Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Mike McCallister - President and Chief Executive Officer

Jim Bloem - Senior Vice President and Chief Financial Officer

Jim Murray - Chief Operating Officer

Chris Todoroff - Senior Vice President and General Counsel

Analysts

Matthew Borsch - Goldman Sachs

Justin Lake – UBS

Josh Raskin – Lehman Brothers

Charles Boorady – Citigroup

Greg Nersessian – Credit Suisse

Peter Costa – FTN Midwest

Scott Fidel – Deutsche Bank

Carl McDonald – Oppenheimer

Anu Gupta – Sanford Bernstein

Matt Perry – Wachovia Capital Markets

Doug Simpson – Merrill Lynch

Bryan Wright – Banc of America Securities

Humana, Inc. (HUM) Q3 2008 Earnings Call October 27, 2008 7:00 AM ET

Operator

I would like to welcome everyone to the Humana third quarter 2008 earnings release conference call. (Operator Instructions) I would now like to turn the call over to Regina Nethery, Vice President of Investor Relations.

Regina Nethery

Good morning and thank you for joining us, particularly at this very early hour. Given market volatility over the past several weeks, our team has worked together to ensure our financial results were released more quickly than we had previously anticipated, but with the same level of confidence and comprehensive detail that investors have come to expect from Humana. Previous scheduling commitments resulted in the unusually early time for the earnings release and conference call today, so we fully anticipate being back to our standard timing of a 6 o’clock a.m. release and a 9 o’clock a.m. conference call next quarter. In a moment, Mike McCallister, Humana’s President and Chief Executive Officer and Jim Bloem, Senior Vice President and Chief Financial Officer, will briefly discuss highlights from our third quarter 2008 results as well as comment on our earnings outlook.

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 Humana’s website www.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 our most recent filings with the Securities and Exchange Commission. All of our SEC filings are available via the Investor Relations page of Humana’s website as well as on the SEC website.

Additionally, investors are advised to read Humana’s third quarter 2008 earnings press release issued this morning, October 27, 2008. This press release and other historical financial news releases are also available on our website. Second, this morning’s call and slide presentation include references to non-GAAP financial measures. The company believes that these non-GAAP measures when presented in conjunction with comparable GAAP measures are useful to both management and its investors in analyzing the company’s ongoing business and operating performance since the non-GAAP adjustments relate to items that were primarily not related to the underwriting or servicing of our products. Internally, management uses this non-GAAP information as indicative of business performance as well as for operational planning and decision making purposes. Non-GAAP financial measures should be considered an addition to but not substitute for or superior to financial measures prepared in accordance with GAAP. This slide details the reconciliations of GAAP to non-GAAP financial measures used in conjunction with this presentation. Finally, any references to earnings per share or EPS made in this morning’s call refer to the diluted earnings per common share. With that, I’ll turn the call over to Mike McCallister.

Mike McCallister

Thank you for joining us this morning. As you know, today we reported third quarter earnings of $1.09 per share. These results include realized losses of $0.40 per share, primarily associated with other than temporary investment impairments. Excluding those investment losses, our operating results were $1.49 per share in the quarter, at the upper end of our prior guidance of $1.45 to $1.50. Because our investment portfolio is large, diverse, and conservatively managed, we were fairly well immunized against the negative effects of the world financial situation during the quarter.

Jim Bloem will discuss the adjustments made to our invested assets this quarter in his remarks. The quarter’s major takeaway is that all our important operating metrics came in as planned. Moreover with just two months left in the calendar year, the end of the PDP issue we disclosed in March is plainly in sight. Nothing in the third quarter caused us to change our view of the previously discussed impact of this issue on our 2008 full year results. As I said on the last two calls, the situation was only confined only to PDP, has no effect on our other operations, and will not adversely impact our result in future years.

Turning now to 2009, in light of the favorable operating results noted above and our ability to correct our PDP issue, we anticipate solid EPS improvement next year. Earnings per share are forecast to be $5.90 to $6.10 for 2009, a return to our previous growth trajectory.

I’ll now review the quarter’s company-specific highlights and then make a few comments on the presidential election before turning to our prospects for 2009. As we previously disclosed, our 2009 PDP bids were above the benchmark in all 34 regions. This will result in the loss of approximately 308,000 auto-assigned seniors next year. Based on our analysis of our competitive positioning across all PDP offerings, we estimate losing a total of 650,000 to 750,000 PDP members which include the 308,000 auto-assigned seniors I cited a moment ago. For 2009, we again filed our bids with CMS in line with our pharmacy claims experience.

On the Medicare Advantage side, our 2009 pricing was adjusted to give us the optimum balance between premium and benefits. As we have also discussed with you before, we bid appropriately based on our cost. We believe the introduction of member premiums in 2009 will prove to be a prudent and successful contribution to our strategy of long-term sustainable Medicare Advantage growth. The commercial segment produced in line results. We are pleased to see growing interest by employers in our specialty and voluntary benefits business lines enabled by the acquisitions of KMG America and CompBenefits. In addition, we saw the continuing shift to our preferred business mix, individual, small group, ASO, and consumer plans.

Later in the fourth quarter, we expect to close on our acquisition of Cariten, which also enhances our provider network and our unit cost positioning in Tennessee. Cariten adds 120,000 new Medicare Advantage and commercial members primarily in the eastern part of the state, and finally we were pleased to welcome Marissa Peterson to our Board of Directors this quarter. Marissa’s consumer-focused approach to operational leadership during her years as executive vice president of worldwide operations for Sun Microsystems makes her an ideal addition to our board.

As we think about the upcoming election, three points stand out with respect to its likely impact on Humana. First, we have successfully partnered with the government for more than 20 years. During that time, there have been Democratic Presidents and Republican Congresses, Republican Presidents and Democratic Congresses and so on. There is no permutation we have not experienced or successfully managed, nor is there any aspect of government health benefits contracting, federal employees health benefits plan, Tricare, the Veterans Administrations’ Project Hero, Medicare, and Medicaid that we have not undertaken through good results through each of these political environments. The same is true today.

Second, regardless of who is elected president, the overriding health policy issue is cost. Working with Congress and the private sector, the new President must find a way to harness Medicare expenses. Traditional Medicare has internal cost controls, no care coordination, no disease management, no data mining, and no health and wellness programs. Only Medicare Advantage has the ability to control cost while improving health outcomes for our nations’ seniors.

Finally, as a leader in this popular program, we are prepared to work with the new administration solver once and for all this vexing public policy problem before the massive influx of retiring baby boomers which begins in 2011. In fact, we don’t see any path that government can reasonably take besides continuing to partner with the private sector. The only other alternatives, cutting benefits for seniors or raising taxes significantly for everyone, won’t solve the problem, which is rising costs.

