# Humana Inc: Form 10-Q for the period ended Mar 31, 2020

- Company: [Humana Inc](/companies/hum.md) (CIK 49071)
- Form: 10-Q
- Filed: 2020-04-29
- Accepted by EDGAR: Apr 29, 2020, 15:17 ET
- Period: 2020-03-31
- Accession: 0000049071-20-000083
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/49071/000004907120000083/hum-20200331x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/49071/000004907120000083/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-01-01 to 2020-03-31 | $18.93bn | us-gaap:Revenues |
| Selling, general and administrative | 3 months, 2020-01-01 to 2020-03-31 | $2.12bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-01-01 to 2020-03-31 | $1.07bn | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-01-01 to 2020-03-31 | $60.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-01-01 to 2020-03-31 | $252.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-01-01 to 2020-03-31 | $473.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-01-01 to 2020-03-31 | $3.56 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-01-01 to 2020-03-31 | $3.58 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-01-01 to 2020-03-31 | 132,811,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2020-01-01 to 2020-03-31 | $474.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2020-01-01 to 2020-03-31 | $192.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2020-01-01 to 2020-03-31 | $73.0m | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2020-01-01 to 2020-03-31 | $17.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-03-31 | $6.05bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-03-31 | $24.55bn | us-gaap:AssetsCurrent |
| Total assets | at 2020-03-31 | $34.63bn | us-gaap:Assets |
| Current liabilities | at 2020-03-31 | $14.83bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-03-31 | $22.28bn | us-gaap:Liabilities |
| Long-term debt | at 2020-03-31 | $6.06bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2020-03-31 | $1.90bn | us-gaap:DebtCurrent |
| Shareholders' equity | at 2020-03-31 | $12.36bn | us-gaap:StockholdersEquity |
| Shares outstanding | at 2020-03-31 | 132,206,069 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 54,993 characters.

### FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

### Executive Overview

### General

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

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

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

### COVID-19

We moved quickly during the first quarter of 2020 to ease some of the burden associated with the outbreak of the novel coronavirus, or COVID-19. We have taken several proactive steps to be a part of the solution for our members, providers, and employees, including:

- waiving costs associated with the diagnostic testing, medical costs related to the treatment of COVID-19 as well as FDA-approved medications or vaccines when they become available;
- lifting administrative requirements including modifying prior authorization and referral requirements;
- expanding access to telehealth services to help reduce the risk of infection and spread, waiving member cost share for all telehealth services delivered by participating/in-network providers and accepting audio-only telephone visits for reimbursement;
- allowing early refills on prescription medicines to provide for member’s extended supply needs given stay-at-home and other restrictions on movement;
- simplifying and expediting claims processing for providers to promote the speed of reimbursement payments and help ease their financial concerns beginning in April 2020;
- transitioning a significant subset of our employee population to work-at-home and providing additional support and benefits.

The emergence of stay-at-home and physical distancing orders and other restrictions on movement and economic activity intended to reduce the spread of COVID-19, during the second half of March 2020 has impacted our business. During this short period of time, we experienced lower hospital admissions and utilization as members and providers began to defer non-essential procedures. We also saw an increase in pharmacy costs as a result of us allowing early prescription refills to permit members to prepare for extended supply needs as well as COVID-19 specific administrative costs, including a $50 million contribution to the Humana Foundation to promote its COVID-19 relief efforts in the communities served by Humana. Taken together, the net impact of COVID-19 was not material to the results of our operations during the first quarter of 2020.

We significantly increased our liquidity position during March 2020 with the issuance of $1.1 billion in senior notes and a $1 billion draw under the prior one-year term loan bank commitment. At March 31, 2020, we held $2.4 billion of cash and short-term investments at our parent company and access to an additional $2.0 billion under our credit agreement.

For the remainder of 2020, we have seen the trend of lower utilization persist while stay-at-home and other restrictions remain in place into the second quarter, and expect a period of recovery in utilization rates in the coming weeks and months as previously deferred non-essential procedures resume with a back log of demand and COVID-19 testing increases. A number of significant variables and uncertainties will impact these trends including, among others, the severity and duration of the pandemic, continued actions taken to mitigate the spread of COVID-19 and in turn, relax those restrictions, the timing and degree in resumption of demand for deferred health care services, the ability of our commercial members to pay their premium, the nature and level of diagnostic testing, the cost and timing of new therapeutic treatments and vaccines all of which are difficult to predict. As such, our response to this global health crisis and the subsequent recovery will continue to evolve over the coming months to support the needs of our stakeholders.

### Recent Transactions

In the first quarter of 2020, we purchased privately held Enclara, one of the nation’s largest hospice pharmacy and benefit management providers, for cash consideration of approximately $709 million, net of cash received.

We have entered into a strategic partnership with WCAS to accelerate the expansion of our primary care model. The WCAS partnership is expected to open approximately 50 payor-agnostic, senior-focused primary care centers over 3 years beginning in 2020.

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

### Business Segments

We manage our business with three reportable segments: Retail, Group and Specialty, and Healthcare Services. The reportable segments are based on a combination of the type of health plan customer and adjacent businesses centered on well-being solutions for our health plans and other customers, as described below. These segment groupings are consistent with information used by our Chief Executive Officer, the Chief Operating Decision Maker, to assess performance and allocate resources.

