Humana Inc (HUM) 2011 Q1 法說會逐字稿

Good morning. My name is Michelle, and I will be your conference operator today. At this time I would like to welcome everyone to the Q1 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions) Thank you.

Ms. Regina Nethery, you may begin your conference.

Good morning and thank you for joining us. In a moment, Mike McCallister, Humana's Chairman of the Board and Chief Executive Officer, and Jim Bloem, Senior Vice President and Chief Financial Officer, will briefly discuss highlights from our first-quarter 2011 results as well as comment on our earnings outlook for 2011. Following these prepared remarks we will open up the lines for a question-and-answer session with industry analysts.

Joining Mike and Jim for the Q&A session will be Jim Murray, our Chief Operating Officer, and Chris Todoroff, Senior Vice President and General Counsel. We encourage the investing public and media to listen in to both management's prepared remarks and the related Q&A with analysts.

This call is being recorded for replay purposes. That replay will be available on the Investor Relations page of Humana's website, Humana.com, later today. This call is also being simulcast via the Internet along with a virtual slide presentation. For those of you who have company firewall issues and cannot access the live presentation, an Adobe version of the slides has been posted to the Investor Relations section of Humana's website.

Before we begin our discussion I need to cover a few other items. First, our cautionary statement. Certain of the matters discussed in this conference call are forward-looking and involve a number of risks and uncertainties. Actual results could differ materially. Investors are advised to read the detailed risk factors discussed in this morning's press release as well as in our filings with the Securities and Exchange Commission. Today's press release, our historical financial news releases, and our filings with the SEC are all available on Humana's Investor Relations website.

Finally, any references made to earnings per share or EPS in this morning's call refer to diluted earnings per common share. With that, I will turn the call over to Mike McCallister.

Good morning, everyone, and thank you for joining us. As you know from our April 26 news release and as was reaffirmed in our release this morning, Humana recorded earnings of $1.86 per share in the first quarter, well above our previous expectations. Jim Bloem will describe the reasons for this positive result in his remarks.

My comments will amplify last week's news release by setting the strategic context for our new segment reporting, described in detail on that release. The updated segment reporting represents the culmination of our work over the past decade, when aligning our businesses around the customers we serve, to create long-term one-to-one relationships that enable us to offer an increasing variety of products and services, all linked to helping people achieve lifelong well-being.

There are four strategic considerations that underlie this segment reporting and are reflected in it. First, the primacy of the individual in our business model. No company of our scale in our sector has developed individual relationships to the extent we have. Two-thirds of our revenues are in the individual space, which makes us unique in the industry and, we believe, uniquely well positioned in a post-reform environment where traditional group health insurance faces numerous challenges.

Second, the importance of information technology and data analytics to provide individuals, employers, and providers with actionable real-time online transparency on cost and quality. The kind of information that explains why buyers are so powerful in the rest of the economy and so powerless in healthcare.

Third, a growing emphasis on lifetime customer value as we substantially expand the volume and variety of our products and services.

And finally, the ongoing building of an innovative, integrated, well-being ecosystem that increasingly features personalized wellness and rewards.

I will highlight two crucial changes in our realigned segment reporting. The inclusion of Medicare Advantage and standalone PDPs in our new Retail Segment is an important manifestation of what I have been saying for some time, that while Medicaid is a program partially funded by the government, we treat it as a product that features individual accountability for choosing among a wide variety of benefit and premium choices. This approach has enabled us to create a Medicare value proposition that is extremely attractive to seniors at a time when the senior population is experiencing accelerated growth.

As for the new Health and Well-Being Segment, while not the largest today, it is projected over time to outpace the growth of our other segments. It includes our rapidly expanding pharmacy business, our Concentra primary care subsidiary that we acquired late last year, and a spectrum of coordinated care and integrated wellness services with vast growth potential in terms of both revenues and product diversity.

The new segments reflect the recently adopted structure for managing our business going forward. Our core businesses of Medicare, TRICARE, individual medical, group medical, and ancillary and specialty products will remain the foundation of our revenue model. Consistent with our emerging focus on lifetime customer value and the expansion of cross-buying opportunities for individuals, we will leverage these core assets through vertical integration opportunities close to our core.

Finally we will explore emerging adjacencies a little further out from our core assets. This is where our M&A activity increasingly will focus, along with joint ventures or new products around caregiving services and lifestyle enhancements.

The elements of the strategic structure will not operate in isolation. Instead, they will benefit from growing cost-cutting -- cross-cutting synergies that enable us to operate more efficiently enterprisewide. These synergies include, but are not limited to, shared physical locations; shared customer relationships; data integration across platforms; cross-selling; and administrative leverage.

I will now briefly cover two first-quarter operational highlights before turn the call over to Jim. In TRICARE, we were pleased that the US Department of Defense announced in February the award of the next South Region TRICARE contract to Humana Military Healthcare Services. Also in February we announced the launch, scheduled for later this year, of a joint venture which we expect will become the centerpiece of our commitment to personalized lifelong well-being.

Humana Vitality will capitalize on the evidence-based rewards and loyalty expertise as well as the actuarial sophistication of Discovery Holdings Limited, the South Africa-based world leader in the field. A joint venture with Discovery's US subsidiary, Humana Vitality, will offer employers and individuals an integrated, comprehensive wellness solution based on customized incentives and personalized health guidance, all designed to drive positive, sustainable behavior change.

These and other first-quarter successes confirm the increasing efficacy of our well-being growth strategy. We believe we are strategically positioned for success in the post-reform environment and tactically effective in implementing reform's various requirements.

Beyond these operational considerations and underpinning many of them, we are pleased that our balance sheet enables us to vigorously pursue a growth agenda. Our overall confidence in Humana's long-term financial future was evidenced most recently by our announcement last week of a quarterly cash dividend policy, the declaration of a $0.25 per share quarterly dividend to stockholders payable this summer, and a fourfold increase in our share repurchase authorization.

