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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

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)
Delaware61-0647538
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

500 West Main Street

Louisville, Kentucky 40202

(Address of principal executive offices, including zip code)

(502) 580-1000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading SymbolName of each exchange on which registered
Common stock, $0.16 2/3 par valueHUMNew York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer☒Accelerated filer☐
Non-accelerated filer☐Smaller reporting company☐
Emerging growth company☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

Class of Common StockOutstanding at September 30, 2022
$0.16 2/3 par value126,600,318 shares

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Humana Inc.

FORM 10-Q

SEPTEMBER 30, 2022

INDEX

Page
Part I: Financial Information
Item 1.Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) at September 30, 2022 and December 31, 20213
Condensed Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2022 and 20214
Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2022 and 20215
Condensed Consolidated Statements of Stockholders' Equity (Unaudited) for the three and nine months ended September 30, 20226
Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2022 and 20218
Notes to Condensed Consolidated Financial Statements (Unaudited)10
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations35
Item 3.Quantitative and Qualitative Disclosures about Market Risk54
Item 4.Controls and Procedures54
Part II: Other Information
Item 1.Legal Proceedings55
Item 1A.Risk Factors55
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds55
Item 3.Defaults Upon Senior Securities56
Item 4.Mine Safety Disclosures56
Item 5.Other Information56
Item 6.Exhibits57
Signatures58
Certifications

Humana Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

September 30, 2022December 31, 2021
(in millions, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents$13,558$3,394
Investment securities13,12413,192
Receivables, net of allowances of $71 in 2022 and $83 in 20211,6091,814
Other current assets5,4206,493
Total current assets33,71124,893
Property and equipment, net3,2183,073
Long-term investment securities375780
Equity method investments738141
Goodwill9,09611,092
Other long-term assets3,6274,379
Total assets$50,765$44,358
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Benefits payable$9,237$8,289
Trade accounts payable and accrued expenses6,7664,509
Book overdraft237326
Unearned revenues6,012254
Short-term debt2,7991,953
Total current liabilities25,05115,331
Long-term debt7,79810,541
Other long-term liabilities1,5992,383
Total liabilities34,44828,255
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; 198,666,598 shares issued at September 30, 2022 and 198,648,742 shares at December 31, 20213333
Capital in excess of par value3,2343,082
Retained earnings25,60623,086
Accumulated other comprehensive (loss) income(1,467)42
Treasury stock, at cost, 72,066,280 shares at September 30, 2022 and 69,846,758 shares at December 31, 2021(11,152)(10,163)
Noncontrolling interests6323
Total stockholders’ equity16,31716,103
Total liabilities and stockholders’ equity$50,765$44,358

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,
2022202120222021
(in millions, except per share results)
Revenues:
Premiums$21,468$19,885$66,437$59,987
Services1,1598453,7721,802
Investment income (loss)172(33)222221
Total revenues22,79920,69770,43162,010
Operating expenses:
Benefits18,38417,31657,10851,761
Operating costs3,0612,6039,1206,726
Depreciation and amortization182150527436
Total operating expenses21,62720,06966,75558,923
Income from operations1,1726283,6763,087
Gain on sale of KAH Hospice(240)—(240)—
Interest expense10288293235
Other expense (income), net13(1,096)(16)(562)
Income before income taxes and equity in net earnings1,2971,6363,6393,414
Provision for income taxes107120820536
Equity in net earnings315169
Net income$1,193$1,531$2,820$2,947
Net loss attributable to noncontrolling interests2—1—
Net income attributable to Humana$1,195$1,531$2,821$2,947
Basic earnings per common share$9.45$11.91$22.27$22.90
Diluted earnings per common share$9.39$11.84$22.16$22.77

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,
2022202120222021
(in millions)
Net income attributable to Humana$1,195$1,531$2,821$2,947
Other comprehensive income:
Change in gross unrealized investment losses(590)(63)(1,982)(247)
Effect of income taxes1351445556
Total change in unrealized investment losses, net of tax(455)(49)(1,527)(191)
Reclassification adjustment for net realized gains (losses)50(16)23(80)
Effect of income taxes(11)4(5)19
Total reclassification adjustment, net of tax39(12)18(61)
Other comprehensive loss, net of tax(416)(61)(1,509)(252)
Comprehensive income attributable to equity method investments—(10)—6
Comprehensive income attributable to Humana$779$1,460$1,312$2,701

See accompanying notes to condensed consolidated financial statements.

Humana Inc.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

Common StockCapital In Excess of Par ValueRetained EarningsAccumulated Other Comprehensive Income (loss)Treasury StockNoncontrolling InterestsTotal Stockholders’ Equity
Issued SharesAmount
(dollars in millions, share amounts in thousands)
Three months ended September 30, 2022
Balances, June 30, 2022198,667$33$3,153$24,511$(1,051)$(11,156)$20$15,510
Net income1,195(2)1,193
Distribution from noncontrolling interest holders, net33
Sale of KAH Hospice(11)(11)
Acquisition5353
Other comprehensive loss(416)(416)
Common stock repurchases—(4)(4)
Dividends and dividend equivalents—(100)(100)
Stock-based compensation8080
Restricted stock unit vesting——(3)3—
Stock option exercises——459
Balances, September 30, 2022198,667$33$3,234$25,606$(1,467)$(11,152)$63$16,317
Three months ended September 30, 2021
Balances, June 30, 2021198,649$33$3,018$21,751$216$(10,175)$—$14,843
Net income1,531—1,531
Acquisition2222
Other comprehensive loss(71)(71)
Common stock repurchases—(3)(3)
Dividends and dividend equivalents—(91)(91)
Stock-based compensation4848
Restricted stock unit vesting——(3)3—
Stock option exercises——123
Balances, September 30, 2021198,649$33$3,064$23,191$145$(10,173)$22$16,282

See accompanying notes to condensed consolidated financial statements.