The Retail segment consists of Medicare benefits, marketed to individuals or directly via group Medicare accounts. In addition, the Retail segment also includes our contract with CMS to administer the Limited Income Newly Eligible Transition, or LI-NET, prescription drug plan program and contracts with various states to provide Medicaid, dual eligible, and Long-Term Support Services benefits, which we refer to collectively as our state-based contracts. The Group and Specialty segment consists of employer group commercial fully-insured medical and specialty health insurance benefits marketed to individuals and employer groups, including dental, vision, and other supplemental health benefits, as well as administrative services only, or ASO products. In addition, our Group and Specialty segment includes our military services business, primarily our TRICARE T2017 East Region contract. The Healthcare Services segment includes our services offered to our health plan members as well as to third parties, including pharmacy solutions, provider services, and clinical care service, such as home health and other services and capabilities to promote wellness and advance population health, including our minority investment in Kindred at Home and the strategic partnership with WCAS to develop and operate senior-focused, payor-agnostic, primary care centers.

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

### Seasonality

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

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

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

### 2020 Highlights

- Our strategy offers our members affordable health care combined with a positive consumer experience in growing markets. At the core of this strategy is our integrated care delivery model, which unites quality care, high member engagement, and sophisticated data analytics. Our approach to primary, physician-directed care for our members aims to provide quality care that is consistent, integrated, cost-effective, and member-focused, provided by both employed physicians and physicians with network contract arrangements. The model is designed to improve health outcomes and affordability for individuals and for the health system as a whole, while offering our members a simple, seamless healthcare experience. We believe this strategy is positioning us for long-term growth in both membership and earnings. We offer providers a continuum of opportunities to increase the integration of care and offer assistance to providers in transitioning from a fee-for-service to a value-based arrangement. These include performance bonuses, shared savings and shared risk relationships. At March 31, 2020, approximately 2,514,000 members, or 66%, of our individual Medicare Advantage members were in value-based relationships under our integrated care delivery model, as compared to 2,223,300 members, or 65%, at March 31, 2019. Medicare Advantage and dual demonstration program membership enrolled in a Humana chronic care management program was 899,700 at March 31, 2020, an increase of 7.8% from 834,700 at March 31, 2019. These members may not be unique to each program since members have

the ability to enroll in multiple programs. The increase is driven by our improved process for identifying and enrolling members in the appropriate program at the right time, coupled with growth in Special Needs Plans, or SNP, membership.

- Net income was $473 million, or $3.56 per diluted common share, in the 2020 quarter compared to $566 million, or $4.16 per diluted common share, in the 2019 quarter. The quarter over quarter comparisons were significantly impacted by the put/call valuation adjustments associated with certain equity method investments which reduced earnings $297 million in the 2020 quarter compared to $39 million in the 2019 quarter. Excluding the impact of the put/call valuation adjustments, the favorable comparison was driven by the strong performance of our Medicare Advantage business and Healthcare Services segment in the 2020 quarter partially offset by the expected lower contribution from our Group and Specialty segment. These changes were further favorably impacted by a lower number of shares used to compute dilutive earnings per common share, primarily reflecting share repurchases completed during 2019, partially offset by a higher tax rate resulting from the return of the non-deductible health insurance industry fee in 2020.
- Contributing to our Retail segment revenue growth was our individual Medicare Advantage membership, which increased 404,800 members, or 11.8%, from March 31, 2019 to March 31, 2020.
- On April 6, 2020, CMS published its Announcement of Calendar Year 2021 Medicare Advantage Capitation Rates and Part C and Part D Payment Policies (the Final Rate Notice). We expect the Final Rate Notice to result in a 1.20% rate increase for our non end stage renal disease (ESRD) Medicare Advantage business, excluding the impact of Employer Group Waiver Plan (EGWP) funding changes. Our 1.20% rate increase compares to CMS’ estimate for the sector of 1.66% on a comparable basis, with the variance primarily driven by county rebasing and our geographic footprint. CMS also establishes separate rates of payment for ESRD beneficiaries enrolled in Medicare Advantage plans. We expect the Final Rate Notice to result in a 3.7% rate increase in 2021 for ESRD beneficiaries. Our estimate of 3.7% is slightly higher than CMS’ 3.6% which is also impacted by our geographic footprint.
- Our operating cash flows for the 2020 quarter decreased from the 2019 quarter due to the timing of working capital items, including the impact of early prescription refills permitting members to prepare for extended supply needs in response to COVID-19, partially offset by higher income from operations.

### Health Care Reform

The Health Care Reform Law enacted significant reforms to various aspects of the U.S. health insurance industry. Certain significant provisions of the Health Care Reform Law include, among others, mandated coverage requirements, mandated benefits and guarantee issuance associated with commercial medical insurance, rebates to policyholders based on minimum benefit ratios, adjustments to Medicare Advantage premiums, the establishment of federally facilitated or state-based exchanges coupled with programs designed to spread risk among insurers, and the introduction of plan designs based on set actuarial values. In addition, the Health Care Reform Law established insurance industry assessments, including an annual health insurance industry fee. The annual health insurance industry fee, which was suspended in 2019, but has resumed for calendar year 2020, is not deductible for income tax purposes and significantly increases our effective tax rate. We expect to pay the federal government $1.2 billion in September 2020 for this fee. Under current law, the health industry fee will be permanently repealed beginning in calendar year 2021.