Since our investor day is less than a month away, I’ll keep my remarks on our businesses brief this morning. Leaders in these areas will be reviewing our operations with you in much more depth in New York on November 20, 2009. Medicare for Humana next year is a disciplined execution story. We’ve told you in the past about our differentiated Medicare value proposition which includes wellness and guidance features like Smart Summary Rx, Medication Therapy Management, and SilverSneakers.

In the next 2 years, we will be extremely focused on network development and further enhancing our clinical processes. Our career sales force continues to be a strong competitive advantage for us. Nearly 35% of our career sales agents have at least 3 years of Humana experience. Many have been with us over 5 years and about 60 agents have been with Humana for more than 10 years. These agents are supported by a well-tenured team of telesales agents as well. I share these statistics with you today as we believe they are a testament to the loyalty of this team and in light of our significant growth their effectiveness. Our utilization management and clinical programs continue to produce significant cost savings and improved health outcomes for our Medicare Advantage members, and our head-of-the-curve network development efforts position us well for growth and increasingly popular PPO products and also for the new MIPPA mandated private fee for service network requirements that go into effect two years from now.

Turning to our Medicare Advantage growth for 2009, we’ve guided this morning to net membership gains of 50,000 new members as a midpoint. This is of course lower than what we were able to do in prior years. The slide outlines one of the reasons. Although we are confident in our ability to continue to leverage our sales model to drive new memberships, it is clear we have competitors that are being quite aggressive with both lower premiums and very rich benefits.

Let me take a moment to explain why the positioning of our benefit designs and premiums is important this year from two perspectives. One, we have significant multiyear experience with Medicare Advantage products and are very confident that our medical expense assumptions are understood and accurately reflected in our premium benefit mix. Two, we have always known that these products would ultimately require a premium from the member, to both reflect cost trends and government payment levels. While we historically have had many counties with zero premium products, especially with the newer private fee for service offerings, 2009 becomes an important inflection point as we introduce member premiums across the country in preparation for the future and to reflect our costs.

We are also continuing our movement away from independent agents for distribution. We have never been deeply dependent on this channel, but it is clear that our use of the agent channel will be narrowly focused on agents who are exclusive to Humana and willing to offer our products based on total value to the senior population and not just price.

While I consider our approach to the market to be sound actuarially and smart strategically, given the current environment, we find ourselves facing a challenging sales season. The good news is that despite this environment, we are positioned to achieve growth in net membership in 2009 that will produce our targeted 5% pretax operating margin for our Medicare business. We are also confident that this approach serves the long-term interest of our senior members and our government partners and is fiscally sound. We have a strong track record of assessing the Medicare Advantage sales environment over the last few years and accurately guiding you to our net growth. I’m confident that for 2009 we are doing so again.

Our commercial segment continues to perform well with pretax operating results 30% year to date. Over the past 3 years, commercial margins have risen from less than 2% to more than 4% as we have grown membership in our areas of strategic focus, individual, small group, ASO, and consumer, while achieving a healthy balance between fully insured and ASO business. Through a combination of our geographic expansion strategy enabled by our Medicare networking and our KMG America and CompBenefits Specialty Product acquisitions, we are now able to sell a full range of products in much of the United States, essentially transforming ourselves from a regional competitor to a national leader as we have also done in Medicare.

In conclusion, our business operations are firmly on track. As the overall health benefits market in both commercial and Medicare continues to evolve toward a consumer-focused approach, Humana is ideally placed to meet businesses, employees, and seniors where they are and where they are going. With our operating metrics indicating solid progress, we’re confident in the growth forecast for 2009 we’ve given you today. My colleagues and I look forward to seeing you all in New York on November 20th, where we will have the opportunity to discuss our prospects in more detail. With that, I’ll turn the call over to Jim Bloem.

Jim Bloem

As Mike mentioned, we’re pleased that the operating performance from each of our business units continues to track closely with our previous guidance, so this morning, I will focus my remarks on the following three items. First, investment income in our portfolio; second, our capital and liquidity positions, and third, our 2009 earnings per share guidance. Before beginning though, I’d like to note that our fourth quarter earnings per share guidance of $1 to $1.10 includes a $0.10 per share impact from lower investment income and higher interest expense. The lower investment income results from much lower short-term rates of return on high-quality investments, while the early October spike in LIBOR will be reflected in our fourth quarter interest expense.

Turning first then to investment income in our portfolio, the recent turmoil in the credit markets especially in September resulted in $108.3 million, or $0.40 per share, of realized investment losses. As we detailed in today’s press release, these losses primarily related to distressed financial institutions. It’s important to note that our previously disclosed holdings in Lehman Brothers, American International Group, and Agency Preferred shares including those of Fannie Mae and Freddie Mac accounted for $76 million of the $108 million of investment losses, or $0.28 of the $0.40 per share. The remaining $33 million, or $0.12 per share, of realized losses was spread over 22 issuers in the financial services, mortgage and asset-backed municipal and corporate sectors. The securities of these issuers were identified through the same vigorous process we employ quarterly to evaluate for impairment. This process is described in this morning’s press release and in each year’s form 10-K. This quarter, securities from 515 issuers were examined for other than temporary impairment. As you might expect, this was a significantly higher number than we’ve needed to evaluate in past quarters.

At the end of September, we had approximately $254 million of unrealized investment losses reflected in our statement of stockholders’ equity. After the first three weeks of October, net unrealized losses were approximately $312 million. Importantly, this amount constitutes 4.8% of the portfolio versus 6% on September 30, 2008, prior to booking the third quarter realized losses. Our investment portfolio continues to benefit from broad diversification, high credit quality, and short duration. That said, a well-diversified $6.5 billion fixed income portfolio could be expected to have some or all of the issuers which resulted in our third quarter investment losses. In this morning’s press release, we’ve included a new statistics page, page S-16, which both details our investment and securities lending portfolios by asset class and also gives each portfolio’s average credit rating and duration. We trust this additional disclosure will be helpful in your assessment of our investments.

Moving next to capital and liquidity, we continue to have ample capital and liquidity to both meet all financial regulatory requirements and satisfy our obligations. This statement is supported by the following 5 points. First, our business produces positive cash flows during periods of increasing enrolments because premiums are collected in advance of claims and other cash disbursements. Our year to date operating cash flows were $686 million, and today we reiterated our full year 2008 operating cash flow guidance of $1 to $1.2 billion.

