(Commission

File Number)

(IRS Employer

Identification No.)

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Results of Operations and Financial Condition.

Regulation FD Disclosure.

Financial Statements and Exhibits.

Exhibits:

Exhibit

    No.    

Description

Tom Noland

Consolidated pretax income

In millions                                 

Generally Accepted Accounting Principles (GAAP)

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

Amortization associated with identifiable intangibles

Operating income associated with the Individual Commercial segment

Net gain associated with the terminated merger agreement (for 1H 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)

Adjusted (non-GAAP)

Diluted earnings per common share (EPS)

GAAP

Loss on sale of KMG, a wholly-owned subsidiary

Amortization associated with identifiable intangibles

Operating income 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 gain associated with the terminated merger agreement (for IH 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

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

Adjusted (non-GAAP)

Diluted earnings per common share

GAAP

Loss on Sale of KMG, a wholly-owned subsidiary

Amortization of identifiable intangibles

Operating income associated with the Individual Commercial segment

Impact of Tax Reform Law, primarily re-measurement of deferred tax assets at lower corporate tax rates

Net (gain) expenses associated with the terminated merger agreement (for FY17, 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

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 in the fourth quarter of 2017

Adjusted (non-GAAP) – FY18 projected

FY18 Adjusted EPS projections exclude the following:

Loss of approximately $790 million pretax, or $2.60 per diluted common share associated with the company’s sale of its wholly-owned subsidiary, KMG America Corporation (KMG).

Amortization expense for identifiable intangibles of approximately $92 million pretax, or $0.51 per diluted common share.

Operating earnings of approximately $70 million pretax, or $0.39 per diluted common share, for the company’s Individual Commercial segment given the company’s exit on January 1, 2018, as previously disclosed.

Adjustment of $0.09 per diluted common share related to provisional estimates for the income tax effects related to the Tax Reform Law.

FY17 Adjusted results exclude the following:

Amortization expense for identifiable intangibles of approximately $75 million pretax, or $0.32 per diluted common share.

Operating income of approximately $193 million pretax, or $0.84 per diluted common share, for the company’s Individual Commercial segment given the company’s exit on January 1, 2018, as previously disclosed.

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.

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 segment impact.

Guaranty fund assessment expense of approximately $54 million pretax, or $0.24 per diluted common share, to support the policyholder obligations of Penn Treaty (an unaffiliated long-term care insurance company). 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.

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.

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.

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.

The divestiture of Humana’s subsidiary, KMG America Corporation, is subject to various closing conditions, including various regulatory approvals and customary closing conditions, as well as other uncertainties, and there can be no assurances as to whether and when it may be completed.

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 relating to rate adjustments resulting from the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, commonly referred to as “sequestration”; other 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.

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 changes, including activities to 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 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.

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 quarter ended March 31, 2018; and

Form 8-Ks filed during 2018.

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

(502) 580-2811

e-mail:Amysmith@humana.com

Tom Noland

(502) 580-3674

e-mail:Tnoland@humana.com

In millions                              

Generally Accepted Accounting Principles (GAAP)

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

Amortization associated with identifiable intangibles

Operating income associated with the Individual Commercial segment

Net gain associated with the terminated merger agreement (for 1H 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)

Adjusted (non-GAAP)

Diluted earnings per common share (EPS)

GAAP

Loss on sale of KMG, a wholly-owned subsidiary

Amortization associated with identifiable intangibles

Operating income 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 gain associated with the terminated merger agreement (for IH 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

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

Adjusted (non-GAAP)

Diluted earnings per common share

GAAP

Loss on Sale of KMG, a wholly-owned subsidiary

Amortization of identifiable intangibles

Operating income associated with the Individual Commercial segment

Impact of Tax Reform Law, primarily re-measurement of deferred tax assets at lower corporate tax rates

Net (gain) expenses associated with the terminated merger agreement (for FY17, 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

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 in the fourth quarter of 2017

Adjusted (non-GAAP) – FY18 projected

Consolidated revenues

(in millions)

GAAP

Revenues associated with 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,

lower favorable prior period medical claims reserve development (Prior Period Development), as expected, and

an increase in the Group and Specialty benefit ratio year-over-year as discussed in the segment highlights that follow.