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

We intend for the discussion of our financial condition and results of operations that follows to assist in the understanding of our financial statements and related changes in certain key items in those financial statements from year to year, including the primary factors that accounted for those changes. Transactions between reportable segments primarily consist of sales of services rendered by our Healthcare Services segment, primarily pharmacy, provider, and clinical care services, to our Retail and Group and Specialty segment customers and are described in Note 14 to the condensed consolidated financial statements included in this report.

### Comparison of Results of Operations for 2020 and 2019

The following discussion primarily deals with our results of operations for the three months ended March 31, 2020, or the 2020 quarter, and the three months ended March 31, 2019, or the 2019 quarter.

### Consolidated

*(dollars in millions, except per common share results)*

| Revenues: Premiums: | For the three months ended March 31, 2020 | 2019 | Change Dollars | Percentage |
| --- | ---: | ---: | ---: | ---: |
| Retail | $16,704 | $13,967 | $2,737 | 19.6% |
| Group and Specialty | 1,658 | 1,684 | (26) | (1.5)% |
| Total premiums | 18,362 | 15,651 | 2,711 | 17.3% |
| Services: |  |  |  |  |
| Retail | 4 | 5 | (1) | (20.0)% |
| Group and Specialty | 195 | 194 | 1 | 0.5% |
| Healthcare Services | 225 | 156 | 69 | 44.2% |
| Total services | 424 | 355 | 69 | 19.4% |
| Investment income | 149 | 101 | 48 | 47.5% |
| Total revenues | 18,935 | 16,107 | 2,828 | 17.6% |
| Operating expenses: |  |  |  |  |
| Benefits | 15,629 | 13,493 | 2,136 | 15.8% |
| Operating costs | 2,117 | 1,660 | 457 | 27.5% |
| Depreciation and amortization | 115 | 107 | 8 | 7.5% |
| Total operating expenses | 17,861 | 15,260 | 2,601 | 17.0% |
| Income from operations | 1,074 | 847 | 227 | 26.8% |
| Interest expense | 60 | 62 | (2) | (3.2)% |
| Other expense, net | 297 | 39 | 258 | 661.5% |
| Income before income taxes and equity in net earnings | 717 | 746 | (29) | (3.9)% |
| Provision for income taxes | 252 | 183 | 69 | 37.7% |
| Equity in net earnings | 8 | 3 | 5 | 166.7% |
| Net income | $473 | $566 | $(93) | (16.4)% |
| Diluted earnings per common share | $3.56 | $4.16 | $(0.60) | (14.4)% |
| Benefit ratio (a) | 85.1% | 86.2% |  | (1.1)% |
| Operating cost ratio (b) | 11.3% | 10.4% |  | 0.9% |
| Effective tax rate | 34.8% | 24.4% |  | 10.4% |

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

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

#### Summary

Net income was $473 million, or $3.56 per diluted common share, in the 2020 quarter compared to $566 million, or $4.16 per diluted common share, in the 2019 quarter. The quarter over quarter comparisons were significantly impacted by the put/call valuation adjustments associated with certain equity method investments which reduced earnings $297 million in the 2020 quarter compared to $39 million in the 2019 quarter. Excluding the impact of the put/call valuation adjustments, the favorable comparison was driven by the strong performance of our Retail and Healthcare Services segments partially offset by the expected lower contribution from our Group and Specialty segment as more fully described in the detailed segment results discussion that follows. These changes were further favorably impacted by a lower number of shares used to compute dilutive earnings per common share, primarily reflecting share repurchases completed during 2019, partially offset by a higher tax rate resulting from the return of the non-deductible health insurance industry fee in 2020.

#### Premiums Revenue

Consolidated premiums increased $2.7 billion, or 17.3%, from $15.7 billion for the 2019 quarter to $18.4 billion for the 2020 quarter primarily due to higher premiums in the Retail segment, mainly resulting from growth in our Medicare Advantage and state-based contract businesses, partially offset by the impact of declining stand-alone PDP membership as more fully described in the detailed segment results discussion that follows.

#### Services Revenue

Consolidated services revenue increased $69 million, or 19.4%, from the 2019 quarter to $424 million for the 2020 quarter primarily due to an increase in services revenue in the Healthcare Services segment associated with higher external pharmacy revenues resulting from the Enclara acquisition in the 2020 quarter.

#### Investment Income

Investment income totaled $149 million for the 2020 quarter, increasing $48 million, or 47.5%, from $101 million for the 2019 quarter primarily reflecting higher realized capital gains.

#### Benefits Expense

Consolidated benefits expense was $15.6 billion for the 2020 quarter, an increase of $2.1 billion from the 2019 quarter, corresponding with an increase in Retail segment premium growth. The consolidated benefit ratio for the 2020 quarter of 85.1% decreased 110 basis points from 86.2% in the 2019 quarter primarily due to the lower benefit ratio in the Retail segment partially offset by a higher benefit ratio in the Group and Specialty segment as more fully described in the detailed segment results that follows. Both segments’ benefit ratios were impacted favorably by the reinstatement of the non-deductible health insurance industry fee in 2020 which was contemplated in the pricing and benefit design of our products and unfavorably by the impact of weekday seasonality including the impact of a leap year in the 2020 quarter.

