Amy Smith

Humana Investor Relations

(502) 580-2811

e-mail: Amysmith@humana.com

Full year 2018 earnings per diluted common share (EPS) of $12.16 on a GAAP basis, $14.55 on an Adjusted basis

2018 earnings outperformance fueled by continued strong Medicare Advantage results

2019 EPS guidance of approximately $16.60 to $17.10 on a GAAP basis, $17.00 to $17.50 on an Adjusted basis, exceeding long-term growth targets

Reaffirmed expected full year 2019 individual Medicare Advantage membership growth of 375,000 to 400,000 members, representing 12 percent to 13 percent growth in 2019

Company’s Board of Directors increases cash dividend to $0.55 per share, an increase of 10 percent from prior dividend of $0.50 per share

Consolidated pretax income

In millions

Generally Accepted Accounting Principles (GAAP)

Loss on sale of KMG America Corporation (KMG), a wholly-owned subsidiary

Put/call valuation adjustments associated with 40% minority interest in Kindred at Home

Amortization associated with identifiable intangibles

Segment losses (earnings) associated with the Individual Commercial segment

Net expense (gain) associated with the terminated merger agreement (for FY 2017, primarily the break-up fee)

Guaranty fund assessment expense to support the policyholder obligations of Penn Treaty (an unaffiliated long-term care insurance company)

Charges associated with voluntary and involuntary workforce reduction programs

Costs associated with early retirement of debt

Adjusted (non-GAAP)

Diluted earnings per common share (EPS)

GAAP

(Favorable adjustment) loss on sale of KMG, a wholly-owned subsidiary

Put/call valuation adjustments associated with 40% minority interest in Kindred at Home

Amortization associated with identifiable intangibles

Segment losses (earnings) associated with the Individual Commercial segment

Adjustments to provisional estimates for the income tax effects related to the tax reform law enacted on December 22, 2017 (Tax Reform Law)

Net expense (gain) associated with the terminated merger agreement (for FY 2017, primarily the break-up fee)

Beneficial effect of lower effective tax rate in light of pricing and benefit design assumptions associated with the 2017 temporary suspension of the non-deductible health insurance industry fee; excludes Individual Commercial segment impact

Charges associated with voluntary and involuntary workforce reduction programs

Costs associated with early retirement of debt

Guaranty fund assessment expense to support the policyholder obligations of Penn Treaty (an unaffiliated long-term care insurance company)

Adjusted (non-GAAP)

Humana Inc. summary of quarter and FY results

(dollars in millions)

Consolidated results:

Revenues – GAAP

Revenues – Adjusted

Pretax income – GAAP

Pretax income – Adjusted

EPS – GAAP

EPS – Adjusted

Benefits expense ratio – GAAP

Benefits expense ratio – Adjusted

Operating cost ratio – GAAP

Operating cost ratio – Adjusted

Operating cash flows– GAAP

Operating cash flows– Adjusted

Parent company cash and short term investments

Debt-to-total capitalization

Retail segment results:

Revenues – GAAP

Benefits expense ratio – GAAP

Operating cost ratio – GAAP

Segment earnings – GAAP

Segment earnings – Adjusted

Group and Specialty segment results:

Revenues – GAAP

Benefits expense ratio – GAAP

Operating cost ratio – GAAP

Segment earnings (loss) – GAAP

Segment earnings (loss) – Adjusted

Healthcare Services segment results:

Revenues – GAAP

Operating cost ratio – GAAP

Segment earnings – GAAP

Adjusted EBITDA (i)

Diluted earnings per common share

GAAP

Loss on Sale of KMG, a wholly-owned subsidiary

Put/call valuation adjustments associated with 40% minority interest in Kindred at Home

Amortization of identifiable intangibles

Segment earnings associated with the Individual Commercial segment

Adjustments to provisional estimates for the income tax effects related to the Tax Reform Law

Adjusted (non-GAAP) – FY 2019 projected

Consolidated revenues

(in millions)

GAAP

Revenues associated with the Individual Commercial segment

Adjusted (non-GAAP)

Consolidated benefit ratio

(benefits expense as a percent of premiums)

GAAP

Benefit ratio impact associated with the Individual Commercial  segment

Adjusted (non-GAAP)

enhanced 2018 Medicare Advantage member benefits resulting from the investment of the better than expected 2017 individual Medicare Advantage pretax earnings,

an unfavorable year-over-year comparison of the Group and Specialty segment benefit ratio as further discussed in the segment highlights that follow, and

lower favorable prior period medical claims reserve development (Prior Period Development).

enhanced 2018 Medicare Advantage member benefits resulting from the investment of the better than expected 2017 individual Medicare Advantage pretax earnings; and

a more severe flu season during the first quarter of 2018.

Consolidated Prior Period Development (in millions)

Favorable (unfavorable)

Prior Period Development from prior years recognized in 4Q18

Prior Period Development from prior years recognized in 4Q17

Prior Period Development from prior years recognized in FY 2018

Prior Period Development from prior years recognized in FY 2017

Consolidated operating cost ratio

(operating costs as a percent of total revenues less investment income)

GAAP

Operating cost ratio impact associated with the Individual Commercial segment

Guaranty fund assessment expense to support the policyholder obligations of Penn Treaty (an unaffiliated long-term care insurance company)

Charges associated with voluntary and involuntary workforce reduction programs

Adjusted (non-GAAP)

the reinstatement of the non-deductible health insurance industry fee in 2018, which increased the consolidated GAAP operating cost ratio by approximately 180 basis points in 4Q18,

investments made in 4Q18 as a result of the Tax Reform Law; these include the continuation of investments in the company’s employees, primarily the establishment of an annual incentive compensation program for a broader range of employees, together with additional investments in the communities of the company’s members, technology and its integrated care delivery model to drive more affordable healthcare and better clinical outcomes, as previously disclosed,

an increase in incentive compensation costs under the expanded program noted above, resulting from the continued strong performance by the company, and

growth in the company’s military services business, which carries a higher operating cost ratio than other company products, due to the previously disclosed transition to the TRICARE East Region contract effective January 1, 2018.

significant operating costs efficiencies in 4Q18 driven by productivity initiatives implemented in 2017,

impact of the charges recorded in 4Q17 associated with the voluntary and involuntary workforce reduction program, and

the exit of the individual commercial business, which carried a higher operating cost ratio than the company’s other products, effective January 1, 2018.