Consolidated Prior Period Development (in millions)

Favorable (unfavorable)

Prior Period Development from prior years recognized in 2Q18

Prior Period Development from prior years recognized in 2Q17

Prior Period Development from prior years recognized in 1H 2018

Prior Period Development from prior years recognized in 1H 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)

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 2Q18,

investments made in 2Q18 as a result of the Tax Reform Law; these include investments in the company’s employees, primarily the establishment of an annual incentive 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, 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 2Q18 driven by productivity initiatives implemented in 2017; 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 June 30, 2018, the company had cash, cash equivalents, and investment securities of $17.90 billion, down $3.06 billion, or 15 percent, from $20.96 billion at March 31, 2018, primarily reflecting the impact of the reclassification of KMG’s cash and investment securities balances to the Assets held-for-sale line of the consolidated balance sheet due to the pending completion of the divestiture as previously discussed. 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 herein.

At June 30, 2018, cash and short-term investments held at the parent company of $1.82 billion increased $1.25 billion, or 220 percent, from $567 million at March 31, 2018, primarily reflecting dividends received from subsidiaries in 2Q18 and operating cash derived from the company’s non-insurance subsidiaries’ profits, partially offset by capital expenditures, dividend payments to stockholders, capital contributions to a subsidiary, and the acquisition of Family Physicians Group in April 2018. Subsidiary dividends to the parent company of $1.95 billion in 2Q18 compared to $1.35 billion in 2Q17.

Days in claims payable (DCP) of 40.1 at June 30, 2018, increased 1.8 days from 38.3 at March 31, 2018 and was essentially unchanged from 40.4 at June 30, 2017. Changes are outlined in the DCP rollforward on page S-19 of the statistical supplement included herein.

Debt-to-total capitalization at June 30, 2018 was 33.6 percent, down 30 basis points from 33.9 percent at March 31, 2018, primarily due to the net impact of 2Q18 earnings. The company’s long-term target debt-to-total capitalization range of 30 to 35 percent is expected to allow the company to maintain its investment grade credit rating while providing significant financial flexibility.

The company had $398 million associated with outstanding commercial paper at June 30, 2018 and at March 31, 2018.

Net cash from operating activities

(in millions)

Provided by (used in)                      

GAAP

Timing of premium payment from CMS (g)

Adjusted (non-GAAP)

Separate from the ASR program described above, the company executed repurchases of $23.5 million, or approximately 78,400 shares, at an average of $299.47 per share in 2Q18 and 1H 2018. As of July 31, 2018, approximately $1.98 billion of the current repurchase authorization was remaining.

In 2Q17, due to an outstanding ASR program, the company did not execute any share repurchases. During 1H 2017, the company executed share repurchases under a prior ASR program of approximately 5,833,700 shares under the ASR program, at an average of $205.70 per share, for $1.20 billion.

The company paid cash dividends to its stockholders of $69 million in 2Q18 versus $57 million in 2Q17. Cash dividends of $126 million were paid to the company’s stockholders during 1H 2018 compared to $104 million in 1H 2017. The increases primarily reflect an increase in the per share dividend to $0.50 per share for 2018 from $0.40 per share for 2017, as previously disclosed.

The 2Q18 revenues for the Retail segment were $12.04 billion, an increase of $740 million, or 7 percent, from $11.30 billion in 2Q17 primarily reflecting individual and group Medicare Advantage membership growth in the most recent Annual Election Period (AEP) as well as increased per-member premiums for certain of the segment’s products, partially offset by declines in state-based contracts and stand-alone PDP revenues resulting from membership declines discussed further below.