The favorable prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 150 basis points in the 2020 quarter versus approximately 170 basis points in the 2019 quarter.

#### Operating Costs

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

Consolidated operating costs increased $457 million, or 27.5%, during the 2020 quarter compared to the 2019 quarter. The consolidated operating cost ratio for the 2020 quarter of 11.3% increased 90 basis points from 10.4% in the 2019 quarter primarily due to the reinstatement of the non-deductible health insurance industry fee in 2020, and COVID-19 related costs, including a $50 million contribution to the Humana Foundation to promote its coronavirus relief efforts in the communities served by Humana. These increases were partially offset by scale efficiencies associated with growth in our Medicare Advantage membership and significant operating cost efficiencies in the 2020 quarter driven by previously disclosed productivity initiatives. The non-deductible health insurance industry fee impacted the operating cost ratio by 160 basis points in the 2020 quarter.

#### Depreciation and Amortization

Depreciation and amortization for the 2020 quarter totaled $115 million compared to $107 million for the 2019 quarter.

#### Interest Expense

Interest expense for the 2020 quarter of $60 million decreased $2 million, compared to $62 million for the 2019 quarter.

#### Income Taxes

The effective income tax rate was 34.8% for the three months ended March 31, 2020, compared to 24.4% for the three months ended March 31, 2019, primarily due to the reinstatement of the non-deductible health insurance industry fee in 2020.

### Retail Segment

| Membership: Medical membership: | March 31, 2020 | 2019 | Change Members | Percentage |
| --- | ---: | ---: | ---: | ---: |
| Individual Medicare Advantage | 3,838,100 | 3,433,300 | 404,800 | 11.8% |
| Group Medicare Advantage | 607,400 | 517,900 | 89,500 | 17.3% |
| Medicare stand-alone PDP | 3,895,100 | 4,448,400 | (553,300) | (12.4)% |
| Total Retail Medicare | 8,340,600 | 8,399,600 | (59,000) | (0.7)% |
| State-based Medicaid | 617,300 | 461,300 | 156,000 | 33.8% |
| Medicare Supplement | 314,000 | 267,300 | 46,700 | 17.5% |
| Total Retail medical members | 9,271,900 | 9,128,200 | 143,700 | 1.6% |

38

*(in millions)*

| Premiums and Services Revenue: Premiums: | For the three months ended March 31, 2020 | 2019 | Change Dollars | Percentage |
| --- | ---: | ---: | ---: | ---: |
| Individual Medicare Advantage | $12,794 | $10,709 | $2,085 | 19.5% |
| Group Medicare Advantage | 2,011 | 1,632 | 379 | 23.2% |
| Medicare stand-alone PDP | 755 | 809 | (54) | (6.7)% |
| Total Retail Medicare | 15,560 | 13,150 | 2,410 | 18.3% |
| State-based Medicaid | 981 | 677 | 304 | 44.9% |
| Medicare Supplement | 163 | 140 | 23 | 16.4% |
| Total premiums | 16,704 | 13,967 | 2,737 | 19.6% |
| Services | 4 | 5 | (1) | (20.0)% |
| Total premiums and services revenue | $16,708 | 13,972 | $2,736 | 19.6% |
| **Segment earnings** | $685 | $465 | $220 | 47.3% |
| Benefit ratio | 86.6% | 88.3% |  | (1.7)% |
| Operating cost ratio | 9.2% | 8.2% |  | 1.0% |

#### Segment Earnings

- Retail segment earnings increased $220 million, or 47.3%, from $465 million in the 2019 quarter to $685 million in the 2020 quarter primarily due to a lower benefit ratio, partially offset by a higher operating cost ratio as more fully described below. Our higher-than-anticipated individual Medicare Advantage membership growth in 2019, which had a muted impact on the segment's earnings last year, is now more profitable as a result of more members being engaged in our clinical programs and appropriately documented under the CMS risk-adjustment model.

