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Humana Reports First Quarter Financial Results

  • 1Q10 results of $1.52 include $0.37 per share in higher-than-expected favorable prior-period reserve development
  • 2010 EPS guidance raised to $5.55 to $5.65
  • Medicare Advantage membership now approximates 1.75 million
  • 1Q10 cash flows from operations of $755 million

Category:

Monday, April 26, 2010 6:00 am EDT

Dateline:

LOUISVILLE, Ky.

Public Company Information:

NYSE:
HUM
US4448591028
"We believe strategic and tactical initiatives over the past several years, together with our continued focus on the consumer, position us well for the remainder of 2010 and for the challenges of the post-health-reform environment."

LOUISVILLE, Ky.--(BUSINESS WIRE)--Humana Inc. (NYSE: HUM) today reported diluted earnings per common share (EPS) for the quarter ended March 31, 2010 (1Q10) of $1.52, ahead of management’s guidance of $1.10 to $1.20. EPS for 1Q10 included earnings of approximately $0.37 per share from higher-than-anticipated favorable prior-period development of medical claims reserves as well as $0.04 per share in higher-than-projected income tax expense due to recently enacted health reform legislation. Excluding these items, 1Q10 EPS was at the top end of the company’s previous guidance range. The 1Q10 results compared to EPS of $1.22 for the quarter ended March 31, 2009 (1Q09).

The company also announced that it had raised its EPS projection for the year ending December 31, 2010 (FY10) to a range of $5.55 to $5.65 versus its previous EPS estimate of $5.15 to $5.35 primarily to reflect the impact of the favorable prior-period reserve development impacting 1Q10 earnings noted above, partially offset by the higher effective tax rate now anticipated.

“Our first quarter results demonstrate solid execution in both of our business segments,” said Michael B. McCallister, Humana’s president and chief executive officer. “We believe strategic and tactical initiatives over the past several years, together with our continued focus on the consumer, position us well for the remainder of 2010 and for the challenges of the post-health-reform environment.”

Consolidated Highlights

Revenues – 1Q10 consolidated revenues rose 9.5 percent to $8.44 billion from $7.71 billion in 1Q09, with total premium and administrative services fees up 9.2 percent compared to the prior year’s quarter. The year-over-year increase in premiums and administrative services fees primarily reflects a 19 percent increase in average membership for the company’s Medicare Advantage plans and continued pricing discipline across all of the company’s lines of business, partially offset by lower average stand-alone Prescription Drug Plan (PDP) and commercial fully-insured medical membership.

Benefit expenses – The 1Q10 consolidated benefit ratio (benefit expenses as a percent of premium revenues) of 83.4 percent compares to 83.9 percent in 1Q09. This 50 basis point decrease was driven by declines in the benefit ratio in both of the company’s business segments.

Selling, general, & administrative (SG&A) expenses – The 1Q10 consolidated SG&A expense ratio (SG&A expenses as a percent of premiums, administrative services fees and other revenue) of 13.5 percent decreased 40 basis points compared to the 1Q09 ratio of 13.9 percent due primarily to efficiencies associated with higher average Medicare Advantage membership together with the company’s continued focus on administrative cost reductions.

Government Segment Results

Pretax results:

  • Government segment pretax income increased to $279.2 million in 1Q10 from $166.1 million in 1Q09. The 1Q10 results included the benefit of $85.9 million in favorable prior-period reserve development and also reflected higher average Medicare Advantage membership year over year as well as improved operating metrics.

Enrollment:

  • Medicare Advantage membership grew to 1,742,300 at March 31, 2010, an increase of 273,400 members, or 19 percent from March 31, 2009, and up 233,800, or 16 percent versus December 31, 2009.
  • April 2010 membership in the company’s Medicare Advantage plans approximated 1,750,900, with 72 percent of fully-insured members in network-based products, up from 63 percent at December 31, 2009.
  • Membership in the company’s stand-alone PDPs totaled 1,917,100 at March 31, 2010 compared to 2,078,900 at March 31, 2009 and 1,927,900 at December 31, 2009. The decline during 1Q10 primarily resulted from the company’s continued competitive positioning as it realigned stand-alone PDP premium and benefit designs to correspond with its pharmacy claims experience.
  • Military services membership at March 31, 2010 of 3,031,400 was up approximately 1 percent from 2,990,600 at March 31, 2009 and essentially unchanged from 3,034,400 at December 31, 2009.

Premiums and administrative services fees:

  • Medicare Advantage premiums and administrative service fees of $4.82 billion in 1Q10 increased 19 percent compared to $4.06 billion in 1Q09, primarily due to a 19 percent increase in average Medicare Advantage membership.
  • Medicare stand-alone PDP premiums of $579.0 million in 1Q10 decreased 3 percent compared to $595.7 million in 1Q09, reflecting a 13 percent decline in average membership year over year, partially offset by an 11 percent increase in premiums per member per month.
  • Military services premiums and administrative services fees during 1Q10 decreased $22.1 million to $867.3 million compared to $889.4 million in 1Q09.

Benefit Expenses:

  • The Government Segment benefit ratio decreased 80 basis points to 86.0 percent in 1Q10 compared to 86.8 percent in the prior year’s quarter, primarily driven by a 130 basis point benefit from higher-than-anticipated favorable prior-period reserve development. The increase in the benefit ratio excluding this favorable reserve development is primarily due to growth in the company’s Medicare Advantage group business which generally carries a higher benefit ratio than the company’s individual Medicare Advantage business.