At December 31, 2018, the company had cash, cash equivalents, and investment securities of $12.78 billion, down $1.46 billion, or 10 percent, from $14.24 billion at September 30, 2018, primarily reflecting the October 1 payment of $1.04 billion payment related to the health insurance industry fee and common stock repurchases, partially offset by net borrowings under a term loan. Additional changes are outlined in the company’s consolidated statement of cash flows on pages S-6 and S-7 of the statistical supplement included in this release.

At December 31, 2018, cash and short-term investments held at the parent company of $578 million decreased $424 million, or 42 percent, from $1.00 billion at September 30, 2018 primarily resulting from common stock repurchases, capital contributions to subsidiaries, and capital expenditures. These declines were partially offset by net borrowings under a term loan and dividends received from subsidiaries.

Days in claims payable (DCP) of 39.1 at December 31, 2018, decreased by 2 days from 41.1 at September 30, 2018, and declined 1.3 days from 40.4 at December 31, 2017. Changes are outlined in the DCP rollforward on page S-19 of the statistical supplement included in this release.

Debt-to-total capitalization at December 31, 2018 was 37.4 percent, slightly above target and up 460 basis points from 32.8 percent at September 30, 2018, primarily resulting from net borrowings of $650 million under the company’s term loan, the net issuance of commercial paper during the fourth quarter, and the impact of share repurchases due to the accelerated share repurchase (ASR) program entered into in 4Q18. These items were partially offset by the net impact of the quarter’s earnings. The company’s long-term debt-to-total capitalization target of approximately 35 percent is expected to allow the company to maintain its investment grade credit rating while providing significant financial flexibility. At times, the company’s debt-to-total capitalization will exceed this target due to the timing of share repurchases, acquisitions, and debt issuance.

Net cash from operating activities

(in millions)

(Used in)provided by

GAAP

Timing of premium payment from CMS (f)

Adjusted (non-GAAP)

GAAP cash flows used in operations of $333 million in 4Q18 favorably compared to cash flows used in operations of $2.91 billion in 4Q17. The year-over-year GAAP comparison was positively impacted by the following:

the timing of the monthly premium remittances from CMS. The company received the October 2017 payment of $3.13 billion during the third quarter of 2017 as a result of October 1 falling on a weekend in 2017. As a result, 4Q17 included only two monthly payments as compared to the scheduled three monthly payments that were received in 4Q18; and

favorable year-over-year earnings in 4Q18 compared to 4Q17.

For FY 2018, GAAP cash flows provided by operations totaled $2.17 billion versus $4.05 billion of GAAP cash flows provided by operations during FY 2017, a decrease of $1.88 billion, or 46 percent. The year-over-year decrease was impacted by the following:

the receipt of the merger termination fee, net of related expenses, in FY 2017,

the funding of reinsurance transactions in connection with the sale of KMG in FY 2018, and

the timing of working capital items.

During November 2018, the company entered into an agreement with a third party financial institution to effect a $750 million ASR program under its current share repurchase authorization. The actual number of shares repurchased under the November 2018 ASR agreement will be determined based on a volume-weighted average price of the company’s common stock during the purchase period. Settlement of approximately $150 million of repurchases under the ASR remains pending, and the company expects final settlement in the first quarter of 2019. During 4Q18, the company executed share purchases of 1,937,800 shares, at an average of $309.63 per share, under this ASR program.

After consideration of the $750 million ASR, the company has a remaining repurchase authorization of approximately $1.03 billion as of February 6, 2019.

The company paid cash dividends to its stockholders of $70 million in 4Q18 versus $58 million in 4Q17. Cash dividends of $265 million were paid to the company’s stockholders during FY 2018 compared to $220 million in FY 2017. The increases primarily reflect an increase in the per share dividend to $0.50 for 2018 from $0.40 per share for 2017, as previously disclosed.

In February 2019, the company’s Board of Directors declared a cash dividend of $0.55 per share, an increase of 10 percent from the company’s previous dividend of $0.50 per share. This dividend will be payable on April 26, 2019 to stockholders of record on March 29, 2019.

The 4Q18 revenues for the Retail segment were $12.04 billion, an increase of $1.09 billion, or 10 percent, from $10.95 billion in 4Q17 primarily reflecting individual and group Medicare Advantage membership growth in last year’s Annual Election Period (AEP) as well as increased per-member premiums for certain of the segment’s products, partially offset by declines in stand-alone PDP and state-based contracts revenues resulting from year-over-year membership declines discussed further below.

The FY 2018 revenues for the Retail segment were $48.26 billion, up $3.53 billion, or 8 percent, from $44.73 billion in FY 2017, primarily reflecting the same factors impacting the year-over-year fourth quarter comparison.

Individual Medicare Advantage membership was 3,064,000 as of December 31, 2018, a net increase of 20,200 or 1 percent, from 3,043,800 as of September 30, 2018, and up 203,200, or 7 percent, from 2,860,800 as of December 31, 2017. The year-over- year increase was primarily due to membership additions associated with last year’s AEP for Medicare beneficiaries.

