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Actionable news in HUM: HUMANA Inc,

Humana: 500 West Main Street

The following excerpt is from the company's SEC filing.

P.O. Box 1438

Louisville, KY 40201-1438

http://www.humana.com

FOR MORE INFORMATION CONTACT:

Regina Nethery

Humana Investor Relations

(502) 580-3644

e-mail:

Rnethery@humana.com

Tom Noland

Humana Corporate Communications

(502) 580-3674

Tnoland@humana.com

Humana Reports Third Quarter 2015 Financial Results;

Reaffirms 2015 Adjusted EPS Guidance

3Q 2015 Adjusted EPS of $2.16 excludes the impact of $0.07 per share in Aetna transaction costs and is in line with managements guidance of approximately $2.15 per share

Reaffirmed full-year 2015 Adjusted EPS guidance of approximately $7.75 excluding $1.53 per share of gain on the companys sale of Concentra and total expected Aetna transaction costs of $0.10 per share

Consolidated revenues up 13 percent year to date

3Q 2015 operating cash flow of $1.03 billion

LOUISVILLE, KY (November 6, 2015)

Humana Inc. (NYSE: HUM) today reported diluted earnings per common share (EPS) for the quarter ended September 30, 2015 (3Q 2015) of $2.09 compared to $1.85 for the quarter ended September 30, 2014 (3Q 2014). For the nine months ended September 30, 2015 (YTD 2015) the company reported EPS of $7.77 compared to $6.39 in the nine months ended September 30, 2014 (YTD 2014).

The company has included certain adjusted financial measures throughout this earnings press release. Adjusted pretax income and Adjusted EPS for 3Q 2015 and YTD 2015 were as follows

Consolidated pretax income

(in millions)

3Q 2015

3Q 2014

YTD 2015

YTD 2014

Costs associated with proposed transaction with Aetna

Gain related to sale of Concentra Inc. (Concentra)

Adjusted (non-GAAP)

Diluted earnings per common share

The higher year-over-year Adjusted pretax income for the quarter and year to date reflected higher operating results from the Group and Healthcare Services segments and higher investment income associated with repositioning of the investment portfolio, partially offset by lower operating results in the Retail segment. Further discussion of the drivers of the business segment operating results are discussed in the sections below highlighting each segment.

The higher year-over-year Adjusted EPS for the quarter reflected the same factors impacting Adjusted pretax income and the favorable impact of share repurchase activity in the first half of 2015, partially offset by a higher effective tax rate associated with the expected increase in the non-deductible health insurance industry fee. The lower year-over year Adjusted EPS year to date also reflected the same factors impacting Adjusted pretax income for the quarter and the favorable impact of share repurchase activity, but these favorable factors were more than offset by the higher effective tax rate on a year-to-date basis.

Our third quarter results included operating performance for our Medicare businesses that was generally in line with our expectations and continuing momentum in our Healthcare Services segment, but were challenged by our individual commercial business, said Bruce D. Broussard, Humanas President and Chief Executive Officer. With all this, consumers have been and continue to be at the forefront of our integrated care delivery model, which produces quality care for our members through clinical excellence and a superior consumer experience. Our proposed transaction with Aetna will provide millions more consumers with a new opportunity to engage with innovative wellness and chronic-care programs that have a proven record of measurably improving peoples health and well-being.

Earnings Guidance

The company reaffirms Adjusted EPS guidance for the year ending December 31, 2015 (FY 2015) of approximately $7.75 as noted below:

FY 2015

Estimated costs associated with proposed transaction with Aetna

As we look to 2016, we anticipate marked improvement in our Medicare and individual commercial businesses as a result of actions taken during 2015, added Brian A. Kane, Senior Vice President and Chief Financial Officer. However, we remain cautious with regard to our expectations around 2016 earnings growth due to the ongoing challenges in the individual commercial business and as we continue to evaluate the impact of Medicare financial recovery process changes made during 2014.

A listing of items expected to significantly impact the companys 2016 earnings are discussed throughout this press release and on page S-24 of the statistical supplement included herein.

The companys FY 2015 Adjusted EPS guidance includes the following changes from its previous expectations:

Guidance July 2015

Medicare Advantage underwriting performance (individual and group)

Healthcare Services segment operating performance

Administrative cost efficiencies, other discretionary cost reductions and investment income associated with investment portfolio rebalancing

Individual commercial medical underwriting performance

Guidance November 2015

Proposed Transaction

As previously announced, Humana has entered into a definitive merger agreement with Aetna Inc. (Aetna) on July 2, 2015 under which, at the closing, Aetna will acquire each outstanding common share of Humana for $125 in cash and 0.8375 of an Aetna common share. At separate special stockholder meetings each held on October 19, 2015, Humana stockholders approved the adoption of the Aetna merger agreement and Aetna shareholders approved the issuance of the Aetna common stock in the transaction.

