Good morning. And welcome to the Fourth Quarter 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I will now hand today’s call over to Regina Nethery. Please go ahead.

Thank you, and good morning. In a moment, Humana's senior management team will discuss our fourth quarter and full year 2014 results and our updated earnings outlook for 2015. Participating in today's prepared remarks will be Bruce Broussard, Humana's President and Chief Executive Officer; and Brian Kane, Senior Vice President and Chief Financial Officer. Following these prepared remarks, we will open up the lines for a question-and-answer session with industry analysts. Joining Bruce and Brian for the Q&A session will be Jim Murray, Executive Vice President and Chief Operating Officer; and Christopher Todoroff, Senior Vice President and General Counsel. We encourage the investing public and media to listen to both management's prepared remarks and the related Q&A with analysts. This call is being recorded for replay purposes. That replay will be available on the Investor Relations page of Humana's website, humana.com, later today. This call is also being simulcast via the Internet along with a virtual slide presentation. An Adobe version of today's slide deck has been posted to the Investor Relations section of Humana's website. Before we begin our discussion, I need to advise call participants of our cautionary statement. Certain of the matters discussed in this conference call are forward-looking and involve a number of risks and uncertainties. Actual results could differ materially. Investors are advised to read the detailed risk factors discussed in this morning's earnings press release, as well as in our filings with the Securities and Exchange Commission. Today's press release, our historical financial news releases and our filings with the SEC are all available on Humana's Investor Relations website. Call participants should also note that today's discussion and slide presentation include financial measures that are not in accordance with generally accepted accounting principles. Management's explanation for the use of these non-GAAP measures is included in today's slide presentation, including a reconciliation of GAAP to non-GAAP financial measures. Finally, any references to earnings per share, or EPS, made during this morning's call refer to diluted earnings per common share. With that, I'll turn the call over to Bruce Broussard.

Good morning, everyone, and thank you for joining us. This morning, Humana reported full year adjusted earnings per share for 2014 of $7.51, in line with our 2014 guidance. This past year was particularly dynamic across the sector and presented a number of challenges, as well as some new opportunities. Humana continues to rise to these challenges through our consumer focused strategy and integrated care delivery model, while simultaneously investing in new growth areas. As a result, we are reiterating our guidance for 2015 earnings of $8.50 to $9 per share, a growth rate of approximately 17% at the midpoint. As we outlined in our Investor Day this past December, Humana’s investment thesis is driven by our customer focused, integrated care delivery model and the related results. This thesis includes four key elements, continued robust organic membership and revenue growth, proven superior clinical operating performance, disciplined capital allocation, which all lead to a sustainable competitive advantage. I will begin our discussion this morning with a focus on our membership and revenue growth. We recently raised our net Medicare Advantage membership growth expectations for 2015 to 300,000 to 350,000, primarily as a result of a strong sales during our -- result of strong sales during the recently completed annual election period or AEP. And looking at the January enrollment data from CMS, Humana continues to lead the industry in membership growth for individual Medicare Advantage plans. The CMS data indicates that Humana accounted for nearly 70% of the individual MA net enrolment growth across the sector. In fact, approximately 52% of our individual gross sales during the AEP came from competitor Medicare Advantage offerings. From a geographic perspective, we do not see strong specific concentration with this growth, but did experience our highest membership gains in North Carolina. We are pleased…

