37
)
Total debt securities
$
3,999

 
$
(30
)
 
$
2,308

 
$
(58
)
 
$
6,307

 
$
(88
)
Approximately 97% 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, 2018. Most of the debt securities that were below investment-grade were rated BB, the higher end of the below investment-grade rating scale. Tax-exempt municipal securities were diversified among general obligation bonds of states and local municipalities in the United States as well as special revenue bonds issued by municipalities to finance specific public works projects such as utilities, water and sewer, transportation, or education. Our general obligation bonds are diversified across the United States with no individual state exceeding 9%. In addition, 2% of our tax-exempt securities were insured by bond insurers and had an

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

equivalent weighted average S&P credit rating of AA exclusive of the bond insurers’ guarantee. Our investment policy limits investments in a single issuer and requires diversification among various asset types.
Our unrealized losses from all securities were generated from approximately 1,250 positions out of a total of approximately 1,520 positions at September 30, 2018. All issuers of securities we own that were trading at an unrealized loss at September 30, 2018 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, 2018, 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, 2018.
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, 2018 and 2017:
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Gross realized gains
$
10

 
$
3

 
$
105

 
$
34

Gross realized losses
(2
)
 
(3
)
 
(15
)
 
(6
)
Net realized capital gains
$
8

 
$
—


$
90


$
28

There were no material other-than-temporary impairments for the three and nine months ended September 30, 2018 or 2017.
The contractual maturities of debt securities available for sale at September 30, 2018, 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
$
711

 
$
709

Due after one year through five years
3,152

 
3,092

Due after five years through ten years
2,038

 
1,962

Due after ten years
779

 
758

Mortgage and asset-backed securities
3,689

 
3,579

Total debt securities
$
10,369

 
$
10,100


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

5. FAIR VALUE
Financial Assets
The following table summarizes our fair value measurements at September 30, 2018 and December 31, 2017, 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, 2018
 
 
 
 
 
 
 