SG&A Expenses:

  • The Government Segment’s SG&A expense ratio decreased 40 basis points to 10.1 percent in 1Q10 compared to 10.5 percent in the prior year’s quarter driven primarily by increased efficiencies from higher average medical membership in the company’s Medicare Advantage plans and the company’s continued focus on administrative cost reductions.

Commercial Segment Results

Pretax results:

  • Commercial Segment pretax earnings increased to $137.8 million in 1Q10 compared to $127.7 million in 1Q09 primarily driven by the benefit of $14.1 million in higher-than-anticipated favorable prior-period reserve development during 1Q10, partially offset by the effect of an 8 percent decline in average fully-insured commercial medical membership from the prior year’s quarter.

Enrollment:

  • Commercial Segment medical membership at March 31, 2010 of 3,331,500 was down 140,000 from March 31, 2009 and down 79,300 from December 31, 2009. The decline during 1Q10 primarily reflected the impact of the economy across various of the company’s fully-insured group medical lines of business.
  • The company’s individual product line has continued to grow steadily, with membership of 370,500, up 10 percent at March 31, 2010 compared to March 31, 2009.
  • Membership in Commercial Segment specialty products(a) of 7,237,900 at March 31, 2010 increased 11 percent from 6,535,100 at March 31, 2009 and up 2 percent from 7,109,900 at December 31, 2009.

Premiums and administrative services fees:

  • Premiums and administrative services fees for the Commercial Segment decreased 2 percent to $1.85 billion in 1Q10 compared to $1.88 billion in the prior year’s quarter, reflecting lower average medical membership partially offset by continued pricing discipline.
  • Commercial Segment medical premiums for fully-insured group accounts increased approximately 8 percent on a per-member basis during 1Q10 compared to 1Q09.

Benefit Expenses:

  • The Commercial Segment benefit ratio for 1Q10 of 74.1 percent was 60 basis points lower than the 1Q09 benefit ratio of 74.7 percent, primarily due to an 80 basis point benefit from higher-than-expected favorable prior-period reserve development during 1Q10.

SG&A Expenses:

  • The Commercial Segment SG&A expense ratio of 24.8 percent for 1Q10 compares to 24.1 percent in 1Q09, primarily driven by increases in the company’s specialty, ancillary and individual medical businesses that carry a higher administrative expense load as a percent of revenues, partially offset by the company’s continued focus on administrative cost reductions.

Balance Sheet

  • At March 31, 2010, the company had cash, cash equivalents, and investment securities of $9.91 billion, up 9 percent from $9.11 billion at December 31, 2009 and up 33 percent from $7.43 billion at March 31, 2009.
  • Parent company cash and investments of $729.8 million at March 31, 2010 increased $64.2 million from $665.6 million at December 31, 2009.
  • Debt-to-total capitalization at March 31, 2010 was 21.6 percent, down 90 basis points from December 31, 2009 due primarily to the increase in capitalization associated with net income during 1Q10.

Cash Flows from Operations

Cash flows provided by operations for 1Q10 of $754.7 million compared to cash flows provided by operations of $45.5 million in 1Q09 with the year-over-year increase primarily due to higher medical claims reserve balances associated with higher average Medicare Advantage membership and increased claims inventories on hand together with other working capital changes during 1Q10 versus the prior year’s quarter.

Footnote

(a)

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

Conference Call & Virtual Slide Presentation

Humana will host a conference call, as well as a virtual slide presentation, at 9:00 a.m. eastern time today to discuss its financial results for the quarter and the company’s expectations for future earnings. A live virtual presentation (audio with slides) may be accessed via Humana’s Investor Relations page at www.humana.com. The company suggests web participants sign on approximately 15 minutes in advance of the call. The company also suggests web participants visit the site well in advance of the call to run a system test and to download any free software needed to view the presentation.

All parties interested in the audio-only portion of the conference call are invited to dial 888-625-7430. No password is required. The company suggests participants dial in approximately ten minutes in advance of the call. For those unable to participate in the live event, the virtual presentation archive may be accessed via the Historical Webcasts & Presentations section of the Investor Relations page at www.humana.com.

Cautionary Statement

This news release includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in investor presentations, press releases, Securities and Exchange Commission (SEC) filings, and in oral statements made by or with the approval of one of Humana’s executive officers, the words or phrases like “expects,” “anticipates,” “intends,” “likely will result,” “estimates,” “projects” or variations of such words and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and assumptions, including, among other things, information set forth in the “Risk Factors” section of the company’s SEC filings, a summary of which includes but is not limited to the following:

  • Recently enacted health care reform, including The Patient Protection and Affordable Care Act and The Health Care and Education Reconciliation Act of 2010, could have a material adverse effect on Humana’s results of operations, including lowering the company’s Medicare payment rates and increasing the company’s expenses associated with a non-deductible federal premium tax; financial position, including goodwill recoverability; and cash flows. In addition, if the new non-deductible federal premium tax is imposed as enacted, and if Humana is unable to adjust its business model to address this new tax, there can be no assurance that the non-deductible federal premium tax would not have a material adverse effect on the company’s results of operations, financial position, and cash flows.
  • If Humana does not design and price its products properly and competitively, if the premiums Humana charges are insufficient to cover the cost of health care services delivered to its members, or if its estimates of benefit expenses 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. These estimates, however, involve extensive judgment, and have considerable inherent variability that is extremely sensitive to payment patterns and medical cost trends.
  • If Humana fails to effectively implement its operational and strategic initiatives, including its Medicare initiatives, the company’s business may be materially adversely affected, which is of particular importance given the concentration of the company’s revenues in the Medicare business.
  • If Humana fails to properly maintain the integrity of its data, to strategically implement new information systems, or to protect Humana’s proprietary rights to its systems, the company’s business may be materially adversely affected.
  • Humana is involved in various legal actions, which, if resolved unfavorably to Humana, could result in substantial monetary damages. Increased litigation and negative publicity could increase the company’s cost of doing business.
  • 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 financial condition. In addition, as a government contractor, Humana is exposed to additional risks that may adversely affect the company’s business or the company’s willingness to participate in government health care programs.
  • Any failure to manage administrative costs could hamper Humana’s profitability.
  • Any failure by Humana to manage acquisitions and other significant transactions successfully may have a material adverse effect on its results of operations, financial position, and cash flows.
  • If Humana fails to develop and maintain satisfactory relationships with the providers of care to its members, the company’s business may be adversely affected.
  • Humana’s mail order 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 its 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.
  • Changes in economic conditions could adversely affect Humana’s business and results of operations.
  • The securities and credit markets may experience volatility and disruption, which may adversely affect Humana’s business.
  • Given the current economic climate, Humana’s stock and the stock of other companies in the insurance industry may be increasingly subject to stock price and trading volume volatility.