Common StockCapital In Excess of Par ValueRetained EarningsAccumulated Other Comprehensive Income (loss)Treasury StockNoncontrolling InterestsTotal Stockholders’ Equity
Issued SharesAmount
(dollars in millions, share amounts in thousands)
Nine months ended September 30, 2022
Balances, December 31, 2021198,649$33$3,082$23,086$42$(10,163)$23$16,103
Net income2,821(1)2,820
Distribution to noncontrolling interest holders, net(1)(1)
Sale of KAH Hospice(11)(11)
Acquisition5353
Other comprehensive loss(1,509)(1,509)
Common stock repurchases—(1,032)(1,032)
Dividends and dividend equivalents—(301)(301)
Stock-based compensation173173
Restricted stock unit vesting18—(31)31—
Stock option exercises——101222
Balances, September 30, 2022198,667$33$3,234$25,606$(1,467)$(11,152)$63$16,317
Nine months ended September 30, 2021
Balances, December 31, 2020198,649$33$2,705$20,517$391$(9,918)$—$13,728
Net income2,947—2,947
Acquisition2222
Other comprehensive loss(246)(246)
Common stock repurchases263(299)(36)
Dividends and dividend equivalents—(273)(273)
Stock-based compensation132132
Restricted stock unit vesting——(40)40—
Stock option exercises——448
Balances, September 30, 2021198,649$33$3,064$23,191$145$(10,173)$22$16,282

Humana Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

For the nine months ended September 30,
20222021
(in millions)
Cash flows from operating activities
Net income$2,820$2,947
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Gain on sale of KAH Hospice(240)—
Loss on investment securities, net13618
Gain on Kindred at Home equity method investment—(1,129)
Equity in net earnings(1)(69)
Stock-based compensation173132
Depreciation555468
Amortization7351
Impairment on property and equipment144—
Deferred income taxes(33)—
Changes in operating assets and liabilities, net of effect of businesses acquired and disposed:
Receivables11(294)
Other assets(465)(476)
Benefits payable948573
Other liabilities(195)207
Unearned revenues5,758(84)
Other3014
Net cash provided by operating activities9,7142,358
Cash flows from investing activities
Proceeds from sale of KAH Hospice, net2,708—
Acquisitions, net of cash and cash equivalents acquired(293)(3,959)
Purchases of property and equipment, net(862)(945)
Purchases of investment securities(4,740)(6,573)
Proceeds from maturities of investment securities1,2142,103
Proceeds from sales of investment securities1,9792,920
Net cash provided by (used in) investing activities6(6,454)
Cash flows from financing activities
Receipts from contract deposits, net3,787605
Proceeds from issuance of senior notes, net7442,984
(Repayments) proceeds from issuance of commercial paper, net(660)193
Proceeds from term loan—500
Repayment of term loan(2,000)(150)
Debt issue costs(2)(29)
Change in book overdraft(89)(80)
Common stock repurchases(1,032)(36)
Dividends paid(291)(263)
Other(13)3
Net cash provided by financing activities4443,727
Increase (decrease) in cash and cash equivalents10,164(369)
Cash and cash equivalents at beginning of period3,3944,673
Cash and cash equivalents at end of period$13,558$4,304

Humana Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

(Unaudited)

For the nine months ended September 30,
20222021
(in millions)
Supplemental cash flow disclosures:
Interest payments$256$183
Income tax payments, net$751$219
Details of businesses acquired in purchase transactions:
Fair value of assets acquired, net of cash and cash equivalents acquired$411$9,572
Less: Fair value of liabilities assumed(65)(3,231)
Less: Noncontrolling interests acquired(53)(22)
Less: Remeasured existing Kindred at Home equity method investment—(2,360)
Cash paid for acquired businesses, net of cash and cash equivalents acquired$293$3,959

See accompanying notes to condensed consolidated financial statements.

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION AND SIGNIFICANT EVENTS

The accompanying unaudited 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, 2021, that was filed with the Securities and Exchange Commission, or the SEC, on February 17, 2022. We refer to this Form 10-K as the “2021 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 unaudited 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 and indefinite-lived intangible assets. These estimates are based on knowledge of current events and anticipated future events, and accordingly, actual results may ultimately differ materially from those estimates. For additional information regarding accounting policies considered in preparing our consolidated financial statements, refer to Note 2 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" in our 2021 Form 10-K.

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.

Value Creation Initiatives

During 2022, in order to create capacity to fund growth and investment in our Medicare Advantage business and further expansion of our Healthcare Services capabilities in 2023, we committed to drive additional value for the enterprise through cost saving, productivity initiatives, and value acceleration from previous investments. As a result of these initiatives, during the three and nine months ended September 30, 2022, we recorded charges of $82 million and $285 million, respectively, primarily related to asset and software impairment and abandonment in the amount of $4 million and $144 million for the three and nine months ended September 30, 2022, respectively. Also included in this charge was $44 million and $65 million for the three and nine months ended September 30, 2022, respectively, in future severance payments in connection with the optimization of our workforce to increase speed, agility, and the pace at which Humana must work as a large, integrated healthcare organization. We expect this liability to be primarily paid within the next 12 months and classified it as a current liability, included in trade accounts payable and accrued expenses. These charges are included within operating costs in the condensed consolidated statements of income for the three and nine months ended September 30, 2022, and were recorded at the corporate level and not allocated to the segments.

COVID-19

The emergence and spread of the novel coronavirus, or COVID-19, beginning in the first quarter of 2020 has impacted our business. During periods of increased incidences of COVID-19, a reduction in non-COVID-19 hospital admissions for non-emergent and elective medical care have resulted in lower overall healthcare system utilization. At the same time, COVID-19 treatment and testing costs increased utilization. During 2022, we experienced lower overall utilization of the healthcare system than anticipated, as the reduction in COVID-19 utilization following the increased incidence associated with the Omicron variant outpaced the increase in non-COVID-19 utilization. The significant disruption in utilization during 2020 also impacted our ability to implement clinical initiatives to manage health care costs and chronic conditions of our members, and appropriately document their risk profiles, and, as

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

such, significantly affected our 2021 revenue under the risk adjustment payment model for Medicare Advantage plans. Finally, changes in utilization patterns and actions taken in 2021 as a result of the COVID-19 pandemic, including the suspension of certain financial recovery programs for a period of time and shifting the timing of claim payments and provider capitation surplus payments, impacted our claim reserve development and operating cash flows for 2021.