Cash equivalents
$
4,990

 
$
4,990

 
$
—

 
$
—

Debt securities:
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
644

 
—

 
644

 
—

Mortgage-backed securities
2,329

 
—

 
2,329

 
—

Tax-exempt municipal securities
2,857

 
—

 
2,857

 
—

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
56

 
—

 
56

 
—

Commercial
510

 
—

 
510

 
—

Asset-backed securities
684

 
—

 
684

 
—

Corporate debt securities
3,020

 
—

 
3,020

 
—

Total debt securities
10,100

 
—

 
10,100

 
—

Total invested assets
$
15,090

 
$
4,990

 
$
10,100

 
$
—

 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Cash equivalents
$
4,564

 
$
4,564

 
$
—

 
$
—

Debt securities:
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
531

 
—

 
531

 
—

Mortgage-backed securities
1,610

 
—

 
1,610

 
—

Tax-exempt municipal securities
3,889

 
—

 
3,889

 
—

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
26

 
—

 
26

 
—

Commercial
456

 
—

 
456

 
—

Asset-backed securities
408

 
—

 
408

 
—

Corporate debt securities
5,382

 
—

 
5,381

 
1

Total debt securities
12,302

 
—

 
12,301

 
1

Total invested assets
$
16,866

 
$
4,564

 
$
12,301

 
$
1



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

Financial Liabilities
Our debt is recorded at carrying value in our consolidated balance sheets. The carrying value of our senior notes debt outstanding, net of unamortized debt issuance costs, was $4,774 million at September 30, 2018 and $4,770 million at December 31, 2017. The fair value of our senior notes debt was $4,879 million at September 30, 2018 and $5,191 million at December 31, 2017. The fair value of our long-term debt is determined based on Level 2 inputs, including quoted market prices for the same or similar debt, or if no quoted market prices are available, on the current prices estimated to be available to us for debt with similar terms and remaining maturities.
Due to the short-term nature, carrying value approximates fair value for our commercial paper borrowings. There were outstanding commercial paper borrowings of $398 million as of September 30, 2018 and $150 million as of December 31, 2017.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
As disclosed in Note 3, we acquired MCCI, FPG, and other health and wellness related businesses during 2018 and 2017. The values of net tangible assets acquired and the resulting goodwill and other intangible assets were recorded at fair value using Level 3 inputs. The majority of the tangible assets acquired and liabilities assumed were recorded at their carrying values as of the respective dates of acquisition, as their carrying values approximated their fair values due to their short-term nature. The fair values of goodwill and other intangible assets acquired in these acquisitions were internally estimated primarily based on the income approach. The income approach estimates fair value based on the present value of the cash flows that the assets are expected to generate in the future. We developed internal estimates for the expected future cash flows and discount rates used in the present value calculations. Other than assets acquired and liabilities assumed in these acquisitions, there were no material assets or liabilities measured at fair value on a nonrecurring basis during 2018 or 2017.
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 2017 Form 10-K. The accompanying condensed consolidated balance sheets include the following amounts associated with Medicare Part D at September 30, 2018 and December 31, 2017. 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, 2018
 
December 31, 2017
Risk
Corridor
Settlement
 
CMS
Subsidies/
Discounts
 
Risk
Corridor
Settlement
 
CMS
Subsidies/
Discounts
 
(in millions)
Other current assets
$
6

 
$
268

 
$
4

 
$
101

Trade accounts payable and accrued expenses
(214
)
 
(1,688
)
 
(255
)
 
(1,085
)
Net current liability
(208
)
 
(1,420
)
 
(251
)
 
(984
)
Other long-term assets
27

 
—

 
—

 
—

Other long-term liabilities
(122
)
 
—

 
(28
)
 
—

Net long-term liability
(95
)
 
—

 
(28
)
 
—

Total net liability
$
(303
)
 
$
(1,420
)
 
$
(279
)
 
$
(984
)
7. HEALTH CARE REFORM
The Patient Protection and Affordable Care Act and The Health Care and Education Reconciliation Act of 2010 (which we collectively refer to as the Health Care Reform Law) established risk spreading premium stabilization

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

programs effective January 1, 2014, including a permanent risk adjustment program and temporary risk corridor and reinsurance programs, which we collectively refer to as the 3Rs. The 3Rs, applicable to certain of our commercial medical insurance products, are further discussed in Note 2 to our 2017 Form 10-K. The temporary programs were only applicable for years 2014 through 2016. As a result of our exit from our individual commercial medical business effective January 1, 2018, the permanent risk adjustment program is currently only applicable to our commercial small group health insurance business.
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 the Health Care Reform Law, for years 2014, 2015 and 2016. Our case has been stayed by the Court, pending resolution of similar cases filed by other insurers.
 
The accompanying condensed consolidated balance sheets include the following amounts associated with the 3Rs at September 30, 2018 and December 31, 2017.
 
September 30, 2018
 
December 31, 2017
 
Risk Adjustment
Settlement
 
Reinsurance
Recoverables
 
Risk Adjustment
Settlement
 
Reinsurance
Recoverables
 
(in millions)
Premiums receivable
$
68
 
 
$
—

 
$
62
 
 
$
—

Other current assets
—
 
 
—

 
—
 
 
44

Trade accounts payable and
accrued expenses
(40
)
 
—

 
(80
)
 
—

Other long-term assets
—
 
 
—

 
5
 
 
—

Total net asset (liability)
$
28
 
 
$
—

 
$
(13
)
 