Second, we have full availability under our $1 billion revolving credit agreement. Later in the fourth quarter, we expect to draw $250 million of this amount to complete the pending Cariten Healthcare acquisition which we announced on August 4, 2008.

Third, based primarily on conditions in the credit markets on October 7, 2008, we terminated each of our interest rate swaps. These swaps had exchanged the fixed rate on our senior notes to variable LIBOR-based rates. As a result of the swap terminations, we received a total of $108.3 million in cash from all of our former counterparties. Coincidentally, this is the exact amount of the third quarter realized investment losses. So the interest rate swap terminations enhanced our cash position by the same amount as the predominantly non-cash investment losses.

Fourth, we continue to carry a significant level of aggregate excess statutory capital and surplus in our state-regulated operating subsidiaries. We expect to maintain at least the level of aggregate excess capital and surplus in these subsidiaries when the third quarter statutory filings are completed next month. This is true because our aggregate operating subsidiary earnings exceeded the investment losses that we realized during the quarter. Finally, we continue to conserve our capital and liquidity in these uncertain times by lowering our 2008 capital expenditures forecast today by $15 million as well as refraining from share repurchased during the third and fourth quarters of this year. Our capital expenditures remain predominantly funded by our depreciation and amortization expenses. Potential share repurchase funding will be used to purchase Cariten by drawing on the revolver. We expect to pay this draw during the first half of 2009.

Turning finally to 2009, our initial full year’s earnings per share guidance range of $5.90 to $6.10 returns us to the earnings per share growth rate trajectory which we had been working on all year. Based on the consistent operating performance of both our government and commercial segments, we’re pleased to be able to provide earnings guidance within this range. While it’s obvious that all companies including ours can expect the continuing challenges associated with the credit markets, our sound capital position and ample liquidity together with our consistent operating performance give us confidence in the forecast that we have shared with you today.

With that, we’ll open the lines for your questions. We ask that you limit yourself to two questions in fairness to those waiting in the queue.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Matthew Borsch with Goldman Sachs.

Matthew Borsch – Goldman Sachs

If I could ask a question about the Medicare Advantage competitive dynamics, it sounds to me like what’s happening is you have adjusted your private fee for service offerings taking a view of the 2011 sunset and many of your competitors have not. Is that correct, or in fact are you seeing offering that are more aggressive for 2009 relative to what you saw last year or this year?

Mike McCallister

It clearly is more aggressive than what we’ve seen in the past, but I don’t know that I would characterize it the way you did. Essentially what we’ve done is we’ve looked at our expenses are, we’ve got several years of experience with this, reflected what we needed to do relative to premium and those expenses, and that’s what our benefit structure looks like. As I said it in my comments, it’s very important that there be premiums on these products because as we deal with payment changes in the future, you’re going to need to have that level in the game as well as just the benefits themselves, so it was an important milestone for us to go to. So, yes, we have a long-term view of this. Yes, it has long-term implications to put premiums in there. They’re relatively modest, but they are there because over the long term, they are a part of all this, so we’re building networks quickly. You’ve already seen the data in terms of where we stand. In terms of preparedness for 2011, we’re well down that road. This is an another step, and I’ll let the competitors speak for themselves as to why they are doing what they’re doing and how that works for them, but this is going to be a very good year for us in terms of a couple of key things happening as well as I’d like to be growing more than 50 at the midpoint, but it is what it is. We’d rather than be disciplined than wrong.

Matthew Borsch – Goldman Sachs

Could you characterize what you think you’re seeing in the commercial markets in terms of pricing going now into 2009 and how that might or might not differ from what you think you’re seeing a year ago?

Jim Murray

We talked about the fact that we were beginning to see some more appropriate pricing in terms of the competitive landscape. I think we’re continuing to see that. Obviously in certain markets you’ll have a competitor that’ll do some things that you’ll wonder why they’re doing that, but generally speaking, we’ve been increasing our pricing over the last several months and last several quarters with the thought in mind that it’s going to be a lot more conservative in terms of the pricing environment and we’re beginning to see that.

Matthew Borsch – Goldman Sachs

Great, thank you, and thanks again for moving up your earnings date!

Operator

Your next question comes from Justin Lake with UBS.

Justin Lake – UBS

I just want to follow up Matt’s question as far as benefit changes and PFFS. What you gave us is a great look at the absolute benefit right now, but when you look year over year, and I’ve gone back and looked at a few of your larger counties, and it does look like you increased the maximum out-of-pockets, like you said added a premium. It looks like you are lowering benefits to some extent, and I’m sure that’s a rational approach. I’m just curious as to what’s driving that specifically. Is it some view of cost trends in private fee for service that’s increasing that we should be looking for, or is it some view that margins may be needed to be expanded to make this product sustainable?

Jim Murray

We’ve looked at the cost that we experience month after month, and we’ve also evaluated the premium that we get from CMS, and if you go back and you evaluate what the Medicare fee for service cost trends are, as you look at those, as they ultimately pay themselves out over a number of years, the fee for service environment experiences trends of 6-7%, and as many of you know, in the last several years, our amount that we got from Medicare more in the range of 4%, and so as we are implementing all of the cost savings opportunities, the network that Mike talked about earlier as well as the clinical programs, we’re just trying to price our products and create benefit structures that take into account the premium that we get and the costs that we are experiencing. So, as we look into 2009, we felt it was appropriate to make those two changes you saw. You also will see a bit of a change in our inpatient benefit structures as well compared to last year.

Mike McCallister

I need to remind you too that this 5% operating margin that we target has an impact on all that. We only have 4 pieces, the premium, the benefits, the SG&A, and the profit, and we start with 5% as a profit and we work around that, and so as we look at the balance, how do you get that? We know what the SG&A is going to be. You’re going to adjust premiums or benefits around those two givens, and we have to make the right call as to whether you go with benefit reductions in light of the things Jim talked about or whether you put the premiums in or what the right balance is, and that’s judgment as much as anything.

Jim Murray

Just as a quick followup, we’re not seen an acceleration in costs. As you look back over the last several years in fact, the Medicare fee for service cost trends are very stable in terms of what we can expect each year, and so we feel very comfortable with the benefits and premium position that we put on the table for ’09, and we look forward to 2010, and some of the clinical programs that we’ve talked about for a number of months are really starting to bear some fruit.

Mike McCallister

If you look at those premiums you’re seeing out there for the first time, they’re in the teens. They vary by market, but we’ve talked about this before and that is the way we look at that is our true competition is not the old Medicare program because no one ever goes back there. Our true competition is are they going to be in a Medigap, are they going to be in a private fee for service, or they going to be in a PPO, and if you look at Medigap premiums, they are quite high, and so we have somewhere between zero and what a Medigap premium looks like to work with here. We’re still really at the low end of what premiums look like here.