In making forward-looking statements, Humana is not undertaking to address or update them in future filings or communications regarding its business or results. In light of these risks, uncertainties, and assumptions, the forward-looking events discussed herein may or may not occur. There also may be other risks that the company is unable to predict at this time. Any of these risks and uncertainties may cause actual results to differ materially from the results discussed in the forward-looking statements.

Humana advises investors to read the following documents as filed by the company with the SEC for further discussion both of the risks it faces and its historical performance:

  • Form 10-K for the year ended December 31, 2009;
  • Form 8-Ks filed during 2010.

About Humana

Humana Inc., headquartered in Louisville, Kentucky, is one of the nation’s largest publicly traded health and supplemental benefits companies, with approximately 10.4 million medical members and 7.2 million specialty members. Humana is a full-service benefits solutions company, offering a wide array of health, pharmacy and supplemental benefit plans for employer groups, government programs and individuals.

Over its 49-year history, Humana has consistently seized opportunities to meet changing customer needs. Today, the company is a leader in consumer engagement, providing guidance that leads to lower costs and a better health plan experience throughout its diversified customer portfolio.

More information regarding Humana is available to investors via the Investor Relations page of the company’s web site at www.humana.com, including copies of:

  • Annual reports to stockholders;
  • Securities and Exchange Commission filings;
  • Most recent investor conference presentations;
  • Quarterly earnings news releases;
  • Replays of most recent earnings release conference calls;
  • Calendar of events (including upcoming earnings conference call dates and times, as well as planned interaction with research analysts and institutional investors);
  • Corporate Governance information.

(in accordance with
  Generally Accepted

  Accounting Principles)

   

For the year ending

December 31, 2010

   

Comments

Diluted earnings per
  common share

   

Full year 2010: $5.55 to $5.65

Second quarter: $1.65 to $1.70

   

FY2010 estimate includes $0.37 per share in higher-than-
  anticipated favorable prior-period reserve development
  and $0.10 per share incremental income tax expense
  associated with recently enacted health reform
  legislation

Revenues     Consolidated revenues: $33.5 billion to $34.5 billion    
 
Premiums and ASO fees:

  Medicare Advantage: $19.0 billion to $19.5 billion

  Medicare stand-alone PDPs: $2.3 billion to $2.4 billion

 

 

  Military services: $3.5 billion to $3.6 billion

Assumes a 3/31/11 transition date for the South Region
  TRICARE contract

 

  Commercial Segment: $7.3 billion to $7.5 billion

 

Consolidated investment income: $325 million to $340 million

 
     

Consolidated other revenue: $320 million to $340 million

     
Ending medical membership Medicare Advantage: up 250,000 to 260,000 from prior year

Includes ASO and fully-insured group and individual
  Medicare Advantage members

 

Medicare stand-alone PDPs: down approximately 220,000 from
  prior year

 
Military services: no material change from prior year

Fully-insured and ASO combined; assumes 3/31/11
  transition for the South Region TRICARE contract

 

Medicaid: no material change from prior year

 

 
Commercial:

  Fully insured: down 170,000 to 180,000 from prior year

     

  ASO: down 90,000 to 100,000 from prior year

     
Benefit ratios and benefit Government Segment benefit ratio in the range of 85% to 86% Medicare, Medicaid, and Military Services combined

  expense trend

  components

  Medicare benefit ratio in the range of 84% to 85%

Medicare Advantage and Stand-Alone PDP combined
 
Commercial Segment benefit ratio in the range of 80% to 81% Medical and Specialty combined

 

     

  Commercial group fully-insured secular benefit expense trend
   components: inpatient hospital utilization – low single digits;
   inpatient and outpatient hospital rates – upper single digits;
   outpatient hospital utilization – mid single digits; physician –
   mid single digits; pharmacy – mid single digits

   

Commercial group fully-insured secular trends of
  approximately 8% represent the underlying percentage
  change in total medical expenses which excludes the
  impact of benefit changes and business, product, and
  demographic mix

Selling, general &
  administrative expense
  ratio

    13% to 13.5%    

SG&A expenses as a percent of premiums, administrative
  services fees, and other revenue
Includes approximately $100 million in administrative cost
  reductions from prior year

Depreciation & amortization     $250 million to $260 million      
Interest expense     $105 million to $110 million      

Government Segment
  operating margins

Medicare pretax operating margin: approximately 5.5%

Medicare Advantage & stand-alone PDP combined;
Includes a 40 basis point benefit from higher-than-expected
  favorable prior-period reserve development in 1Q10

 
      Military services: operating earnings of $25 million to $50 million    

Military Services earnings include the anticipated impact of
  the write-down of goodwill and other charges of $50
  million to $75 million related to the termination of the
  South Region contract on 3/31/11

Commercial Segment pretax
  earnings

    $150 million to $175 million    

Includes $14 million in pretax earnings from higher-than-
  expected favorable prior-period reserve development in
  1Q10;
Segment-level results include the impact of investment
  income and interest expense

Cash flows from operations     $1.2 billion to $1.4 billion      
Capital expenditures     Approximately $200 million      
Effective tax rate     37.0% to 37.5%    

Includes the impact of health reform provisions disallowing
  for the deductibility of certain items

Shares used in computing
  full-year EPS

    Approximately 171 million     Excludes impact of potential future share repurchases

 

Humana Inc.