January 2019 individual Medicare Advantage membership approximated 3,406,000, up approximately 342,000, or 11 percent, from December 31, 2018, reflecting net membership additions during the recently completed AEP for Medicare beneficiaries.

Group Medicare Advantage membership was 497,800 as of December 31, 2018, a net increase of 1,000, or less than 1 percent, from 496,800 at September 30, 2018, and up 56,400, or 13 percent, from 441,400 as of December 31, 2017. The year-over-year increase primarily resulted from increased sales to the company’s existing group accounts during last year’s AEP for Medicare beneficiaries.

January 2019 group Medicare Advantage membership approximated 516,800, up approximately 19,000, or 4 percent, from December 31, 2018, reflecting net membership additions during the recently completed AEP for Medicare beneficiaries.

Membership in the company’s stand-alone PDP offerings was 5,004,300 as of December 31, 2018, a net decrease of 11,600, or less than 1 percent, from 5,015,900 as of September 30, 2018, and down 303,800, or 6 percent, from 5,308,100 as of December 31, 2017, reflecting net declines during last year’s AEP for Medicare beneficiaries. These declines primarily resulted from the previously disclosed loss of auto assigned members in Florida and South Carolina due to pricing over the CMS low income benchmark and continued membership declines in the company’s Enhanced Plan. In addition, growth in the company’s co-branded Walmart plan was significantly lower than historical levels due to the introduction of additional low-priced competitor offerings in many regions.

January 2019 stand-alone PDP membership approximated 4,458,000, down approximately 546,300, or 11 percent, from December 31, 2018, reflecting net membership declines during the recently completed AEP for Medicare beneficiaries. The decline is primarily due to the competitive nature of the industry and the pricing discipline the company has employed, which has resulted in it no longer being the low cost plan in any market for 2019.

State-based contracts membership (including dual-eligible demonstration members) was 341,100 as of December 31, 2018, a net increase of 17,300, or 5 percent, from 323,800 at September 30, 2018, but down 19,000, or 5 percent, from 360,100 as of December 31, 2017. The sequential increase primarily resulted from increased membership in the Managed Medical Assistance (MMA) program in Florida as a result of the December 1, 2018 contract effective date in certain regions. The year-over-year decrease was primarily driven by the company’s election not to participate in Illinois’ Medicaid Integrated Care Program and the Virginia Long Term Support Services (LTSS) contract that replaced the state’s previous stand-alone dual eligible demonstration program in December 2017. Year-over-year comparisons were also impacted by lower membership associated with the company’s Florida Medicaid contract due to overall strengthening economic conditions, partially offset by the addition of members in 4Q18 associated with the Florida MMA program described above.

The 4Q18 benefit ratio for the Retail segment of 84.0 percent decreased 20 basis points from 84.2 percent in 4Q17 primarily due to the reinstatement of the non-deductible health insurance industry fee in 2018 which was contemplated in the pricing and benefit design of the company’s products. This improvement was partially offset by the unfavorable impact from enhanced 2018 Medicare Advantage member benefits resulting from the investment of the better than expected 2017 individual Medicare Advantage pretax earnings.

The FY 2018 benefit ratio for the Retail segment of 85.1 percent was 50 basis points lower than the FY 2017 ratio of 85.6 percent, primarily reflecting the same factors impacting the year-over-year comparison for the fourth quarter, while being partially offset by the impact of a more severe flu season in the first quarter of 2018.

Prior Period Development for the Retail segment, as noted in the table below, improved the segment benefit ratio by 30 basis points in 4Q18 and 40 basis points in 4Q17. Prior Period Development lowered the FY 2018 benefit ratio by 80 basis points and lowered the FY 2017 ratio by 90 basis points.

Retail segment Prior Period Development (in millions)

Favorable (unfavorable)

Prior Period Development from prior years recognized in FY 2018

Prior Period Development from prior years recognized in FY 2017

The Retail segment’s operating cost ratio of 12.9 percent in 4Q18 increased 110 basis points from 11.8 percent in 4Q17. The year-over-year comparison was negatively impacted by the following:

the reinstatement of the non-deductible health insurance industry fee in 2018, which increased the Retail segment’s operating cost ratio by approximately 190 basis points in 4Q18,

an increase in incentive compensation costs under the expanded program noted previously, resulting from the continued strong performance by the company, and

strategic investments made in 4Q18 as a result of the Tax Reform Law as previously described.

The Retail segment’s FY 2018 operating cost ratio of 11.1 percent increased 150 basis points from 9.6 percent in FY 2017 primarily reflecting the same factors that impacted the year-over-year comparison for the fourth quarter. The reinstatement of the non-deductible health insurance fee impacted the segment’s FY 2018 operating cost ratio by approximately 190 basis points.

Retail segment earnings

in millions

GAAP

Amortization associated with identifiable intangibles

Adjusted (non-GAAP)

The Retail segment’s GAAP segment earnings of $339 million in 4Q18 decreased $52 million, or 13 percent, from GAAP segment earnings of $391 million in 4Q17. Adjusted segment earnings for the Retail segment of $343 million in 4Q18 decreased $54 million, or 14 percent, from the 4Q17 Adjusted segment earnings. The unfavorable comparisons reflect the segment’s higher operating cost ratio in 4Q18, partially offset by the year-over-year improvement in the segment’s benefit ratio in 4Q18.

For FY 2018, GAAP segment earnings for the Retail segment of $1.73 billion decreased $245 million, or 12 percent, from $1.98 billion in FY 2017. Adjusted segment earnings of $1.75 billion in FY 2018 declined $250 million, or 12 percent, from $2.00 billion of Adjusted segment earnings in FY 2017. The year-over-year decreases primarily reflect a higher operating cost ratio in FY 2018, partially offset by an improving benefit ratio.

The 4Q18 revenues for the Group and Specialty segment were $1.91 billion, up $18 million, or 1 percent, from $1.89 billion in 4Q17. The year-over-year increase was primarily due to the following factors:

higher stop-loss premiums related to the company’s level-funded ASO accounts resulting from membership growth in this product as more fully described below; and

higher per member premiums across the commercial fully-insured business.

The FY 2018 revenues for the Group and Specialty segment were $7.68 billion, up $230 million, or 3 percent, from $7.45 billion in FY 2017, primarily reflecting the same factors that impacted the year-over-year fourth quarter comparison, as well as greater services revenues from the company’s military services business as a result of the transition to the East Region TRICARE contract on January 1, 2018.

Group fully-insured commercial medical membership was 1,004,700 at December 31, 2018, a decrease of 24,400, or 2 percent, from 1,029,100 at September 30, 2018, and down 93,000, or 8 percent, from 1,097,700 at December 31, 2017. These anticipated declines primarily reflect lower membership in small group accounts due in part to more small group accounts selecting level-funded ASO products in 2018. The portion of group fully-insured commercial medical membership in small group accounts (2-99 sized employer groups) was approximately 61 percent at December 31, 2018 and 62 percent at September 30, 2018 and approximately 64 percent at December 31, 2017.

Group ASO commercial medical membership was 481,900 at December 31, 2018, an increase of 32,000, or 7 percent, from 449,900 at September 30, 2018, and up 23,200, or 5 percent, from 458,700 at December 31, 2017. The increases primarily reflect more small group accounts selecting level-funded ASO products in 2018, partially offset by 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 26 percent of group ASO medical membership at December 31, 2018 versus 21 percent at September 30, 2018 and 12 percent at December 31, 2017.

Military services membership was 5,928,600 at December 31, 2018, an increase of 1,200, or less than 1 percent, from 5,927,400 at September 30, 2018, and up 2,846,800 or 92 percent, versus 3,081,800 at December 31, 2017 primarily due to the company’s transition to providing healthcare services to military service members, retirees, and their families under the TRICARE East Region contract from the South Region contract. The new contract, which covers 32 states, became effective on January 1, 2018.

Membership in specialty products ^(g) was 6,072,300 at December 31, 2018, a decrease of 44,000, or 1 percent, from 6,116,300, at September 30, 2018, and down 913,700, or 13 percent, from 6,986,000 at December 31, 2017. The decreases primarily resulted from the previously disclosed exit of the company’s WVB and FPP lines of business in connection with the KMG divestiture, as well as the loss of some large group accounts offering stand-alone dental and vision products. These decreases were partially offset by an increase in individual dental and vision membership.

The 4Q18 benefit ratio for the Group and Specialty segment was 84.6 percent, an increase of 150 basis points from 83.1 percent for 4Q17. The year-over-year increase in the benefit ratio is primarily due to the impact of the following factors:

retroactive contractual rate adjustments,

membership mix, including the continued migration of healthier groups to level-funded ASO products in 2018, and

the impact of the exit of the WVB and FPP lines of business in connection with the KMG divestiture during the second quarter of 2018, which carried a very low benefit ratio.

the reinstatement of the non-deductible health insurance industry fee in 2018 which was contemplated in the pricing of the company’s products; and

higher favorable Prior Period Development.

The FY 2018 benefit ratio for the segment of 79.7 percent was 50 basis points higher than the FY 2017 ratio of 79.2 percent. The year-to-date comparison was impacted by the same factors affecting the fourth quarter comparison.

Prior Period Development for the Group and Specialty segment decreased the 4Q18 segment benefit ratio by 30 basis points but increased the 4Q17 ratio by 20 basis points. Prior Period Development lowered the segment benefit ratio by 70 basis points in FY 2018 and by 60 basis points in FY 2017.

Group and Specialty segment Prior Period Development (in millions)

Favorable (unfavorable)

Prior Period Development from prior years recognized in FY 2018

Prior Period Development from prior years recognized in FY 2017

The Group and Specialty segment’s operating cost ratio was 23.9 percent in 4Q18, an increase of 200 basis points from 21.9 percent in 4Q17. The year-over-year comparison was primarily impacted by the following factors:

reinstatement of the non-deductible health insurance industry fee in 2018, which increased the segment’s operating cost ratio by approximately 160 basis points in 4Q18,

growth in the company’s military services business which carries a higher operating cost ratio than other products within the segment, as a result of the transition to the TRICARE East Region contract,

an increase in incentive compensation costs under the expanded program noted previously, resulting from the continued strong performance by the company, and

investments made in 4Q18 as a result of the Tax Reform Law as previously described.

significant operating costs efficiencies in 4Q18 driven by productivity initiatives implemented in 2017; and

the impact of the exit of the WVB and FPP lines of business in connection with the KMG divestiture during the second quarter of 2018, which carried a higher operating cost ratio.

The Group and Specialty segment’s operating cost ratio of 23.6 percent for FY 2018 was up 220 basis points compared to 21.4 percent for FY 2017. The year-over-year increase was primarily impacted by the same factors influencing the fourth quarter comparison. The reinstatement of the non-deductible health insurance industry fee impacted the segment’s FY 2018 operating cost ratio by approximately 160 basis points.