Justin Lake – UBS

My second question is around the membership size. If you can give us some color around the mix of membership, of that 50,000, how do you see your membership changing between PPO, HMO, and private fee for service? Maybe talk about the expectation for attrition versus new sales in ’09 and ’08, and then just maybe tell us how your PPO benefit now compares to private fee for service given what you’ve done in your private fee for service benefit and maybe compare that to ’08 as well.

Jim Murray

There’s a lot in there, and I’ll try to hit them all. We’ve identified that we believe that we can sell on the low end 300,000 new members and on the high end maybe as many as 350,000, and then if you look at what our net guidance, you can do the math around the attrition levels. The sales amount is down a little bit from last year, and the terminations as you might expect are up from last year. We hope that of the 300,000 we’ve targeted, at least 50% of those will be coming from network-based products. We’re currently sitting at around 500,000 in HMO offerings, about 175 or thereabouts of PPO, and 700,000 in private fee for service, so if you take all those data points that I just gave you, you can get a sense that we’re starting to see some amount of acceleration in the network-based plans that are going to be the thing of the future in 2011. So we feel very good with the way that we’ve set up what we call product continuum, and to answer one of your other questions, the best value that a senior can get would be with an HMO. The second best value would be with a local PPO. Next would be a regional PPO, and then a private fee for service plan. As we go in market by market, we’ve tried to create that type of product continuum so that people can understand that with the network-based options, they’ll get more value, lower premium, better benefits as they move up the continuum. We’re also as we’ve talked about in the past creating Medicare supplement offerings in all parts of the United State so that we’ve got a full product continuum for the seniors that we represent. So we feel very good about how this is setting up. We’ve got 2 years to get the network in place, and we feel good about how we’re positioning all of our products in the different markets, and all for us it is now, as Mike said earlier, is an execution story.

Justin Lake – UBS

The PPO versus PFFS, was that similar in ’08 and now PPO is actually better in ’09?

Jim Murray

We’re starting to try to position these local PPO better than the regional PPO, and that would be positioned better than the private fee for service. There may be some, I’ll call them, dislocations in certain markets because of cost structures and some of the rules you have to follow when you file bids, but generally what we try to do is to create that continuum of our benefit offerings.

Operator

Your next question comes from Josh Raskin with Barclays Capital.

Josh Raskin – Barclays Capital

My question relates to the 2009 guidance around Medicare earnings, and I understand 5% is sort of a target range, but if I think the guidance for ’08 revenues and a 3.5% margin and the ’09 revenues and a 5% margin, I’m coming out with a difference in earnings of somewhere around $310 to $320 million, and that’s obviously lower than what the PDP losses were this year, so is it fair assume that sort of net-net you’re not looking really for earnings growth in aggregate when excluding the PDP losses year over year?

Jim Bloem

When you think about the PDP losses that we talked about going back in March, the number that you just mentioned is very close to the number that the PDP losses.

Josh Raskin – Barclays Capital

Was that 350? Is that still the number?

Jim Bloem

It’s a little bit better than that now. As we said in the last call, we’ve sort of come down toward the lower end of that initial range of $330 to $390 and then now we say we’re sort of at the bottom or slightly below the bottom of that, and we work through this new set of benefits, we’re just giving you our initial guidance now to see, but the guidance point is to reinforce the point that 5% operating margin is what we’re really striving for, and all the remarks of Jim and Mike regarding what the benefit designs are and whether other people have zero premium or different benefit configurations, we took a proactive cost approach and we looked at the long-term viability and sustainability really of the Medicare program and said that 5% operating margin is what we’re after.

Jim Murray

Having said that, when we started 2008 and our estimates were how we were going to do and had to reduce that by the 350, we now are looking at next year where although we incurred a loss of 350 on that PDP error, we’re going to have 750,000 less PDP members next year, and our profit targets on the PDP business are similar in terms of the MERs that we anticipated year over year, but we won’t have as many members for which to make that, so I don’t know if I’m being clear, but there is going to be some profit improvement as a result of the MAPD business as well because we’re losing 750,000 PDP members.

Josh Raskin – Barclays Capital

The unrealized losses that you spoke about Jim of $254 million at the end of September, is that the gross losses number or is that a net losses number? If it is net, what is the gross?

Jim Bloem

The gross is 266. There is a meager $12 million of investment unrealized gains in there, but again since people are focusing on what the loss position is, it’s 266 minus 12, 254.

Josh Raskin – Barclays Capital

And the 312, the current number?

Jim Bloem

That’s roughly the same. Generally the unrealized have moved up 58, and the reason for that is when you do this, you have to do it on 09/30. If you look at when was the worst day in the market in terms of the bond market, it’s probably somewhere around the 15th of October, so now taking it through, let’s say, last Wednesday or so, I think that was the day we did it, that’s why you see that further deterioration, but we’re very happy overall with how this looks in terms of the government’s decision to make direct injections into the financial institutions and the Fed’s decision to start being a direct purchase of commercial paper.

Operator

Your next question comes from Greg Nersessian with Credit Suisse.

Greg Nersessian – Credit Suisse

My first question is on the commercial enrollment for next year. Are you expecting the mix of business to remain relatively unchanged? When I calculate the yields, they are coming in right around that 6 to 7% same-store range that you’re projecting, and I know there is some acquisition impact in there, but broadly speaking, do you expect any change in the mix like you had this year?

Jim Bloem

Very similar to what we’ve been seeing over the last several years. There’ll be more of a shift to individual Humana One small group and probably some reduction in members from large national accounts in certain areas, and so as we guided, we think our membership will be generally flat, but you’ll see more coming from fully insured individual and small group, very similar to what we’ve done over the last two or three years.

Greg Nersessian – Credit Suisse

So the realized yields will end up being below the 6-7%?

Jim Bloem

Probably a tad, yes.

Greg Nersessian – Credit Suisse

My second question is on the PDP outlook for next year. You obviously have made a decision here with respect to the dual eligibles, but I remember earlier this year, you had talked about other issues with respect to the positioning of your co-pay levels this year as well as where you had certain drugs in the formulary. I was wondering if you could just speak to if and how you may have adjusted both of those factors into next year, or is it just simply a matter of no longer coming in below the benchmark?