Statistical Schedules

And

Supplementary Information

1Q10 Earnings Release

 
 
 
 

S-1

 
Humana Inc.
Statistical Schedules and Supplementary Information
1Q10 Earnings Release
 
Contents
 

Page

       

Description

 
S-3 Consolidated Statements of Income
S-4 Consolidated Balance Sheets
S-5 Consolidated Statements of Cash Flows
S-6 Key Income Statement Ratios and Segment Operating Results
S-7 Membership Detail
S-8 Premiums and Administrative Services Fees Detail
S-9 Percentage of Ending Membership under Capitation Arrangements
S-10 Investments
S-11-13 Benefits Payable
S-14 Footnotes
 

S-2

 
Humana Inc.
Consolidated Statements of Income
In thousands, except per common share results
 
    Three Months Ended March 31,        
    Dollar Percentage
2010 2009 Change     Change
Revenues:
Premiums $ 8,161,863 $ 7,471,294 $ 690,569 9.2 %
Administrative services fees 125,882 115,882 10,000 8.6 %
Investment income 85,455 69,544 15,911 22.9 %
Other revenue   67,394   54,941   12,453   22.7 %
Total revenues   8,440,594   7,711,661   728,933   9.5 %
Operating expenses:
Benefits 6,807,555 6,269,310 538,245 8.6 %
Selling, general and administrative 1,127,043 1,063,803 63,240 5.9 %
Depreciation 53,189 48,676 4,513 9.3 %
Other intangible amortization   9,567   9,338   229   2.5 %
Total operating expenses   7,997,354   7,391,127   606,227   8.2 %
Income from operations 443,240 320,534 122,706 38.3 %
Interest expense   26,314   26,772   (458 ) -1.7 %
Income before income taxes 416,926 293,762 123,164 41.9 %
Provision for income taxes   158,158   88,045   70,113   79.6 %
Net income $ 258,768 $ 205,717 $ 53,051   25.8 %
 
Basic earnings per common share $ 1.54 $ 1.23 $ 0.31 25.2 %
Diluted earnings per common share $ 1.52 $ 1.22 $ 0.30 24.6 %
 
Shares used in computing basic earnings per common share 168,200 167,043
Shares used in computing diluted earnings per common share   170,080 168,658
 

S-3

 
Humana Inc.
Consolidated Balance Sheets
Dollars in thousands, except share amounts
 
    March 31,     December 31,     Sequential Change
2010 2009 Dollar     Percent
Assets    
Current assets:
Cash and cash equivalents $ 1,813,993 $ 1,613,588
Investment securities 6,764,833 6,190,062
Receivables, net:
Premiums 1,091,372 811,800
Administrative services fees 13,226 11,820
Securities lending invested collateral 62,013 119,586
Other   514,549     505,960  
Total current assets 10,259,986 9,252,816 $ 1,007,170 10.9 %
Property and equipment, net 665,909 679,142
Long-term investment securities 1,333,659 1,307,088
Goodwill 1,992,924 1,992,924
Other   956,658     921,524  
Total assets $ 15,209,136   $ 14,153,494   $ 1,055,642 7.5 %
 
Liabilities and Stockholders' Equity
Current liabilities:
Benefits payable $ 3,707,033 $ 3,222,574
Trade accounts payable and accrued expenses 1,658,985 1,307,710
Book overdraft 236,038 374,464
Securities lending payable 68,221 126,427
Unearned revenues   235,584     228,817  
Total current liabilities 5,905,861 5,259,992 $ 645,869 12.3 %
Long-term debt 1,675,880 1,678,166
Future policy benefits payable 1,213,179 1,193,047
Other long-term liabilities   328,979     246,286  
Total liabilities   9,123,899     8,377,491   $ 746,408 8.9 %
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par; 10,000,000 shares authorized, none issued - -

Common stock, $0.16 2/3 par; 300,000,000 shares authorized; 189,981,964 issued at March 31, 2010

31,664 31,634
Capital in excess of par value 1,688,768 1,658,521
Retained earnings 4,688,379 4,429,611
Accumulated other comprehensive income 69,994 42,135

Treasury stock, at cost, 19,784,653 shares at March 31, 2010

  (393,568 )   (385,898 )
Total stockholders' equity   6,085,237     5,776,003   $ 309,234 5.4 %
Total liabilities and stockholders' equity $ 15,209,136   $ 14,153,494   $ 1,055,642 7.5 %
 
Debt-to-total capitalization ratio 21.6 % 22.5 %
 

S-4

 
Humana Inc.
Consolidated Statements of Cash Flows
Dollars in thousands
 
    Three Months Ended March 31,        
    Dollar Percentage
2010 2009 Change     Change
Cash flows from operating activities
Net income $ 258,768 $ 205,717
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 62,756 58,014
Net realized capital gains (8,694 ) (1,043 )
Stock-based compensation 27,339 15,676
(Benefit) provision from deferred income taxes (20,862 ) 19,687