Revenue Recognition

Our revenues include premiums and services revenue. Services revenue includes 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, services revenue includes net patient services revenue that are recorded based upon established billing rates, less allowances for contractual adjustments, and are recognized as services are provided. For additional information regarding our revenues, refer to Note 2 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" in our 2021 Form 10-K. For additional information regarding disaggregation of revenue by segment and type, refer to Note 14 to the unaudited Condensed Consolidated Financial Statements included in Part I, Item 1, "Financial Statements" of this Form 10-Q.

At September 30, 2022, accounts receivable related to services were $311 million. For the three and nine months ended September 30, 2022, 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, 2022.

For the three and nine months ended September 30, 2022, services revenue recognized from performance obligations related to prior periods, such as 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.

2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In November 2020, the FASB issued Accounting Standards Update No. 2020-11, Financial Services—Insurance (Topic 944): Effective Date and Early Application (“ASU 2020-11”). The amendments in ASU 2020-11 make changes to the effective date and early application of Accounting Standards Update No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (“ASU 2018-12”), which was issued in November 2018. The amendments in ASU 2020-11 have extended the original effective date by one year, and now the amendments are required for our interim and annual reporting periods beginning after December 15, 2022. The new guidance relates 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, including the amortization of deferred contract acquisition costs and the measurement of liabilities for future policy benefits using current, rather than locked-in, assumptions. The new guidance, limited to our Medicare supplement product which represent less than 1% of consolidated premiums and services revenue, is effective for us beginning with annual and interim periods in 2023 and, using a modified retrospective approach, is to be applied to contracts in force on the basis of their existing carrying value amounts at the beginning of the earliest period presented. 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.

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

3. ACQUISITIONS AND DIVESTITURES

On August 11, 2022, we completed the sale of a 60% interest of Humana’s Kindred at Home Hospice subsidiary, or KAH Hospice, to Clayton, Dubilier & Rice, or CD&R, for cash proceeds of approximately $2.7 billion, net of cash disposed, including debt repayments from KAH Hospice to Humana of $1.9 billion. In connection with the sale we recognized a pre-tax gain, net of transaction costs, of $240 million which is reported as a gain on sale of KAH Hospice in the accompanying condensed consolidated statements of income for the three and nine months ended September 30, 2022.

In June 2022, we classified KAH Hospice as held-for-sale and aggregated KAH Hospice’s assets and liabilities separately on the balance sheet. The assets, liabilities and noncontrolling interest disposed of on August 11, 2022 were as follows:

August 11, 2022
(in millions)
Assets
Cash and cash equivalents$66
Receivables, net of allowances194
Other current assets20
Property and equipment, net44
Goodwill2,331
Other assets960
Total assets$3,615
Liabilities
Trade accounts payable and accrued expenses$245
Other long-term liabilities281
Total liabilities$526
Noncontrolling interest$11

Other assets included $866 million identifiable intangibles consisting of Medicare licenses and certificates of need.

Prior to the KAH Hospice disposition on August 11, 2022, as discussed above, KAH Hospice revenues for the three and nine months ended September 30, 2022 were $177 million and $958 million, respectively. Prior to the KAH Hospice disposition on August 11, 2022, KAH Hospice pretax earnings for the three and nine months ended September 30, 2022 were $24 million and $150 million, respectively.

On August 17, 2021, we acquired the remaining 60% interest in Kindred at Home, or KAH, the nation’s largest home health and hospice provider, from TPG Capital, or TPG, and Welsh, Carson, Anderson & Stowe, or WCAS, two private equity funds for an enterprise value of $8.2 billion, which included our equity value of $2.4 billion associated with our 40% minority ownership interest. We paid the approximate $5.8 billion transaction price (net of our existing equity stake) through a combination of debt financing, the assumption of existing KAH indebtedness and parent company cash.

During 2022 and 2021, we acquired various health and wellness related businesses which, individually or in the aggregate, have not had a material impact on our results of operations, financial condition, or cash flows. The results of operations and financial condition of these businesses acquired in 2022 and 2021 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 2022 and 2021 were not material to our results of operations. For asset acquisitions, the goodwill acquired is partially amortizable as deductible expenses for tax purposes. The pro forma financial information assuming the acquisitions had occurred as of the beginning of the

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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.

4. INVESTMENT SECURITIES

Investment securities classified as current and long-term were as follows at September 30, 2022 and December 31, 2021, respectively:

Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
(in millions)
September 30, 2022
U.S. Treasury and other U.S. government corporations and agencies:
U.S. Treasury and agency obligations$657$—$(58)$599
Mortgage-backed securities3,5891(550)3,040
Tax-exempt municipal securities769—(54)715
Mortgage-backed securities:
Residential482—(78)404
Commercial1,562—(154)1,408
Asset-backed securities1,915—(81)1,834
Corporate debt securities6,418—(931)5,487
Total debt securities$15,392$1$(1,906)13,487
Common stock12
Total investment securities$13,499
December 31, 2021
U.S. Treasury and other U.S. government corporations and agencies:
U.S. Treasury and agency obligations$611$1$(10)$602
Mortgage-backed securities3,26533(69)3,229
Tax-exempt municipal securities81033(2)841
Mortgage-backed securities:
Residential373—(6)367
Commercial1,39427(11)1,410
Asset-backed securities1,3466(4)1,348
Corporate debt securities5,641118(59)5,700
Total debt securities$13,440$218$(161)13,497
Common stock475
Total investment securities$13,972

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

In August 2022, we purchased certain corporate debt securities of KAH Hospice subsequent to the sale. The book value and fair value are $279 million and $274 million, respectively, at September 30, 2022.