The 1H 2018 revenues for the Retail segment were $24.15 billion, up $1.41 billion, or 6 percent, from $22.73 billion in 1H 2017, primarily reflecting the same factors impacting the year-over-year second quarter comparison.

Individual Medicare Advantage membership was 3,027,200 as of June 30, 2018, a net increase of 187,100, or 7 percent, from 2,840,100 as of June 30, 2017, and up 166,400, or 6 percent, from 2,860,800 as of December 31, 2017, primarily due to membership additions associated with the most recent AEP for Medicare beneficiaries.

Group Medicare Advantage membership was 493,100 as of June 30, 2018, a net increase of 59,700, or 14 percent, from 433,400 at June 30, 2017, and up 51,700, or 12 percent, from 441,400 as of December 31, 2017. The increases primarily resulted from increased sales to the company’s existing group accounts during the most recent AEP for Medicare beneficiaries.

Membership in the company’s stand-alone PDP offerings was 5,008,200 as of June 30, 2018, a net decrease of 228,200, or 4 percent, from 5,236,400 as of June 30, 2017, and down 299,900, or 6 percent, from 5,308,100 as of December 31, 2017, reflecting net declines during the most recent 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.

State-based contracts membership (including dual-eligible demonstration members) was 325,200 as of June 30, 2018, a net decrease of 49,700, or 13 percent, from 374,900 at June 30, 2017, and down 34,900, or 10 percent, from 360,100 as of December 31, 2017. The decreases were primarily driven by the previously disclosed decision to not participate in Illinois’ Integrated Care Program Medicaid contract, along with lower membership associated with the company’s Florida Medicaid contract due to overall strengthening economic conditions.

The 2Q18 benefit ratio for the Retail segment of 85.5 percent decreased 30 basis points from 85.8 percent in 2Q17 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 was partially offset by the unfavorable impact on 2Q18 from:

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

lower favorable Prior Period Development, as expected.

The 1H 2018 benefit ratio for the Retail segment of 86.5 percent was 50 basis points lower than the 1H 2017 ratio of 87.0 percent, primarily reflecting the same factors impacting the year-over-year comparison for the second quarter, partially offset by the impact of a more severe flu season in 2018.

Prior Period Development for the Retail segment, as noted in the table below, decreased the segment benefit ratio by 50 basis points in 2Q18 and 70 basis points in 2Q17. Prior Period Development lowered the 1H 2018 benefit ratio by 100 basis points and by 130 basis points in 1H 2017.

Retail segment Prior Period Development (in millions)

Favorable (unfavorable)                                                     

Prior Period Development from prior years recognized in 1H 2018

Prior Period Development from prior years recognized in 1H 2017

The Retail segment’s operating cost ratio of 10.1 percent in 2Q18 increased 160 basis points from 8.5 percent in 2Q17. 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 2Q18; and

strategic investments made in 2Q18 as a result of the Tax Reform Law as previously described.

The Retail segment’s 1H 2018 operating cost ratio of 10.1 percent increased 160 basis points from 8.5 percent primarily reflecting the same factors that impacted the year-over-year comparison for the second quarter. The reinstatement of the non-deductible health insurance fee impacted the segment’s 1H 2018 operating cost ratio by approximately 190 basis points.

Retail segment pretax income

in millions                                  

GAAP

Amortization associated with identifiable intangibles

Adjusted (non-GAAP)

The Retail segment’s GAAP pretax income of $493 million in 2Q18 declined $114 million, or 19 percent, from GAAP pretax income of $607 million in 2Q17. Adjusted pretax income for the Retail segment of $498 million in 2Q18 declined $115 million, or 19 percent, from the 2Q17 Adjusted pretax income. The declines primarily were the result of the investment in benefit design for 2018 Medicare Advantage offerings discussed above, investments made in 2Q18 as a result of the Tax Reform Law, and the anticipated lower favorable Prior Period Development. These items were partially offset by the significant operating cost efficiencies discussed above.