Changes in operating assets and liabilities excluding the effects of acquisitions:

Receivables (280,978 ) (255,098 )
Other assets (29,177 ) (61,907 )
Benefits payable 484,459 32,920
Other liabilities 246,068 22,375
Unearned revenues 6,767 3,364
Other   8,205     5,815  
Net cash provided by operating activities   754,651     45,520   $ 709,131 1557.8 %
 
Cash flows from investing activities
Acquisitions, net of cash acquired - (12,367 )
Purchases of property and equipment (39,028 ) (39,047 )
Purchases of investment securities (1,525,349 ) (1,403,906 )
Proceeds from maturities of investment securities 433,788 404,951
Proceeds from sales of investment securities 545,166 722,288
Change in securities lending collateral   58,206     71,283  
Net cash used in investing activities   (527,217 )   (256,798 ) ($270,419 ) -105.3 %
 
Cash flows from financing activities
Receipts from CMS contract deposits 438,108 528,965
Withdrawals from CMS contract deposits (266,649 ) (334,528 )
Change in book overdraft (138,426 ) 33,520
Change in securities lending payable (58,206 ) (71,283 )
Common stock repurchases (7,670 ) (5,999 )
Excess tax benefit from stock-based compensation 734 148
Proceeds from stock option exercises and other   5,080     1,234  
Net cash (used in) provided by financing activities   (27,029 )   152,057   ($179,086 ) -117.8 %
 
Increase (decrease) in cash and cash equivalents 200,405 (59,221 )
Cash and cash equivalents at beginning of period   1,613,588     1,970,423  
 
Cash and cash equivalents at end of period $ 1,813,993   $ 1,911,202  
 

S-5

 
Humana Inc.
Key Income Statement Ratios and Segment Operating Results
Dollars in thousands
 
    Three Months Ended March 31,        
    Percentage
2010 2009 Difference     Change
Benefit ratio
Government Segment 86.0 % 86.8 % -0.8 %
Commercial Segment 74.1 % 74.7 % -0.6 %
Consolidated 83.4 % 83.9 % -0.5 %
 

Selling, general, and administrative expense ratio (A)

Government Segment 10.1 % 10.5 % -0.4 %
Commercial Segment 24.8 % 24.1 % 0.7 %
Consolidated 13.5 % 13.9 % -0.4 %
 
Investment income
Government Segment $ 56,169 $ 40,782 $ 15,387 37.7 %
Commercial Segment   29,286     28,762     524   1.8 %
Consolidated $ 85,455   $ 69,544   $ 15,911   22.9 %
 
Interest expense
Government Segment $ 19,781 $ 16,488 $ 3,293 20.0 %
Commercial Segment   6,533     10,284     (3,751 ) -36.5 %
Consolidated $ 26,314   $ 26,772     ($458 ) -1.7 %
 
Detail of pretax income
Government Segment $ 279,173 $ 166,101 $ 113,072 68.1 %
Commercial Segment   137,753     127,661     10,092   7.9 %
Consolidated $ 416,926   $ 293,762   $ 123,164   41.9 %
 
Detail of pretax margins
Government Segment 4.3 % 2.9 % 1.4 %
Commercial Segment 7.1 % 6.5 % 0.6 %
Consolidated 4.9 % 3.8 % 1.1 %
 

S-6

 
Humana Inc.
Membership Detail
In thousands
 
    Ending    

Average

    Ending     Year-over-year Change     Ending     Sequential Change
March 31, 2010

1Q10

    March 31, 2009 Amount     Percent December 31, 2009 Amount     Percent
Medical Membership:        
Government Segment:
Medicare Advantage - HMO 629.8 627.5 578.6 51.2 8.8 % 591.9 37.9 6.4 %
Medicare Advantage - PPO 602.6 594.5 313.2 289.4 92.4 % 352.4 250.2 71.0 %
Medicare Advantage - PFFS 480.9 483.7     577.1 (96.2 ) -16.7 % 564.2 (83.3 ) -14.8 %
Total MA fully-insured 1,713.3 1,705.7     1,468.9 244.4   16.6 % 1,508.5 204.8   13.6 %
ASO 29.0 29.3     - 29.0   - 29.0  
Total Medicare Advantage 1,742.3 1,735.0     1,468.9 273.4   18.6 % 1,508.5 233.8   15.5 %
Medicare stand-alone PDPs 1,917.1 1,844.4     2,078.9 (161.8 ) -7.8 % 1,927.9 (10.8 ) -0.6 %
Total Medicare 3,659.4 3,579.4     3,547.8 111.6   3.1 % 3,436.4 223.0   6.5 %
Military services insured 1,756.8 1,755.3 1,746.6 10.2 0.6 % 1,756.0 0.8 0.0 %
Military services ASO 1,274.6 1,272.8     1,244.0 30.6   2.5 % 1,278.4 (3.8 ) -0.3 %
Total military services 3,031.4 3,028.1 2,990.6 40.8 1.4 % 3,034.4 (3.0 ) -0.1 %
Medicaid 398.6 397.3     385.2 13.4   3.5 % 401.7 (3.1 ) -0.8 %
Total Government Segment 7,089.4 7,004.8     6,923.6 165.8   2.4 % 6,872.5 216.9   3.2 %
Commercial Segment:
Fully-insured medical:
Group 1,338.8 1,357.7 1,534.8 (196.0 ) -12.8 % 1,442.1 (103.3 ) -7.2 %
Individual 370.5 368.9 336.1 34.4 10.2 % 367.4 3.1 0.8 %
Medicare supplement 33.7 33.4     22.8 10.9   47.8 % 30.0 3.7   12.3 %
Total fully-insured medical 1,743.0 1,760.0 1,893.7 (150.7 ) -8.0 % 1,839.5 (96.5 ) -5.2 %
ASO 1,588.5 1,589.9     1,577.8 10.7   0.7 % 1,571.3 17.2   1.1 %
Total Commercial Segment 3,331.5 3,349.9     3,471.5 (140.0 ) -4.0 % 3,410.8 (79.3 ) -2.3 %
 
Total medical membership 10,420.9 10,354.7     10,395.1 25.8   0.2 % 10,283.3 137.6   1.3 %
 
Specialty Membership
Dental - fully-insured 2,656.3 2,650.3 2,466.9 189.4 7.7 % 2,635.7 20.6 0.8 %
Dental - ASO 1,213.9 1,214.2     982.3 231.6   23.6 % 1,197.2 16.7   1.4 %
Total dental 3,870.2 3,864.5 3,449.2 421.0 12.2 % 3,832.9 37.3 1.0 %
Vision 2,439.5 2,422.0 2,224.6 214.9 9.7 % 2,369.4 70.1 3.0 %
Other supplemental benefits (B) 928.2 917.0     861.3 66.9   7.8 % 907.6 20.6   2.3 %
Total specialty membership 7,237.9 7,203.5     6,535.1 702.8   10.8 % 7,109.9 128.0   1.8 %
 

S-7

 
Humana Inc.
Premiums and Administrative Services Fees Detail
Dollars in thousands, except per member per month
 
                    Per Member per Month (C)
Three Months Ended March 31, Three Months Ended March 31,
Dollar Percentage    
2010 2009 Change     Change 2010     2009
Premium revenues
Government Segment:
Medicare Advantage $ 4,816,980 $ 4,060,459 $ 756,521 18.6 % $ 941 $ 930
Medicare stand-alone PDPs   579,025   595,683   (16,658 ) -2.8 % $ 105 $ 94

Total Medicare

5,396,005 4,656,142 739,863 15.9 %
Military services insured (D) 844,994 871,171 (26,177 ) -3.0 % $ 160 $ 167
Medicaid insured   164,703   156,660   8,043   5.1 % $ 138 $ 136
Total Government Segment premiums   6,405,702   5,683,973   721,729   12.7 %
Commercial Segment:
Fully-insured medical 1,506,818 1,558,669 (51,851 ) -3.3 % $ 285 $ 273
Specialty   249,343   228,652   20,691   9.0 % $ 12 $ 12
Total Commercial Segment premiums   1,756,161   1,787,321   (31,160 ) -1.7 %
Total premium revenues $ 8,161,863 $ 7,471,294 $ 690,569   9.2 %
 
Administrative services fees
Military services ASO (D) $ 22,298 $ 18,196 $ 4,102 22.5 % $ 6 $ 5
Other government ASO (E) 5,230 2,137 3,093 144.7 % n/a n/a
Commercial Segment   98,354   95,549   2,805   2.9 % $ 12 $ 12
Total administrative services fees $ 125,882 $ 115,882 $ 10,000   8.6 %
 

S-8

 
Humana Inc.
Percentage of Ending Membership under Capitation Arrangements
 
    Government Segment     Commercial Segment    

March 31, 2010

Medicare

Advantage

   

Medicare

stand-alone

PDPs

   

Military

Services

    Medicaid    

Total Govt.

Segment

    Fully-insured     ASO    

Total Comm.

Segment

   

Total Medical

Membership

                       
Capitated HMO hospital system based (F) 0.8 % - - - 0.2 % 1.3 % - 0.7 % 0.3 %
Capitated HMO physician group based (F) 2.5 % - - 28.9 % 2.3 % 1.6 % - 0.8 % 1.8 %
Risk-sharing (G) 18.2 % - - 66.9 % 8.2 % 1.4 % - 0.7 % 5.9 %
All other membership 78.5 %     100.0 %     100.0 %     4.2 %     89.3 %     95.7 %     100.0 %     97.8 %     92.0 %
Total medical membership 100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
 

March 31, 2009

 
Capitated HMO hospital system based (F) 1.9 % - - - 0.4 % 1.2 % - 0.7 % 0.5 %
Capitated HMO physician group based (F) 3.3 % - - 37.1 % 2.8 % 1.4 % - 0.8 % 2.1 %
Risk-sharing (G) 19.0 % - - 61.7 % 7.5 % 1.3 % - 0.7 % 5.2 %
All other membership 75.8 %     100.0 %     100.0 %     1.2 %     89.3 %     96.1 %     100.0 %     97.8 %     92.2 %
Total medical membership 100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
 

S-9

 
Humana Inc.     Fair value
Investments    
Dollars in thousands

03/31/2010

12/31/2009

 
Investment Portfolio:
Cash & cash equivalents $ 1,813,993 $ 1,613,588
Investment securities 6,764,833 6,190,062
Long-term investment securities   1,333,659   1,307,088
Total investment portfolio $ 9,912,485 $ 9,110,738
   
Duration (H)   3.60   3.78
Average Credit Rating AA AA+
   
Securities Lending Invested Collateral Portfolio:
Cash & cash equivalents $ 28,823 $ 53,569
Corporate floating rate - 32,375
Asset-backed securities   33,190   33,642
$ 62,013 $ 119,586
   
Average Credit Rating AAA AAA-
   
Investment Portfolio Detail:    
Cash and cash equivalents $ 1,813,993 $ 1,613,588
U.S. Government and agency obligations
U.S. Treasury and agency obligations 968,631 1,009,352
U.S. Government residential mortgage-backed 1,847,196 1,662,246
U.S. Government commercial mortgage-backed   27,152   26,417
Total U.S. Government and agency obligations   2,842,979   2,698,015
Tax-exempt municipal securities
Pre-refunded 346,485 346,937
Insured 581,215 587,203
Other 1,150,634 1,221,087
Auction rate securities   63,902   68,814
Total tax-exempt municipal securities   2,142,236   2,224,041
Residential mortgage-backed
Prime residential mortgages 72,338 89,956
Alt-A residential mortgages 2,551 3,856
Sub-prime residential mortgages   1,502   1,600
Total residential mortgage-backed   76,391   95,412
Commercial mortgage-backed   289,615   279,626
Asset-backed securities   201,358   107,188
Corporate securities
Financial services 811,713 775,990
Other   1,732,200   1,303,578
Total corporate securities 2,543,913 2,079,568
Redeemable preferred stocks   2,000   13,300
Total investment portfolio $ 9,912,485 $ 9,110,738
 

S-10

 
Humana Inc.
Detail of Benefits Payable Balance and Year-to-Date Changes
Dollars in thousands
 
    March 31,     March 31,     December 31,
2010 2009 2009
Detail of benefits payable
IBNR and other benefits payable (I) $ 2,755,876 $ 2,338,794 $ 2,377,324
Unprocessed claim inventories (J) 426,200 258,800 323,000
Processed claim inventories (K) 126,581 166,402 48,358
Payable to pharmacy benefit administrator (L)   136,688     162,663     194,697  
Benefits payable, excluding military services 3,445,345 2,926,659 2,943,379
 
Military services benefits payable (M)   261,688     311,840     279,195  
Total Benefits Payable $ 3,707,033   $ 3,238,499   $ 3,222,574  
 
 
Three Months Ended Three Months Ended Year Ended
March 31, 2010 March 31, 2009 December 31, 2009

Year-to-date changes in benefits payable, excluding military services (N)

 
Balances at January 1 $ 2,943,379 $ 2,898,782 $ 2,898,782
 
Incurred related to:
Current year 6,344,639 5,645,070 21,934,973
Prior years (O)   (307,855 )   (168,955 )   (252,756 )
Total incurred   6,036,784     5,476,115     21,682,217  
 
Paid related to:
Current year (3,590,194 ) (3,545,040 ) (19,572,740 )
Prior years   (1,944,624 )   (1,903,198 )   (2,064,880 )
Total paid   (5,534,818 )   (5,448,238 )   (21,637,620 )
 
Balances at end of period $ 3,445,345   $ 2,926,659   $ 2,943,379  
 
 
Three Months Ended Three Months Ended Year Ended
March 31, 2010 March 31, 2009 December 31, 2009
Summary of Consolidated Benefit Expense:
Total benefit expense incurred, per above $ 6,036,784 $ 5,476,115 $ 21,682,217
Military services benefit expense 749,300 778,289 3,019,655
Future policy benefit expense (P)   21,471     14,906     73,130  
Consolidated Benefit Expense $ 6,807,555   $ 6,269,310   $ 24,775,002  
 

S-11

 
Humana Inc.
Benefits Payable Statistics (Q)
 
Receipt Cycle Time (R)
    2010     2009     Change    

Percentage

Change

1st Quarter Average 13.8 14.8     (1.0 )     -6.8 %
2nd Quarter Average - 14.0 n/a n/a
3rd Quarter Average - 13.7 n/a n/a
4th Quarter Average   - 13.6     n/a   n/a
Full Year Average   13.8 14.0     (0.2 ) -1.4 %
 
 
Unprocessed Claims Inventories
 
Date    

Estimated Valuation

(000's)

    Claim Item Counts    

Number of Days

on Hand

3/31/2008 $ 212,000 673,000 4.4
6/30/2008 $ 228,700 742,800 4.6
9/30/2008 $ 293,600 946,500 6.0
12/31/2008 $ 247,200 745,500 4.3
3/31/2009 $ 258,800 740,600 4.2
6/30/2009 $ 258,000 709,900 4.0
9/30/2009 $ 317,100 856,500 4.9
12/31/2009     $ 323,000     775,500     4.3  
3/31/2010     $ 426,200     1,091,700     5.6  
 

S-12

 
Humana Inc.
Benefits Payable Statistics (Continued) (Q)
 

Days in Claims Payable (S)

   
Quarter Ended    

Days in Claims

Payable (DCP)

   

Change Last 4

Quarters

   

Percentage

Change

   

DCP Excluding

Capitation

   

Change Last 4

Quarters

   

Percentage

Change

3/31/2008 56.9     (2.4 )     -4.0 %     63.3     (2.7 )     -4.1 %
6/30/2008 57.2 (2.8 ) -4.7 % 63.3 (5.2 ) -7.6 %
9/30/2008 58.1 (3.7 ) -6.0 % 65.1 (5.1 ) -7.3 %
12/31/2008 59.4 (0.8 ) -1.3 % 66.5 (1.8 ) -2.6 %
3/31/2009 54.6 (2.3 ) -4.0 % 60.9 (2.4 ) -3.8 %
6/30/2009 56.1 (1.1 ) -1.9 % 61.5 (1.8 ) -2.8 %
9/30/2009 56.2 (1.9 ) -3.3 % 62.7 (2.4 ) -3.7 %
12/31/2009     55.4     (4.0 )     -6.7 %     62.1       (4.4 )     -6.6 %
3/31/2010     57.0     2.4       4.4 %     64.3       3.4       5.6 %
 
Year-to-Date Change in Days in Claims Payable (T)
2010 2009
DCP - beginning of period 55.4 59.4
Components of change in DCP:
Change in unprocessed claims inventories 1.7 0.6
Change in processed claims inventories 1.2 (2.7 )
Change in pharmacy payment cutoff (1.0 ) (1.1 )
Impact of Cariten acquisition in 4Q08 - (0.9 )
All other (0.3 ) 0.1  
DCP - end of period 57.0   55.4  
 

S-13

Humana Inc.

Footnotes to Statistical Schedules and Supplementary Information

1Q10 Earnings Release

 

(A)

 

The selling, general and administrative (SG&A) expense ratio is defined as SG&A expenses as a percent of premiums, administrative services fees and other revenue.

(B)

Other supplemental benefits include life, disability, and fixed benefit products including cancer and critical illness policies.

(C)

Computed based on average membership for the period (i.e., monthly ending membership during the period divided by the number of months in the period).

(D)

Military services revenues are generally not contracted on a per-member basis.

(E)

Includes administrative services fees associated with Medicare and Medicaid, operations in the United Kingdom, and, for 2009, fees associated with Green Ribbon Health.

(F)

In a limited number of circumstances, the company contracts with hospitals and physicians to accept financial risk for a defined set of HMO membership. In transferring this risk, the company prepays these providers a monthly fixed-fee per member to coordinate substantially all of the medical care for their capitated HMO membership, including some health benefit administrative functions and claims processing. For these capitated HMO arrangements, the company generally agrees to reimbursement rates that target a benefit expense ratio. Providers participating in hospital-based capitated HMO arrangements generally receive a monthly payment for all of the services within their system for their HMO membership. Providers participating in physician-based capitated HMO arrangements generally have subcontracted specialist physicians and are responsible for reimbursing such physicians and hospitals for services rendered to their HMO membership.

(G)

In some circumstances, the company contracts with physicians under risk-sharing arrangements whereby physicians have assumed some level of risk for all or a portion of the benefit expenses of their HMO membership. Although these arrangements do include capitation payments for services rendered, the company processes substantially all of the claims under these arrangements.

(H)

Duration is the time-weighted average of the present value of the bond portfolio cash flows.

(I)

IBNR represents an estimate of benefit expenses payable for claims incurred but not reported (IBNR) at the balance sheet date. The level of IBNR is primarily impacted by membership levels, benefit claim trends and the receipt cycle time, which represents the length of time between when a claim is initially incurred and when the claim form is received (i.e. a shorter time span results in lower reserves for claims IBNR). Other benefits payable includes amounts payable to providers under capitation arrangements.

(J)

Unprocessed claim inventories represent the estimated valuation of claims received but not yet fully processed.

(K)

Processed claim inventories represent the estimated valuation of processed claims that are in the post-claim-adjudication process, which consists of administrative functions such as audit and check batching and handling.

(L)

The balance due to the company's pharmacy benefit administrator fluctuates as a result of the number of business days in the last payment cycle of the month. Payment cycles are every 10 days (10th & 20th of month) and the last day of the month.

(M)

Military services benefits payable primarily consist of IBNR and to a lesser extent risk share payables to the Department of Defense and liabilities to subcontractors.

(N)

The table excludes activity associated with military services benefits payable, because the federal government bears a substantial portion of the risk associated with financing the cost of health benefits. More specifically, the risk-sharing provisions of the military services contracts with the federal government and with subcontractors effectively limit profits and losses when actual claim experience varies from the targeted claim amount negotiated annually. As a result of these contract provisions, the impact of changes in estimates for prior year military services benefits payable are substantially offset by the associated changes in estimates of revenue from health care services reimbursements. As such, any impact on the company's results of operations is reduced substantially, whether positive or negative.

(O)

Amounts incurred related to prior years vary from previously estimated liabilities as the claims ultimately are settled. Negative amounts reported for incurred related to prior years result from claims being ultimately settled for amounts less than originally estimated (favorable development). There were no changes in the approach used to determine the company's estimate of claim reserves during the quarter.

(P)

Future policy benefit expense has a related liability classified as a long-term liability on the balance sheet.

(Q)

Benefits reserves statistics represents fully-insured medical claims data and excludes military services claims data and specialty benefits.

(R)

The receipt cycle time measures the average length of time between when a claim was initially incurred and when the claim form was received. Receipt cycle time data for the company's largest claim processing platforms represent approximately 95% of the company's fully-insured claims volume. Pharmacy and specialty claims, including dental, vision and other supplemental benefits, are excluded from this measurement.

(S)

A common metric for monitoring benefits payable levels relative to the benefit expense is days in claims payable, or DCP, which represents the benefits payable at the end of the period divided by average benefit expenses per day in the quarterly period. Since the company has some providers under capitation payment arrangements (which do not require a benefits payable IBNR reserve), the company has also summarized this metric excluding capitation expense. In addition, this calculation excludes the impact of the company's military services and stand-alone PDP business.

(T)

DCP fluctuates due to a number of issues, the more significant of which are detailed in this rollforward. Growth in certain product lines can also impact DCP for the quarter since a provision for claims would not have been recorded for members that had not yet enrolled earlier in the quarter, yet those members would have a provision and corresponding reserve recorded upon enrollment later in the quarter. This analysis excludes the impact of military services and Medicare stand-alone PDPs upon DCP.

S-14

Contact:

Humana Inc.
Regina Nethery, 502-580-3644
Investor Relations
Rnethery@humana.com
or
Tom Noland, 502-580-3674
Corporate Communications
Tnoland@humana.com