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 for which no allowances for credit loss has been recorded were as follows at September 30, 2022 and December 31, 2021, respectively:

Less than 12 months12 months or moreTotal
Fair ValueGross Unrealized LossesFair ValueGross Unrealized LossesFair ValueGross Unrealized Losses
(in millions)
September 30, 2022
U.S. Treasury and other U.S. government corporations and agencies:
U.S. Treasury and agency obligations$146$(6)$380$(52)$526$(58)
Mortgage-backed securities1,114(131)1,802(419)2,916(550)
Tax-exempt municipal securities79(3)625(51)704(54)
Mortgage-backed securities:
Residential127(15)277(63)404(78)
Commercial252(13)1,156(141)1,408(154)
Asset-backed securities598(30)1,226(51)1,824(81)
Corporate debt securities1,909(191)3,484(740)5,393(931)
Total debt securities$4,225$(389)$8,950$(1,517)$13,175$(1,906)
December 31, 2021
U.S. Treasury and other U.S. government corporations and agencies:
U.S. Treasury and agency obligations$201$(3)$355$(7)$556$(10)
Mortgage-backed securities2,082(49)556(20)2,638(69)
Tax-exempt municipal securities68(1)34(1)102(2)
Mortgage-backed securities:
Residential358(6)8—366(6)
Commercial295(4)400(7)695(11)
Asset-backed securities530(3)425(1)955(4)
Corporate debt securities1,456(28)769(31)2,225(59)
Total debt securities$4,990$(94)$2,547$(67)$7,537$(161)

Approximately 95% 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, 2022. 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.

Our unrealized losses from all debt securities were generated from approximately 1,655 positions out of a total of approximately 1,905 positions at September 30, 2022. All issuers of debt securities we own that were trading at an unrealized loss at September 30, 2022 remain current on all contractual payments. After taking into account these

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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, 2022, 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. As such, 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, 2022 and 2021.

The detail of (losses) gains related to investment securities and included within investment income was as follows for the three and nine months ended September 30, 2022 and 2021:

Three months ended September 30,Nine months ended September 30,
2022202120222021
(in millions)(in millions)
Gross gains on investment securities$2$71$41$180
Gross losses on investment securities(52)(1)(58)(1)
Gross gains on equity securities514051104
Gross losses on equity securities—(214)(170)(301)
Net recognized gains (losses) on investment securities$1$(104)$(136)$(18)

The gains and losses related to equity securities for the three and nine months ended September 30, 2022 and 2021 was as follows:

Three months ended September 30,Nine months ended September 30,
2022202120222021
(in millions)(in millions)
Net gains (losses) recognized on equity securities during the period$51$(174)$(119)$(197)
Less: Net gains (losses) recognized on equity securities sold during the period47—(105)—
Unrealized gains (losses) recognized on equity securities still held at the end of the period$4$(174)$(14)$(197)

The contractual maturities of debt securities available for sale at September 30, 2022, 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 CostFair Value
(in millions)
Due within one year$442$438
Due after one year through five years2,8952,682
Due after five years through ten years3,2272,687
Due after ten years1,280994
Mortgage and asset-backed securities7,5486,686
Total debt securities$15,392$13,487

For additional information regarding our investment securities, refer to Note 2 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" in our 2021 Form 10-K.

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5. FAIR VALUE

Financial Assets

The following table summarizes our fair value measurements at September 30, 2022 and December 31, 2021, respectively, for financial assets measured at fair value on a recurring basis:

Fair Value Measurements Using
Fair ValueQuoted Prices in Active Markets (Level 1)Other Observable Inputs (Level 2)Unobservable Inputs (Level 3)
(in millions)
September 30, 2022
Cash equivalents$13,357$13,357$—$—
Debt securities:
U.S. Treasury and other U.S. government corporations and agencies:
U.S. Treasury and agency obligations599—599—
Mortgage-backed securities3,040—3,040—
Tax-exempt municipal securities715—715—
Mortgage-backed securities:
Residential404—404—
Commercial1,408—1,408—
Asset-backed securities1,834—1,834—
Corporate debt securities5,487—5,387100
Total debt securities13,487—13,387100
Common stock1212——
Total invested assets$26,856$13,369$13,387$100
December 31, 2021
Cash equivalents$3,322$3,322$—$—
Debt securities:
U.S. Treasury and other U.S. government corporations and agencies:
U.S. Treasury and agency obligations602—602—
Mortgage-backed securities3,229—3,229—
Tax-exempt municipal securities841—841—
Mortgage-backed securities:
Residential367—367—
Commercial1,410—1,410—
Asset-backed securities1,348—1,348—
Corporate debt securities5,700—5,63268
Total debt securities13,497—13,42968
Common stock475475——
Total invested assets$17,294$3,797$13,429$68

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Our Level 3 assets had a fair value of $100 million at September 30, 2022 , or 0.4% of our total invested assets. During the year ended September 30, 2022, the changes in the fair value of the assets measured using significant unobservable inputs (Level 3) were comprised of the following:

For the nine months ended September 30, 2022
Private Placements
(in millions)
Beginning balance at January 1$68
Total gains or losses:
Realized in earnings—
Unrealized in other comprehensive income(12)
Purchases44
Sales—
Settlements—
Balance at September 30$100

There were no Level 3 assets for the nine months ended September 30, 2021.

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 $9.8 billion at September 30, 2022 and $9.0 billion at December 31, 2021. The fair value of our senior notes debt was $9.0 billion at September 30, 2022 and $10.0 billion at December 31, 2021. The fair value of our senior notes 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. Carrying value approximates fair value for our term loans and commercial paper borrowings. The term loans and commercial paper borrowings were $803 million at September 30, 2022 and $3.5 billion at December 31, 2021.

Put and Call Options Measured at Fair Value

Our put and call options associated with our equity method investments are measured at fair value each period using a Monte Carlo simulation.

