FAIR VALUE

3 Months Ended

Mar. 31, 2020

Financial Assets

The following table summarizes our fair value measurements at March 31, 2020 and December 31, 2019, respectively, for financial assets measured at fair value on a recurring basis:



	Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets (Level 1)		Other Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
	(in millions)
March 31, 2020
Cash equivalents	$	5,857	$	5,857	$	—	$	—
Debt securities:
U.S. Treasury and other U.S. government corporations and agencies:
U.S. Treasury and agency obligations	398		—		398		—
Mortgage-backed securities	3,597		—		3,597		—
Tax-exempt municipal securities	1,553		—		1,553		—
Mortgage-backed securities:
Commercial	822		—		822		—
Asset-backed securities	1,081		—		1,081		—
Corporate debt securities	4,046		—		4,046		—
Total debt securities	11,497		—		11,497		—
Total invested assets	$	17,354	$	5,857	$	11,497	$	—

December 31, 2019
Cash equivalents	$	3,660	$	3,660	$	—	$	—
Debt securities:
U.S. Treasury and other U.S. government corporations and agencies:
U.S. Treasury and agency obligations	354		—		354		—
Mortgage-backed securities	3,710		—		3,710		—
Tax-exempt municipal securities	1,463		—		1,463		—
Mortgage-backed securities:
Commercial	804		—		804		—
Asset-backed securities	1,093		—		1,093		—
Corporate debt securities	3,947		—		3,947		—
Total debt securities	11,371		—		11,371		—
Common stock	7		7		—		—
Total invested assets	$	15,038	$	3,667	$	11,371	$	—

Financial Liabilities

Our debt is recorded at carrying value in our consolidated balance sheets. The carrying value of our senior notes debt outstanding, net of unamortized debt issuance costs, was $6,455 million at March 31, 2020 and $5,366 million at December 31, 2019. The fair value of our senior notes debt was $6,841 million at March 31, 2020 and $5,916 million at December 31, 2019. The fair value of our senior note debt is determined based on Level 2 inputs, including quoted market prices for the same or similar debt, or if no quoted market prices are available, on the current prices estimated to be available to us for debt with similar terms and remaining maturities. Due to the short-term nature, carrying value approximates fair value for our term note and commercial paper borrowings. The term loan outstanding and commercial paper borrowings were $1,500 million as of March 31, 2020. The commercial paper borrowings were $300 million as of December 31, 2019.

Put and Call Options Measured at Fair Value

As part of our investment in Kindred at Home, we entered into a shareholders agreement with TPG Capital, or TPG, and Welsh, Carson, Anderson & Stowe, or WCAS, the Sponsors, that provides for certain rights and obligations of each party. The shareholders agreement with the Sponsors includes a put option under which they have the right to require us to purchase their interest in the joint venture beginning on July 2, 2021 and ending on July 1, 2022. Likewise, we have a call option under which we have the right to require the Sponsors to sell their interest in the joint venture to Humana beginning on July 2, 2022 and ending on July 1, 2023. The put and call options, which are exercisable at a fixed EBITDA multiple and provide a minimum return on the Sponsor's investment if exercised, are measured at fair value each period using a Monte Carlo simulation.

The put and call options fair values were $137 million and $368 million, respectively, at March 31, 2020, and $28 million and $557 million, respectively, at December 31, 2019. The put option is included within other long-term liabilities and the call option is included within other long-term assets. The change in fair value of the put and call options is reflected as "Other (income) expense, net" in our condensed consolidated statements of income.

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



	March 31, 2020		December 31, 2019
Annualized volatility	28.0	%	19.8	%
Secured credit rate	4.1	%	2.2	%
NOPAT	12.0	%	12.0	%
Weighted average cost of capital	10.5	%	10.0	%
Long term growth rate	3.0	%	3.0	%

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

Other Assets and Liabilities Measured at Fair Value

As disclosed in Note 3, we acquired Enclara during 2020. The values of net tangible assets acquired and the resulting goodwill and other intangible assets were recorded at fair value using Level 3 inputs. The majority of the net tangible liabilities assumed were recorded at their carrying values as of the date of acquisition, as their carrying values

approximated their fair values due to their short-term nature. The fair values of goodwill and other intangible assets acquired in this acquisition were internally estimated primarily based on the income approach. The income approach estimates fair value based on the present value of the cash flows that the assets are expected to generate in the future. We developed internal estimates for the expected future cash flows and discount rates used in the present value calculations. Other than assets acquired and liabilities assumed in this acquisition, there were no other material assets or liabilities measured at fair value on a recurring or nonrecurring basis during 2020.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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