Thank you, Bruce. And good morning, everyone. As Bruce said in his remarks, 2014 was an unusually dynamic year full of opportunities and challenges. The growth in our Medicare business was substantial and was supplemented by the power of our Healthcare Services segment, which has prospered, while making a truly positive difference in our members' lives. Our Employer Group business capitalized on the late 2013 rollout of an exciting new offering in the form of Total Health while also ending the year on a high note in terms of financial performance. All this transpired while we invested heavily in new growth opportunities both HumanaOne and our state-based businesses, which we believe will generate significant returns for our shareholders down the road. We are pleased that our full year adjusted EPS came in just above the midpoint of our guidance at $7.51 per share. As we closed out the year, there were a few items that adversely affected our 2014 results, but we do not see any of these significantly impacting our 2015 guidance. Our Retail segment pretax earnings finished the year below our guidance range. This was primarily attributable to the severity of the flu season, slightly higher investment spending for our duals and state-based contracts and deterioration in the results for our Puerto Rico Medicare business, which continues to be a difficult market for us. With regard to the flu, hospital inpatient admissions peaked in late December, early January but have since abated and have returned to more normalized levels. I should hasten to add that utilization more broadly remains benign and within expectations. With regard to the duals, we continue to build out our infrastructure and are well positioned heading into 2015 to significantly reduce our investments which we have committed to do. Turning to the Employer Group…

[Operator Instructions] Your first question comes from the line of Justin Lake with JP Morgan.

Thanks. Good morning. Question around the retail results, you laid out a few headwinds to the quarter. Can you put some numbers around them and also give us some color on your positioning in Puerto Rico Medicare and how much money you are losing there right now?

Sure. So the flu is a major driver. It was around $45 million all-in for the company. About three quarters of that was driven in the Retail segment. With regard to Puerto Rico, I’d rather not go into the details of the numbers there but we are losing money in that market. We lost more this quarter than we expected. And really that’s driven by the fact that the dynamics in that market are different. The medical management of those members is different. We got hit by uncompensated care adjustments that we had to take into our results that weren’t in the bids because they came after the bids. And so 2014 was a very difficult year for that market. On the dual side, we are continuing to build up that infrastructure. As we think about investments for 2014, I’d say the duals came in slightly higher, individual came in slightly lower. So that’s sort of how I’d calibrate those results on the retail segment.

Okay. Thanks for the color.

Your next question comes from the line of Kevin Fischbeck with Bank of America.

Okay. Great. Thanks. Just wanted to follow-up on, I guess that last comment before the Q&A about evaluating certain businesses, making sure that they are appropriately returned. I don’t really remember you guys talking a lot about this before. Is there -- are there significant business lines that are currently being evaluated? And I think you mentioned either divesting them or fixing them. Is there anything in the guidance that would contemplate some potential cost of fixing a business line that is not ready to return that you are targeting?

Well, our guidance really incorporates all of our current businesses as they stand today. We are very focused on continuing to drive down admin costs and as you saw that in the Employer Group segment this year, we’ll continue to work on that. But we are evaluating all the lines of business. I think we’ve been very clear that all of our businesses over time needs to earn their cost of capital and we are going to make sure that occurs and we are being very disciplined about it. And so, I don’t want to comment on any specific businesses but we are evaluating our entire portfolio.

So, I guess, is there a way to frame it? Are we talking about things around the edges, or are there decent-sized parts of the business that are being evaluated?

Again, I will say, all of our businesses are being evaluated. I think we feel very good about our core businesses. So, I wouldn’t see any major change in that regard. But there are number of businesses that need to hit their returns and we are focused on that.

Okay. Great. Thanks.

Your next question is from the line of Josh Raskin with Barclays.

Hi. Thanks. The question is around the Medicare Advantage growth and the sources, the drivers. I think I heard you say 52% had come from competitors. I guess I was little surprised to hear that. I know last year was a little bit of an anomaly. But I’m just curios where that has trended in the past. And then as you think about the overall MA growth, how much of that is coming from previously fee-for-service Medicare lives, how many are agents, how many are PDP conversions and maybe any other buckets over all of that MA growth?

This is Jim Murray. As we look across the various markets that we grew and there were probably 10 or 12 markets that we would point to. We are seeing the beneficial impact of our higher stars rating. We believe having a favorable impact in the way that we were able to position ourselves relative to the competition. Bruce earlier talked about North Carolina and that’s a market where we have 4.5 stars. And some of the competitors there were there before didn’t have as higher stars score. We think that that in terms of the premium and benefits that we are able to put on the street helps to position us better. So, I would say that that’s one aspect that we are seeing play itself out well. We are obviously very pleased about that. As respects, the numbers that we get from competitors versus fee-for-service, I would tell you that that number, as we looked at is about 50-50. Agent generally, the significant part of the agent growth occurs during the ROI as opposed to during the AEP itself. A lot of favorable dynamics and again, as Bryan and Bruce both pointed out, we are pretty pleased with the way that this AEP played out for us.