The put and call options fair values associated with our Primary Care Organization strategic partnership with WCAS, which are exercisable at a fixed revenue exit multiple and provide a minimum return on WCAS' investment if exercised, are measured at fair value each reporting period. The put and call options fair values were $190 million and $17 million, respectively, at September 30, 2022. The put and call options fair values, derived from the Monte Carlo simulation, were $202 million and $13 million, respectively, at December 31, 2021.

The significant unobservable inputs utilized in these Level 3 fair value measurements (and selected values) include the enterprise value, annualized volatility and credit spread. Enterprise value was derived from a discounted cash flow model, which utilized significant unobservable inputs for long-term revenue, 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.

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September 30, 2022December 31, 2021
Annualized volatility23.4% - 23.5%22.4%
Credit spread1.2% - 1.4%0.9%
Revenue exit multiple1.5x - 2.5x1.5x - 2.5x
Weighted average cost of capital13.0%12.5%
Long term growth rate3.0%3.0%

Other Assets and Liabilities Measured at Fair Value

Certain assets and liabilities are measured at fair value on a non-recurring basis subject to fair value adjustment only in certain circumstances. As disclosed in Note 3, we acquired various health and wellness related businesses during 2022. The net assets acquired and resulting goodwill and other intangible assets were recorded at fair value primarily using Level 3 inputs. The net tangible assets including receivables and accrued liabilities were recorded at their carrying value which approximated their fair value due to their short term nature. The fair value of goodwill and other intangible assets were internally estimated based primarily on the income approach. The income approach estimates fair value based on the present value of cash flow that the assets could be expected to generate in the future. We developed internal estimates for expected cash flows in the present value calculation using inputs and significant assumptions that include historical revenues and earnings, revenue growth rates, the amount and timing of future cash flows, discount rates, contributory asset charges and future tax rates, among others. The excess purchase price over the fair value of assets and liabilities acquired is recorded as goodwill.

As disclosed in Note 3, we completed the sale of KAH Hospice on August 11, 2022. The carrying value of the assets and liabilities of KAH Hospice disposed approximates fair value. The amount of goodwill included in the carrying value is based on the relative fair value of the Home Solutions reporting unit included within the Healthcare Services segment.

Other than the assets and liabilities acquired and disposed during 2022, there were no other material assets or liabilities measured at fair value on a recurring or nonrecurring basis during 2022.

For additional information regarding our fair value measurements, refer to Note 2 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" in our 2021 Form 10-K.

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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. The accompanying condensed consolidated balance sheets include the following amounts associated with Medicare Part D at September 30, 2022 and December 31, 2021. 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. For additional information regarding our prescription drug benefits coverage in accordance with Medicare Part D, refer to Note 2 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" in our 2021 Form 10-K.

September 30, 2022December 31, 2021
Risk Corridor SettlementCMS Subsidies/ DiscountsRisk Corridor SettlementCMS Subsidies/ Discounts
(in millions)
Other current assets$157$775$363$1,894
Trade accounts payable and accrued expenses(94)(3,074)(68)(466)
Net current asset (liability)63(2,299)2951,428
Other long-term assets234—5—
Other long-term liabilities(188)—(194)—
Net long-term asset (liability)46—(189)—
Total net asset (liability)$109$(2,299)$106$1,428

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of goodwill for our reportable segments for the nine months ended September 30, 2022 were as follows:

RetailGroup and SpecialtyHealthcare ServicesTotal
(in millions)
Balance at January 1, 2022$1,933$261$8,898$11,092
Acquisitions183—152335
Dispositions——(2,331)(2,331)
Balance at September 30, 2022$2,116$261$6,719$9,096

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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, 2022 and December 31, 2021:

September 30, 2022December 31, 2021
Weighted Average LifeCostAccumulated AmortizationNetCostAccumulated AmortizationNet
($ in millions)
Other intangible assets:
Certificates of needIndefinite$1,138$—$1,138$1,771$—$1,771
Medicare licensesIndefinite292—292522—522
Customer contracts/ relationships9.4 years929659270883620263
Trade names and technology6.7 years142104381609763
Provider contracts11.6 years736112725715
Noncompetes and other8.4 years85384735305
Total other intangible assets9.1 years$2,659$862$1,797$3,443$804$2,639

For the three months ended September 30, 2022 and 2021, amortization expense for other intangible assets was approximately $25 million and $17 million, respectively. For the nine months ended September 30, 2022 and 2021, amortization expense for other intangible assets was approximately $61 million and $47 million, respectively. The following table presents our estimate of amortization expense remaining for 2022 and each of the five next succeeding years at September 30, 2022:

(in millions)
For the years ending December 31,
2022$19
202363
202455
202553
202640
202731

For additional information regarding our goodwill and intangible assets, refer to Note 2 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" in our 2021 Form 10-K.

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8. BENEFITS PAYABLE

On a consolidated and segment basis, activity in benefits payable was as follows for the nine months ended September 30, 2022 and 2021:

For the nine months ended September 30, 2022
ConsolidatedRetailGroup & Specialty
(in millions)
Balances, beginning of period$8,289$7,675$614
Acquisitions———
Incurred related to:
Current year57,51254,7313,168
Prior years(404)(379)(25)
Total incurred57,10854,3523,143
Paid related to:
Current year(48,835)(46,608)(2,614)
Prior years(7,325)(6,757)(568)
Total paid(56,160)(53,365)(3,182)
Balances, end of period$9,237$8,662$575
For the nine months ended September 30, 2021
ConsolidatedRetailGroup & Specialty
(in millions)
Balances, beginning of period$8,143$7,428$715
Acquisitions4242—
Incurred related to:
Current year52,52949,2473,769
Prior years(768)(673)(95)
Total incurred51,76148,5743,674
Paid related to:
Current year(44,370)(41,721)(3,136)
Prior years(6,818)(6,216)(602)
Total paid(51,188)(47,937)(3,738)
Balances, end of period$8,758$8,107$651

The total estimate of benefits payable for claims incurred but not reported, or IBNR, is included within the net incurred claims amounts. At September 30, 2022, benefits payable for our Retail segment included IBNR of approximately $5.2 billion, primarily associated with claims incurred in 2022. At September 30, 2022, benefits payable for our Group & Specialty segment included IBNR of approximately $484 million, primarily associated with claims incurred in 2022.

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. For additional information regarding our benefits payable and benefits expense recognition, refer to Note 2 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" in our 2021 Form 10-K.

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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, 2022 and 2021:

Three months ended September 30,Nine months ended September 30,
2022202120222021
(dollars in millions, except per common share results; number of shares in thousands)
Net income available for common stockholders$1,195$1,531$2,821$2,947
Weighted average outstanding shares of common stock used to compute basic earnings per common share126,572128,518126,678128,714
Dilutive effect of:
Employee stock options61685065
Restricted stock723669577619
Shares used to compute diluted earnings per common share127,356129,255127,305129,398
Basic earnings per common share$9.45$11.91$22.27$22.90
Diluted earnings per common share$9.39$11.84$22.16$22.77
Number of antidilutive stock options and restricted stock excluded from computation78136267256

For additional information regarding earnings per common share, refer to Note 2 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" in our 2021 Form 10-K.

10. STOCKHOLDERS’ EQUITY

Dividends

The following table provides details of dividend payments, excluding dividend equivalent rights for unvested stock awards, during 2022 under our Board approved quarterly cash dividend policy:

Record DatePayment DateAmount per ShareTotal Amount
(in millions)
12/31/20211/28/2022$0.7000$90
3/31/20224/29/2022$0.7875$100
6/30/20227/29/2022$0.7875$100
9/30/202210/28/2022$0.7875$100

In October 2022, the Board declared a cash dividend of $0.7875 per share payable on January 27, 2023 to stockholders of record as of the close of business on December 30, 2022. Declaration and payment of future quarterly dividends are at the discretion of our Board and may be adjusted as business needs or market conditions change.

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

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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 January 11, 2022, we entered into separate accelerated stock repurchase agreements, the January 2022 ASR Agreements, with Mizuho Markets Americas LLC, or Mizuho, and Wells Fargo Bank, or Wells Fargo, to repurchase $1 billion of our common stock as part of the $3 billion repurchase program authorized by the Board of Directors on February 18, 2021. On January 12, 2022, in accordance with the January 2022 ASR Agreements, we made a payment of $1 billion ($500 million to Mizuho and $500 million to Wells Fargo) and received an initial delivery of 2.2 million shares of our common stock (1.08 million shares each from Mizuho and Wells Fargo). In January 2022, we recorded the payments to Mizuho and Wells Fargo as a reduction to stockholders’ equity, consisting of an $850 million increase in treasury stock, which reflects the value of the initial 2.2 million shares received upon initial settlement, and a $150 million decrease in capital in excess of par value, which reflects the value of stock held back by Mizuho and Wells Fargo pending final settlement of the January 2022 ASR Agreements. Upon final settlement of the January 2022 ASR Agreements with Mizuho and Wells Fargo on March 29, 2022 and March 30, 2022, respectively, we received an additional 0.1 million shares and 0.1 million shares, respectively, as determined by the average daily volume weighted-averages share price of our common stock during the term of the agreement, less a discount, of $410.96 and $411.66, respectively, bringing the total shares received under the January 2022 ASR Agreements to 2.4 million. In addition, upon settlement we reclassified the $150 million value of stock initially held back by Mizuho and Wells Fargo from capital in excess of par value to treasury stock.

Our remaining repurchase authorization was $2 billion as of November 1, 2022.

In connection with employee stock plans, we acquired 0.07 million common shares for $32 million and 0.09 million common shares for $36 million during the nine months ended September 30, 2022 and 2021, respectively.

For additional information regarding our stockholders' equity, refer to Note 16 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" in our 2021 Form 10-K.

11. INCOME TAXES

The effective income tax rate was 8.2% and 22.5% for the three and nine months ended September 30, 2022, respectively, and 7.2% and 15.4% for the three and nine months ended September 30, 2021, respectively. The year-over-year increase in the effective income tax rates is primarily due to the impact of the August 2021 acquisition of the remaining 60% interest in KAH. In that period, we recognized a $1.1 billion mark-to-market gain related to our previously held 40% investment in KAH. This unrealized gain was not taxable, thereby reducing the effective income tax rate for the three and nine months ended September 30, 2021. The increase is partially offset by the August 2022 disposition of our 60% interest in KAH Hospice, which resulted in an increase to our tax basis in both the shares sold and the shares retained, thereby reducing the effective income tax rate for the three and nine months ended September 30, 2022.

On August 16, 2022, the Inflation Reduction Act was signed into law. The Inflation Reduction Act includes various tax provisions, which are effective for the tax years beginning on or after January 1, 2023. We do not expect these tax changes to have a material impact on our consolidated financial statements.

For additional information regarding income taxes, refer to Note 2 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" in our 2021 Form 10-K.

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12. DEBT

The carrying value of debt outstanding, net of unamortized debt issuance costs, was as follows at September 30, 2022 and December 31, 2021:

September 30, 2022December 31, 2021
(in millions)
Short-term debt:
Commercial paper$303$955
Senior notes:
$1.5 billion, 0.650% due August 3, 20231,496—
$600 million, 3.150% due December 1, 2022600599
$400 million, 2.900% due December 15, 2022400399
Total senior notes2,496998
Total short-term debt$2,799$1,953
Long-term debt:
Senior notes:
$1.5 billion, 0.650% due August 3, 2023$—$1,492
$600 million, 3.850% due October 1, 2024599598
$600 million, 4.500% due April 1, 2025597596
$750 million, 1.350% due February 3, 2027744742
$600 million, 3.950% due March 15, 2027597596
$750 million, 3.700% due March 23, 2029742—
$500 million, 3.125% due August 15, 2029496496
$500 million, 4.875% due April 1, 2030495495
$750 million, 2.150% due February 3, 2032742741
$250 million, 8.150% due June 15, 2038261261
$400 million, 4.625% due December 1, 2042396396
$750 million, 4.950% due October 1, 2044740740
$400 million, 4.800% due March 15, 2047396395
$500 million, 3.950% due August 15, 2049493493
Total senior notes7,2988,041
Term loans:
Term loan, due October 29, 2023—2,000
Delayed draw term loan, due May 28, 2024500500
Total term loans5002,500
Total long-term debt$7,798$10,541

Senior Notes

In March 2022, we issued $750 million of 3.700% unsecured senior notes due March 23, 2029. Our net proceeds, reduced for the underwriters' discounts and commissions paid, were $744 million. We used the net proceeds for general corporate purposes, which included the repayment of existing indebtedness, including borrowings under our commercial paper program.