Jim Murray

First, we’ll start with the standard plan, and as we’ve shared with you in the past, we find ourselves with what we were referring to around here a barbell of membership. We had a lot members who were heavy utilizers and another large group of members who were lower than average utilizers, and unfortunately what we found was that the heavy utilizers being supported by the low utilizing members that we also had. So what we had to do based upon our trends, when we priced our products, we had no desire to go above the benchmarks, but what we did is we priced to the cost structures and the trends that we had been seeing over the last year or so, and when we developed that pricing based upon the trends that we saw, we unfortunately did go above the benchmarks in all of the states that we did business, so in addition to raising the premiums as you references, we also changed some co-payment levels and we also changed the fact that we had an open formulary, so those three changes we’ve been messaging our members trying to share with them some of the changes that they might expect to see and giving them some suggestions about where they might be able to get better benefits. So that will move me over to the enhancement plan. That was the plan that we talked about last year where we got adversely selected against. There we have more modest premium increases, but we also changed our co-payment level and also went to a closed formulary, very similar to our competitors called closed formulary. In the standard last year, we found ourselves as one of only two competitors that had an open formulary, and that caused some of the problems that we referenced. So we did all three of those steps, and we feel pretty good about where we are at relative to the competition and our pricing and cost structures that we were seeing.

Mike McCallister

And I think that’s really the way to look at it because our thing is not a decision to decide whether or not to attract or not attract the dual eligible or the auto-assigns. It has to do with the trends are and what drug costs are and what the formula for the bids specify.

Jim Murray

Frankly as a result of doing what we did this year, it puts us in a better position to reconsider our bids for 2010 and our ability to compete for the auto-assigned membership that unfortunately we’re going to lose this year.

Greg Nersessian – Credit Suisse

Jim, just one last quick question. Could you just explain the difference between the 6.28 weighted average rate versus the 6.94 in the press release?

Jim Bloem

The 6.94, we have four issues of senior notes, and if you blend them by their size, if you just took the coupon, weighted it by the size of each issue, you’d get 6.94%. We used to have interest swaps attached to each one of those four issues. On October 7th, when there was a tremendous spread between the amount we pay under the swaps and what LIBOR was, we surrendered our swaps and picked up $108 million, and what that did was effectively lower that 6.94 to 6.28 on the $1.55 billion of senior notes.

Operator

Your next question comes from Charles Boorady with Citigroup.

Charles Boorady – Citigroup

This year on March 12th, you had to cut guidance unfortunately because you found the unexpected adverse selection in the PDP end. I was just wondering looking forward do we still need to beware of the March in 2009 or can you talk about what changes in the past seven months you’ve made to improve your ability to predict things like adverse selection bias going forward?

Jim Murray

Sure. As you might expect, I’ve spent a lot of time with our Medicare Actuary. We’ve evaluated our processes and procedures. We’ve made a number of changes in personnel. We now have a new vice president of Medicare Actuarial Services who just started with us a couple of weeks ago. Again, we’ve changed our process, and we’re using the services of two well-known actuarial outside firms to assist us to create better processes for preparing our bids and also to assist to be a little bit more analytical than in the past in evaluating costs and what have you, and I feel very good about how all of that process, procedure, discipline, and data aggregation is coming together to produce the 2009 bids and what it will do for us to be able to get even better prepared for 2010. So, we’ve learned a lot over the last several months, and I think we are better for the learning.

Charles Boorady – Citigroup

Related to that, you’re imposing a member premium on Medicare Advantage whereas on the slide your competition generally is not. How would you take into consideration the potential for a healthy person with low expected medical expenses to have bias towards a free product or zero-premium product, whereas a heavier user of medical care might be more willing to stick around and pay the extra premium, or is there something else not on this slide?

Jim Murray

There is a number of things that are on that slide. If you look at the benefit structures, it would suggest that a healthier person would choose our benefits. You’re right that the premiums that we have would suggest that somebody who is not a user of medical costs might be interested in going with a zero premium product, so there’s a lot of dynamics on that slide, some of which argue against each other. The other thing that you have sit back and think about is distribution channels and what kinds of business different distribution channels create for you as a company. We believe that our distribution model is a lot better in terms of working with seniors and identifying with the seniors the products that they need and sitting across the table and discussing those things with them. So there’s a lot of dynamics that go into figuring out healthy risks versus unhealthy risks, and we’ve evaluated where we’re at and we feel pretty comfortable about what 2009 might look like for us in terms of our benefit designs and our distribution model.

Mike McCallister

I’ll go one step further, Charles. We’ve done a fair amount of research on seniors on what they expect, what they need, and what they want from all of this, and as we have seen in the past, there are subsets out there that move around. There are certain types of virus, but at the core of this population, these folks are looking for, and this term is thrown around rather casually, but they are looking for a total value proposition in terms of this relationship. They’re not interesting in bouncing around, and I think you’ve seen some of the things we do with these people and for them, everything from the statements we send out which have been a spectacular success in terms of really driving that concept of value for them. So, at the end of the day, there is a number of ways to compete. You can throw price, you can throw benefits. You can do what we’re doing which I think is basically dealing with them long term, plan on having them long term and deal with fundamental core value proposition and that’s what we offer.

Charles Boorady – Citigroup

So in putting this guidance together for ’09, have you already gone through this competitive analysis bottoms up throughout the geographies that you’re doing business in?

Jim Murray

We’ve analyzed every market where we do business. I can show you all the books that we’ve gone through in terms of where we’re positioned, and we’re cautiously optimistic that in light of what are seeing out there that we’ve got the right products in, I’ll say, 80% of our markets. Obviously there are a lot of markets that are really strong markets where we feel very good. There are other markets where we have some membership that we’re a little bit concerned about, and so when we look through each and every place where we do business and we evaluate whether our lead product is going to be a private fee for service or a local PPO or a regional PPO or an HMO, and we step back and we think about it, we feel pretty comfortable with what we’ve out there in terms of our guidance.

Mike McCallister

There’s another aspect of our distribution that I don’t know is well understood. We don’t ever really tease it out in great detail, but in terms of how they are compensated. They do receive a base pay. As career agents, they have commissions, but then also receive monthly a small stipend for every member that they’ve brought in, so they have sort of a book of business that is Humana customers but is also theirs to care for and take care of, and there are some relationship implications between these seniors and the folks that they’ve dealt with in making these choices, so there’re all sorts of little things here and there that represent some piece of the total value chain here that have the potential to overcome some sort of a frontal attack by virtue of just price.