I got you.

One thing I would add to that is, as we’ve discussed, we had great growth in our HMO area and our strategy has always been is create a relationship through the PPO product and then evolve them over. And we just see that strategy continue to be strong, which both helps us on retention but also on the engagement and helping them with their health.

And just a follow-up on that. So, one, are you seeing any material impact from PDP conversions in the AEP? And then I guess I am just looking at that sort of competitor impact. Are you seeing -- is that different than what you have seen in previous years? Is the impact of stars more important now or you doing better vis-à-vis the competition in a different way than you’ve seen in previous years?

I think last year, we had the same circumstance. We sound like a broken record, but our clinical platform has allowed us to offer stable benefits in the marketplace. And that clinical platform is not only helping us with stars score but it’s also helping engage individuals and getting them in the right clinical programs, which is ultimately lowering the cost of medical side, which is then turning around and allowing us to offer the proper benefits. I think it all sort of fits together. It’s just now stars. I would say that that’s a contributor in the individual marketplaces, but I wouldn’t walk away from the call and say that’s our competitor advantage or competitive advantage. It’s really the clinical program that drives the lower medical cost and better quality.

Okay. Thanks.

Your next question is from the line of A.J. Rice with UBS.

Hello everybody. I might just ask you about two items that were in your walk forward to guidance last quarter. I think you had in there about a $0.35 tailwind from lower investments in exchange and state-based contracts. And Brian, you mentioned that a little bit into your prepared remarks. I wondered if there is an update on what you are thinking in terms of investments and the timing. And the other when I was going to ask you about was Hep C. You had a $0.45 tailwind in your guidance there. And since then, I know you've done your preferred vendor contracts with Gilead, and I wondered did that $0.45 contemplate that contract, or is there now potential upside?

So with regard to the first question on the investments, I would say it’s similar to what we discussed last call in terms of what we are expecting. Again, H1, we expect to breakeven. Hopefully, do better than that on the Medicaid dual side. We are expecting to reduce our investments pretty significantly. I would think about it sort of a $0.25 investment plus or minus on the Medicaid dual side for 2015. For Hep C, it really is -- it’s early to tell. Let’s see what happens for 2015. Clearly, the unit price discount helps but we still need to see where utilization ultimately plays out. We’re watching that very closely and we’ll see over the next few months where we stand. I would say as it looks today, we feel pretty good but it’s still early.

Okay. All right. Thanks a lot.

Your next question comes from the line of Scott Fidel with Deutsche Bank.

Thanks. Just interested if you can give your thoughts on the CMS value-based contracting initiative for fee-for-service and whether we would view that as more of a positive or a risk for MA. And just thinking about from a reimbursement perspective if you think there is any risk that MA rates could be pressured in the intermediate to long-term if CMS does assume lower unit cost and lower cost trends in fee-for-service and whether that could translate into the per capita growth rate assumption that they make for the MA business.

So, I think overall, our view is this transition to value-based reimbursement and getting more providers in those reimbursement models is the best for, I think the industry as a whole. And we look at that as an opportunity for us, both in helping providers. At the same time, continuing to enhance the Medicare Advantage positioning. In regards to, does it affect the benchmark, I think is what you are getting to. Over time, it will affect the benchmark, I think in any kind of plan that’s there. It’s lowering the cost on Medicare if you affect it. But I do think, long-term, the Medicare Advantage offers a significantly better advantage as you look at the comprehensive nature of it. It’s just not about the price. Also what we found is about the integration of the services and the assistance that is provided there. But at the same time, we realize that we have to do better than the competition in our clinical programs and that competition is both within Medicare Advantage and also Medicaid as a whole.

Okay. Thanks.