For additional information regarding our Senior Notes, refer to Note 13 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" in our 2021 Form 10-K.

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October 2021 Term Loan Agreement

On August 16, 2022, we repaid the $2.0 billion October 2021 Term Loan Agreement without a prepayment penalty due.

For additional information regarding our October 2021 Term Loan Agreement, refer to Note 3 to the unaudited Consolidated Financial Statements included in Part I, Item 1, "Financial Statements" of this Form 10-Q and Note 13 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" in our 2021 Form 10-K.

Revolving Credit Agreements

In June 2022, we entered into a 364-day $1.5 billion unsecured revolving credit agreement (replacing the 364-day $1.5 billion unsecured revolving credit agreement entered into in June 2021, which expired in accordance with its terms). Under the 364-day revolving 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 Term SOFR or the base rate plus a spread. 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 Term SOFR, at our option.

Our credit agreements contain customary restrictive covenants and a financial covenant regarding maximum debt to capitalization of 60%, as well as customary events of default. We are in compliance with this financial covenant, with actual debt to capitalization of 39.4% as measured in accordance with the revolving credit agreements as of September 30, 2022.

At September 30, 2022, we had no borrowings and approximately $59 million of letters of credit outstanding under the revolving credit agreements, including those of KAH. Accordingly, as of September 30, 2022, we had $2.4 billion of remaining borrowing capacity under the 5-year revolving credit agreement and $1.5 billion of remaining borrowing capacity under the 364-day revolving credit agreement (which excludes the uncommitted $750 million of incremental loan facilities), none of which would be restricted by our financial covenant compliance requirement.

For additional information regarding our Revolving Credit Agreements, refer to Note 13 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" in our 2021 Form 10-K.

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. On February 10, 2022, we increased the size of our commercial paper program to permit the issuance of commercial paper notes in an aggregate principal amount not to exceed $4 billion compared to the prior amount 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, 2022 was $1.5 billion, with $303 million outstanding at September 30, 2022 compared to $955 million outstanding at December 31, 2021. The outstanding commercial paper at September 30, 2022 had a weighted average annual interest rate of 3.23%.

Other Short-term Borrowings

We are a member, through one subsidiary, of the Federal Home Loan Bank of Cincinnati, or FHLB. As a member we have the ability to obtain short-term cash advances, subject to certain minimum collateral requirements. At September 30, 2022 we had no outstanding short-term FHLB borrowings.

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13. COMMITMENTS, GUARANTEES AND CONTINGENCIES

Government Contracts

Our Medicare products, which accounted for approximately 81% of our total premiums and services revenue for the nine months ended September 30, 2022, primarily 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 2023 and all of our product offerings 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, or BBA, and the Benefits Improvement and Protection Act of 2000, or 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 from providers and submit the necessary diagnosis code information 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 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 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

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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 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 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.

Our state-based Medicaid business, which accounted for approximately 6% of our total premiums and services revenue for the nine months ended September 30, 2022 primarily consisted of serving members enrolled in Medicaid, and in certain circumstances members who qualify for both Medicaid and Medicare, under contracts with various states.

At September 30, 2022, our military services business, which accounted for approximately 1% of our total premiums and services revenue for the nine months ended September 30, 2022, primarily consisted of the TRICARE T2017 East Region contract. The T2017 East Region contract comprising 32 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.

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.

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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 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 have substantially completed discovery with the relator who has pursued the matter on behalf of the United States following unsealing. On March 31, 2022, the Court denied the parties' Motions for Summary Judgement. We take seriously our obligations to comply with applicable CMS requirements and actuarial standards of practice, and continue to vigorously defend against these allegations.

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.

As a government contractor, we may also be subject to false claims litigation, such as qui tam lawsuits brought by individuals who seek to sue on behalf of the government, alleging that the government contractor submitted false claims to the government or related overpayments from 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 nonperformance of

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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.

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.

14. SEGMENT INFORMATION

We manage our business with three reportable segments: Retail, Group and Specialty, and Healthcare Services. 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, including Temporary Assistance for Needy Families, or TANF, dual eligible demonstration, 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 pharmacy, provider, and home services, along with other services and capabilities to promote wellness and advance population health. The segment also includes the company's strategic partnerships with WCAS to develop and operate senior-focused, payor-agnostic, primary care centers. Services offered by this segment are designed to enhance the overall healthcare experience. These services may lead to lower utilization associated with improved member health and/or lower drug costs.

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

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government (subsidies), plus any associated administrative fees. Services revenue 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 revenue 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 revenue associated with non-risk-based agreements are presented net of associated healthcare costs.

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 $5.4 billion and $5.0 billion for the three months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022 and 2021 these amounts were $14.2 billion and $12.9 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 $30 million and $28 million for the three months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022 and 2021, the amount of this expense was $89 million and $80 million, respectively.