In addition, as you also saw, we revised our full-year 2011 earnings per share guidance to a range of $6.70 to $6.90 per share, up from the previous range of $5.95 to $6.15 per share. In summary, the news from Humana today and last week send several messages.

One, our businesses are strong and producing solid operating results and cash flow. Two, our balance sheet strength allows us to begin a more aggressive capital deployment program while fully supporting the continued execution of our corporate strategy overall. Third, our strategic focus on growth coming to the individual space is very timely. And finally, we are prepared and confident we can respond to the challenges presented by the implementation of health insurance reform over the coming years.

With that, Jim Bloem will now provide further background for our capital deployment decisions and give an in-depth view of our financial results and projections.

Thanks, Mike, and good morning, everyone. Looking at the first quarter, we were pleased with our earnings per share of $1.86 versus $1.52 in last year's first quarter. As previously reported, our first-quarter 2011 results were favorably impacted by $0.31 per share or $84 million related to prior-period development of medical claims costs. For comparison purposes, it should be noted that the first quarter of 2010 benefited by $0.37 per share or $100 million for the same reason.

The remaining $0.37 per share of first-quarter improvement over our previous EPS guidance midpoint of $1.18 was principally due to the following two items. First, we continued to see lower medical claims trend levels, primarily in our Employer Group Segment. Second, we also experienced a lower than expected benefit ratio in our Medicare Advantage business.

Looking further at the year, we raised our 2011 earnings per share guidance by a net $0.44 in addition to the $0.31 of favorable prior-period development in the first quarter. As indicated on the slide, we now estimate that our full-year 2011 results will include $0.10 per share or $27 million of expense as our pro rata share of an industrywide assessment for policyholder claims against Penn Treaty, an unaffiliated insurance concern now approaching insolvency. Although we do not know exactly when the success this assessment will occur, we have currently included it in our second-half internal forecast.

Finally, with respect to the full-year 2011, the midpoint of our updated earnings guidance of $6.80 per share also includes the effect of the first-quarter items I just described plus approximately $0.10 per share attributable to the expected increase in our full-year membership growth projections for both our Medicare Advantage and standalone PDP businesses, as well as approximately $0.07 per share primarily for commercial trend in Health and Well-Being Services earnings, roughly in equal amounts.

Turning next to the Retail Segment, our two main positive first-quarter changes versus our previous estimates were, first, the lower than expected benefit ratio and, second, the increase in our full-year membership expectations for Medicare Advantage and PDP. In terms of claims trend, both our Medicare Advantage and PDP businesses remain in line with our expectations.

The unfavorable first-quarter and full-year year-over-year pretax and margin percentage comparisons in the Retail Segment reflect significantly lower favorable prior-period development, as well as the impact of health insurance reform, particularly the medical loss ratio minimum on our HumanaOne business.

Additionally, it is important to remember that due to its plan design the PDP product runs a mid-90s benefit ratio in the first quarter of each year. And therefore the pretax benefit of PDP membership growth is heavily weighted toward the second half of the year.

Finally with respect to the Retail Segment, I would note that we are experiencing both membership and revenue growth in every Retail Segment business line, including our HumanaOne and specialty products, as indicated in the statistical pages of this morning's press release.

Moving on to our Employer Group Segment, we continued to experience a favorable trend development in the first quarter. Having said that, we still anticipate that trend will revert to more usual levels this year. Accordingly, we now expect full-year overall secular trends in the 7% plus or minus 50 basis points range for the Employer Group Segment.

Additionally, it is important to note that this year the beneficial effect of lower than expected claims trend will be offset to a great degree by a commensurate increase in the expected medical loss ratio rebate, a rule that was not applicable last year. Because of the new minimum MLR requirements, the favorable trend development we saw in our small group business in the first quarter will have only limited impact in our full-year results.

I also would remind everyone that Employer Group products typically experience their best performance financially during the first quarter, due to the calendar year reset of member deductibles and cost sharing.

Finally, about $21 million of the $27 million of Penn Treaty expense described a few moments ago was included in our $143 million of full-year pretax income guidance for the Employer Group Segment.

Turning next to our Health and Well-Being Services Segment, we are now providing enhanced visibility into this distinct part of our Company strategy. Each of this segment's service businesses was fully described in our press release of last Tuesday, with revenues disclosed by each of the four major service categories in this morning's press release.

The largest part of this segment is our Pharmacy Solutions business, which includes our PBM and our home delivery pharmacy operations. Application of PBM industry accounting principles results in revenue recognition for the prescription drugs used by our members in their medical plans, making this aspect of our business comparable to external PBMs when comparing the revenues and pretax of this segment to the PBM industry. However, the inter-Company revenue attributable to pharmacy utilization of our own members is eliminated in consolidation, so that our overall consolidated results remain comparable to our health benefit plan competitors.

As shown on the slide, both revenue and pretax earnings are showing significant growth over 2010. This is primarily for two reasons. First, the increase in volumes for our PBM and home delivery pharmacy operations are the result of increased Medicare Advantage and PDP membership as well as increasing same-store home delivery penetration levels. This results in higher revenue and pretax levels for both the first quarter and for the full year.

Second, the acquisition of Concentra which occurred in December of 2010 contributes to our full-year 2011 results. Concentra revenues are included as part of primary care services.

The final two slides give context to the increased share repurchase program and $0.25 quarterly cash dividend announced last week. Many have asked us one or both of the following two questions.

First, why are we doing this now, and why didn't we do it sooner? And second, won't these two items interfere with Humana's ability to make the acquisitions and investments needed to further its strategies to help people achieve lifelong well-being?

The first question centers on timing, while the second involves the availability of financial resources and our capital allocation process. Let's start with timing.

Humana's total statutory capital for each year-end represented by the bars on this slide grew from $1.2 billion at the end of 2005 to $4.3 billion at the end of 2010. This $3.1 billion increase, or over 250%, primarily was driven by the increases in membership, revenues, and income earned annually since 2006.

At the same time, the risk-based capital or RBC requirements of our operating subsidiaries also predictably increased substantially. These state-specific statutory requirements primarily are driven by membership revenues and new geographies, each of which increased dramatically as we expanded from the Medicare HMO model in roughly a dozen metropolitan markets in eight states to our multiproduct Medicare offerings nationwide.

The blue line on the slide shows our year-end RBC as a percent of the authorized control level capital ratios for the five-year period, while the red line shows our minimum targeted 400% RBC authorized control level threshold. The 400% RBC threshold is desirable both from a state regulatory standpoint and is compatible with both the financial strength ratings of our various operating subsidiaries as well as the debt ratings of Humana Inc.

As we continued to grow throughout the 2006 through 2010 period, we prudently and strictly conserved capital in order to continue to annually progress toward attainment of the 400% RBC threshold. As the target shows, at the end of 2010 we surpassed the 400% threshold, making now the time to move forward with the increased share repurchase program and the $0.25 per share quarterly cash dividend.

We will continue to target above-400% RBC authorized control level as the desired level of aggregate statutory capital in surplus. Last week Standard & Poor's recognized our progress with a 1-notch upgrade in our debt rating to BBB, citing among other things strong financial flexibility.

This final slide summarizes the availability of financial resources in order to demonstrate that our increased share repurchase program and cash dividend do not interfere with our ability to further implement Humana's strategy. From the standpoint of available financial resources, we have three non-equity sources.

First, parent cash and investments. Second, our $1 billion bank credit facility. And three, our historically low current debt to total capitalization ratio.

With respect to parent cash we expect to receive $1.075 billion in 2011 dividends remitted from our operating subsidiaries to Humana Inc. by June 30. This amount compares with $747 million in 2010 and will enhance our March 31, 2011, parent cash and investment balance of $367.8 million.

In addition, our $1 billion bank credit facility remains undrawn, as it has been since mid-2009. Finally, our current 18.7% debt-to-cap ratio gives us additional borrowing capacity in the debt capital markets. We continue to target a debt to total capitalization ratio of 25% to 30%, which is consistent with our debt ratings.

Together, these three components give us substantial non-equity financial resources, should the right opportunity or combination of opportunities arise.

Finally, with respect to our capital allocation process, in addition to our newly established quarterly dividend and a more robust share repurchase program, we expect to continue to constantly review strategically important potential acquisitions and investments as well as capital projects, both with returns that raise the enterprise value of Humana by exceeding our weighted average cost of capital, which currently is 9.3%. Thus the capital allocation process used for the last 10 years, including the high opportunity and rapid growth five-year period we just successfully completed, remains intact and is now enhanced by our share repurchase and dividend plans.

With that, we will open the phone lines for questions. We request that each caller ask only two questions, in fairness to those still waiting in the queue. Operator, will you please introduce the first caller?

(Operator Instructions) Josh Raskin, Barclays Capital.

Hi, thanks. Good morning. I have a timing question as well. I guess just talking a little about the segment reporting -- and I know, Mike, you mentioned this is sort of the culmination of a decade of work you guys have been putting together. But I am just curious; what was the catalyst to do this in the first quarter of 2011?

Well, Jim can add to this, but I think the Concentra acquisition really put the whole idea on the front burner, because it was not going to fit into our segments at all. We were going to have to make some change to be able to do that, so I think that began to get the ball rolling.

I think also, Josh, if you go back to Investor Day last November 18, we began to show you the rainbow chart that was in Mike's script. And again, when we did the Concentra acquisition later in December, then we said -- hey, we are going to really move to do this in the first quarter.

It is the easiest to do in the first quarter, also just for comparability; but also we really began the year by beginning to think about managing the business, again from the standpoint of who buys the product, what customer are we focused on; not who is the plan sponsor or what is the product that we are talking about.

Okay, okay. I got you. Then second you guys talked about it on the call, but also in the press release you mentioned that the strong results are allowing you to begin a more aggressive capital deployment program. So should we read into it that's the share repurchase and the dividends? Or should we think about going forward you are now going to be more aggressive on M&A and things like that?

I think that what we are trying to show here is that we have a more balanced approach, that this is -- we have now, come as I mentioned in my remarks, to the point where we have got the adequate RBC thresholds for both our subsidiary financial strength ratings and our parent debt ratings that we wanted for a long time and that, because of our growth and our increase in geography, eluded us basically over the four years prior to last year.

So now we have the ability really to do both, Josh. We basically can look at acquisitions and investments that further the strategy and also we are able to make these commitments to the shareholders in terms of a more robust share repurchase program and the cash dividend.

There has been no change in attitude relative to M&A. We have done those things that made sense when we had opportunities and we will continue to do that.

So, Mike, you say there is no change in attitude. But there is a change in ability, I guess; is that the way to think about it?

Well, we have always had borrowing capacity and could have done things. I think the overall strength of the Company is quite obvious, and the fact that we can do the capital deployment on dividends and the share buybacks, and not have to worry about the ability to execute on the rest of our strategy I think is a real sign of strength.

Okay, okay, got it. Thanks.

Justin Lake, UBS.

Justin? Let's move on to the Next question, please.

Sarah James, Wedbush.

Thank you. I was hoping you could provide us more color on the utilization levels as far as what that meant for bed days; if it was more pronounced in any certain products or geographies and if there has been any incremental uptick in the last two months trending differently from the first two months of the year.

This is Jim Murray. The utilization that we are seeing in the first quarter of 2011 for the Group business that we have the separate segment for this year seems to be mirroring that which we saw in 2010. But for purposes of projecting the rest of the year we anticipate that that utilization will revert to levels that we saw prior to 2010. Therefore, our guidance points.