Group and Specialty segment earnings (losses)

In millions

GAAP

Amortization associated with identifiable intangibles

Adjusted (non-GAAP)

The Group and Specialty segment’s GAAP segment losses of $11 million in 4Q18 compared to GAAP segment earnings of $47 million in 4Q17, a decrease of $58 million. Adjusted segment losses for the Group and Specialty segment of $10 million in 4Q18 decreased $58 million from $48 million of Adjusted segment earnings in 4Q17. The decreases primarily reflect the factors resulting in the segment’s higher benefit and operating cost ratios in 4Q18, along with lower military services business earnings, which were unfavorably impacted by the timing of certain contractual incentives and adjustments. The declines were partially offset by a favorable year-over-year earnings comparison for the company’s group ASO commercial medical business.

The Group and Specialty segment’s GAAP segment earnings of $361 million in FY 2018 compared to GAAP segment earnings of $412 million in FY 2017, a decrease of $51 million, or 12 percent. Adjusted segment earnings of $366 million in FY 2018 decreased $49 million, or 12 percent, from $415 million of Adjusted segment earnings in FY 2017. The year-over-year declines primarily reflect the same factors impacting the fourth quarter GAAP and Adjusted comparisons, excluding the timing impact of the military services business earnings noted above.

Revenues of $6.19 billion in 4Q18 for the Healthcare Services segment increased by $173 million, or 3 percent, from $6.02 billion in 4Q17. The year-over-year comparison was favorably impacted by the following:

strong Medicare Advantage membership growth in 2018,

higher intersegment revenues associated with the company’s provider services business reflecting its previously disclosed acquisition of MCCI Holdings, LLC (MCCI), and

favorable year-over-year comparison of external services revenues driven by growth in the company’s provider services and pharmacy solutions businesses.

the result of improving the effectiveness of the company’s chronic care management programs discussed below,

the impact on the company’s provider services business of the lower Medicare rates year-over-year in geographies where the company’s provider assets are primarily located, and

the loss of intersegment revenues associated with the company’s exit from the individual commercial business and the reduction of stand-alone PDP membership as previously discussed.

The Healthcare Services segment’s operating cost ratio of 96.8 percent in 4Q18 increased 80 basis points from 96.0 percent in 4Q17 primarily due to the following factors:

an increase in incentive compensation costs under the expanded program noted previously, resulting from the continued strong performance by the company,

transitory costs associated with the integration of the acquired MCCI assets into the Conviva business,

investments made in 4Q18 as a result of the Tax Reform Law as previously described, and

the lag in operating cost reductions associated with improving the effectiveness of the company’s chronic care management programs, as compared to the timing of the reduction in revenues.

The Healthcare Services segment’s operating cost ratio of 96.3 percent for FY 2018 increased 80 basis points from 95.5 percent in FY 2017 primarily due to the same factors that impacted the year-over-year fourth quarter comparison.

Primary care providers in value-based (shared risk and path to risk) relationships of 53,400 at December 31, 2018 increased 2 percent from 52,300 at September 30, 2018, and also increased 2 percent from 52,200 at December 31, 2017. The percentage of the company’s individual Medicare Advantage members in value-based relationships was 67 percent as of December 31, 2018 compared to 66 percent at September 30, 2018 and 66 percent December 31, 2017.

Medicare Advantage and dual demonstration program membership enrolled in a Humana chronic care management program^(h) was 716,000 at December 31, 2018, up less than one percent from 713,300 at September 30, 2018 but down 10 percent from 794,900 at December 31, 2017. The company continues to align the effectiveness of its chronic care management programs to the needs of members, leveraging technology and data analytics. This includes graduating members into a monitoring program as their health improves thereby reducing the number of member and clinician interactions to the appropriate level, and transitioning them out of the care management program when they no longer benefit from the services. This improvement in the programs leads to reduced Healthcare Services segment earnings but improved Retail segment operating results.

Pharmacy script volume on an adjusted 30-day equivalent basis of 112 million for 4Q18 increased 2 percent compared to 110 million for 4Q17. Pharmacy script volume of 440 million for FY 2018 increased 2 percent compared to 433 million for FY 2017. These increases primarily were driven by higher individual Medicare Advantage membership, partially offset by the decline in stand-alone PDP and Individual Commercial membership.

Healthcare Services segment results

(in millions)

GAAP segment earnings

Depreciation and amortization expense

Interest and taxes from Kindred at Home

Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA)

The Healthcare Services segment’s GAAP segment earnings in 4Q18 decreased $53 million, or 25 percent, to $160 million compared to GAAP segment earnings of $213 million in 4Q17. The decrease primarily resulted from the impact of the optimization process associated with the company’s chronic care management programs, transitory costs associated with the integration of the acquired MCCI assets into the Conviva business, and investments made in 4Q18 as a result of the Tax Reform Law, partially offset by the impact of Kindred at Home.

The Healthcare Services segment’s GAAP segment earnings in FY 2018 decreased $213 million, or 22 percent, to $754 million compared to GAAP segment earnings of $967 million in FY 2017. The decrease resulted from the same factors impacting the fourth quarter GAAP segment earnings comparison.

Individual Commercial segment losses of $2 million in 4Q18 compared to segment losses of $14 million in 4Q17. FY 2018 segment earnings of $74 million were $119 million, or 62 percent, lower than FY 2017 segment earnings of $193 million. The segment earnings in FY 2018 primarily reflect the impact of favorable Prior Period Development.

4Q18 Adjusted results exclude the following:

Favorable adjustment to the previously recognized loss associated with the company’s sale of its wholly-owned subsidiary, KMG America Corporation (KMG) of approximately $0.17 per diluted common share. GAAP measure affected in this release is EPS.

Put/call valuation adjustments of approximately $22 million, or $0.13 per diluted common share, associated with Humana’s 40% minority interest in Kindred at Home. GAAP measures affected in this release include consolidated pretax and EPS.

Amortization expense for identifiable intangibles of approximately $20 million pretax income, or $0.11 per diluted common share; GAAP measures affected in this release include consolidated pretax, EPS, and segment earnings (for respective amortization expense for the Retail and Group and Specialty segments).

Segment losses of $2 million (no material impact to EPS) for the company’s Individual Commercial segment given the company’s exit on January 1, 2018, as previously disclosed. GAAP measures affected in this release include consolidated pretax income, EPS, consolidated revenues, consolidated benefit ratio and consolidated operating cost ratio.

4Q17 Adjusted results exclude the following:

Amortization expense for identifiable intangibles of approximately $21 million pretax, or $0.09 per diluted common share; GAAP measures affected in this release include consolidated pretax, EPS, and segment earnings (for respective amortization expense for the Retail and Group and Specialty segments).

Segment losses of $14 million, or $0.06 per diluted common share, for the company’s Individual Commercial segment given the company’s planned exit on January 1, 2018, as previously disclosed. GAAP measures affected in this release include consolidated pretax income, EPS, consolidated revenues, consolidated benefit ratio and consolidated operating cost ratio.

Transaction and integration costs of $11 million pretax, or $0.05 per diluted common share, associated with the then-pending merger agreement; GAAP measures affected in this release include consolidated pretax income and EPS.

Expense of approximately $23 million pretax, or $0.10 per diluted common share, associated with voluntary and involuntary workforce reduction programs; GAAP measures affected in this release include consolidated pretax, EPS, and consolidated operating cost ratio.

Expense of approximately $17 million pretax, or $0.08 per diluted common share, associated with early retirement of debt in the fourth quarter of 2017; GAAP measures affected in this release include consolidated pretax income and EPS.

The impact of approximately $0.94 per diluted common share associated with the re-measurement of deferred tax assets at lower corporate tax rates under the Tax Reform Law. The only GAAP measure affected in this release is EPS.

The one-year beneficial effect of a lower effective tax rate of approximately $0.55 per diluted common share in light of pricing and benefit design assumptions associated with the 2017 temporary suspension of the non-deductible health insurance industry fee; excludes Individual Commercial business impact. The only GAAP measure affected in this release is EPS.

FY 2018 Adjusted results exclude the following:

Loss of approximately $786 million pretax, or $2.41 per diluted common share, associated with the company’s sale of its wholly-owned subsidiary, KMG. GAAP measures affected in this release include consolidated pretax and EPS.

Put/call valuation adjustments of approximately $33 million, or $0.18 per diluted common share, associated with Humana’s 40% minority interest in Kindred at Home. GAAP measures affected in this release include consolidated pretax and EPS.

Amortization expense for identifiable intangibles of approximately $90 million pretax, or $0.49 per diluted common share; GAAP measures affected in this release include consolidated pretax income, EPS, and segment earnings (for respective amortization expense for the Retail and Group and Specialty segments).

Segment earnings of approximately $74 million, or $0.41 per diluted common share, for the company’s Individual Commercial segment given the company’s exit on January 1, 2018, as previously disclosed. GAAP measures affected in this release include consolidated pretax income, EPS, consolidated revenues, consolidated benefit ratio and consolidated operating cost ratio.

Adjustment of $0.28 per diluted common share related to provisional estimates for the income tax effects related to the Tax Reform Law. The only GAAP measure affected in this release is EPS.

FY 2017 Adjusted results exclude the following:

Amortization expense for identifiable intangibles of approximately $75 million pretax, or $0.32 per diluted common share; GAAP measures affected in this release include consolidated pretax, EPS, and segment earnings (for respective amortization expense for the Retail and Group and Specialty segments).

Segment earnings of approximately $193 million, or $0.84 per diluted common share, for the company’s Individual Commercial segment given the company’s planned exit on January 1, 2018, as previously disclosed. GAAP measures affected in this release include consolidated pretax income, EPS, consolidated revenues, consolidated benefit ratio and consolidated operating cost ratio.

Net gain from the termination of the merger agreement of approximately $936 million pretax, or $4.31 per diluted common share; includes the net break-up fee and transaction costs net of the tax benefit associated with certain expenses which were previously non-deductible; GAAP measures affected in this release include consolidated pretax income and EPS.

Guaranty fund assessment expense of approximately $54 million pretax, or $0.24 per diluted common share, to support the policy-holder obligations of Penn Treaty (an unaffiliated long-term care insurance company); GAAP measures affected in this release include consolidated pretax income, EPS, and consolidated operating costs ratio. Under state guaranty assessment laws, the company may be assessed (up to prescribed limits) for certain obligations to the policyholders and claimants of insolvent insurance companies that write the same line or lines of business as the company. On March 1, 2017, a court ordered the liquidation of Penn Treaty which triggered assessments from the state guaranty associations.

Expense of approximately $148 million pretax, or $0.64 per diluted common share, associated with voluntary and involuntary workforce reduction programs; GAAP measures affected in this release include consolidated pretax, EPS, and consolidated operating cost ratio.

Expense of approximately $17 million pretax, or $0.08 per diluted common share, associated with early retirement of debt in the fourth quarter of 2017; GAAP measures affected in this release include consolidated pretax income and EPS.

The impact of approximately $0.92 per diluted common share associated with the re-measurement of deferred tax assets at lower corporate tax rates under the Tax Reform Law. The only GAAP measure affected in this release is EPS.

The one-year beneficial effect of a lower effective tax rate of approximately $2.15 per diluted common share in light of pricing and benefit design assumptions associated with the 2017 temporary suspension of the non-deductible health insurance industry fee; excludes Individual Commercial business impact. The only GAAP measure affected in this release is EPS.

FY 2019 Adjusted EPS projections exclude the following:

FY 2019 GAAP EPS guidance excludes the impact of future value changes of the Kindred at Home put/call option.

Amortization expense for identifiable intangibles of approximately $0.40 per diluted common share.

Generally, when the first day of a month falls on a weekend or holiday, with the exception of January 1 (New Year’s Day), the company receives its monthly Medicare premium payment from CMS on the last business day of the previous month. On a GAAP basis, this can result in certain quarterly cash flows from operations including more or less than three monthly payments. Consequently, when this occurs, the company reports Adjusted cash flows from operations to reflect three payments in each quarter to match the related expenses.

The company provides a full range of insured specialty products including dental, vision, and other supplemental health benefits marketed to individuals and groups. Members included in these products may not be unique to each product since members have the ability to enroll in multiple products. Other supplemental benefits include life, disability, and fixed benefit products including cancer and critical illness policies.

Includes Medicare Advantage (including Special Needs Plans (SNP)) and dual-eligible demonstration program members enrolled in one of Humana’s chronic care programs. These members may be enrolled in Humana At Home Chronic Care Program (HCCP), Humana At Home Remote Monitoring, or an Advance Illness Support program.    Members included in these programs may not be unique to each program since members have the ability to enroll in multiple programs. In addition, the members in the HCCP program may receive varying levels of care management based on their health status and needs, ranging from active care management to ongoing monitoring.

The Healthcare Services segment Adjusted EBITDA includes GAAP segment earnings with adjustments to add back depreciation and amortization expense, interest expense, and income taxes. The Adjusted EBITDA includes results from the all lines of business within the segment, as well as in 2018, the impact of Humana’s 40% minority interest in Kindred at Home.

If Humana does not design and price its products properly and competitively, if the premiums Humana receives are insufficient to cover the cost of healthcare services delivered to its members, if the company is unable to implement clinical initiatives to provide a better healthcare experience for its members, lower costs and appropriately document the risk profile of its

members, or if its estimates of benefits expense are inadequate, Humana’s profitability could be materially adversely affected. Humana estimates the costs of its benefit expense payments, and designs and prices its products accordingly, using actuarial methods and assumptions based upon, among other relevant factors, claim payment patterns, medical cost inflation, and historical developments such as claim inventory levels and claim receipt patterns. The company continually reviews estimates of future payments relating to benefit expenses for services incurred in the current and prior periods and makes necessary adjustments to its reserves, including premium deficiency reserves, where appropriate. These estimates, however, involve extensive judgment, and have considerable inherent variability because they are extremely sensitive to changes in claim payment patterns and medical cost trends, so any reserves the company may establish, including premium deficiency reserves, may be insufficient.

If Humana fails to effectively implement its operational and strategic initiatives, particularly its Medicare initiatives and state-based contract strategy, the company’s business may be materially adversely affected, which is of particular importance given the concentration of the company’s revenues in these products. In addition, there can be no assurances that the company will be successful in maintaining or improving its Star ratings in future years.

If Humana fails to properly maintain the integrity of its data, to strategically implement new information systems, to protect Humana’s proprietary rights to its systems, or to defend against cyber-security attacks, the company’s business may be materially adversely affected.

Humana is involved in various legal actions, or disputes that could lead to legal actions (such as, among other things, provider contract disputes and qui tam litigation brought by individuals on behalf of the government), governmental and internal investigations, and routine internal review of business processes any of which, if resolved unfavorably to the company, could result in substantial monetary damages or changes in its business practices. Increased litigation and negative publicity could also increase the company’s cost of doing business.

As a government contractor, Humana is exposed to risks that may materially adversely affect its business or its willingness or ability to participate in government healthcare programs including, among other things, loss of material government contracts, governmental audits and investigations, potential inadequacy of government determined payment rates, potential restrictions on profitability, including by comparison of profitability of the company’s Medicare Advantage business to non-Medicare Advantage business, or other changes in the governmental programs in which Humana participates. Changes to the risk-adjustment model utilized by CMS to adjust premiums paid to Medicare Advantage, or MA, plans according to the health status of covered members, including proposed changes to the methodology used by CMS for risk adjustment data validation audits that fail to address adequately the statutory requirement of actuarial equivalence, if implemented, could have a material adverse effect on our operating results, financial position and cash flows.

The Healthcare Reform Law, including The Patient Protection and Affordable Care Act and The Healthcare and Education Reconciliation Act of 2010, could have a material adverse effect on Humana’s results of operations, including restricting revenue, enrollment and premium growth in certain products and market segments, restricting the company’s ability to expand into new markets, increasing the company’s medical and operating costs by, among other things, requiring a minimum benefit ratio on insured products, lowering the company’s Medicare payment rates and increasing the company’s expenses associated with a non-deductible health insurance industry fee and other assessments; the company’s financial position, including the company’s ability to maintain the value of its goodwill; and the company’s cash flows. Additionally, potential legislative or judicial changes, including activities to invalidate, repeal or replace, in whole or in part, the Health Care Reform Law, creates uncertainty for Humana’s business, and when, or in what form, such legislative or judicial changes may occur cannot be predicted with certainty.

Humana’s business activities are subject to substantial government regulation. New laws or regulations, or changes in existing laws or regulations or their manner of application could increase the company’s cost of doing business and may adversely affect the company’s business, profitability and cash flows.

Humana’s failure to manage acquisitions, divestitures and other significant transactions successfully may have a material adverse effect on the company’s results of operations, financial position, and cash flows.

If Humana fails to develop and maintain satisfactory relationships with the providers of care to its members, the company’s business may be adversely affected.

Humana’s pharmacy business is highly competitive and subjects it to regulations in addition to those the company faces with its core health benefits businesses.

Changes in the prescription drug industry pricing benchmarks may adversely affect Humana’s financial performance.

If Humana does not continue to earn and retain purchase discounts and volume rebates from pharmaceutical manufacturers at current levels, Humana’s gross margins may decline.

Humana’s ability to obtain funds from certain of its licensed subsidiaries is restricted by state insurance regulations.

Downgrades in Humana’s debt ratings, should they occur, may adversely affect its business, results of operations, and financial condition.

The securities and credit markets may experience volatility and disruption, which may adversely affect Humana’s business.

Form 10-K for the year ended December 31, 2017;

Form 10-Q for the quarters ended March 31, 2018; June 30, 2018; September 30, 2018; and

Form 8-Ks filed during 2018 and 2019.

Annual reports to stockholders

Securities and Exchange Commission filings

Most recent investor conference presentations

Quarterly earnings news releases and conference calls

Calendar of events

Corporate Governance information

Humana Inc. – Rollforward of Initial FY 2018 Guidance to Actual FY 2018 Results

Diluted earnings per common share (EPS)

Initial FY 2018 guidance issued on February 7, 2018

Changes in projected operating performance:

Retail segment

Group and Specialty segment

Healthcare Services segment

Individual Commercial segment

Loss on sale of KMG, a wholly-owned subsidiary

Put/call valuation adjustments associated with 40% minority ownership in Kindred at Home

Adjustments to provisional estimates for the income tax effects related to Tax Reform Law

Other

As of December 31, 2018

Humana Inc. – Rollforward of FY 2018 Guidance (published in 3Q18 earnings release) to
Actual FY 2018 Results

Diluted earnings per common share (EPS)

FY 2018 guidance issued on November 7, 2018

Changes in projected operating performance:

Retail segment

Group and Specialty segment

Healthcare Services segment

Loss on sale of KMG, a wholly-owned subsidiary

Put/call valuation adjustments associated with 40% minority ownership in Kindred at Home

Other

As of December 31, 2018

In accordance
with GAAP
unless

otherwise

noted

Humana Inc.

Full-Year 2019 Projections

As of February 6, 2019

Comments

•  GAAP EPS guidance excludes the impact of future fair value changes of the Kindred at Home put/call option

•  See footnote (e) for detail of non-GAAP adjustments

•  Consolidated and segment-level revenue projections include expected investment income

•  Segment-level revenues include amounts that eliminate in consolidation

Change in year-

end medical

membership

from prior

year end

•  Individual Medicare Advantage: Up 375,000 to 400,000 (no change)

•  Group commercial medical membership includes fully insured and ASO.

•  Group Medicare Advantage: Up ~30,000 (no change)

•  Medicare stand-alone PDP: Down 700,000 to 750,000 (no change)

•  Group commercial medical: Down 80,000 to 100,000

•  Ratio calculation: benefits expense as a percent of premium revenues

•  Ratio calculation: operating costs excluding depreciation and amortization as a percent of revenues excluding investment income

In accordance
with GAAP
unless
otherwise
noted

Humana Inc.

Full-Year 2019 Projections

As of February 6, 2019

Comments

Segment results

•  No material impact to segment earnings anticipated from non-GAAP adjustments

Group and Specialty

segment earnings

Healthcare Services

Adjusted EBITDA

$1.00 billion to $1.05 billion

Weighted average share count for

diluted EPS

•  Includes impact of share repurchases

Consolidated Financial Statements

1.

Consolidated Statements of Income

3.

Consolidated Balance Sheets

4.

Consolidated Statements of Cash Flows

6.

Consolidating Statements of Income - Quarter

7.

Consolidating Statements of Income - YTD

8.

Ending Membership Detail

9.

Premiums and Services Revenue Detail

11.

Healthcare Services Segment Metrics

12.

Benefits Payable Detail and Statistics

Revenues:

Premiums

Services

Investment income

Total revenues

Operating expenses:

Benefits

Operating costs

Merger termination fee and related costs, net

Depreciation and amortization

Total operating expenses

Income from operations

Interest expense

Other expense, net (A)

Income before income taxes and equity in net earnings

Provision for income taxes

Equity in net earnings of Kindred at Home (B)

Net income

Basic earnings per common share

Diluted earnings per common share

Shares used in computing basic earnings per common share (000’s)

Shares used in computing diluted earnings per common share (000’s)

Revenues:

Premiums

Services

Investment income

Total revenues

Operating expenses:

Benefits

Operating costs

Merger termination fee and related costs, net

Depreciation and amortization

Total operating expenses

Income from operations

Loss on sale of business

Interest expense

Other expense, net (A)

Income before income taxes and equity in net earnings

Provision for income taxes

Equity in net earnings of Kindred at Home (B)

Net income

Basic earnings per common share

Diluted earnings per common share

Shares used in computing basic earnings per common share (000’s)

Shares used in computing diluted earnings per common share (000’s)

Assets

Current assets:

Cash and cash equivalents

Investment securities

Receivables, net

Other current assets

Total current assets

Property and equipment, net

Long-term investment securities

Goodwill

Equity method investment in Kindred at Home

Other long-term assets

Total assets

Liabilities and Stockholders’ Equity

Current liabilities:

Benefits payable

Trade accounts payable and accrued expenses

Book overdraft

Unearned revenues

Short-term debt

Total current liabilities

Long-term debt

Future policy benefits payable

Other long-term liabilities

Total liabilities