Other than those described previously, the accounting policies of each segment are the same. For additional information regarding our accounting policies refer to Note 2 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" in our 2021 Form 10-K. Transactions between reportable segments primarily consist of sales of services rendered by our Healthcare Services segment, primarily pharmacy, provider, and home solutions 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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Our segment results were as follows for the three and nine months ended September 30, 2022 and 2021:

RetailGroup and SpecialtyHealthcare ServicesEliminations/ CorporateConsolidated
Three months ended September 30, 2022(in millions)
External revenues
Premiums:
Individual Medicare Advantage$16,007$—$—$—$16,007
Group Medicare Advantage1,792———1,792
Medicare stand-alone PDP534———534
Total Medicare18,333———18,333
Fully-insured188912——1,100
Specialty—425——425
Medicaid and other1,610———1,610
Total premiums20,1311,337——21,468
Services revenue:
Home solutions——519—519
Provider——159—159
ASO and other10197——207
Pharmacy——274—274
Total services revenue10197952—1,159
Total external revenues20,1411,534952—22,627
Intersegment revenues
Services—145,466(5,480)—
Products——2,459(2,459)—
Total intersegment revenues—147,925(7,939)—
Investment income4833118172
Total revenues20,1891,5518,880(7,821)22,799
Operating expenses:
Benefits17,4201,052—(88)18,384
Operating costs1,9034278,435(7,704)3,061
Depreciation and amortization1372350(28)182
Total operating expenses19,4601,5028,485(7,820)21,627
Income (loss) from operations72949395(1)1,172
Gain on sale of KAH Hospice——(240)—(240)
Interest expense———102102
Other expense, net———1313
Income (loss) before income taxes and equity in net earnings72949635(116)1,297
Equity in net earnings (losses)8—(5)—3
Segment earnings (loss)$737$49$630$(116)$1,300
Net loss attributable to noncontrolling interests2———2
Segment earnings (loss) attributable to Humana$739$49$630$(116)$1,302

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RetailGroup and SpecialtyHealthcare ServicesEliminations/ CorporateConsolidated
Three months ended September 30, 2021(in millions)
External revenues
Premiums:
Individual Medicare Advantage$14,642$—$—$—$14,642
Group Medicare Advantage1,737———1,737
Medicare stand-alone PDP541———541
Total Medicare16,920———16,920
Fully-insured1851,052——1,237
Specialty—432——432
Medicaid and other1,296———1,296
Total premiums18,4011,484——19,885
Services revenue:
Home solutions——374—374
Provider——110—110
ASO and other—198——198
Pharmacy——163—163
Total services revenue—198647—845
Total external revenues18,4011,682647—20,730
Intersegment revenues
Services1105,087(5,098)—
Products——2,303(2,303)—
Total intersegment revenues1107,390(7,401)—
Investment income (loss)3831(75)(33)
Total revenues18,4401,6958,038(7,476)20,697
Operating expenses:
Benefits16,2071,282—(173)17,316
Operating costs1,6694217,634(7,121)2,603
Depreciation and amortization1082046(24)150
Total operating expenses17,9841,7237,680(7,318)20,069
Income (loss) from operations456(28)358(158)628
Interest expense———8888
Other income, net———(1,096)(1,096)
Income (loss) before income taxes and equity in net earnings456(28)3588501,636
Equity in net earnings——15—15
Segment earnings (loss)$456$(28)$373$850$1,651

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RetailGroup and SpecialtyHealthcare ServicesEliminations/ CorporateConsolidated
Nine months ended September 30, 2022(in millions)
External revenues
Premiums:
Individual Medicare Advantage$49,751$—$—$—$49,751
Group Medicare Advantage5,524———5,524
Medicare stand-alone PDP1,779———1,779
Total Medicare57,054———57,054
Fully-insured5552,827——3,382
Specialty—1,281——1,281
Medicaid and other4,720———4,720
Total premiums62,3294,108——66,437
Services revenue:
Home solutions——1,997—1,997
Provider services——409—409
ASO and other24588——612
Pharmacy solutions——754—754
Total services revenue245883,160—3,772
Total external revenues62,3534,6963,160—70,209
Intersegment revenues
Services—4215,970(16,012)—
Products——7,394(7,394)—
Total intersegment revenues—4223,364(23,406)—
Investment income13310673222
Total revenues62,4864,74826,530(23,333)70,431
Operating expenses:
Benefits54,3523,143—(387)57,108
Operating costs5,3091,25525,089(22,533)9,120
Depreciation and amortization39168153(85)527
Total operating expenses60,0524,46625,242(23,005)66,755
Income (loss) from operations2,4342821,288(328)3,676
Gain on sale of KAH Hospice——(240)—(240)
Interest expense———293293
Other income, net———(16)(16)
Income (loss) before income taxes and equity in net earnings2,4342821,528(605)3,639
Equity in net earnings (losses)16—(15)—1
Segment earnings (loss)$2,450$282$1,513$(605)$3,640
Net loss (income) attributable to noncontrolling interests2—(1)—1
Segment earnings (loss) attributable to Humana$2,452$282$1,512$(605)$3,641

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RetailGroup and SpecialtyHealthcare ServicesEliminations/ CorporateConsolidated
Nine months ended September 30, 2021(in millions)
External Revenues
Premiums:
Individual Medicare Advantage$44,042$—$—$—$44,042
Group Medicare Advantage5,267———5,267
Medicare stand-alone PDP1,867———1,867
Total Medicare51,176———51,176
Fully-insured5453,229——3,774
Specialty—1,298——1,298
Medicaid and other3,739———3,739
Total premiums55,4604,527——59,987
Services revenue:
Home solutions——423—423
Provider services——298—298
ASO and other17582——599
Pharmacy solutions——482—482
Total services revenue175821,203—1,802
Total external revenues55,4775,1091,203—61,789
Intersegment revenues
Services13014,838(14,869)—
Products——6,716(6,716)—
Total intersegment revenues13021,554(21,585)—
Investment income15511352221
Total revenues55,6335,15022,760(21,533)62,010
Operating expenses:
Benefits48,5743,674—(487)51,761
Operating costs4,6531,22721,749(20,903)6,726
Depreciation and amortization32063127(74)436
Total operating expenses53,5474,96421,876(21,464)58,923
Income (loss) from operations2,086186884(69)3,087
Interest expense———235235
Other income, net———(562)(562)
Income before income taxes and equity in net earnings2,0861868842583,414
Equity in net earnings——69—69
Segment earnings$2,086$186$953$258$3,483

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Next: Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF