Good morning. My name is Andrew. And I'll be your conference operator today. At this time, I'd like to welcome everyone to the Humana, Inc. First Quarter 2018 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. Thank you. Amy Smith, Vice President of Investor Relations, you may begin your conference.

Thank you, and good morning. In a moment Bruce Broussard, Humana's President and Chief Executive Officer; and Brian Kane, Chief Financial Officer, will discuss our first quarter 2018 results and our financial outlook for the full-year. Following these prepared remarks, we will open up the lines for a question-and-answer session with industry analysts. 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. 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 our first quarter 2018 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 also available on our Investor Relations site. Call participants should note that today's discussion includes financial measures that are not in accordance with Generally Accepted Accounting Principles or GAAP. Management's explanation for the use of these non-GAAP measures, and reconciliations of GAAP to non-GAAP financial measures are included in today's press release. Finally, any references to earnings per share or EPS made during this conference call refer to diluted earnings per common share. With that, I'll turn the call over to Bruce Broussard.

Good morning. And thank you for joining us. Today, we reported adjusted earnings per share of $3.36 for the first quarter of 2018 and raised our full-year 2018 adjusted EPS guidance to $13.70 to $14.10. We continue to expect strong individual Medicare Advantage membership growth of 180,000 to 200,000 members for full-year 2018, and all segments are performing well. We are pleased that we continue to consistently deliver strong financial results, while significantly advancing our consumer-focused health strategy, demonstrating excellence in operational execution. We continue to be very active in building our primary care model. In March, we acquired the remaining 51% interest in MCCI and officially launched Conviva, bringing together our fully-owned and JV primary care assets in South Florida and Texas under one brand and one management team. In addition, in April, we acquired Family Physicians Group, one of the largest value-based providers serving Medicare Advantage and manage Medicaid HMO patients in Greater Orlando with a footprint that includes 22 clinics. This brings our total owned JV and alliance clinics to 224, including 138 in Florida. With FPG, we advanced our payer-agnostic primary care strategy, and we continue to look for options to accelerate capability development and geographic expansion of our value-based primary care and MSO support models. We also continued to advance our strategy to integrate clinical programs that intersect healthcare and lifestyle, including in the home, where our Kindred transaction will be an accelerant of our strategy. The Kindred shareholders recently approved the Kindred at Home transaction, and we have been steadily – steadfastly moving forward with the development of the integrated clinical model. One benefit of the Kindred at Home transaction structure that it allows us to focus on advancing our care models and associated impact on lowering the cost of care. We are beginning…

Thank you, Bruce. And good morning, everyone. Today, we reported adjusted EPS of $3.36 for the first quarter. This exceeds our previous expectations, primarily due to favorable current year medical utilization in our Retail segment, relative to our initial expectations, some of which is attributable to a lower-than-previously expected flu impact, and also to positive prior-period medical claims reserve development in our Group and Specialty segment. Consequently, we raised our adjusted EPS guidance to a range of $13.70 to $14.10 from our previous guidance of $13.50 to $14. We expect second quarter adjusted EPS to approach 27% of the full-year number. For the first quarter of 2018, adjusted EPS of $3.36 compares to adjusted EPS of $2.75 in the first quarter of 2017. The year-over-year increase includes, among other items, the impact of a significantly lower tax rate year-over-year, partially offset by investments made in the first quarter of 2018, both as a result of the tax reform law. These investments include investments in our employees, primarily the establishment of an annual incentive program for a broader range of associates, as well as raising the minimum wage to $15 per hour. Additionally, we are making investments in the communities we serve, as well as spending on technology and on our integrated care delivery model to drive longer-term value creation and sustainability. With regard to the flu, our consolidated benefit ratio for 1Q 2018 was negatively impacted by approximately 35 basis points from the incremental flu expense, relative to a typical flu season. Most of the impact came from the Retail segment and our Medicare Advantage business. While it was more severe than last year's, the flu season peaked sooner than we initially expected when we gave guidance, and accordingly, came in a bit below our previous expectations. I will now…

And our first question comes from the line of Ana Gupte with Leerink Partners. Your line is open.

Good morning. Thanks for taking the questions. The questions was about the difference in the Final Rate Notice from February to April, which look quite significantly good. Can you tell us what your thoughts are around the margins that you would target then into 2019 and the progression back to the 4.5% to 5%? Do you think that might accelerate? Or might you, again, just funnel that back into investments and the like?

Sure. Good morning, Ana. Yeah, I'd rather not talk about specifically what we'll do from a competitive perspective, of course. But as I mentioned in my remarks, we do intend to guide next year to an EPS target in excess of our long-term target range of 11% to 15%. I know there's been a lot of questions about that, and so we thought it was important to make sure that was clear. As it relates specifically to our 4.5% to 5% margin target, as we've said previously, we expect to make meaningful progress on the road to getting back to that margin level. Just as a reminder and to level set, one of the reasons, the major reason why we're below the margin target is because of the tax reform investments that we invested in our associates and in our business. And as we've said, over time, we will work to get back to our 4.5% to 5%. But as I said, we will make meaningful progress in that regard next year and guide to a range above our long-term EPS guidance range.

Okay. If I could just ask one follow-up. When you look at the selling season now and in context of the potential CVS Aetna deal with retail clinics and you are doing a lot of primary care, when you think about your clinical and your distribution strategy, do you have a mixed view of you should do primary care and clinics relative to retail clinics and store and the like? Or is it one or the other from a strategic perspective?

I mean, today, we are looking at all different ways to build and develop clinics, both standalone and retail centers, which today, we do in retail centers, not directly in the store, but adjacent to stores. And we'll continue to look at that. We do see convenience as being an important part of the decisions that individuals make when they choose a primary care clinic.

Got it. Thanks so much.

Next question, please?

Your next question comes from line of Matt Borsch with BMO Capital Markets. Your line is open.

Yes, thank you. Could you just talk about – sorry, let me ask you just on the individual business. This is now the second year that you've been out. It's separated from your operating results, and yet it's making a pretty substantial earnings contribution to you. How do you look at your strategy going forward about the potential to get back into that business, given how some of the dynamics have changed?

Yeah. Thanks. Good morning, Matt. I think we continue to look at that as not being part of our core. I think as we communicated last year in our Shareholder Meeting that we are very oriented to staying focused on what we do well. That's been the Medicare individual or Medicare group and individual MA market. We found that our clinical capabilities and our long-term engagement with individuals in the commercial market was really tough; it was very transitory, it was a market that seemed to use the healthcare system on spot basis. And that really isn't our long-term both strategy and our strength. And we feel there's a significant opportunity in the markets that we are in for significant growth, and we want to stay focused on building the capabilities to service those customers.

That's great. And I can just – also one more on Florida and your expansion there. What are your thoughts about the capabilities that you have in that market, and generally, in terms of taking care of a broader TANF population, understanding that you already have statewide LTC, is that, hasn't historically been your preferred focus area?

Yeah. As we committed to the shareholders a number of years ago that we would build our Medicaid platform in concert of being able to serve dual-eligible. And in the State of Florida, we've been working really hard in building our TANF capabilities. And we service five regions for a period of time in that marketplace, and we've built a fairly sophisticated capability in that marketplace that is affordable to any other state, it's not specific to Florida. We built it on a platform that allows us to expand that. And I think the recent preliminary grant by the State of Florida for us to serve all regions in that marketplace is just an example of the consistency of our operating model. So, I would say that we have the capabilities today to service members. I would say, it's just a continued expansion of our procurement process that we'll have to continue to look at as we go from state-to-state.

Sounds good. Thank you.

Your next question comes from the line of Justin Lake with Wolfe Research. Your line is open.

Hi. This is Steve Baxter on for Justin. Question on the services business. In the release, you spoke of a mismatch of the timing of sort of some of the lower revenues in that business and removing the associated operating expense during the first quarter. Can you help us quantify those costs and how you expect them to trend down throughout the balance of the year to kind of get comfortable with the earnings ramp that's implied in guidance for the rest of the year in that business?

Sure. Let me give some context around the quarterly progression on (32:02), we're not going to get to too many specifics. First of all, it's important to note that it's assumed that the Kindred Healthcare transactions will close in the latter half of the year. So, there's some back end waiting there. You mentioned the clinical optimization, and that's an important element, which is the revenue goes away but it takes a little bit of time to remove those costs. I'd rather not quantify that here, but it has a meaningful impact on our quarterly progression. There's also a few one-time expected items on the provider side related to the Conviva acquisition and writing off certain intangibles and the like. So, there are number of things that are assumed in the guidance that results in that quarterly progression. But as I said in my remarks, we feel good about where the numbers are today.

Okay. Thanks. And then a question on the small group market. Like some of the discussion there around trends and seeing some increased success with some of the level-funded products you guys are targeting there, couple of the stop loss. I was hoping you kind of could expand a little bit on what you're seeing there in terms of employer interest in these alternative funding products?

Well, as we said, they really are, I think, resonating in the marketplace, this notion of effectively an ASO product with a stop-loss wrap. We've seen meaningful growth in that area, and I think the financial performance is also really starting to perform, which we like to see. I think it's an attractive offering that gives our employers flexibility and really tailors the product to their needs. So, I think that's why it's resonating in the marketplace.

Thank you. And I'd like to remind everyone if they could please limit themselves to one question, so that we can get to everyone in the queue, we would appreciate it. Next question, please?

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

Great. Thanks. Question about the group MA market. You guys have been growing that pretty nicely, but I think you said that in this quarter most of the increase was related to sales to existing group accounts, which I assume means commercial accounts where you are selling in the group MA side of things. So, if that's the case, it looks like also maybe your larger account ASO business is in decline. So, is there any negative implications of those two trends that you're selling mostly to your own customers, but you're seeing some attrition in that customer base? And what is, therefore, the long-term outlook on group MA?

Good morning, Kevin. So, what we meant on that comment about group MA is that we're in an existing group MA account where we materially expanded the amount of lives that were covered in that particular group MA account. It put more members into the group MA program rather than Medicare secondary. So, it's unrelated to the commercial side. We also won some nice smaller accounts as well and added organic growth in our existing business there too. So really the group MA business is performing quite well, but from a membership perspective as well as from a financial perspective. Obviously, the ASO commercial business, there are some opportunities to cross-sell and the like. That's not where we've been particularly focused, given the fact that we don't have a very large presence in the commercial ASO space, but I think we've been and the team has been very successful at going out and finding new accounts and competing where it makes sense from a financial perspective on some of these larger accounts. So like I said, we feel very good about how the group MA business is progressing.

So, are you saying a slice business or are you saying med supp turning into MA?

Medicare secondary. It's effectively a med supp product that group accounts have the option they could go through a group MA product or more of a traditional supplementary wrap. So, in this one instance that I was referring to is that they are putting them into our group MA product, because it's compelling both from a financial perspective for the accounts. It also offers very attractive benefits for the beneficiary. So, it's really a win-win.

Okay. Thank you.

Your next question comes from the line of Josh Raskin with Nephron Research. Your line is open.

Hi, thanks. Good morning. I just want to talk broadly about – or ask a question broadly about the benefits of a retail partnership and what you think would be the benefit to Humana and, specifically, the Medicare Advantage lives to have a more expanded retail partnership? Thanks.

We pride ourselves on partnerships in general. I mean, we've been successful both in providers, retailers, such as our Part D product that we have, along with other people that are part of the healthcare system. A retailer provides, I think, some interesting access points for customers that are more convenient. We would think that it would be closer aligned to more of a primary care clinic extended by some lighter care services that could be a referral source for that. And then obviously, any kind of distribution opportunities that would be created from that. Now in our Walmart relationship that we've had long-standing, we've had a very successful Part D relationship with them. In addition, we are part of their distribution, insurance distribution channel that they have and actually manage a lot of that for them. And we see that being in the stores as helpful and convenient for the customer, and in addition, it just drives further traffic to the clinical models and in addition to the distribution model.

And I'm sorry, just a follow-up, Bruce, you've been selling MA. I know you've got folks in their stores. Is there meaningful growth in Medicare Advantage as part of that relationship? Or do you think there's more opportunity outside of the Part D to actually generate new sales leads and growth in MA as well?

We have – our market point sales people are in the stores, they would be selling both. They would be selling MA and Part D as a result of that. So, it's just another access point for people to, as they're in the store to learn more about the benefits of MA and Part D. And so, we do have our distribution channel inside the store there. And their customers are making decisions around Medicare.

Okay. Thanks.

Your next question comes from the line of A. J. Rice with Credit Suisse. Your line is open. A. J. Rice - Credit Suisse Securities (USA) LLC: Hello, everybody. Thanks. I'm going to ask about capital deployment. It looks like you've laid out pretty well what you're going to do with the share repurchases you've done already and will do for the rest of the year. I guess when I think about what you're doing with home health and hospice, my original understanding and I might have been wrong, was that the Kindred at Home vehicle would be the vehicle to go forward and the primary focus would be on that self-funding its growth. I know you've stepped up and done this Curo, which may have been just an opportunistic one. But, do you see once you put those two together, is that vehicle now got the capability to self-fund what it's going to do in the future? Or do you see more capital commitments there? And I think two other areas you mentioned for capital, even in the prepared remarks, MA, geography expansion and capabilities expansion and physician acquisitions. Can you give us a sense of what might be the types of size and scope of capital outlays in those areas and whether you think you'll see something this year? Or are there projects that you're actively considering at this point?

Sure. Good morning, A. J. Let me take that one. So, I think on the other capital in Curo and Kindred, we feel pretty good about how that company is now positioned in terms of the capabilities that it has. Obviously, we'll always look for assets that make sense. Our sense today is that that business will be able to self-fund as they look for additional opportunities in the home health and hospice space. That said, we have a very good relationship with our private-equity partners, and if something makes sense, we would certainly look at it. But I think it's fair to say that from a sort of material capital deployment perspective as we sit here today, the $1.1 billion that I mentioned is the number that I think that we can feel pretty good about. As it relates to other potential deployment, it really – I mean, we obviously look at a number of things, I wouldn't be prepared today to commit to something specific in terms of size. We'll look at small transactions, for example, the FPG transaction versus we'll look at larger deals as well, that really depends. But I'm not prepared today to commit to specific capital spending levels. But whatever we do, we're pretty disciplined about how we deploy that capital. I think we're judicious about the optimal forms to get that capital. I think the Kindred deal is an example of that, and so we'll always look to deploy our capital optimally. A. J. Rice - Credit Suisse Securities (USA) LLC: Okay. Thanks a lot.

Your next question comes from the line of Dave Windley with Jefferies. Your line is open.

Hi. Good morning. It's Dave Styblo in for Windley. I just want to come back to the Retail comments that you guys had made about early indications of some cost trends that you see that are looking favorable. I think you had spiked out the lower pre-authorizations, and then, of course flu was a little bit less than you had guided to. Can you flesh that out and just remind us what the guidance is for? Is that really just less flu and some prior-period development? Or are you factoring in any of the early indications from the pre-authorization trends? And any other data points on medical utilization that you could flag for us would be great.

Sure. So, I would say a couple of things. There is some beneficial flu impact in there, but there's also, really focused on the first quarter, some of the early indicators of positive medical utilization that we've seen. As I mentioned, we haven't assumed that it carries forward, and I think we've been very reasonable in the amount of benefits we've recognized in the first quarter and in our guidance. As I mentioned, we just want to be, again, very prudent about the claims experience, recognizing that we're still early in the year. But particularly on the inpatient side, we are seeing favorability in our authorizations. And I would say, the other service categories are running fine as well. And so again, I think it's a good start to the year. We feel very good about how we are positioned from a medical cost trend perspective. Frankly, both for the Retail side and on the Group side, I'm sorry?

Okay. And pharmacy trends. I know you mentioned the inpatient pre-authorization. Anything on pharmacy?

Yeah, pharmacy, I would say also running well. Scripts are largely in line with our forecast, maybe slightly better, might be slightly lower than we had anticipated. There's some different mix issues and the like that impacts the cost. But overall, I would say, we're running in line or perhaps slightly better.

Thanks.

Your next question comes from the line of Gary Taylor with JPMorgan. Your line is open.

Hi, good morning. If I could just follow-up a little bit on that last question, one of the things we've noticed from the hospital this quarter is fairly large jump in acuity growth in the first quarter, probably more noticeable than any real volume pickup. Could you describe what visibility and/or lag you have between seeing inpatient census and pharma claims versus actual acuity of those claims? And I guess what I'm trying to get at, is there some lag between what you might be seeing on your pre-authorizations versus the actual acuity that comes through the claims once fully quoted?

Yeah. We can see preliminary data on that. I think it is fair to say that there is some higher acuity or what we call cost per admission, what we're seeing in the data. It's still something that we are analyzing, part of it may well be the fact that because more of the admissions are moving to outpatient as opposed to inpatient, what's left is a higher acuity level. But that's something that we are analyzing. But again overall, from an overall utilization perspective both rate and volume, we feel good about where we are.

Okay. Thank you.

Your next question comes from the line of Zack Sopcak with Morgan Stanley. Your line is open. Zachary Sopcak - Morgan Stanley & Co. LLC: Thanks for the question. I just want to go back to the comments earlier on the Final Rate Notice and the opportunity to do supplemental benefits. Can you talk about your capabilities there, any capabilities you may need to add and what the opportunity you see as over the next couple of years if that remains? Thanks.

Yeah. One of the things about the supplemental benefits, details are still coming out. So, what they are and how they work are going to continue to need to be refined. But in general, over a number of years, we've been working on supplemental benefits through both connecting with charitable organizations, and at the same time, incorporating it in our process and workflow. At this time, I don't think there's anything that I would say that we couldn't deliver through partnerships and other means that would need to be altered in any fashion. We feel very, very equipped and capable as we look at both our clinical programs and the relationships in our communities. Zachary Sopcak - Morgan Stanley & Co. LLC: Great. Thank you.

Your next question comes from the line of Steve Tanal with Goldman Sachs. Your line is open. Stephen Tanal - Goldman Sachs & Co. LLC: Thanks, good morning, guys. Wanted to ask a general question, just help us think about integrated care opportunities. Can you give us a general sense of sort of the mix of medical costs or the percent inpatient, outpatient drug? And sort of pursuant to that, I would be curious to know what sort of hip and knee surgeries represent as a percent of total and how much the bundle of care initiatives can save in broad strokes. Any kind of rule of thumb there would be helpful.

Yeah, I'd rather not comment on specifics like that. As we've said in the past, inpatient is probably 25% to 30%; outpatient, another 25%; physician, I think is 15% or 20%, and we use some capitation in there; and pharmacy is the rest. But I think that's broadly what I would point to, so call it, 25% to 30% inpatient, and then call it 20% outpatient, 10% pharmacy, and then the rest sort of other and we have a bunch of different payments we make to our providers and the like, and capitation. So, that's how I sort of break out or frac out the medical spend. But as it relates to specific hip and knees, I'd rather not comment on that. But I would just say more broadly, we're always looking for opportunities to engage with our providers in a value-based way and we think bundles is an interesting opportunity and something that we continue to pursue.

We have a number of programs in the test-and-learn phase in different markets and we have found to have significant benefits both on outcomes and on cost. And we'll continue to pursue those on kind of more conditioned-based. Stephen Tanal - Goldman Sachs & Co. LLC: Got it. Thanks.

Your next question comes from the line of Sarah James with Piper Jaffray. Your line is open. Sarah E. James - Piper Jaffray & Co.: Thank you. Has Florida made any commitment to you to getting you to critical mass on the new products? As I look at the auto assignment algorithm, it says that it won't favor anyone's plan, but that's not really clear if that means round-robin or if it would at least get you to a minimum critical mass. And then does this win influence how you think about the need to go out and buy mixed books in order to continue your LTSS growth strategy? Thanks.

Why don't I take the first question and then hand to Bruce. With regard to the sort of allocation, the algorithm methodology, there are some parameters laid out in the proposal. We feel good about sort of what I'd call material upside relative to our current revenue and membership. There could be some movement there, but I think we feel pretty good about how the methodology is laid out. Obviously, we've got to get through all the protests and the like, but that's really what I'd say on that front.

And the second front around acquisition and being able to build additional capabilities, we feel really good about the capabilities that we have from a clinical point of view and from a service point of view for the Medicaid population, both in the TANF area and, in addition, in the long-term support service area combined with the Medicare Advantage duals opportunity. Where I think we would constantly look to see if we needed additional capabilities would be in the procurement area, where there's already an existing relationship in that particular state or market, and the barriers-to-entry are much greater outside of just the core capabilities you have. And so, it would be more of a procurement review as opposed to a capability side. Sarah E. James - Piper Jaffray & Co.: Thank you.

Your next question comes from the line (50:21) with Bank of America. Your line is open.

Thank you for taking my question. And congrats on the quarter. Just looking at the funding math here, you did Curo for $1.4 billion and Kindred for $800 million. And then you're guiding towards $500 million repurchases in the back of 2018. And if you use $1.1 billion of parent cash, should we expect you to tap the long-term debt markets anytime soon?

I'd rather not comment specifically on our financing plans. Obviously, we'll ensure that we're adequately capitalized and have sufficient liquidity. We also have, as you know, a large commercial paper program. But again, just to make sure that you have the math right, it's $1.1 billion for both Kindred and Curo. So, there's a debt financing component that will be done at the asset specifically, would be non-recourse to Humana. And so that's where the $1.1 billion is. Effectively the $800 million we talked about before and approximately $300 million for Curo, that could move a little bit plus or minus. But that's probably how we're thinking about it. But we have sufficient capital to execute what we've laid out.

Okay. Appreciate it. Thanks a lot.

There are no further questions at this time. I'd now like to turn the call back over to Bruce Broussard.

Well, great. Thank you again for our investors supporting the organization over the period of time you've been with us as an organization. That means a lot to us. And, of course, we couldn't do what we've done this quarter and throughout the year without the support and dedication of our 50,000 associates, and I thank them. So thank you, and everyone have a great day.

This concludes today's conference call. You may now disconnect.