For 1H 2018, GAAP pretax income for the Retail segment of $760 million decreased $217 million, or 22 percent from $977 million in 1H 2017. Adjusted pretax income for the segment of $771 million in 1H 2018 declined $218 million, or 22 percent, from $989 million of Adjusted pretax income in 1H 2017. Both the GAAP and Adjusted declines resulted from the same factors impacting the year-over-year second quarter comparison, along with the impact of a more severe flu season in 2018.

The 2Q18 revenues for the Group and Specialty segment were $1.91 billion, up $78 million, or 4 percent, from $1.83 billion in 2Q17, primarily reflecting greater services revenue as a result of the transition to the East Region TRICARE contract on January 1, 2018, higher stop-loss premiums related to the company’s small group level funded accounts, and higher per member premiums across most lines of business in the segment. These items were partially offset by declines in average group fully-insured commercial medical membership.

The 1H 2018 revenues for the Group and Specialty segment were $3.88 billion, up $171 million, or 5 percent, from $3.71 billion in 1H 2017, primarily reflecting the same factors that impacted the year-over-year second quarter comparison.

Group fully-insured commercial medical membership was 1,050,900 at June 30, 2018, a decrease of 56,600, or 5 percent, from 1,107,500 at June 30, 2017, and down 46,800, or 4 percent, from 1,097,700 at December 31, 2017. These anticipated declines are reflective of lower membership in small group accounts due in part to more small group accounts selecting level-funded ASO products in 2018.

Group ASO commercial medical membership was 458,800 at June 30, 2018, an increase of 12,000, or 3 percent, from 446,800 at June 30, 2017, and up 100 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 18 percent of group ASO medical membership at June 30, 2018 versus 7 percent at June 30, 2017 and 12 percent at December 31, 2017.

Military services membership was 5,931,500 at June 30, 2018, an increase of 2,842,900, or 92 percent, from 3,088,600 at June 30, 2017, and up 2,849,700, 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^(h) was 6,227,700 at June 30, 2018, a decrease of 690,100, or 10 percent, from 6,917,800 at June 30, 2017, and down 758,300, or 11 percent, from 6,986,000 at December 31, 2017. The decreases primarily result from reinsuring the company’s WVB and FPP membership to a third party in connection with the Reinsurance Transaction as discussed above, as well as the losses 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 2Q18 benefit ratio for the Group and Specialty segment was 80.4 percent, an increase of 200 basis points from 78.4 percent for 2Q17. The year-over-year increase in the benefit ratio is primarily due to the impact of the following factors:

unfavorable impact of seasonality on fully-insured group commercial medical claims,

unfavorable comparison of Prior Period Development in 2Q18 versus 2Q17,

the impact of lower premiums resulting from the adjustment of the company’s commercial risk adjustment (CRA) accrual related to its Affordable Care Act (ACA)-compliant business resulting from the release of the Centers for Medicare & Medicaid Services’ (CMS) final 2017 CRA data, and

membership mix, including the expected migration of healthier groups to ASO level funded products in 2018.

Prior Period Development for the Group and Specialty segment as outlined below did not impact the 2Q18 segment benefit ratio but decreased the 2Q17 ratio by 70 basis points. Prior Period Development lowered the 1H 2018 segment benefit ratio by 100 basis points and by 90 basis points in 1H 2017.

Group and Specialty segment Prior Period Development (in millions)

Favorable (unfavorable)

Prior Period Development from prior years recognized in 1H 2018

Prior Period Development from prior years recognized in 1H 2017

The Group and Specialty segment’s operating cost ratio was 23.5 percent in 2Q18, an increase of 190 basis points from 21.6 percent in 2Q17. 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 2Q18,

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, and

Group and Specialty segment pretax income

In millions

GAAP

Amortization associated with identifiable intangibles

Adjusted (non-GAAP)

Revenue of $5.99 billion in 2Q18 for the Healthcare Services segment slightly increased by $9 million, or less than 1 percent, from $5.98 billion in 2Q17. The favorable year-over-year comparison was impacted by the strong Medicare Advantage membership growth in 2Q18 and higher intersegment revenues associated with the company’s provider services business reflecting its previously disclosed acquisition of MCCI Holdings, LLC (MCCI).

the loss of intersegment revenues associated with the company’s exit from the individual commercial business,

a decline in pharmacy solutions intersegment revenue year-over-year primarily due to lower stand-alone PDP membership as previously described,

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

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.