Your next question is from the line of Andy Schenker with Morgan Stanley.

So, I appreciate Brian's comments in the prepared remarks on DCPs. But they have been trending down for some time, so maybe if you could just give me a little bit more understanding about the moving parts behind the trend over that time, including maybe specifically how changing mix has impacted that number? So you have mentioned the long-term support services, but how do growing exchange and MA growth impact that and how should we really be thinking about that metric going forward?

The major driver really is the capitation. As we continue to increase our physicians under capitation arrangements, basically you have a benefit expense, you don’t have a reserve. And so that really is the major driver. If you look at the roll forwards, you can see the days move really driven by that. The LTSS business has a similar dynamic in the sense that we pay the nursing homes on a monthly basis and so again, we have this expense without having that reserve and so that will naturally take it down. And then as I mentioned in my prepared remarks, this quarter, we had an outlier in the sense of H1 and that the members came on a little bit late. There were a bunch of pended claims that we were working through and we really did that over the fourth quarter. And so that really I think -- I’ll put those as the three major buckets what’s driving today’s claims. I would also add that our cash flows are still very strong. And so as we think about our quality of earnings metrics, we’re very focused to make sure our cash flows are good and they are.

So therefore, just to follow up going forward because you are expecting more growth in capitation. You would expect that number to keep going down. And does the growth in exchanges or MA somewhat offset that to the other side, or..?

I would say, all else being equal, I think that’s right.

Okay. Thank you.

Your next question comes from the line of Ralph Giacobbe with Credit Suisse.

Back to the Puerto Rico book, can you give us a sense of size and/or magnitude of the loss? And then I knew you exited Medicaid there. Can you maybe talk about your commitment to that region within Medicare and/or how you are going to be able to sort of fix the issues? Thanks.

Again, I’d rather not go into specifics on our P&L in that market. I would say, there are real losses, they move the needle, they affected our tax rate. We are working hard to fix the problems in the market. The Medicaid -- losing the Medicaid contract, I think is indicative of where we are and deciding not to re-up there. And so our guys are working hard on that on fixing the problems and getting our members to engage and improve the medical management and a like. Again, we had some one-time issue in 2014 is related to uncompensated care and the time when that came into effect with respect to the bids. But as I said, all of our businesses that aren’t earning their cost of capital need to be evaluated and we’re certainly doing that.

Okay. And maybe, I know you don't want to talk about the size of the losses. Can you give us a sense of even just the premium?

There are about -- this is Jim. There are about 50,000 Medicare Advantage members in Puerto Rico as we ended the year. We purposely try to downsize as respect to our activities relative to the AEP, so that we can shrink that membership. The premium that we get from the Federal Government for Medicare is solid. As Brian alluded to you earlier, the government made some change in the way that they pay hospitals after our bids were finalize for 2014. That was a big drag on our results. And the other thing that Brian mentioned, the loss of focus, because we did loose the Medicaid contract and the clinical model that was commensurate with that negatively impacted our Medicare results. So we expect this smaller portfolio of business in 2015 and as Brian said, we’re actively working on things that would improve that our prospects in Puerto Rico and that’s probably, where we should end it.

Okay. Thank you.

Your next question is from the line of Peter Costa with Wells Fargo Securities.

We are getting close to that time of year when we hear about what the 2016 Medicare Advantage rates are going to be? We know from December that 2.45% was sort of what they were talking about for the growth rate at that point? But what other factors should we be considering that might be impacting the payments that you get from the government for Medicare rates in 2016?

Yeah. Peter, this is pure speculation, so it’s always difficulty. I think we will look at the discussions that have historically been in the rate notice around in-home assessments as being an area of discussion and I also think the MRA adjustments are another area that possibly could be included in the rate notice. But that’s really based on the dialog that has happened over the past few years with them and I don’t have any insight information more than anybody else has on what’s going to come out.

And in terms of the range of possibilities, how do you think it will impact your ability to price business for next year, attain growth for next year?