The transaction is subject to customary closing conditions, including the expiration of the Hart-Scott-Rodino anti-trust waiting period and approvals of certain state Departments of Insurance and other regulators. The company expects the transaction to close in the second half of 2016.

CONSOLIDATED HIGHLIGHTS

Consolidated revenues

Consolidated revenues (including investment income) for 3Q 2015 were $13.36 billion, an increase of $1.13 billion, or 9 percent, from $12.24 billion in 3Q 2014, with total premiums and services revenues for 3Q 2015 of $13.23 billion increasing $1.09 billion, or 9 percent, from $12.14 billion in 3Q 2014. The year-over-year increase in premiums and services revenues primarily reflected higher Retail and Group segment totals.

Consolidated revenues for YTD 2015 increased $4.76 billion, or 13 percent, to $40.93 billion from $36.17 billion in YTD 2014 with total premiums and services revenues for YTD 2015 of $40.59 billion also up 13 percent, increasing $4.70 billion from $35.89 billion in YTD 2014. Higher Retail and Group segment premiums and services revenues also drove the year-over-year change in YTD 2015.

Investment income for 3Q 2015 of $130 million increased by $35 million from 3Q 2014 due to a repositioning of the investment portfolio as the company took advantage of recent market volatility and anticipated changes to interest rates. This investment portfolio repositioning is expected to be completed by the end of 2015.

Consolidated benefits expense

The 3Q 2015 consolidated benefit ratio (benefits expense as a percent of premiums) of 83.9 percent increased by 60 basis points from 83.3 percent for the prior years quarter primarily reflecting higher ratios in both the Retail and Group segments. Prior period medical claims development (Prior Period Development) decreased the 3Q 2015 consolidated benefit ratio by 50 basis points versus 80 basis points in the prior years quarter. Excluding Prior Period Development, the consolidated benefit ratios were 84.4 percent and 84.1 percent for 3Q 2015 and 3Q 2014, respectively. Drivers of the segment-level ratios are discussed in the sections below highlighting each segment.

The YTD 2015 consolidated benefit ratio of 84.0 percent increased by 110 basis points from 82.9 percent in YTD 2014. The increase primarily reflects the same factors impacting the third quarter year-over-year comparison. Prior Period Development lowered the YTD 2015 consolidated benefit ratio by 60 basis points versus 130 basis points in YTD 2014. Excluding Prior Period Development, the consolidated benefit ratios were 84.6 percent and 84.2 percent for YTD 2015 and YTD 2014, respectively.

As discussed in the Retail segment highlights below, the companys consolidated Prior Period Development was primarily from positive Medicare Advantage claims development, partially offset by negative individual commercial claims development. Consolidated Prior Period Development was as follows:

Consolidated Prior Period Development

Favorable (unfavorable)

First quarter

Second quarter

Third quarter

Prior Period Development from 2014 and prior years recognized in FY 2015

Prior Period Development from 2013 and prior years recognized in FY 2014

Consolidated operating expenses

The consolidated operating cost ratio (operating costs as a percent of total revenues less investment income) of 12.8 percent for 3Q 2015 decreased 280 basis points from 15.6 percent in 3Q 2014, primarily reflecting lower ratios in the Retail and Group segments as well as the sale of Concentra in June 2015. Drivers of the segment-level ratios are discussed in the sections below highlighting each segment.

The YTD 2015 consolidated operating cost ratio of 13.4 percent decreased 200 basis points from 15.4 percent in YTD 2014, primarily reflecting the same factors impacting the year-over-year comparisons for the third quarter.

Consolidated operating expenses included amortization expense for intangible assets of approximately $22 million and $29 million for 3Q 2015 and 3Q 2014, respectively, and approximately $72 million and $85 million for YTD 2015 and YTD 2014, respectively.

For 2016, the company anticipates higher consolidated operating expenses as discretionary cost reductions implemented in 2015 are expected to return to normal levels in 2016.

Balance sheet

At September 30, 2015, the company had cash, cash equivalents, and investment securities of $10.90 billion, down $231 million from $11.13 billion at June 30, 2015 primarily reflecting net commercial paper repayments of $290 million.

Cash and short-term investments held at the parent company of $1.03 billion at September 30, 2015 decreased $830 million from $1.86 billion at June 30, 2015, primarily reflecting the commercial paper repayment, capital expenditures, payment of stockholder dividends, and the funding of subsidiary working capital requirements.