#### Enrollment

- Individual Medicare Advantage membership increased 404,800 members, or 11.8%, from March 31, 2019 to March 31, 2020, primarily due to membership additions associated with the most recent Annual Election Period, or AEP, and Open Election Period, or OEP, for Medicare beneficiaries. The membership growth was further impacted by strong sales to age-ins and Dual Eligible Special Need Plans, or D-SNP. Individual Medicare Advantage membership includes 342,500 D-SNP members as of March 31, 2020, a net increase of 94,000, or 38%, from 248,500 as of March 31, 2019. The OEP sales period, which ran from January 1 to March 31, 2020 added approximately 20,700 members through March 31, 2020. An additional 10,300 members became effective April 1, 2020, for a total 2020 OEP impact of 31,000 members. In comparison, the 2019 OEP added approximately 28,700 members through March 31, 2019 and an additional 15,000 members with an April 1, 2019 effective date for a total 2019 OEP impact of 43,700 members.
- Group Medicare Advantage membership increased 89,500, or 17.3%, from March 31, 2019 to March 31, 2020, primarily due to the addition of a large account in January 2020, along with net membership additions associated with the most recent AEP for Medicare beneficiaries.
- Medicare stand-alone PDP membership decreased 553,300 members, or 12.4%, from March 31, 2019 to March 31, 2020 primarily reflecting net declines during the most recent AEP for Medicare beneficiaries. The anticipated decline was primarily the result of terminations driven by premium and benefit adjustments experienced by members that were previously enrolled in our 2019 Humana Walmart Rx plan and the 2019 Humana Enhanced plan, which were consolidated into the Premier Rx plan in 2020. The expected PDP losses were partially offset by growth in the new low-price Humana Walmart Value Rx plan, driven by both new sales and plan to plan changes.
- State-based Medicaid membership increased 156,000 members, or 33.8%, from March 31, 2019 to March 31, 2020. This increase primarily reflects the impact of discontinuing the reinsurance agreement with CareSource and the assumption of full financial risk for the existing Kentucky Medicaid contract as of January 1, 2020.

#### Premiums Revenue

- Retail segment premiums increased $2.7 billion, or 19.6%, from the 2019 quarter to the 2020 quarter primarily reflecting higher premiums as a result of membership growth and higher per member premiums in our Medicare Advantage and state-based contract businesses. These favorable items were partially offset by the decline in membership in our stand-alone PDP offerings.

#### Benefits Expense

- The Retail segment benefit ratio decreased 170 basis points from 88.3% in the 2019 quarter to 86.6% in the 2020 quarter primarily due to reinstatement of the non-deductible health insurance industry fee in 2020 which was contemplated in the pricing and benefit design of our products, and engaging our Medicare Advantage members, including the robust growth of members in 2019, in clinical programs, as well as ensuring they are appropriately documented under the CMS risk-adjustment model. The benefit ratio was further favorably impacted by the continued shift in Medicare membership mix due to the decline of stand-alone PDP members and significant growth in Medicare Advantage members; the benefit ratio for stand-alone PDP members generally is higher earlier in the year and then decreases as the year progresses. Lastly, the decrease in the benefit ratio was impacted by the benefit design of Humana’s 2020 Premier Rx plan, which includes a member deductible. These decreases were partially offset by the unfavorable impact of weekday seasonality including the impact of a leap year day in the 2020 quarter and lower favorable prior-period medical reserve development in the 2020 quarter.
- The Retail segment's benefits expense for the 2020 quarter included $238 million in favorable prior-period medical claims reserve development versus $283 million in the 2019 quarter. Prior-period medical claims reserve development decreased the Retail segment benefit ratio by approximately 140 basis points in the 2020 quarter versus approximately 200 basis points in the 2019 quarter.

#### Operating Costs

- The Retail segment operating cost ratio of 9.2% for the 2020 quarter increased 100 basis points from 8.2% for the 2019 quarter primarily due to the reinstatement of the non-deductible health insurance industry fee in 2020, partially offset by scale efficiencies associated with growth in our Medicare Advantage membership and significant operating cost efficiencies in the 2020 quarter driven by previously disclosed productivity initiatives. The non-deductible health insurance industry fee impacted the operating cost ratio by 170 basis points in the 2020 quarter.

### Group and Specialty Segment

| Membership: Medical membership: | March 31, 2020 | 2019 | Change Members | Percentage |
| --- | ---: | ---: | ---: | ---: |
| Fully-insured commercial group | 861,600 | 958,200 | (96,600) | (10.1)% |
| ASO | 506,100 | 478,600 | 27,500 | 5.7% |
| Military services | 5,999,200 | 5,942,500 | 56,700 | 1.0% |
| Total group medical members | 7,366,900 | 7,379,300 | (12,400) | (0.2)% |
| Specialty membership (a) | 5,470,700 | 5,835,200 | (364,500) | (6.2)% |

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

*(in millions)*

| Premiums and Services Revenue: Premiums: | For the three months ended March 31, 2020 | 2019 | Change Dollars | Percentage |
| --- | ---: | ---: | ---: | ---: |
| Fully-insured commercial group | $1,229 | $1,311 | $(82) | (6.3)% |
| Group specialty | 429 | 373 | 56 | 15.0% |
| Total premiums | 1,658 | 1,684 | (26) | (1.5)% |
| Services | 195 | 194 | 1 | 0.5% |
| Total premiums and services revenue | $1,853 | $1,878 | $(25) | (1.3)% |
| **Segment earnings** | $105 | $165 | $(60) | (36.4)% |
| Benefit ratio | 79.1% | 76.4% |  | 2.7% |
| Operating cost ratio | 23.1% | 21.9% |  | 1.2% |

#### Segment Earnings

- Group and Specialty segment earnings decreased $60 million, or 36.4%, from $165 million in the 2019 quarter to $105 million in the 2020 quarter primarily reflecting our deliberate pricing and benefit design changes in our commercial business in response to the 2019 performance.