This is Jim. We have always -- over the last number of years expected the worst and as we focus on what our necessary actions relative to trend benders, we plan for that and we’d see what happens in April and then we evaluate our bid processes and strategies accordingly. But we are in the process as we speak of trying to identify trend bending activities that would address the worst case scenario in some of the things that Bruce talked about. And we are putting those in place for 2016 as we speak.

Thank you.

Your next question comes from the line of Matthew Borsch with Goldman Sachs.

Hi. Good morning. Question on your guidance in the Medicaid duals, so I think as I understood, you are looking at a $0.25 approximate tailwind on that business from reduced investment? But am I correct that that business is still losing money, if you will, when you count in the investment or expect to for 2015 or is that wrong and can you quantify any magnitude?

Yeah. If I wasn’t cleat, I think, we expect around $0.25 of loss in 2015 for the state base businesses.

Okay. Okay.

And that is reduced from 2014, pretty meaningfully.

Okay. And can you give us a range of magnitude on 2014?

No. I would say, if you combine H1 and the duals it was caught around $0.70 plus or minus.

Okay. Okay. Thank you.

No problem.

Your next question is from the line of Sarah James with Wedbush Securities.

Yeah. And Humana and other insurers have been working on providing new data to CMS that follows up on actions and results from home health risk assessments? And I'm wondering if there has been any consensus reached among the insurers or with CMS on how to effectively evaluate the results of that or the deficiency of follow-up actions?

No there -- there has been discussion on the effectiveness of in-home assessments and the work that’s been done there on a number of different occasions. I don’t think there has been one proposal that has been agreed upon by the industry and by CMS. And I don’t -- we don’t want to get into commenting on what we think CMS would come out with based on our discussions about industry wide and company specific.

Next question please?

Your next question is from the line of Tom Carroll with Stifel.

Hey good morning. Just a question on the 3Rs, how do you want investors to think about the change in the 3R accruals that you are making for 2015. I mean, is this just you have more color as you put it which provides more visibility on operation or is Humana perhaps getting a little more aggressive on assumptions? I wonder if you could balance that out for us?

Well, I guess, I’d say we viewed it’s a good thing that we are able to reduce the reliance on the 3Rs by over half. That’s a delivered strategy we made by ticking up pricing. We’re being very disciplined there. And that’s really part of our strategy to get to breakeven or better for 2015. So I think when we saw the new sales come in and break down by medal tear and age and geography et cetera, we are able to take it down slightly from where we were on the third quarter but we view that as a good thing. And again feel positive about where we are with that business and how we priced it.

When we entered the exchanges in 2014, I think we communicated to the investors that we were going to grow in 2014, while in 2015 transition to insure that there were sustainability in that business long-term. And what you see happening is that -- that’s what’s happening that we grew in 2014, we would define success this year as maintaining our membership that we had in 2014 and 2015 and -- and having maintaining that level while at the same time reducing our reliance on the 3Rs, specifically 2Rs to allow us to make that transition, when the 2Rs go away next year.

Okay. Thank you.

Your next question is from the line of Christine Arnold with Cowen.

Could you speak to your expectations for medical trends? You got a better economy, consumer confidence seems to be rising, fuel prices -- fuel prices are down kind of like increasing discretionary income for folks. How do you think that might impact medical cost? And how do you build that into your Medicare Advantage assumptions with respect to trend benders that you are going to need and the medical trend expected in ‘15 versus ‘14 for MA? Thanks.

Sure. Well, as you know, we did increase the expected trend for our commercial group business to 5.5% to 6.5% from 4.5%. So that was a significant increase, I think, reflecting all the things that you just discussed. On the Medicare side, it’s not as directly tied to economic growth. There was probably some impact. We focus pretty intently on where the trend benders need to be relative to whether the rates come in at from a CMS perspective. And I would say there is probably less marginal move unlike the commercial side based on economic growth and other factors, employment, et cetera that you would typically see.

What about the fact that fuel prices are lower? Old people are spending less to fuel up their vehicles. And also, can you tell us what kind of trend bender you assumed in 2015 versus 2014?