1H 2018 revenue for the Healthcare Services segment was $11.65 billion, a decline of $286 million, or 2 percent, from $11.94 billion in 1H 2017 primarily reflecting the net unfavorable impact of the same factors affecting the year-over-year comparison for the second quarter.

The Healthcare Services segment’s operating cost ratio of 96.2 percent in 2Q18 increased 120 basis points from 95.0 percent in 2Q17 primarily due to the following factors:

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

investments made in 2Q18 as a result of the Tax Reform Law as previously described.

The Healthcare Service segment’s operating cost ratio of 96.2 percent for 1H 2018 increased 100 basis points from 95.2 percent in 1H 2017 primarily due to the same factors that impacted the year-over-year second quarter comparison.

Primary care providers in value-based (shared risk and path to risk) relationships of 52,100 at June 30, 2018 increased 3 percent from 50,700 at June 30, 2017, but remained relatively stable from 52,200 at December 31, 2017. The percentage of the company’s individual Medicare Advantage members in value-based relationships has remained relatively steady for the past year, with 65 percent of the company’s individual Medicare Advantage members in such relationships at June 30, 2018 and June 30, 2017, and 66 percent in those relationships at December 31, 2017.

Medicare Advantage and dual demonstration program membership enrolled in a Humana chronic care management program was 752,700⁽ⁱ⁾ at June 30, 2018, down 23 percent from 981,600 at June 30, 2017 and down 5 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 110 million for 2Q18 increased 2 percent compared to 108 million for 2Q17. Pharmacy script volume of 218 million for 1H 2018 increased 2 percent compared to 215 million for 1H 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 pretax income

Amortization associated with identifiable intangibles

Adjusted (non-GAAP) pretax income

Depreciation

Interest expense

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

Healthcare Services segment GAAP pretax income of $206 million in 2Q18 decreased by $64 million, or 24 percent, from GAAP pretax income of $270 million in 2Q17. The decline primarily was due to the impact of the optimization process associated with the company’s chronic care management programs and the investments made in 2Q18 as a result of the Tax Reform Law.

1H 2018 GAAP pretax income for the Healthcare Services segment of $379 million decreased by $135 million, or 26 percent, from 1H 2017 GAAP pretax earnings of $514 million. The year-over-year comparison of GAAP pretax income for the Healthcare Services segment primarily reflects the same factors impacting the quarterly comparison, as well as increased amortization expense resulting from the write-off of certain tradename identifiable intangible assets in the first quarter of 2018 reflecting the rebranding of certain provider assets to the Conviva name.

The Individual Commercial segment’s pretax income of $18 million in 2Q18 compared to a pretax income of $118 million in 2Q17, a decline of $100 million. 1H 2018 pretax income of $71 million for the segment was $110 million lower than 1H 2017 pretax income of $181 million. The pretax income in 2Q18 and 1H 2018 primarily reflects the impact of favorable Prior Period Development.

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.

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.

The divestiture of Humana’s subsidiary, KMG America Corporation, is subject to various closing conditions, including various regulatory approvals and customary closing conditions, as well as other uncertainties, and there can be no assurances as to whether and when it may be completed.

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 relating to rate adjustments resulting from the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, commonly referred to as “sequestration”; other 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.

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 changes, including activities to 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 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.

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 quarter ended March 31, 2018; and

Form 8-Ks filed during 2018.

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

In accordance

with GAAP

unless

otherwise

noted

Humana Inc.