#### Enrollment

- Fully-insured commercial group medical membership decreased 96,600 members, or 10.1%, from March 31, 2019 to March 31, 2020. These anticipated declines primarily reflect lower membership in small group accounts due in part to more small group accounts selecting level-funded ASO products, as well as the loss of certain large group accounts due to disciplined pricing in the competitive environment. The portion of group fully-insured commercial medical membership in small group accounts was approximately 57% at March 31, 2020 and 61% at March 31, 2019.
- Group ASO commercial medical membership increased 27,500 members, or 5.7%, from March 31, 2019 to March 31, 2020 reflecting more small group accounts selecting level-funded ASO products combined with the loss of certain large group accounts due to continued discipline in pricing of services for self-funded

accounts amid a highly competitive environment. Small group membership comprised 45% of group ASO medical membership at March 31, 2020 versus 34% at March 31, 2019.

- Military services membership increased 56,700 members, or 1.0%, from March 31, 2019 to March 31, 2020. Membership includes military service members, retirees, and their families to whom we are providing healthcare services under the current TRICARE East Region contract.
- Specialty membership decreased 364,500 members, or 6.2%, from March 31, 2019 to March 31, 2020 primarily due the loss of certain group accounts, including one jumbo account, offering stand-alone dental and vision products.

#### Premiums Revenue

- Group and Specialty segment premiums decreased $26 million, or 1.5%, from $1.68 billion in the 2019 quarter to $1.66 billion for the 2020 quarter, primarily due to the decline in our fully-insured group commercial membership. The decrease was partially offset by higher stop-loss revenues related to our level-funded ASO accounts resulting from membership growth in this product and higher per member premiums across the fully-insured commercial business.

#### Services Revenue

- Group and Specialty segment services revenue increased $1 million, or 0.5%, from the 2019 quarter to $195 million for the 2020 quarter.

#### Benefits Expense

- The Group and Specialty segment benefit ratio increased 270 basis points from 76.4% in the 2019 quarter to 79.1% in the 2020 quarter primarily due to deliberate pricing and benefit design changes in the commercial business in response to the 2019 performance and the unfavorable impact of weekday seasonality including the impact of a leap year in the 2020 quarter. These increases were partially offset by the reinstatement of the non-deductible health insurance industry fee in 2020 which was contemplated in the pricing and benefit design of our products as well as higher favorable prior-period medical reserve development.
- The Group and Specialty segment's benefits expense included $46 million in favorable prior-period medical claims reserve development in the 2020 quarter versus unfavorable prior-period medical reserve development of $16 million in the 2019 quarter. This favorable prior-period medical claims reserve development decreased the Group and Specialty segment benefit ratio by approximately 280 basis points in the 2020 quarter while the unfavorable prior-period medical reserve development increased the benefit ratio by approximately 100 basis points in the 2019 quarter.

#### Operating Costs

- The Group and Specialty segment operating cost ratio of 23.1% for the 2020 quarter increased 120 basis points from 21.9% for the 2019 quarter primarily reflecting the reinstatement of the non-deductible health insurance industry fee in 2020, partially offset by significant operating cost efficiencies in the 2020 quarter driven by previously disclosed productivity initiatives.
- The non-deductible health insurance industry fee impacted the operating cost ratio by 140 basis points in the 2020 quarter.

### Healthcare Services Segment

*(in millions)*

| Revenues: Services: | For the three months ended March 31, 2020 | 2019 | Change Dollars | Percentage |
| --- | ---: | ---: | ---: | ---: |
| Pharmacy solutions | $121 | $36 | $85 | 236.1% |
| Provider services | 76 | 79 | (3) | (3.8)% |
| Clinical care services | 28 | 41 | (13) | (31.7)% |
| Total services revenues | 225 | 156 | 69 | 44.2% |
| Intersegment revenues: |  |  |  |  |
| Pharmacy solutions | 6,140 | 5,197 | 943 | 18.1% |
| Provider services | 576 | 599 | (23) | (3.8)% |
| Clinical care services | 144 | 146 | (2) | (1.4)% |
| Total intersegment revenues | 6,860 | 5,942 | 918 | 15.4% |
| Total services and intersegment revenues | $7,085 | $6,098 | $987 | 16.2% |
| **Segment earnings** | $250 | $175 | $75 | 42.9% |
| Operating cost ratio | 96.0% | 96.6% |  | (0.6)% |

#### Segment Earnings

- Healthcare Services segment earnings of $250 million for the 2020 quarter increased $75 million, or 42.9%, from $175 million in the 2019 quarter primarily due to higher earnings from our pharmacy operations, operational improvement in our provider services business, and higher earnings from our investment in Kindred at Home.

#### Script Volume

- Humana Pharmacy Solutions script volumes on an adjusted 30-day equivalent basis increased to approximately 120 million in the 2020 quarter, up 9.1%, versus scripts of approximately 110 million in the 2019 quarter, primarily reflecting growth associated with higher individual Medicare Advantage membership along with the impact of early prescription refills as members prepared for extended supply needs in response to COVID-19. These increases were partially offset by the decline in stand-alone PDP membership.

#### Services Revenues

- Services revenues increased $69 million, or 44.2%, from the 2019 quarter to $225 million for the 2020 quarter primarily due to the additional pharmacy revenues associated with the acquisition of Enclara in the 2020 quarter.