$
44

Net payments under the 3Rs were $60 million during the nine months ended September 30, 2018. Net collections were $307 million during the nine months ended September 30, 2017.
In October 2018, we paid the federal government approximately $1.04 billion for our portion of the annual health insurance industry fee attributed to calendar year 2018 in accordance with the Health Care Reform Law. This fee, fixed in amount by law and apportioned to insurance carriers based on market share, is not deductible for tax purposes. Each year on January 1, except for when the fee is 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, resulting from the amortization of the 2018 annual health insurance industry fee. The annual health insurance industry fee was suspended for calendar year 2017, and is also, under current law, suspended for calendar year 2019.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for our reportable segments for the nine months ended September 30, 2018 were as follows:
 
Retail
 
Group and Specialty
 
Healthcare
Services
 
Total
 
(in millions)
Balance at January 1, 2018
$
1,059

 
$
261

 
$
1,961

 
$
3,281

Acquisitions
476

 
—

 
138

 
614

Balance at September 30, 2018
$
1,535

 
$
261

 
$
2,099

 
$
3,895


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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, 2018 and December 31, 2017.
 
 
 
September 30, 2018
 
December 31, 2017
 
Weighted
Average
Life
 
Cost
 
Accumulated
Amortization
 
Net
 
Cost
 
Accumulated
Amortization
 
Net
 
 
 
($ in millions)
Other intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer contracts/
relationships
8.7 years
 
$
646

 
$
419

 
$
227

 
$
566

 
$
401

 
$
165

Trade names and
technology
6.4 years
 
84

 
82

 
2

 
104

 
84

 
20

Provider contracts
11.9 years
 
68

 
36

 
32

 
68

 
30

 
38

Noncompetes and
other
7.3 years
 
29

 
27

 
2

 
32

 
29

 
3

Total other intangible
assets
8.7 years
 
$
827

 
$
564

 
$
263

 
$
770

 
$
544

 
$
226

Amortization expense for other intangible assets was approximately $19 million for the three months ended September 30, 2018 and $18 million for the three months ended September 30, 2017. For the nine months ended September 30, 2018 and 2017, amortization expense for other intangible assets was approximately $70 million and $54 million, respectively. Amortization expense for the nine months ended September 30, 2018 included $12 million associated with the write-off of a trade name value reflecting the re-branding of certain provider assets. The following table presents our estimate of amortization expense for 2018 and each of the five next succeeding years:
 
(in millions)
For the years ending December 31,
 
2018
$
90

2019
70

2020
67

2021
34

2022
31

2023
18


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

9. BENEFITS PAYABLE
On a consolidated basis, activity in benefits payable, excluding military services, was as follows for the nine months ended September 30, 2018 and 2017:
 
 
For the nine months ended September 30,
 
 
2018
 
2017
 
 
(in millions)
Balances, beginning of period
 
$
4,668

 
$
4,563

Less: Reinsurance recoverables
 
(70
)
 
(76
)
Balances, beginning of period, net
 
4,598

 
4,487

Incurred related to:
 
 
 
 
Current year
 
34,915

 
33,318

Prior years
 
(467
)
 
(430
)
Total incurred
 
34,448

 
32,888

Paid related to:
 
 
 
 
Current year
 
(30,204
)
 
(28,741
)
Prior years
 
(3,920
)
 
(3,745
)
Total paid
 
(34,124
)
 
(32,486
)
Reinsurance recoverable
 
98

 
70

Balances, end of period
 
$
5,020

 
$
4,959

Amounts incurred related to prior periods vary from previously estimated liabilities as the claims ultimately are settled. Negative amounts reported for incurred related to prior years result from claims being ultimately settled for amounts less than originally estimated (favorable development).
Our reserving practice is to consistently recognize the actuarial best estimate of our ultimate liability for claims. Actuarial standards require the use of assumptions based on moderately adverse experience, which generally results in favorable reserve development, or reserves that are considered redundant.
Benefits expense excluded from the previous table was as follows for the nine months ended September 30, 2018 and 2017.
 