Full-Year 2018 Projections

As of August 1, 2018

Comments

Diluted earnings

per common

share (EPS)

GAAP

  Adjustments

Non-GAAP

~$11.52

(was ~$13.54 - $13.94)

~$2.63 (was ~$0.16)

~$14.15

(was ~$13.70 - $14.10)

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

$55.9 billion to $56.5 billion (was $55.8 billion to $56.4 billion)

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

•   Segment-level revenues include amounts that eliminate in consolidation

Retail segment

$47.5 billion to $48.0 billion

(no change)

$7.1 billion to $7.6 billion

(was $7.0 billion to $7.5 billion)

Change in year-

end medical

membership

from prior

year end

•   Individual Medicare Advantage: Up 180,000 to 200,000 (no change)

•   Group Medicare Advantage: Up 65,000 to 70,000 (no change)

•   Medicare stand-alone PDP: Down 280,000 to 320,000 (no change)

•   Group commercial fully-insured: Down 60,000 to 70,000 (no change)

Retail segment

85.1% to 86.0%

(was 85.2% to 86.2%)

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

78.3% to 78.8%

(was 77.5% to 78.0%)

•   No material impact anticipated from non-GAAP adjustments

•   Change in the Group and Specialty benefit ratio guidance reflects the impact of the Reinsurance Transaction discussed on page 3 as well as the impact of the CRA adjustment discussed on page 13.

Consolidated operating cost

ratio

•   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 2018 Projections

As of August 1, 2018

Comments

•   No material impact to pretax income anticipated from non-GAAP adjustments on segment-level results for the Retail, Group and Specialty, or Healthcare Services segments

•   The lower Healthcare Services pretax guidance primarily reflects a change in disclosure assumptions related to the recently completed Kindred at Home acquisition, moving its results from pretax to below the line

•   Healthcare Services segment adjustments include segment depreciation and amortization, as well as 40% Kindred at Home EBITDA for the second half of 2018

Group and Specialty

segment pretax income

$360 million to $410 million

(no change)

Healthcare Services

segment earnings

Pretax income: $800 million to $850 million

(was $825 million to $875 million)

Adjustments:                                  $225 million

Adjusted EBITDA:

$1.025 billion to $1.075 billion

Effective tax

rate

GAAP                                 22.5% to 23.5%

                                   (was 32.1% to 33.1%)

Adjustments                 ~9.8% (was ~0.2%)

Non-GAAP                         32.3% to 33.3%

                                                    (no change)

•   Includes impact of the non-deductible health insurance industry fee

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

Weighted average share count for

diluted EPS

•   Includes impact of projected share repurchases

Change in guidance reflects the approximately $245 million impact of the Reinsurance Transaction discussed on page 3.

Humana Inc. – Rollforward of Initial FY18 Guidance to FY18

Guidance as of August 1, 2018

Diluted earnings per common share (EPS)                                 

Initial FY18 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

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

Other

FY18 guidance issued on August 1, 2018

Humana Inc. – Rollforward of Initial FY18 Guidance to Current

FY18 Guidance as of August 1, 2018

Diluted earnings per common share (EPS)                                       

Initial FY18 guidance issued on February 7, 2018

Changes in projected operating performance:

Retail segment

Group and Specialty segment

Individual Commercial segment

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

Other

FY18 guidance issued on May 2, 2018

Changes in projected operating performance:

Retail segment

Healthcare Services segment

Individual Commercial segment

Loss on sale of KMG, a wholly-owned subsidiary

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

FY18 guidance issued on August 1, 2018

Consolidated Financial Statements

1.

Consolidated Statements of Income

3.

Consolidated Balance Sheets

4.

Consolidated Statements of Cash Flows

Operating Results Detail

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

Balance Sheet Detail

12.

Benefits Payable Detail and Statistics

Footnotes

Revenues:

Premiums

Services

Investment income

Total revenues

Operating expenses:

Benefits

Operating costs

Depreciation and amortization

Total operating expenses

Income from operations

Loss on sale of business

Interest expense

Income before income taxes

(Benefit) provision for income taxes

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