#### Intersegment Revenues

- Intersegment revenues increased $918 million, or 15.4%, from the 2019 quarter to $6.9 billion for the 2020 quarter primarily was due to strong Medicare Advantage membership growth and an increase in pharmacy revenues as a result of members being allowed early prescription refills to permit them to prepare for extended supply needs in response to COVID-19. These increases were partially offset by the loss of intersegment revenues associated with the decline in stand-alone PDP membership.

#### Operating Costs

- The Healthcare Services segment operating cost ratio of 96.0% for the 2020 quarter decreased 60 basis points from 96.6% in the 2019 quarter primarily as a result of operational improvements in our provider services business, largely related to Conviva, along with significant operating cost efficiencies in the 2020 quarter driven by previously disclosed productivity initiatives.

### Liquidity

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

For additional information on our liquidity risk, please refer to the section entitled “Risk Factors” in our 2019 Form 10-K.

Cash and cash equivalents increased to approximately $6.1 billion at March 31, 2020 from $4.1 billion at December 31, 2019. The change in cash and cash equivalents for the three months ended March 31, 2020 and 2019 is summarized as follows:

*(in millions)*

|  | Three Months Ended 2020 | 2019 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $474 | $896 |
| Net cash (used in) provided by investing activities | (1,210) | 145 |
| Net cash provided by financing activities | 2,736 | 493 |
| Increase in cash and cash equivalents | $2,000 | $1,534 |

### Cash Flow from Operating Activities

Our operating cash flows for the 2020 quarter decreased from the 2019 quarter due to the timing of working capital items, including the impact of early prescription refills permitting members to prepare for extended supply needs in response to COVID-19, partially offset by higher income from operations.

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

The detail of benefits payable was as follows at March 31, 2020 and December 31, 2019:

*(in millions)*

|  | March 31, 2020 | December 31, 2019 | 2020 Quarter Change | 2019 Quarter Change |
| --- | ---: | ---: | ---: | ---: |
| IBNR (1) | $4,887 | $4,150 | $737 | $561 |
| Reported claims in process (2) | 856 | 628 | 228 | 402 |
| Other benefits payable (3) | 1,347 | 1,226 | 121 | 199 |
| Total benefits payable | $7,090 | $6,004 | $1,086 | $1,162 |

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

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

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

The increase in benefits payable from December 31, 2019 to March 31, 2020 and from December 31, 2018 to March 31, 2019 primarily was due to an increase in IBNR primarily as a result of Medicare Advantage membership growth, an increase in the amount of processed but unpaid claims which fluctuate due to month-end cutoff and an increase in the amounts owed to providers under the capitated and risk sharing arrangements.

The detail of total net receivables was as follows at March 31, 2020 and December 31, 2019:

*(in millions)*

|  | March 31, 2020 | December 31, 2019 | 2020 Quarter Change | 2019 Quarter Change |
| --- | ---: | ---: | ---: | ---: |
| Medicare | $1,767 | $835 | $932 | $935 |
| Commercial and other | 182 | 162 | 20 | 1 |
| Military services | 133 | 128 | 5 | 3 |
| Allowance for doubtful accounts | (73) | (69) | (4) | 1 |
| Total net receivables | $2,009 | $1,056 | $953 | $940 |

The changes in Medicare receivables for both the 2020 quarter and the 2019 quarter reflect the typical pattern caused by the timing of accruals and related collections associated with the CMS risk-adjustment model. Significant collections occur with the mid-year and final settlements with CMS in the second and third quarter.

### Cash Flow from Investing Activities

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

Our ongoing capital expenditures primarily relate to our information technology initiatives, support of services in our provider services operations including medical and administrative facility improvements necessary for activities such as the provision of care to members, claims processing, billing and collections, wellness solutions, care coordination, regulatory compliance and customer service. Total capital expenditures, excluding acquisitions, were $192 million in the 2020 quarter and $139 million in the 2019 quarter.

Net purchases of investment securities in the 2020 quarter were $309 million as compared to net proceeds from sales and maturities of $284 million in the 2019 quarter.

### Cash Flow from Financing Activities

Receipts from CMS associated with Medicare Part D claim subsidies for which we do not assume risk were higher than claims payments by $575 million in the 2020 quarter and $620 million in the 2019 quarter.

Under our administrative services only TRICARE contracts, health care cost payments for which we do not assume risk exceeded reimbursements from the federal government by $1 million in the 2020 quarter and by $66 million in the 2019 quarter.

In March 2020, we issued $600 million of 4.500% senior notes due April 1, 2025 and $500 million of 4.875% senior notes due April 1, 2030. Our net proceeds, reduced for the underwriters' discount and commission and offering expenses paid as of March 31, 2020 were $1,090 million.

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

We also acquired common shares in connection with employee stock plans for an aggregate cost of $17 million in the 2020 quarter and $10 million in the 2019 quarter.

Net proceeds from the issuance of commercial paper were $198 million in the 2020 quarter and $17 million in the 2019 quarter. The maximum principal amount outstanding at any one time during the 2020 quarter was $600 million.

We paid dividends to stockholders of $73 million during the 2020 quarter and $68 million during the 2019 quarter.