The Medicare utilization seems to be very consistent. 2009, '10, and '11, we don't see any significant ups or downs in the Medicare business. So primarily the Group business seems to be performing better than we had anticipated, and we will see how the rest of the year plays out.

Got it. What margins does your guidance assume on the MA business now?

We have always talked about 5% margins in our Medicare business, and we are probably going to stick to that for as far as we can see.

And that is inclusive of the first-quarter utilization levels and prior-period development still?

That's correct.

Yes, they were in line with -- our utilization levels and our claims trend in Medicare were in line with our prior expectations. What was better was our membership.

Thank you.

Tom Carroll, Stifel Nicolaus.

Hey, good morning. First of all, in thinking about the decline in the Retail Segment income, which had a greater impact -- the MLR minimums on your HumanaOne business, or perhaps the lower-margin mix of stand-alone PDP products?

The biggest one, Tom -- the biggest reason for the decline is the lower -- is the lack of favorable development. So always remember that first.

Then when you look at the other things, they are pretty much in line with what we had thought before. But again looking at first-quarter performance year-over-year it is basically an issue of whether or not the favorable development is basically the entire difference.

So PDP is the big -- I will just have to look at that again.

Then secondly, just given your enhanced liquidity that you have described to us this morning, on the M&A side maybe give us an update on your thinking about what businesses or industry direction you may add to going forward? Especially given the segmented Health and Well-Being group right.

Well, I mean, we would obviously be in the market for Medicare lives, to the extent that they come with an infrastructure or management. We have said that for a long time. So Medicare Advantage would be something we would be interested in.

PDP as well we would also be interested; I have mentioned it in the past. I think at the end of the day we're going to find ourselves in some home healthcare services, and it could be both traditional home healthcare after hospitalization type of care, as well as some business around helping people stay at home. Those sort of things.

So those emerging adjacencies around seniors and everything that goes with that. So those are sort of what our thoughts are.

So adding around the core MA, PDP business is still your number-one priority?

I am not sure that is number one. Those -- it is hard to find those opportunities, but when we do find them we are pretty aggressive in terms of pursuing them. So I think we have a clear strategy. It is well laid out, and we're going to look at every space. And we don't drive the timing of those things, unfortunately.

Okay, thank you.

Charles Boorady, Credit Suisse.

Thanks. Good morning. I just wanted to ask you to elaborate a little bit, when you talked about the highly competitive environment for both the risk and ASO Group Commercial business.

Yes, this is Jim Murray. The HumanaOne that is in the Retail Segment and the small group, which is in the Group Segment, seem to be performing very nicely in 2011. Kind of a carryover from what we saw at the tail end of 2010.

Where we are seeing some competitive pressure is in case sizes that we here at Humana call portfolio, which is 100 to 300 employees; seems to get a little bit aggressive in terms of pricing from some of the competition. No one in particular.

The self-funded business seems to be -- on periodic cases, which are very large, you will see some unusual guarantees that would be a part of some of our competitors' equation. When we see those we don't generally try to chase those, because we don't think those make a lot of sense.

So from our perspective, what it appears is happening is that some of the larger players, national players, are getting a little bit more aggressive in terms of the pricing on the larger stuff.

Got it. Can I ask for your comment on a couple other trends that I wonder if you are also seeing? One in that portfolio, or the 100 to 300 business, is some of what you are characterizing as price competition really a shift to a self-funding type arrangement in that end market?

We have heard about one of our competitors buying a block of business that had that kind of a characteristic. I am not certain that I am seeing that significantly.

So I haven't seen that begin to develop in the marketplace yet, although that is something that is intriguing. Because of -- some of you know the rules around healthcare reform allow a bit of an opening there, that we are also looking at. But I haven't seen that begin to develop yet.

Got it. Then finally, the other thing to clarify, on the price or the competitive environment, is there an increased focus on the part of your larger customers on -- the ASO customers -- on the total cost of care? Are they increasingly looking at things like your network discounts or ability to manage trend, and factoring that into the equation?

That has always been a part of the equation. That is a real -- I don't want to say art or science; it gets a little bit crazy when you have an outside consultant who becomes part of a process. And some outside consultants don't have the ability, in my opinion, to evaluate claim cost trends if they don't do a very detailed job.

So hopefully all of our customers in that space will look at the total cost of care as a way to look at this. Years ago we saw where procurement departments focused on the fees that were related to this, the administrative costs. That seems to be going away and companies are looking more at the total cost.

One of the things that they don't continue to do, unfortunately, is look at the whole package, where some will carve out behavioral or disease management or pharmacy. What we would love customers to do is to look at the entire bundle of products and services that we can bring to the equation.

We haven't seen that develop yet, but that would be something that would be intelligent for larger companies to begin to think about.

Charles, let me add something at 50,000 feet for a second, because it has something to do with our strategy. I think the days of these big companies being able to work around benefits and trying to find discounted networks and try to win on messing around with an annually bid for services, that game is kind of over.

So now we are working around the edges, but I can tell you it is becoming highly obvious to most of them at this point that they are going to actually have to do something about the health status of their employees if they are ever going to get control of this. Because just working on the insurance side is not effective.

So that is one of the reasons we were pretty excited about, frankly, getting into these worksite clinics and getting involved with Humana Vitality and health and wellness programs. Because I think there is a wave coming and these employers are going to have to turn to something else besides trying to get the insurance companies to compete with each other to solve their problems.

Justin Lake, UBS.

Thanks, good morning; and sorry about that before; I'm trying to call in from the road. Two quick questions.

First, on Concentra, can you talk about, identify what the integration costs that you are looking at there this year, and maybe just give us some color on what your expect the long-term net income margins might be in that business, versus the low single-digit margins that were implied in the 2011 guidance?