No. We are not going to get to that level of detail. We haven’t really evaluated it. I don’t know the answer of this specific, how fuel impacted but we take the holistic view where trend maybe and number of factors go into that.

I’m actually happy that the seniors have fuel for their cars because then they can go and see their doctors and take care of all the things that they need to take care of rather than waiting for an acute event. So I’m happy about that.

Thanks.

The next question is from the line of Ana Gupte with Leerink Partner.

Yeah. Thanks. Good morning. I was just trying to see some of the less focused areas of business, if they might be potential drivers for upside. So one of them is individual off-exchange, and I know that's a much smaller piece of your book. But two of your peers have stated that they lost money in '14 and taking some pretty serious pricing actions on removing ACA-compliant plans. Is there anything here that you might have been doing? And I get it that the MLR floors probably took care of a piece of this, but just '14 with guaranteed issue and community rating did hurt some of the off-exchange books.

Yeah. So as we said, I don’t really want to distinguish between off-exchange and on-exchange in terms of our pricing. As we said, we’ve been very disciplined on pricing with our entire ACA-compliant book. Off-exchange is part of our strategy. It’s an important part of our strategy. And we’re looking to mitigate the losses in both the off-exchange and on-exchange. And again all-in, as we said, we do expect to do that this year.

And then secondly -- thanks for that, Brian. Secondly on the small group, and maybe just the broader commercial fully insured book, your employer loss ratio looks pretty good for this quarter. In the third quarter, it’s deteriorated if I remember right. And somehow I didn't have a chance to follow up on that. Our pricing surveys show you jacked up your pricing quite a bit for '15. So any improvement in margin there and what are you baking into your guidance?

Well, again, as we -- back in the third quarter we did suffer the impact of some of the transitional relief that we discussed. We got some of that back in the fourth quarter through, I would say both current period and prior period development that were better than expectations. And that really was the driver of the outperformance along with the continued focus on admin cost. I would say as we move into the next year, the price for Hep C and the like, hopefully we’ll continue to see improvements there. And really where we need to focus is on the admin side as well.

Yes. There is one other dynamic in this small group space that you are all aware of, I’m sure is that there is a movement into the community base trading methodology and that’s kind of an interesting dynamic that we’re watching play out with some of our competition and where they price their community rated business rates versus where we’re at. As we sit here right now, we feel pretty good about how we’re positioned and are monitoring not only the community rights but the migration from our existing block of business into those with the transitional relief opportunity that we have. So again feel pretty good about that and I am glad that you noticed that in some of the stuff that we provided.

Next question please.

Your next question is from the line of Chris Rigg with Susquehanna Financial Group.

Thanks. I just wanted to follow up on the flu comments from earlier. I know you talked about $45 million headwind in the quarter. I guess, I am just trying to get a sense for -- just want to confirm and that was relative to budget, and just for how much the flu costs increase on a year-to-year basis? Thanks.

That was relative to our forecast for the fourth quarter. We had a very difficult December with regard to flu. As I said, it’s abated towards the end of the month and early January, and so we feel good about where we are for 2015. The 2014 results were worst than the 2013 results, but I don’t want to go into specifics there, but they were certainly worst particularly in December.

Okay. Thanks a lot.

Your final question comes from the line of Dave Windley with Jefferies.

Hi. Thanks for squeezing me in. On some maybe difficult to answer questions, but curious of your broader thoughts, first of all, on the Supreme Court decision and how you are contingency planning around that? And secondly, your thoughts on President Obama's budget and proposed cuts to Medicare and specifically Medicare Advantage? Thanks.

Yeah. We really don’t get into the habit of commenting on those broad aspects until they’re finalized. I don’t want to get into that, because it’s just speculation and I will leave it at that.

I think that was the last question. So with that being said, we really appreciate the support by our investors and the confidence in the company. And most importantly, we thank our 55,000 associates for their dedication and helping our members with their health and all the necessary actions that are required with that. So thank you very much, and have a great day.