At September 30, 2015, net receivables of $808 million were associated with premium stabilization programs established under health care reform, commonly referred to as the 3Rs

. Approximately 51 percent of the total net 3Rs receivables were related to reinsurance recoverables. At September 30, 2015, net receivables (payables) for the 3Rs were as follows:

Net Amounts Accrued for the 3Rs

Assets (liabilities)

Balances Related

to 2014 plan year

to 2015 plan year

Total Balances

at 9/30/15

Reinsurance recoverables

Net risk adjustment settlement

Net risk corridor settlement

Total Net Amounts Accrued for the 3Rs

Reinsurance recoverables for the 2015 plan year are anticipated to be primarily collected in the third quarter of 2016. Net risk corridor receivables are now anticipated to be primarily collected in future years and thus the related amounts have been classified as long-term receivables as of September 30, 2015.

Days in claims payable of 43.4 at September 30, 2015 increased 2.3 days from 41.1 at June 30, 2015. This change was primarily driven by higher balances in unprocessed claims inventories associated with slower claims processing speed during 3Q 2015 versus the second quarter of 2015.

Debt-to-total capitalization at September 30, 2015 was 27.0 percent, down from 29.0 percent at June 30, 2015 primarily reflecting lower commercial paper balances outstanding at the end of 3Q 2015. Increases in capital associated with 3Q 2015 earnings were partially offset by cash dividends paid during the quarter. As of September 30, 2015, the company had approximately $11 million outstanding on its commercial paper program compared to $300 million at June 30, 2015.

Cash flows from operations

Cash flows provided by operations for 3Q 2015 were $1.03 billion compared to cash flows provided by operations of $954 million in 3Q 2014. This year-over-year change in operating cash flows primarily reflected higher net income as well as changes in working capital items with the favorable impact of net 3Rs receivables collected in the quarter partially offset by payment of the higher non-deductible health insurance industry fee.

For YTD 2015, cash flows provided by operations totaled $531 million versus $1.43 billion of cash flows provided by operations during YTD 2014. This year-over-year decline primarily reflected lower net income excluding the gain on the Concentra sale (proceeds from the sale are recognized in investing cash flows) and the unfavorable

impact of changes in working capital items, primarily driven by the cash flow impact of lower membership growth YTD 2015 compared to YTD 2014. Membership growth rates have a positive cash flow impact because premiums are generally collected in advance of claim payments.

Fourth quarter 2015 cash flows from operations are anticipated to be lower than previously expected primarily due to the delay in collection of risk corridor receivables associated with the 3Rs. Additionally, fourth quarter cash flows are anticipated to be impacted by normal fluctuation in working capital balances.

Share repurchases

In September 2014, the companys Board of Directors approved a new $2 billion share repurchase authorization with an expiration date of December 31, 2016 that replaced its previous $1 billion share repurchase authorization. Approximately $1.04 billion of the current $2 billion repurchase authorization remains outstanding.

As a result of the proposed transaction with Aetna, the company has suspended its share repurchase program. Consequently, the company did not repurchase shares during 3Q 2015. The company executed repurchases of 967,200 shares for approximately $118 million during 3Q 2014.

Year to date through July 2, 2015 (the date of the merger agreement), the company had repurchased approximately 1,849,800 shares for $329 million. The company repurchased approximately 1,872,600 shares for $230 million during YTD 2014.

In light of the suspension of the companys share repurchase program discussed above, 2016 EPS is not expected to include any benefit from share repurchases versus an active share repurchase program in the first half of 2015.

Cash dividends

The company paid cash dividends to its stockholders of $43 million in each of 3Q 2015 and 3Q 2014. Cash dividends of $129 million were paid to the companys stockholders during each of YTD 2015 and YTD 2014. In August 2015, the companys Board of Directors declared a cash dividend of $0.29 per share, totaling $43 million in the aggregate, which was paid on October 30, 2015 to stockholders of record on September 30, 2015.

The companys ability and intent to continue its quarterly dividend policy is not impacted by the proposed transaction with Aetna, although the company has agreed with Aetna that its quarterly dividend will not exceed $0.29 per share prior to closing the transaction.

RETAIL SEGMENT

This segment consists of Medicare benefits, marketed to individuals or directly via group accounts, as well as individual commercial fully-insured medical and specialty health insurance benefits, including dental, vision, and other supplemental health and financial protection products. In addition, this segment also includes the companys contract with the Centers for Medicare and Medicaid Services (CMS) to administer the Limited Income Newly Eligible Transition (LI-NET) prescription drug plan program and contracts with various states to provide Medicaid, dual eligible, and Long-Term Support Services (LTSS) benefits. These contracts are collectively referred to as state-based contracts

Retail Segment Highlights

While operating performance for the companys stand-alone PDP and group Medicare Advantage businesses are performing in line with the companys expectations, as previously disclosed, its individual commercial and Medicare Advantage businesses are facing certain challenges in 2015.

The companys Medicare Advantage operating results year over year reflect significant growth in membership but were negatively impacted by certain pricing assumptions in Humanas plan designs for 2015 primarily related to lower-than-expected 2015 financial claim recovery levels (included in Prior Period Development) and lower-than-anticipated reductions in inpatient admissions from its clinical programs. Overall, year-over-year hospital admissions have decreased from 2014 and are running slightly favorable versus the companys expectations as revised in July 2015. The company continues to manage the impact of financial recovery process changes made during 2014.

For 2016, Humana believes it has largely captured the 2015 medical cost experience in its Medicare plan designs submitted to CMS in June 2015. However, the financial recovery process changes discussed above and their potential impact on reserve development may negatively affect the companys anticipated growth in earnings for 2016.

2016 individual Medicare Advantage net membership growth is anticipated to be in line with overall market growth and is projected to be in the mid to upper single digits on a percentage basis, excluding the loss of approximately 35,000 members from the discontinuance of a product offering in Puerto Rico. Group Medicare Advantage membership for 2016 is projected to be down due to a large account (approximately 145,000 members) converting to a private exchange offering.

Individual commercial business

Operating results for the companys individual commercial medical business continue to be challenged primarily due to the volatility related to the start of the healthcare exchange program created under the Affordable Care Act (ACA) as well as the morbidity of membership served under this relatively new program. The benefit ratio associated with many of the companys individual products, in particular ACA-compliant offerings, continue to exceed prior expectations for FY 2015 driven primarily by product designs which attracted a higher-utilizing member base than was assumed when the 2015 plan offerings were priced, in part due to the on-going impact of the transitional policies associated with the program. The transitory nature of the population served has also contributed to use of emergency room services and non-participating providers above priced-for levels.

During 2015, the company has taken a number of actions that are anticipated to improve the profitability of the individual commercial business in 2016. However, the deterioration in claims experience for this business in 3Q 2015, if it continues, would reduce the likelihood of achieving the level of profitability the company had previously anticipated for this business in 2016. The company continues to evaluate its participation in this line of business for 2017.

Steps taken to address challenges in this business during 2015 include:

Premium increases for 2016 including the impact of early 2015 claims experience and June 2015 updated risk adjustment data from CMS.

Discontinuance of certain products as well as market exits for 2016, with approximately 100,000 current members expected to be impacted, though approximately 88 percent of those will have other Humana options from which they can choose in addition to offerings in the open market. Product discontinuance for 2016 primarily focuses on off-exchange products as well as platinum metal-tier and broad-network products both on and off exchange. Offerings to be discontinued in 2016 account for a significant portion of the 2015 pretax losses for the individual commercial business.

Network improvements, enhancements to claims and clinical processes and administrative cost right-sizing.

State-based contracts business

In total, the companys state-based contracts business continues to perform in line with managements expectations. State-based business associated with the companys dual eligible membership is outperforming expectations while its Medicaid Temporary Assistance for Needy Families (TANF) products are underperforming expectations.

For 2016, the companys state-based contracts business is expected to benefit from the full-year effect of rate increases and operational improvements implemented in 2015.

Retail segment premiums and services revenue:

The 3Q 2015 premiums and services revenues for the Retail segment was $11.35 billion, an increase of 14 percent from $9.99 billion in 3Q 2014. The increase resulted primarily from an increase of 12 percent in average Medicare Advantage membership year over year, along with membership growth in the companys state-based contracts and stand-alone PDP offerings as well as a heavier percentage of individual commercial business in higher premium ACA-compliant plans.

YTD 2015 premium and services revenues for the Retail segment was $34.49 billion, an increase of 17 percent from $29.45 billion in YTD 2014, primarily reflecting the same factors impacting the year-over-year comparison for the third quarter.

Retail segment enrollment:

Individual Medicare Advantage membership was 2,737,100 as of September 30, 2015, an increase of 334,300, or 14 percent, from 2,402,800 at September 30, 2014, and up 309,200, or 13 percent from 2,427,900 as of December 31, 2014, primarily due to net membership additions associated with the 2015 plan year, particularly HMO offerings.

Group Medicare Advantage membership was 481,300 as of September 30, 2015, a decrease of 3,600, or 1 percent, from 484,900 at September 30, 2014 and down 8,400, or 2 percent, from 489,700 at December 31, 2014. The decline from December 31, 2014 primarily reflects the loss of a large group...


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