Yes, Justin, Jim Bloem. In looking at Concentra one of the things that was very important to us is that we continue to do the business and that they continue to build the business that we bought from them. And then we have the strategic emphasis that we have with respect to what Mike said about Concentra; that is, we can do a lot more with our members. We have 3 million members that live within 7 miles, etc. We have got lots of ability to do our own members.

But in terms of synergies or knocking down costs or integration costs with Concentra there's probably not as many as you would think. Because again we have that $800 million or a little less of core business that they did, that is kinds of businesses that we weren't in before. We are working very hard to preserve that and to continue to enhance that.

So the real costs are really sort of building out ours. And we are doing that in a more gradual and nuanced fashion in order to again begin to take their capabilities and make them into our capabilities, and then do that in places where again we have concentrated membership.

Yes, this is Jim Murray. I would suggest that we don't have any significant costs whatsoever. In fact, we are looking more at opportunities as the two companies get together.

We had a meeting about two or so months ago where about 40 people got in a room and we came up with 57 ideas which we cut down to 15, because we wanted to make sure we were very targeted and effective. Things like urgent care, steerage are things that were talked -- Mike referenced the Worksite product being linked with Vitality. We think that there is a real opportunity there.

Corporate relationships; we have obviously got a lot of relationships with a lot of companies because of what we have been selling, as do they because of their workers compensation and occupational medicine relationships. So we are in the process of putting customer lists together.

There are some opportunities in our Humana Military to do some business between Humana Military and Concentra.

Procurement. A lot of the things that they buy, we buy. So what can we do in terms of combined buying power?

And then finally and most importantly, this whole area around primary care. They have 700 docs on staff, and there has been a lot of talk about ACOs and things of that nature. Their being a platform for that opportunity for us is something that really excites us going forward.

Okay, so to be clear, the return on investment, if I just measure net income divided on (technical difficulty) low single (technical difficulty) and the margins implied (technical difficulty). You don't expect that to improve on a stand-alone basis, I mean ex synergies of trying to build this into (technical difficulty)? You don't expect any improvement there in '12?

Yes, yes we do. We are not guiding to '12 right now. But yes, it will continue to get better because, again, as we both said to enhance their capabilities and to have them continue to do what they have been doing before we bought them, you get the benefit of both of those. There is no retardation or there is no diminishment because we are going to try to switch them over, which is what some people have thought prior to our discussion of it.

You sound just like our Board of Directors. And believe me, we have a pretty fulsome plan going forward to make the numbers that you are asking about work.

Okay, great. Then just last question on capital. You put in an interesting slide that talked about your RBC ratio now trending up above 400%. Can you give us an idea? It looks like you kept -- you didn't dividend out everything you could have this year because you wanted to build some (technical difficulty) above that 400% range for 2011. Is that correct?

Actually, we always dividend. Every one of those years in there we dividended as much as we could. But again, because of the growth that we had, particularly the first three years, we had --. It's not on the slide, because you can't put everything on the slide, but the debt to capital of the Company just two years ago was over 30% because of the borrowings and things that we had to do, in addition to leaving the money there and having smaller dividends.

So this year we weren't as encumbered. But every year, commensurate with what we think the requirements of the state and our credit ratings, and the care and feeding of our insurance subsidiaries, our regulated subsidiaries, we dividend as much as we could.

Okay, but you don't expect that 400%, that RBC ratio to need to increase beyond where it is right now?

Now, I don't. No, I don't -- I'm sorry, yes, that is exactly what I was trying to say in my remarks. Now that we are between let's say 440% and 450% we feel very comfortable. Again as the slide shows the blue line you can see that was a certain discount for the four or five years before.

So would we expect that dividends coming from the subsidiaries as a percentage of net income would increase because you don't need their increased RBC? Or am I not thinking about that correctly?

I think that the best proxy are the earnings of the Company in the preceding year, now that we're at the 440%. So this is the best year we ever had, 2010, so this is the highest dividend we have ever taken.

Matt Borsch, Goldman Sachs.

Yes, thank you. Question about if you can give us any update on the ongoing discussion over the [Reg B] regulations. Do you have any idea on timing there or the process or how that -- any better idea of how that may impact you?

There is no update now. Basically they did receive a lot of comments when they asked for them.

Okay.

You saw what they said publicly, but there is nothing new at this point.

Okay, circling back to another topic, when you referenced the unusual guarantees on some of the self-funded contracts, is that -- are you seeing that from multiple carriers? Or, not that you will highlight the name, but is there one in particular?

I am just curious because a few years ago we had seen that at I think it was one carrier in particular. I am just wondering how that is playing out this time.

Periodically we will see a company guarantee claim costs, which changes an ASO contract to a fully insured contract. That is a game that we won't play.

I can't tell you that it is any one in particular. Periodically one of our large cases will get a bit of a surprise with some of what we hear the competitor is willing to do. But I don't see anybody in particular doing that broad-based.

Lastly, can you talk a little bit about what you have done with the HumanaOne product with regard to managing the level of price versus expected rebate liability or maybe terminating some product offerings, if you have done that in response to the new regulations?

Sure. You all are very familiar that our medical expense ratio on the HumanaOne product was below where the current minimum is sitting. So after we adjusted for the benefit changes that were a part of healthcare reform and after we did some things around trend, we looked at where we were going to be as a Company in 2011 and 2012, and we began to change our pricing to reflect a rebate level that we thought was reasonable and prudent. We didn't want to write significant rebate, but we did want to write some amount of a rebate check.

So our pricing over the last several months has gotten nicely competitive. We are seeing some nice growth on HumanaOne. As we look forward, what we would expect is that HumanaOne will continue to grow.

When we step back and think about where HumanaOne sits in our family of products, right now in 2011 we expect that we will come close to breaking even. And as we continue to work on our administrative cost structure around HumanaOne, given some of the things that we have had to do because of the minimum medical expense ratio, we say that over the next couple of years that we can take the medical margins to a number that is reasonable. And our strategy as a Company is to create a relationship with those members and sell them all other kinds of products and services. And you see our success in that in some of the stats sheets that were given.

We don't think that the HumanaOnes or the small groups or the large commercial products, long term, that the medical piece of that will be significantly profitable. That is why you have seen us do a lot around specialty and ancillary lines and some of the things Mike talked about earlier, with the worksite and the rewards and wellness capabilities, as an opportunity to make more of a lifetime profit from those members that we have relationships with.

That is probably more than you asked for. I apologize.

Chris Rigg, Susquehanna.

Good morning. Thanks for taking my question. I don't want to get too far beyond 2011, but can you give us a sense for how the final MA rates shaped up relative to Humana's expectations? And if possible give us a sense for maybe Humana's specific average rate change in 2012, or a sense whether that would be above or below what the industry average will be?

We have had two of our regions in doing their 2012 bids. The other two are in this week and next. Based upon what we receive from the government and the success of The 15% Solution we feel pretty good about what we have seen so far in the first two regions.

We think that one of the things we learned this past year, with the nice growth and retention that we saw, is that stability in terms of premiums and benefits is well received by the seniors that we serve. And that is going to be our philosophical goal going forward.

We think that a lot of the things that we're working on as an organization, particularly around The 15% Solution, allow us to create that stability. So we are pleased so far.

And as we look at some of the two regions that are coming in we don't anticipate any significant market problems to make our pricing and benefits nicely stable again in 2012.

Okay, thanks. Then just in your guidance for this year specifically there is nothing specific that is worth highlighting on the MA enrollment decline, relative to where you ended the first quarter? Is that just conservatism at this point?

We have got some premiums out there with some of the members who are low-income subsidy members, and we're wanting to make sure that those premium levels are acceptable for those members. We will see how the rest of the year plays out.

We haven't seen anything yet that would suggest that we won't get those premiums from the members collected; but we are just being cautious.

Got you. Okay, thanks a lot.

Ana Gupte, Sanford Bernstein.

Hi, thanks; good morning. I had a longer-term question. You referred to the ACOs and how you are excited about them. Can you comment on, after you have seen the CMS rules, what your beliefs are about future penetration for Medicare Advantage? It's about 25% now. Is your growth strategy, you think, likely more from just the pie growing more? Or do you see more shifting or more penetration into the private plans?

Then just associated with that, how do you see your product in the MA value proposition competing with fee-for-service Medicare in this ACO era on moderating costs trends?

Well, you know, the ACO rules that came out were rather lengthy and set up kind of a complicated environment. So we will have to wait and see whether the providers respond to that.

I think that our history has been pretty clear. There's been things out there for a long time that look an awful lot like ACOs, and we do business with them. There are integrated systems. There's PCP-based systems. There's hospital system based systems.

So we have a lot of relationships with folks that are in the business of being paid in a capitated way, seeking out productivity in medical spend, and doing better by doing so. So the basic principle behind this is not new.

I think we will have opportunities to work with some of these, to the extent that they are ready to step into that environment. But I think the level to which the providers are going to step in is really uncertain.

Actually I have never seen quite so much hype about something, frankly, as I have about ACOs. The consultants are doing well in this business. But I don't know at the end of the day whether the providers are actually going to step in here.

Based on the math, I am not sure there is enough upside in there for them. They are probably much better off working with a private Medicare Advantage plan if they really want to work in this space.

So we are prepared to go in any direction. We have had meetings with some of these folks that are talking about getting into this business. And we have referred them to others that we do business with in a similar fashion.

So we are in the middle of it. We are keeping an eye on it. I think there is more upside here than anything for us as a Company. But I think it is real uncertain how big this is going to be.

Then related to that, you also made a comment about Concentra and how excited you are about the ACO thing. Do you see Concentra as being primarily a commercial play and worksite clinics and all of that? Or do you see that over time becoming something you leverage into ensuring the supply chain remains competitive for the MA product?

You know, we could spend a couple hours on all the implications of Concentra to Humana. I would say that it is going to be doing a little bit of all of it.

It has the real future in helping us with our Medicare business. Clearly there is going to be a demand for a lot of services, for a lot of newly insured people over the next few years. So just the primary care capacity opportunity is good.

So we will see. I love the fact that they are big into the worksite clinic space, because it is a different relationship with employers and gives us some opportunity around health and wellness. So they are going to have multiple facets to their platform, and that is exactly how we think about it and that is how we spoke about it when we made the acquisition. This is a platform to allow us to respond to needs in a number of places and the future around Medicare is going to be good with this organization.

Carl McDonald, Citigroup.

Thanks, I was interested in an update in terms of what you are seeing in the Medicare M&A environment. Any changes? Certainly we have seen or it at least sounds like more interest from some of the larger plans in getting into the business. Maybe more interested from a seller perspective, sort of how they are thinking at this point.

Well, I don't know that I have seen any real change here. These plans come up periodically. If you look at a place like Florida there's new plans that open up every year in Medicare. Some of them make it and some of them don't. Those that don't call us.

And if you look around the country there's others. I wouldn't be shocked by some of our competitors looking to buy their way into the Medicare space. I have said all along it is hard to get in at this point organically, and the timing is tough.

So I think when these opportunities pop up I am sure there is going to be competition for those properties. We will see how that goes.

I think we are a great place for or for Medicare plans to make a home, and our history would say that we get chosen a lot in these processes. So I feel pretty good about our opportunity to buy things.

I think it will be more competitive. I think others are going to realize that they are going to need to be in this space, and this is one way for them to get there.

Just in terms of the type of prices that are being asked, has that changed? From whether you are looking at price per member or whatever your metric you are looking at, is the acquisition prices going up?