### Future Sources and Uses of Liquidity

### Dividends

For a detailed discussion of dividends to stockholders, please refer to Note 10 to the condensed consolidated financial statements.

### Stock Repurchases

For a detailed discussion of stock repurchases, please refer to Note 10 to the condensed consolidated financial statements.

### Debt

For a detailed discussion of our debt, including our senior notes, term loan, credit agreement and commercial paper program, please refer to Note 12 to the condensed consolidated financial statements.

### Acquisitions and Divestitures

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

### Liquidity Requirements

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

Adverse changes in our credit rating may increase the rate of interest we pay and may impact the amount of credit available to us in the future. Our investment-grade credit rating at March 31, 2020 was BBB+ according to Standard & Poor’s Rating Services, or S&P, and Baa3 according to Moody’s Investors Services, Inc., or Moody’s. A downgrade by S&P to BB+ or by Moody’s to Ba1 triggers an interest rate increase of 25 basis points with respect to $250 million of our senior notes. Successive one notch downgrades increase the interest rate an additional 25 basis points, or annual interest expense by less than $1 million, up to a maximum 100 basis points, or annual interest expense by $3 million.

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

### Regulatory Requirements

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

Although minimum required levels of equity are largely based on premium volume, product mix, and the quality of assets held, minimum requirements vary significantly at the state level. Based on the most recently filed statutory financial statements as of December 31, 2019, our state regulated subsidiaries had aggregate statutory capital and surplus of approximately $8.0 billion, which exceeded aggregate minimum regulatory requirements of $5.9 billion. The amount of ordinary dividends that may be paid to our parent company in 2020 is approximately $1.0 billion in the aggregate. The amount, timing and mix of ordinary and extraordinary dividend payments will vary due to state regulatory requirements, the level of excess statutory capital and surplus and expected future surplus requirements related to, for example, premium volume and product mix. Actual dividends that were paid to our parent company were approximately $1.8 billion in 2019.

## Market risk

As filed, 2,252 characters.

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

Interest rate risk also represents a market risk factor affecting our consolidated financial position due to our significant investment portfolio, consisting primarily of fixed maturity securities of investment-grade quality with a weighted average S&P credit rating of AA at March 31, 2020. Our net unrealized position decreased $137 million from a net unrealized gain position of $211 million at December 31, 2019 to a net unrealized gain position of $74 million at March 31, 2020. At March 31, 2020, we had gross unrealized losses of $171 million on our investment portfolio primarily due to an increase in market interest rates since the time the securities were purchased. There were no material credit allowances during the three months ended March 31, 2020. While we believe that these securities in an unrealized loss will recover in value over time and we currently do not have the intent to sell such securities, given the current market conditions and the significant judgments involved, there is a continuing risk that future declines in fair value may occur and material realized losses from sales or credit allowances may be recorded in future periods.

Duration is the time-weighted average of the present value of the bond portfolio’s cash flow. Duration is indicative of the relationship between changes in fair value and changes in interest rates, providing a general indication of the sensitivity of the fair values of our fixed maturity securities to changes in interest rates. However, actual fair values may differ significantly from estimates based on duration. The average duration of our investment portfolio, including cash and cash equivalents, was approximately 1.9 years as of March 31, 2020 and approximately 2.5 years as of December 31, 2019. The decline in the average duration is reflective of the increased holdings of cash and cash equivalents, along with other portfolio management activities. Based on the duration, including cash equivalents, a 1% increase in interest rates would generally decrease the fair value of our securities by approximately $335 million at March 31, 2020.

## Controls and procedures

As filed, 1,293 characters.

Under the supervision and with the participation of our Chief Executive Officer, or CEO, our Chief Financial Officer, or CFO, and our Principal Accounting Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures for the quarter ended March 31, 2020.

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

There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 4,995 characters.

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

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

In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China. COVID-19 has since spread to over 200 countries, including every state in the United States. On March 11, 2020 the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020 the United States declared a national emergency with respect to COVID-19. The spread of COVID-19 underscores certain risks we face in our business, including those discussed in our Form 10-K for the fiscal year ended December 31, 2019.

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

The spread of COVID-19, or actions taken to mitigate this spread, could have material and adverse effects on our ability to operate effectively, including as a result of the complete or partial closure of facilities or labor shortages. Disruptions in public and private infrastructure, including communications, financial services and supply chains, could materially and adversely disrupt our normal business operations. We have transitioned a significant subset of our employee population to a remote work environment in an effort to mitigate the spread of COVID-19, as have a number of our third-party service providers, which may exacerbate certain risks to our business, including an increased demand for information technology resources, increased risk of phishing and other cybersecurity attacks, and increased risk of unauthorized dissemination of sensitive personal information or proprietary or confidential information about us or our members or other third-parties. The outbreak of COVID-19 has severely impacted global economic activity, including the businesses of some of our commercial customers, and caused significant volatility and negative pressure in the financial markets. In addition to disrupting our operations, these developments may adversely affect the timing of commercial customer premium collections and corresponding claim payments as well as the value of our investment portfolio.

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

Filed Apr 29, 2020.
Source: SEC EDGAR, the filing index for accession 0000049071-20-000083. Last ingested by Listed: Nov 6, 2026, 14:15 ET. No prices; not investment advice.