Jim Murray

Mike just made an important that I’ll build on a little bit. Our market point agency and the 2000 career agents that are a part of that have been working with their books of business over the last several months, which is different from what some of our competition in terms of all of a sudden if it becomes the selling season for these particular products and the outside agents now spend their time thinking about that while the rest of the year they are selling the other products that are more seasonal in nature, and so we feel very good about our seniors understanding exactly what it is we’re doing, and as Mike said the different value propositions that we bring to the table, and that’s a big part of why we think that our retention levels will be what we are estimating.

Operator

Your next question comes from Scott Fidel with Deutsche Bank.

Scott Fidel – Deutsche Bank

Could you maybe give us some insights into how you expect first quarter commercial membership to look, whether you expect that to be down or flat, and within that, what you’re expecting for your ASO business, and then if you could just remind us how much of your commercial business renews on January 1?

Jim Murray

The guidance that we’ve given is it will be generally flat. I would estimate that in the first quarter we’re going to be down somewhere around 50,000 or so members. That’s an estimate. I haven’t stepped back and tried to analyze that exactly, so I’ll throw that out as an estimate. Most of the reduction will be from self-funded or ASO customers. We break our membership into various pieces, and I would say that 60% of our large group membership renews on January 1st, and that is what would cause the reduction of some of those larger self-funded or ASO accounts, and then as the year progresses, the individual net growth that we’ve been experiencing over the last several years and the small group net growth that we’ve been experiencing will begin to take hold, and we’ll get back to that flattish for the full year.

Scott Fidel – Deutsche Bank

To follow up just on investment income, it looks like for ’09 you are expecting an uptick in that even when you back out the realized losses that you’re expecting in the back half of this year, and maybe if you could help us think about what the anticipated drivers of the higher investment income are for ’09. Do you expect higher cash balances, and also what type of portfolio yield you’re building for ’09 relative to ’08?

Jim Bloem

That’s generally it, Scott. The main thing is the average investment balance will be higher because of the cash flow that we’re forecasting. With respect to rates, we don’t public guidance on prognostication of rates, but I’ll just say to you we’re not expecting a lot in rates given what’s happened, so it’s basically driven, the improvements driven by putting back the investment losses and then having a higher invested balance.

Scott Fidel – Deutsche Bank

Just getting back to the Medicare competitive environment, just interested in terms of on the commission side how aggressive things look for ’09 relative to ’08. I would have thought that with some of the focus there in ’08 and with some of the CMS marketing guidelines that we would’ve seen maybe some easing in commission from competition, but it doesn’t sound like we’re hearing that in the market place, so your views on commissions, and then just also relative to the private fee for service product, you gave the example there, and how widespread are the still intense competitive products within private fee for service? Now we know Wellpoint is exiting that market, but clearly we saw one of your competitors with significant issues there last week, so are you still seeing a very wide range of highly competitive richer PFFS products out there?

Mike McCallister

I’ll start with the commission fees. First of all, all bets are off on commissions because CMS withdrew their regulatory structure for that last Friday, so they’re supposed to issue something new this week, and we’ll wait for that to come out. There is a significant focus on commission levels because some of the early indications which have resulted in this action on their part would reflect some pretty interesting things being done by companies relative to how they pay out under the new regulations, so news at 11 relative to commissions. The good news is it’s not a real driver for us one way or another because of our career agent environment. We do work with a few independent agents, but not many so, again, news at 11 on that.

Jim Murray

With respect to your second question, we looked at our HMO offerings in the states and the cities where we do business, and we’ve looked at our local and regional PPO offerings, and we feel very good about how those are generally positioned, but to your point about the private fee for service, there are a couple of competitors throughout the United States that seem to have a lot of zero premium products with benefits that are richer than ours, and as Mike said earlier, we understand because we’ve been in the private fee for service business for 5 years what our cost structures are, and we’ve created our benefit design and premiums to react to the cost structures, and that’s why we’re giving the lower net growth guidance because if those competitors continue to market those products, it may impact us.

Mike McCasslister

Just one last comment on the commission side of things. To me, it’s a loser’s game. Commissions are easy to copy. It can be done in 10 seconds, and if that’s the way you’re going to compete, that’s interesting, but I don’t think it’s sustainable.

Scott Fidel – Deutsche Bank

On the commissions that changed at 11 last week, where would you say that decision to change or pull back on some of the commission rules came more from? Was that more toll driven or more from commentary from the industry or within CMS themselves?

Mike McCallister

It came from virtually everywhere. There was a fair number of politicians who were becoming quite aware of it, and they started up, and there was some industry angst, and it was as little bit of every thing.

Jim Murray

When we looked at what was happening, we didn’t think that it was what CMS had intended when they came out with their guidance.

Mike McCallister

The intent was really straightforward from CMS. They were trying to eliminate these high payments in the first year and then drastic reductions in year 2 because it clearly sets up a churning scenario, so they were trying to flatten out commissions so that there was more stability for seniors and less motivation for agents to do things that maybe they shouldn’t, and so essentially what some did was they decided to make the high commission first year, be the renewal as well, which just generates an awful lot of potential for confusion and churn and a lot of other things, so I expect a much more rational regulatory structure to come out this week that will bring it back to the original intent which was protect seniors from being moved around by commission schedules.

Operator

Your next question comes from Carl McDonald with Oppenheimer.

Carl McDonald – Oppenheimer

I was wondering if you can give any color on what your internal agents can do within the construct of the new Medicare marketing rules to try and send seniors towards the PPO. Is it purely just the benefit design and that’s it, or are there other things that the agents can do?

Jim Murray

As I said earlier, we just sit across the kitchen table from the seniors and talk to them about their benefits of the different offerings and their particular needs and what makes the most sense for them and what they can afford. Obviously with a network-based product, there is a possibility that there’ll be less providers in that network, and we just have to make sure that the seniors are aware of all of those things, and whatever then works for the seniors is where we’ll go.

Carl McDonald – Oppenheimer

It looks like the company has become a little bit more reliant on the use of multiyear rate guarantees on the commercial business, so could you walk through the structure of when you’ll give a multiyear rate guarantee and sort of what the general cost trend guarantee looks like?

Jim Murray

Sure. We have created a pilot program that’s called Smart Results. I think we sold about 20 customers, and it is a sell-funded offering or ASO offering, and so we don’t have any insurance risks, but we do charge an admin fee to those customers, and what we’ve tried to do is around this whole idea of consumerism is to not demand but suggest to them if those customers do certain things, if they have their associates prepare HRAs, if they have their associates work with our personal nurses, if they their associates give us their phone numbers, if they have their associates give us their e-mail addresses, if they talk to their associates about our disease management programs, if they do a number of things, we are willing to guarantee trend levels, because we found as we studied what are called our SmartSuite products that if these companies do some of these things to enhance engagement, it has a significant impact on cost. So this 20 or so sample pilot, whatever we want to call it, of groups, we have gone out with those kinds of programs, and we are in the process of evaluating those as we speak. I think if you come to the presentation in New York, we will share some information about what we’ve found with those, and I think you will be pleased with what you see.

Carl McDonald – Oppenheimer

So the multi-year guarantees then aren’t becoming more prevalent on risk products?

Jim Murray

No. I would say I watch the TV like some of you may do. Assurant of late is one of our competitors, and they have a 2-year guarantee for their individual products. We see that in the market place. We don’t see a lot of multi-year guarantees out there.

Mike McCallister

Particularly on insured products.

Operator

Your next question comes from Anu Gupta with Sanford Bernstein.

Anu Gupta – Sanford Bernstein

I was again following up on the sources of growth for MA in ‘09, and particularly I was trying to understand how much of this is related to the competitive dynamic that you describe on product design relative to intrinsically the growth slowing down in this segment. For example, on the existing over 65, are you targeting more on the retail side or the group side? Similarly on the agents, are you putting together products to motivate early retirees as they are aging in to stick with Humana? The third point I had was around GM, for example. They recently talked about moving to defined contributions, so in addition to all the retail sales you make, are you looking for additional sources of growth and may those be more high growth than you are targeting right now?

Jim Murray

Trying to break that question into a lot of pieces, I’ll say a few things, and then we can figure out how I have done. Our sales levels will remain high in 2009 on the MA. What we are concerned about is the possibility that we will terminate more than we have in the past, so that would be one day to point. In addition to the competitive landscape that we are experiencing, another factor we’re thinking about is what our net growth might be if some of the changes that were made by HR6331 that CMS promulgated which doesn’t allow us to make any outbound calls, and it also changes what we used to refer to as our referral model. When we would have a discussion across the table from seniors, we talked to them about whether they knew of anybody else who might be interested in our products. Well, CMS now has eliminated that, and every contact that we have with a member must be initiated by that member, so we are trying to evaluate the impact that that might have on our growth and we try to be conservative in that regard. To another question that I heard in there, we are doing a lot more. As Mike talked on many occasions about the ageing opportunity, we are trying to go down downstream if you will and start to create products that might attract and create a relationship with the 50 to 64 year olds so that they age in to our MAPD products. That will be more longer term. We will talk about some of those when we are in New York in terms of some things that we are doing around our Humana One offering and some other kinds of products that we are creating so that we can create that relationship with the seniors so that we can then have a discussion with them sometime in the future about MAPD and PDP offerings that we will have.

Anu Gupta – Sanford Bernstein

I have one more question. You speak about the total cost issue being fundamental to the future of the Medicare program, and I was curious to see if you had a roadmap on your efforts underway around moderation of the underlying cost trends, so you still have the 5% operating margin, you are roughly 10% on the admin ratio. While you are not directly competing with the fee for service product, they are at 3%, so as you start to make that business case to Congress, how are you looking at closing the gap overall on your cost structure relative to what the government could do on their own?

Mike McCallister

We’ll do more of this in New York this month. We really are beginning to shine a light on clinical management things that we do because at the end of the day, you are exactly correct, for there to be value here long term as part of the private sector’s role in Medicare, we have to find ourselves to a place. We are really reducing actual medical spend and in an amount that covers the cost of having done so. Essentially the reason that the traditional program has a low administration is because they don’t do much. Basically, it is a claim paying system, and so admin is relatively low and it should be. The question is if you are going to start investing in clinical coordination and management and doing all the things that we have been doing for decades on the other side and the commercial side of the business, there are costs associated with that which at a minimum, you have to cover those with your results, and so I think it’s a work in progress where we have an awful lot of confidence at this point that if the standard is to be able to take what is essentially we need get about 11 or 12% out of the Medicare spend to sort of make this all work given the admin and the margin that we have and profit margin. I mean the question is if you can’t get 11% efficiency and effectiveness out of Medicare, then maybe we shouldn’t be here, and I think the answer is yes we will. That model is completely broken. The trends are out of control and have been for a very long time and that’s the standard against which we have to execute and perform, and we are pretty comfortable based on everything we have done that it’s quite doable.

Operator

Your next question comes from Matt Perry with Wachovia Capital Markets.

Matt Perry – Wachovia Capital Markets

A couple of questions. First on Medicare Advantage, the growth guidance in ’09 is obviously lower than in recent years and then dovetailing that with what CMS might do to commissions, what is of higher correlation for enrolment growth? The level of benefits offered or commission levels offered by the companies, and I guess ultimately what I’m asking is if CMS puts some kind of stronger restrictions on commissions, is it possible that your growth in ’09 might be a little better than you are thinking right now?

Jim Murray

I would say that the more impactful decision or issue impacting our growth would be premium and benefit levels but equally important, perhaps, not as strong as benefits and premiums would be the commission levels. I’ll just say this. The higher the commission level, the more likely it is that some folks who are compensated in that matter might be willing to move business around, and if you take away that incentive, I think it creates more stability, and I’m just trying to be as honest as I possibly can, and so I just think that we are getting ourselves set up for the possibility that people would move business just because the historical retention payments that we made for renewals was going to be significantly lower than what the new sales commission levels were going to be, and it just created an unhealthy environment in our opinion.

Mike McCallister

Remember that in the first year we did use a fair number of independent agents. I mean it was a huge rollout. If you recall, the numbers were off the charts in terms of the number of seniors that joined all these programs, and they were a bigger piece of our distribution model back then than they are today, and so as a result we do have business sitting out there that came through that channel. Big commission scenario is placed at some level of risk if you believe people can and will move business for commission itself. All that has been baked into our thinking about this, and we have sort of settled on the 50 mid point as where we think we are going to end up.

Matt Perry – Wachovia Capital Markets

Cash flow from operations next year, midpoint, I think, $1.3 billion. Any view on how much of that will be sent up to the parent company?

Jim Bloem

Not yet at this time, but we will be. Again last time we had said that based on our 2008 results that by the second quarter of next year, we’d probably be able to move 500 out for consultation with the rating agencies and with the states, so that’s still very much in our thinking. Obviously with the credit markets and everything else, it will be interesting to see what everybody’s reaction is, but if they use the same rules, we feel comfortable about the 500, but then as we get into 2009, again, our initial estimate that we always give at this time of the year basically is run off of very few differences and variables. Generally speaking, the cash flow for next year is based on the change in net income round numbers that we expect for this year. If you look at the 2 years, that’s the difference in the cash flow guidance.