 
For the nine months ended September 30,
 
 
2018
 
2017
 
 
(in millions)
Future policy benefits:
 
 
 
 
Individual Commercial
 
$
(14
)
 
$
(67
)
Other Businesses
 
15

 
36

Total future policy benefits
 
$
1

 
$
(31
)





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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, Group and Specialty, and Individual Commercial segments as of September 30, 2018 and 2017, net of reinsurance, and the total of IBNR included within the net incurred claims amounts.
Retail Segment
Activity in benefits payable for our Retail segment was as follows for the nine months ended September 30, 2018 and 2017:
 
 
For the nine months ended September 30,
 
 
2018
 
2017
 
 
(in millions)
Balances, beginning of period
 
$
3,963

 
$
3,507

Less: Reinsurance recoverables
 
(70
)
 
(76
)
Balances, beginning of period, net
 
3,893

 
3,431

Incurred related to:
 
 
 
 
Current year
 
31,209

 
29,356

Prior years
 
(367
)
 
(339
)
Total incurred
 
30,842

 
29,017

Paid related to:
 
 
 
 
Current year
 
(27,062
)
 
(25,460
)
Prior years
 
(3,334
)
 
(2,822
)
Total paid
 
(30,396
)
 
(28,282
)
Reinsurance recoverable
 
98

 
70

Balances, end of period
 
$
4,437

 
$
4,236

At September 30, 2018, benefits payable for our Retail segment included IBNR of approximately $2.8 billion, primarily associated with claims incurred in 2018.












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

Group and Specialty Segment
Activity in benefits payable for our Group and Specialty segment, excluding military services, was as follows for the nine months ended September 30, 2018 and 2017:
 
 
For the nine months ended September 30,
 
 
2018
 
2017
 
 
(in millions)
Balances, beginning of period
 
$
568

 
$
578

Incurred related to:
 
 
 
 
Current year
 
4,018

 
3,996

Prior years
 
(41
)
 
(44
)
Total incurred
 
3,977

 
3,952

Paid related to:
 
 
 
 
Current year
 
(3,462
)
 
(3,452
)
Prior years
 
(509
)
 
(517
)
Total paid
 
(3,971
)
 
(3,969
)
Balances, end of period
 
$
574

 
$
561

At September 30, 2018, benefits payable for our Group and Specialty segment included IBNR of approximately $490 million, primarily associated with claims incurred in 2018.

Individual Commercial Segment
Activity in benefits payable for our Individual Commercial segment was as follows for the nine months ended September 30, 2018 and 2017:
 
 
For the nine months ended September 30,
 
 
2018
 
2017
 
 
(in millions)
Balances, beginning of period
 
$
101

 
$
454

Incurred related to:
 
 
 
 
Current year
 
—

 
502

Prior years
 
(58
)
 
(46
)
Total incurred
 
(58
)
 
456

Paid related to:
 
 
 
 
Current year
 
—

 
(393
)
Prior years
 
(34
)
 
(383
)
Total paid
 
(34
)
 
(776
)
Balance, end of period
 
$
9

 
$
134


At September 30, 2018, benefits payable for our Individual Commercial segment included IBNR of approximately $2 million, associated with claims incurred in 2017 and prior.




23
Table of Contents


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,
 
 
2018
 
Net outstanding liabilities
 
 
Retail
$
4,339

 
Group and Specialty
574

 
Individual Commercial
9

 
Other Businesses
—

 
    Benefits payable, net of reinsurance
4,922

 
 
 
 
Reinsurance recoverable on unpaid claims
 
 
Retail
98

 
     Total benefits payable, gross
$
5,020

10. EARNINGS PER COMMON SHARE COMPUTATION
Detail supporting the computation of basic and diluted earnings per common share was as follows for the three and nine months ended September 30, 2018 and 2017:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(dollars in millions, except per common share results; number of shares in thousands)
Net income available for common stockholders
$
644

 
$
499

 
$
1,328

 
$
2,264

Weighted average outstanding shares of common stock
used to compute basic earnings per common share
137,709

 
144,215

 
137,792