To me, if you have seen one deal, you have seen one deal. It just depends on how big it is, where it is, whether it represents a tuck-in or whether it represents a new market entry. There's a lot of implications around how things get priced. So I don't think there is any rule of thumb you can really hold to.

Okay, thank you.

David Windley, Jefferies & Company.

Hi, thanks for taking the question. Thinking about your benefit expense ratio in the Retail Segment and the mix of business there, I guess I am thinking long term; or my question is around your long-term views of your ability to manage that benefit expense ratio down to the floor or close to the floor, once all the pieces of that segment are subject to a floor. Just wondering your thoughts about that in light of rate increases and all the implications.

This is Jim Murray. The 15% Solution that we have talked about in the past would give me comfort that we will have the ability to manage the medical expense ratio in line with the minimums that go into place I believe in 2015 as it relates to the Medicare Advantage business.

As respects the HumanaOne piece that is included in the Retail Segment, we are seeing some ability currently to manage that in line with the minimum medical expense ratio. So I feel comfortable that we will be able to make a small single digit margin in a couple of years as we, as I said earlier, manage down the administrative cost structure.

Key to all of the Retail Segment is the ability to create a relationship with an individual and cross-sell a lot of different products and services, which will allow us the ability to enhance the margins that we enjoy, away from the medical margins that we just discussed.

So that is all an integral part of our strategy, creating a base or a core and a relationship with that individual around a medical product and then enhancing our ability to cross-sell new products and services into that individual going forward.

I would add to that, Dave, let's just talk about Medicare for a second. If the question is, can we run our 5% target profit and live with an 85% benefit ratio? The answer is yes. We think we can do that.

I guess implicit in the question is -- can you run better than that if these adjustments allow that floor to really be 83 or 82.5? Can you push that envelope?

We're not looking to have a margin higher than that. So even if we did, we would turn it, put in right back in the products in terms of benefits or premiums. So it potentially would help us grow because we would have a more stronger value proposition.

And the other thing that happens when you grow is that your administrative efficiency continues to get better and better. So it just really feeds on itself.

Certainly. So the second question real quickly, you have commented on -- I think Jim Bloem commented that claims experience so far in the year was pretty much in line with expectations. In the PDP business I wondered if you can drill down a level and comment on whether the claims experience is consistent within each of the types of products. So consistent in Walmart and in the others.

The results that we are seeing on the claims line for each of the individual products, the Walmart Plan, the Enhanced Plan, and the Complete Plan, are very much in line with what we had expected. We are very excited and happy with how each of those lines of business is playing out. And we find ourselves nicely positioned for 2012.

Peter Costa, Wells Fargo.

Good morning. Just curious about the inter-Company transfers and the eliminations. Were there any changes between last year and this year? How did that business go or that elimination go from a $7 million loss to a $9 million gain?

Obviously I can see the interest income and interest expense and D&A. But just was it like $10 million of corporate cuts? Or what else was in there?

Yes, Peter, that is generally it. The difference is basically the interest expense now all appears in the Corporate and eliminations section; and the rest of it is basically shareholder type expenses and other things that add up to whatever the difference is. But again, we didn't feel it was really meaningful to highlight it any further.

Just basically to take a look then at the interest, the investment income is allocated to the segments based on their capital requirements; and then there is an amount that comes over as you can see into the consolidated line, into the Corporate & Other as well.

Yes, I guess I can see that. I was more looking about the transfer prices for the other parts, the inter-Company transfers there. Did you change those between years or did that stay consistent?

No, those are consistent. It is just a matter of again trying to show more transparency around the different segments by the customer who buys the product and not the sponsor or the product itself.

Okay, thanks.

Doug Simpson, Morgan Stanley.

Thanks. Mike, just building on your comments earlier, as you think about the evolution of health coverage and as employers step back and think about how they want to be positioned in 2014, do you have any early thoughts as to how primary care may evolve if we do more retail?

Maybe just connect the dots back to your Concentra comments; but just trying to think through -- do you expect to see employers move to more of a situation where they essentially carve out the benefit and employees are picking up the tab, but the employers are negotiating a structure? Just how do you see that dynamic working out?

Yes, I've been saying for a while that I think these exchanges are going to have more business in it than a lot of people think. I think employers will step forward in some ways and move to sort of a defined contribution environment.

On the primary care side I think some directional things are pretty clear at this point. I mean it is true, that if you suddenly have 30 million new people out trying to find primary care, they'd have trouble getting access. So I think we are going to see continued growth of extenders, nurse practitioners, other lower tiered providers of sorts filling in some of the routine care. So we have seen that with the small clinics in pharmacies and all that sort of thing.

So I think high-volume demand for PCPs and I think directionally you're going to see extensions of all sorts. Whether we have a true shortage long term, I don't know; because I don't know what new technologies and other capabilities are going to come along that would somehow drive demand in one direction or another.

But Concentra is beautifully positioned for us to respond to wherever this goes.

Then just thinking about some of the comments you made earlier about the M&A pipeline, you obviously felt confident; you put up a dividend, raised buybacks. Any read-through to what that means for the M&A pipeline?

Is it that you don't think that is maybe a 2011 type event, but you expect to see stuff coming down the pike a little further down the line?

No, not at all. I think we have the capacity to do all of it. Jim outlined in our debt capacity that's out there is still, we have got the line of credit that has not been tapped. We have plenty of flexibility.

I would not have done the capital deployment moves we have done if I thought it was going to in any way affect our ability to execute on the rest.

Okay, and then if I can sneak one last one in, we are seeing some change obviously to the distribution side. You have a shorter MA selling season, and then the broker commission model changed this year with the new rules.

Is this a one-step process that in 2011 distribution shifted? Or is this something that you think will be more evolutionary that plays out again in '12 and '13 as the market evolves?

This is Jim Murray. There is a lot of changes that are going on in distribution right now, and we are in the process of trying to figure out where the puck is headed. Things like strategic alliances.

The career shop that we have known and loved with our MarketPOINT associates, we think that that is a real opportunity to cross-sell a lot of products.

You referenced the shortening of the MA selling season and the PDP selling season. We are in the process of identifying products to allow those individuals who support us during the open enrollment to sell throughout the course of the year. So you are seeing some of the positive effect of that in our Retail growth results.

Call centers, digital, sponsorships, associations, affiliating with payroll companies, there's other things. Branding relationships. We are in the process of trying to step back and say -- okay; how have we sold in the past and how do we see this thing migrating over time?

We are making nice incremental steps to reposition the way that we sell business going forward. It is probably going to take place over the next several years.

But we still have a strong broker network and relationship that serves us very well. I just see there's going to be other ways to sell business going forward.

Christine Arnold, Cowen and Company.

Hi, there, I just wanted to clarify, does your guidance contemplate a 5% Medicare margin? Or have you incorporated the better than expected results? Because I know you were over 6% last year.

Right, Christine, still right now we're at a 5% operating pretax margin.

Is it safe to say you were over that in the first quarter?

Yes, we were slightly over that. But again, we continued to work very hard on delivering through The 15% Solution the enhancement to the 5% throughout the year. And until that shows up we generally don't recognize it because, again, we need to earn that.

Our bids, which are just for this year, which we're just -- we are down into May; we will talk more about during the year. But if you look at our pattern of earnings guidance through the year, this is very consistent with what we have done in the past.

Then again, people can see how The 15% Solution is working. All the questions we have had today before this again come back to the fact that we have run the Company really on an 85%, 10%, and 5% model for a long time; and again we are going to continue to do that.

Okay. Then as we think forward to the exchanges, you talked a little bit about having this individual presence and how post-reform that is a good thing. Do you feel that you need to have a presence in Medicaid because some of these exchanges may look more like Medicaid than commercial in some of the markets? Or not? How are we thinking about Medicaid long-term?

We continue to look at it. You know it has never been one of my favorite lines of business, but there's issues relative to dual-eligibles where you have got Medicaid overlapping with Medicare. We are constantly looking at that.

The whole analysis of what is going to happen in those exchanges is still under way, and how we are going to respond to that. So I think the answer to all that is -- are we rushing out to jump into the Medicaid business? Not so much; but we are definitely keeping an eye on it, both from the standpoint of the exchanges and individual relationships as well as dual-eligibles.

Kevin Fischbeck, Bank of America Merrill Lynch.

Okay, thank you. I wanted to go back to your commentary about the change in disclosure policy. Certainly more information around Concentra is warranted. But can you just talk a little bit more about the thought process behind the other changes?

I guess when you think about -- do you think there is going to be a very different growth trajectory at the Retail business versus the Group business? Is that part of really what you're really trying to underscore here? Is that it is more important to think about the Company as Retail versus Group that it is commercial versus Medicare? I guess I am trying to understand.

Because historically I have always thought about the Medicare business as a business with a 5% margin, and now you are kind of breaking it up. I just want to understand how you are thinking about that going forward.

This is Jim Murray. Just to add some thoughts on a part of our deliberations. When we think about -- to your example just there -- the Medicare business has the individual sales that we make on a Retail basis; and we do that across the table with our MarketPOINT reps. And it also includes the Group Medicare business which we sell to companies.

So for us having a relationship with a company allows us to sell not only medical products and specialty products but also the Group Medicare products. Mike referenced earlier the Vitality and the Concentra product that we are going to be rolling out here shortly and relationships with companies will allow us to sell all of those as a bundle.

So a part of this decision was about how we align or organize our management of these different businesses and the end customer and getting closer to the customer, as opposed to being close to a particular product. So that was a big part of what we contemplated when we made these changes.

I think the biggest piece is this idea around the individual. I mean this Company has more going on with individuals as one-on-one customers than I think anybody in our space. So I don't think that was clear the way we used to report the Company. And I think by doing it this way it is pretty clear and it will be easier for you to see what is going on relative to the businesses that we think the future is all about.

As well as getting some clarity around some of these support businesses we have such as the PBM activity. That had been buried in the Company for a long time. And I think making it visible lets people understand better what we are doing.

Yes. To add to Mike's comments, not that they need to be added to, but when you all came in, in November, and we had our investor conference, for years and years we have always included the pharmacy business in Commercial; and we just think it is time that people get an opportunity to see what might happen with this pharmacy business.

You can see that playing out with the guidance and the year-over-year improvement in the Health and Well-Being Services. A lot of that is because of what is happening with the pharmacy operation. We just think it is better for you guys to think about it that way as opposed to burying it in the commercial results.

Maybe to that end, do you have any thoughts about the long-term growth rate of those different business lines or the target margins for those different lines as they evolve?

Well, I won't use rate; but Medicare is going to continue to grow in the Company and so is the individual business barring something desperately wrong with the exchange environment. So that is clearly going to be a growth sector for us.

Then I think the Health and Well-Being space is going to grow faster. I think one of the reasons it is going to be interesting to watch the group health insurance is that it isn't going to do much. I think we are in some ways pretty reflective of what the industry is going to look like in that segment.

So I think it is important for you all to see and for us to be able to highlight and focus on those things that we know we are spending our energy and our time and our growth efforts around. I just think it is better clarity for everybody.

Thank you. This concludes today's Q&A session. I'll turn the call back over to Mr. McCallister.

Well, thanks, everyone for joining us today. I would characterize the quarter as a really good start to the year. I think the Company benefits from having a clear strategy at this point. We were pleased to be able to do the capital deployment moves we have announced.

Then lastly I would like to thank all the Humana associates that are on the call for making Humana a better Company every quarter. We will see you next time around. Thank you.

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