Operator

Your next question comes from Doug Simpson with Merrill Lynch.

Doug Simpson – Merrill Lynch

One question just to be clear. The diamond pressure that you are talking about in Q4 from investment income that has been factored into the outlook for next year, and I guess if you didn’t see that pressure, can we just extrapolate that number would have been 6 bucks plus another $0.40?

Jim Bloem

Forty cents might be a little high. First of all, to answer the first question, yes, it is factored in. Generally speaking, as I said our investment income is not a lot built in in terms of rate changes because again the rates are very unsteady, and they have in terms of investment income fallen substantially, particularly since September for the rest of the year. That is baked in going into next year. The other thing though is when we look at it, we look at the net of interest expense and investment income, and interest expense will be higher next year because again the uncoupling of LIBOR from Fed funds. This morning’s yield on 3-month bills is less than 1%, but the 3-month LIBOR is I believe around 3.25%, so they used to be 100 basis points or 50 basis points of each other. Now they have really spread out, so next year’s investment income, net investment income, that is investment income less interest expense, is fairly flat when you look at both guidance points.

Doug Simpson – Merrill Lynch

Could you talk little bit about specific competition on the M&A side with respect to the smallest players. Some of the land grab plays that were laid out in ‘’06 and ’07, are you starting to see them exit or look for partners? Can you give us a sense as to how many of those smaller players are still out there?

Mike McCallister

It is going to be challenging to be in Medicare as small player over the long term, so it may be reasonable to think that some of these smaller companies would be looking for a home, but I don’t really have anything to share with you today. It’s something we will look at when they pop up as opportunities, and we’ve picked up a couple of little things here and there. They were pretty tiny. They had some Medicare business baked in them, but I don’t see any sort of sweeping consolidation that is likely to happen in the short term. It is inevitable that there’ll be some of it.

Doug Simpson – Merrill Lynch

But there’s no real change in the last 6 to 12 months?

Mike McCallister

I don’t think we’ve anything yet that’s really chipped it.

Operator

Your next question comes from Peter Costa with FTN Midwest Securities.

Peter Costa – FTN Midwest

Regarding Medicare Advantage membership, since it is terminations that is causing the relatively wider guidance, do you expect to see even declining membership in one Q or January in Medicare Advantage, and as far as Group Medicare, do you expect that to have really no growth this year because of the requirement for that to be networked products going forward, and then thirdly, on the same topic, in terms of the migration to PPOs for Medicare Advantage membership, that seems like that’s going to happen relatively slowly until 2011. How will you gauge your success of your networks if the membership does not migrate until 2011?

Jim Murray

We don’t anticipate that we’re going to have a net reduction in membership in the first quarter. We have a nice number of sales to offset the conservative termination number that we’ve developed. We’re pleased with the fact that Group Medicare will ultimately have network-based options. Mike has talked with you and we’ll share more and more in New York with you about where we’re going to have networks, but we’re going to have a significant number of network options throughout much of the United States, so we’ll be a good opportunity for groups to give us some consideration in terms of some of the products and services that we’ve had out there. For a while there, I think groups have been somewhat concerned about the privacy for service business and whether or not it was more long term. I think when we get to the point where a lot of shifting goes to the network-based options, I think the groups will feel more comfortable with putting some of their retirees in those kinds of programs. So, sometime in the future, I would expect more and more growth, and there is some increasing interest that we’re seeing with our discussion with groups, but nothing in terms of a sea of change for 2009. Your last question, I think over the next several quarters and next several years, you’re going to see some nice migration to the network based options because the seniors will be able to see more value, less premiums, more benefits in those kinds of products, and we’ll feature those when we talk with seniors when we have that discussion across the kitchen table and try to demonstrate to them that there is not a significant reduction in the networks that they’re going to be looking at, and I think as seniors understand that, there’ll be more and more acceptance of those products going forward. I don’t expect that in 2011 there’ll be a huge shift from private fee for service to PPO or HMO or regional PPO. I think it’ll be more of a gradual shift over the next quarters and next several years.

Mike McCallister

Let me go one step further on that. We’ve visited with you on quite bit and I’ve talked about this a lot, but I’m not sure I’m getting through completely, so let me try it again. This is a retail consumer business. These folks made their decisions one person at a time. They do it every year between November 15th and the end of the year. They’re going to be doing that for the foreseeable future. Effectively, what they do and this is what we’ve watched, and they act in their best interest all the time. They sit down, they look at all their options, they consider everything, and they make their choice. That is totally different than the rest of the commercial business we have and health insurance as we think of it. The implications of that is that whenever that period comes, and in this case it will be November 15, 2010, through the end of that year, they will be sitting down evaluating PPO products, traditional Medicare, Medigap, and whatever is available to them in terms of choices at that time, and what they’re going to find at that time is that their PPO offering is likely to be their best choice. Going back to traditional Medicare will not be a great choice. Medigap is quite expensive. This is going to fall right in the middle there somewhere and be quite attractive, and so I don’t wake up every day worrying whether people are rushing to the PPO prior to 2011. There will be nice movement there as Jim has indicated, but they’re going to make that decision November 15, 2010, and having come to the end of the day, they will choose this path because it will be the best value in front of them at the time.

Operator

Your last question comes from Bryan Wright with Banc of America Securities.

Bryan Wright – Banc of America Securities

Can you remind me how many internal sales agents does the company have right now and how does that differ from the beginning of the year?

Jim Murray

I’m assuming you are referring the Medicare, and there is about 1700 market point agents that will go out and sit across the table from seniors, and then we have a force of telesales agents that will take calls from seniors that see advertisements and set up appointments with them, and there is I would guess about 800 of those folks that are located in Florida, so we feel very good about our model in terms of distribution.

Bryan Wright – Banc of America Securities

Can you give us the size of Cariten’s cash and investment portfolio?

Jim Bloem

I don’t have that right at my fingertips.

Bryan Wright – Banc of America Securities

Okay, maybe offline we could get that then.

Regina Nethery

I’ll look and see what is in their latest statutory filing and see if we can get you some frame of reference that way.

Jim Bloem

Right, that’s where we would refer you.

Operator

At this time there are no further questions.

Mike McCallister

Thanks for joining us this morning. Again, I’m pretty pleased with where we are. This was a good quarter. I think we are set up nicely for next year, and we clearly have to deal with the implications of a change in leadership in Washington. I think we are prepared to do that. I think there is significant value in the private sectors involvement in Medicare, and I think that will become quite clear to people as they start to understand what we do, and with that, I would like to thank all the Humana associates that are on this call for making these results possible. Thank you very much.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Humana, Inc. Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts