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Humana Reports Third Quarter Financial Results

  • EPS for 3Q10 of $2.32 included $0.31 of favorable prior-period medical claims development
  • 2010 EPS guidance raised to $6.40 to $6.50
  • Strong operating performance in both business segments
  • YTD cash flows from operations exceeded $2.2 billion
  • TRICARE contract expected to be extended through March 2012

Category:

Monday, November 1, 2010 6:00 am EDT

Dateline:

LOUISVILLE, Ky.

Public Company Information:

NYSE:
HUM
US4448591028
"Our third-quarter results showed strong operating performance in both our Government and Commercial segments"

LOUISVILLE, Ky.--(BUSINESS WIRE)--Humana Inc. (NYSE: HUM) today reported diluted earnings per common share (EPS) for the quarter ended September 30, 2010 (3Q10) of $2.32, ahead of management’s guidance of $1.65 to $1.75. The company earned $1.78 per share for the quarter ended September 30, 2009 (3Q09). Results for 3Q10 reflect improved performance in the company’s operations, the beneficial effect of $0.21 per share in higher-than-expected favorable medical claims development related to prior years(a) and $0.10 per share in higher-than-expected favorable medical claims development related to the first half of 2010(a).

For the nine months ended September 30, 2010 (YTD10) the company reported $5.84 in EPS compared to $4.67 in EPS for the nine months ended September 30, 2009 (YTD09). Results for YTD10 reflect improved performance in the company’s operations and the beneficial effect of $0.72 per share in higher-than-expected favorable medical claims development related to prior years(a), partially offset by $0.55 per share in expenses from the write-down of certain deferred acquisition costs in the second quarter 2010.

“Our third-quarter results showed strong operating performance in both our Government and Commercial segments,” said Michael B. McCallister, Humana's chairman of the board and chief executive officer. “With the success of our one-to-one retail approach to membership growth solidly aligned with the continued expansion of Medicare and potential retail opportunities in the individual market, Humana faces the post-reform future with confidence.”

The company now anticipates EPS of approximately $6.40 to $6.50 for the year ending December 31, 2010 (FY10) reflecting the improved operating performance and the expectation of a TRICARE contract extension, as discussed below.

Humana plans to issue its 2011 earnings guidance in conjunction with its biennial investor meeting scheduled for November 18, 2010. That meeting will be available to the media and general public via a live web cast.

TRICARE Update

As previously disclosed by the company, on October 5, 2010, Humana Military Healthcare Services, Inc. (HMHS), a wholly-owned subsidiary of the company, was notified by the United States Department of Defense TRICARE Management Activity (TMA) that the TMA intends to negotiate with HMHS for an extension of HMHS’s administration of the TRICARE program South Region contract for an additional option period from April 1, 2011 through March 31, 2012.

Discussions are still at a preliminary stage, but Humana no longer anticipates incurring the previously expected expenses of between $0.19 and $0.28 per diluted common share during FY10 related to the previously anticipated loss of the TRICARE contract on March 31, 2011. Such expenses may, however, be incurred in future periods, depending on the ultimate disposition of future contract awards, as discussed in the company’s Securities and Exchange Commission filings.

Consolidated Highlights

Revenues – 3Q10 consolidated revenues rose 9 percent to $8.42 billion from $7.72 billion in 3Q09, with total premium and administrative services fees also up 9 percent compared to the prior year’s quarter. The year-over-year increase in premiums and administrative services fees primarily reflects a 17 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 group medical membership.

Consolidated revenues for YTD10 rose 9 percent to $25.52 billion from $23.33 billion for YTD09 with total premiums and administrative services fees up 9 percent compared to the prior year’s period, also driven primarily by the same factors as the third quarter year-over-year increase.

Benefit expenses – The 3Q10 consolidated benefit ratio (benefit expenses as a percent of premium revenues) of 81.6 percent decreased 50 basis points from 82.1 percent for the prior year’s quarter and included a 100 basis point beneficial effect of higher-than-expected favorable prior-period medical claims development in 3Q10 (a). The Commercial Segment benefit ratio for 3Q10 improved 350 basis points while that for the Government Segment increased 30 basis points year over year. The primary drivers of these changes are detailed in the segment discussions below.

The consolidated benefit ratio for YTD10 of 82.3 percent was 80 basis points lower than the YTD09 consolidated benefit ratio of 83.1 percent due primarily to an 80 basis point beneficial effect of higher-than-expected favorable prior-year medical claims development YTD10 (a). The lower consolidated benefit ratio versus the prior year’s period included a 390 basis point improvement in the benefit ratio for the Commercial Segment and a 20 basis point improvement for the Government Segment. These changes were primarily driven by the same factors impacting the third quarter year-over-year comparisons.

Selling, general, & administrative (SG&A) expenses – The 3Q10 consolidated SG&A expense ratio (SG&A expenses as a percent of premiums, administrative services fees and other revenue) of 12.9 percent decreased 80 basis points from the 3Q09 ratio of 13.7 percent reflecting both scale efficiencies associated with higher average Medicare Advantage membership and the company’s continued focus on administrative cost reductions.

The YTD10 consolidated SG&A expense ratio of 13.3 percent decreased 20 basis points from the YTD09 ratio of 13.5 percent primarily reflecting the same factors impacting the third quarter year-over-year comparison, partially offset by the impact of the write-down of certain deferred acquisition costs in the second quarter of 2010.

Government Segment Results

Pretax results:

  • Government Segment pretax income increased to $554.1 million in 3Q10 from $474.5 million in 3Q09 primarily due to higher average Medicare Advantage membership year-over-year and a lower SG&A expense ratio. The lower SG&A expense ratio resulted from economies of scale associated with higher average membership and a continued focus on administrative cost reductions.
  • For YTD10, pretax earnings for the Government Segment of $1.36 billion increased by $316.4 million versus YTD09 pretax earnings for the segment of $1.05 billion, primarily reflecting the same factors as those affecting the quarterly year-over-year comparisons.

Enrollment:

  • Medicare Advantage membership grew to 1,764,800 at September 30, 2010, an increase of 250,000 members, or 17 percent, from 1,514,800 at September 30, 2009, and up 256,300, or 17 percent, versus 1,508,500 at December 31, 2009. As of September 30, 2010, approximately 74 percent of the company’s fully-insured Medicare Advantage members were in network-based products versus 62 percent at September 30, 2009 and 63 percent at December 31, 2009.
  • Membership in the company’s stand-alone PDPs totaled 1,785,600 at September 30, 2010 compared to 1,960,400 at September 30, 2009 and 1,927,900 at December 31, 2009. Both the year-over-year and year-to-date membership declines resulted primarily from attrition due to the company’s competitive positioning as it realigned stand-alone PDP premium and benefit designs to correspond with its pharmacy claims experience.
  • Military services membership at September 30, 2010 of 3,031,100 was essentially unchanged from 3,015,100 at September 30, 2009 and 3,034,400 at December 31, 2009.

Premiums and administrative services fees:

  • Medicare Advantage premiums of $4.80 billion in 3Q10 increased 16 percent compared to $4.14 billion in 3Q09, primarily the result of a 17 percent increase in average Medicare Advantage membership.
  • Medicare stand-alone PDP premiums of $579.6 million in 3Q10 were up slightly compared to $578.1 million in 3Q09, reflecting the generally offsetting impacts of a 10 percent increase in premiums per member per month and a 9 percent decline in average membership year over year.
  • Military services premiums and administrative services fees during 3Q10 increased $77.0 million, or 9 percent, to $895.8 million compared to $818.8 million in 3Q09.

Benefit Expenses:

  • The Government Segment benefit ratio of 82.2 percent increased 30 basis points versus the 3Q09 ratio of 81.9 percent primarily due to an increase in Medicare Advantage group business (which generally carries a higher benefit ratio than the company’s individual Medicare Advantage business). The segment’s benefit ratio for 3Q10 also included the beneficial effect of 100 basis points from higher-than-expected favorable prior-period medical claims development(a), 70 basis points related to the prior year and 30 basis points related to the first half of 2010.

SG&A Expenses:

  • The Government Segment’s SG&A expense ratio of 9.5 percent decreased from 10.2 percent in 3Q09 reflecting continued scale efficiencies associated with higher average Medicare Advantage membership and a continued focus on administrative cost reductions.

Commercial Segment Results

Pretax results:

  • Commercial Segment pretax income increased to $68.1 million in 3Q10 compared to a pretax loss of $5.2 million in 3Q09 due to lower levels of health care services utilization as well as the company’s continued focus on pricing discipline and administrative cost reductions.
  • For YTD10, pretax income for the Commercial Segment of $213.4 million compared to earnings of $157.8 million for YTD09 primarily reflecting the same factors as those affecting the quarterly year-over-year comparisons partially offset by $147.5 million in expenses during the second quarter of 2010 associated with the write-off of certain deferred acquisition costs.

Enrollment:

  • Commercial Segment medical membership declined to 3,130,900 at September 30, 2010, a decrease of 296,000, or 9 percent, from 3,426,900 at September 30, 2009 and a decline of 279,900, or 8 percent, from 3,410,800 at December 31, 2009. The year-over-year declines during both 3Q10 and YTD10 primarily reflected continued pricing discipline across the company’s fully-insured medical lines of business.
  • Membership in Commercial Segment specialty products(b) of 7,038,800 at September 30, 2010 decreased less than 1 percent from 7,073,700 at September 30, 2009 and 1 percent from 7,109,900 at December 31, 2009.

Premiums and administrative services fees:

  • Premiums and administrative services fees for the Commercial Segment decreased 3 percent to $1.81 billion in 3Q09 compared to $1.87 billion in the prior year’s quarter, reflecting an 8 percent decline in average medical membership year over year, 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 3Q10 compared to 3Q09.

Benefit Expenses:

  • The Commercial Segment benefit ratio for 3Q10 of 79.2 percent was 350 basis points lower than the 3Q09 benefit ratio of 82.7 percent, primarily due to lower levels of health care services utilization year over year and continued pricing discipline. The segment’s benefit ratio for 3Q10 also included the beneficial effect of 120 basis points from higher-than-expected favorable prior-period medical claims development(a), 90 basis points related to the prior year and 30 basis points related to the first half of 2010.

SG&A Expenses:

  • The Commercial Segment SG&A expense ratio of 24.4 percent for 3Q10 compares to 24.0 percent in 3Q09, as increases in the company’s specialty, ancillary and individual medical businesses that carry a higher administrative expense load as a percent of revenues were partially offset by the company’s continued focus on administrative cost reductions.

Balance Sheet

  • At September 30, 2010, the company had cash, cash equivalents, and investment securities of $11.54 billion, up 12 percent from $10.29 billion in such assets at June 30, 2010. Parent company cash and investments at September 30, 2010 were $1.27 billion, up $270.4 million from $1.00 billion at June 30, 2010.
  • Debt-to-total capitalization at September 30, 2010 was 19.4 percent, down 110 basis points from 20.5 percent at June 30, 2010 due primarily to increased net income during 3Q10.

Cash Flows from Operations

Cash flows provided by operations for 3Q10 of $1.21 billion compared to cash flows provided by operations of $940.1 million in 3Q09 with the increase primarily due to higher net income and changes in working capital balances year over year.

Share Repurchase Program

In December 2009, the company’s Board of Directors renewed its authorization for the use of up to $250 million for the repurchase of Humana common shares. During 3Q10, the company repurchased 968,000 of its outstanding shares at an average price per share of $51.66. As of November 1, 2010, the company had approximately $150 million remaining on the December 2009 authorization, which is effective until December 31, 2011.

Footnotes

(a)

  Actuarial standards require the use of assumptions based on moderately adverse experience, which generally results in favorable reserve development, or reserves that are considered redundant. When the Company recognizes a release of the redundancy, it discloses the amount that is not in the ordinary course of business.
 

(b)

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 insurance 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 restricting revenue, enrollment and premium growth in certain products and market segments, increasing the company's medical and administrative costs by, among other things, requiring a minimum benefit ratio, lowering the company’s Medicare payment rates and increasing the company’s expenses associated with a non-deductible federal premium tax; financial position, including the company's ability to maintain the value of its goodwill; 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.
  • On October 5, 2010, Humana was notified that the Department of Defense TRICARE Management Activity intends to negotiate with Humana for an extension of Humana’s administration of the TRICARE South Region contract, comprised of a one-year option period from April 1, 2011 through March 31, 2012. As a result, Humana no longer expects that an impairment of certain assets associated with its military services business, primarily consisting of goodwill, will occur during 2010. There can be no assurance, however, that the contract will be extended.
  • 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 10-Q for the quarters ended March 31, 2010 and June 30, 2010;
  • 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 10.1 million medical members and 7.0 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.
 

Humana Inc. – Earnings Guidance Points as of November 1, 2010

 

(in accordance with Generally Accepted Accounting Principles (GAAP))

    For the year ending December 31, 2010 (FY10)     Comments

Diluted earnings per common share (EPS)

FY10: approximately $6.40 to $6.50

EPS estimates exclude the impact of potential future share repurchases

 

FY10 EPS includes $0.72 per share beneficial effect from higher-than-expected favorable prior-year medical claims reserve development and $0.55 per share in expenses associated with the write-down of certain deferred acquisition costs

Revenues Consolidated revenues: $33.5 billion to $34.0 billion
 
Premiums and ASO fees:
Medicare Advantage: approximately $19.3 billion
Medicare stand-alone PDPs: approximately $2.4 billion
Military Services: $3.5 billion to $3.6 billion
Commercial Segment: approximately $7.3 billion
 
Consolidated investment income: $330 million to $340 million
 
  Consolidated other revenue: $290 million to $310 million  
Ending medical membership Medicare Advantage: up approximately 255,000 to 260,000 from prior year

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

 

Medicare stand-alone PDPs: down 175,000 to 180,000 from prior year
 
Military services: no material change from prior year
 
Medicaid: up approximately 150,000 from prior year

Includes additional Puerto Rico contract effective 10/1/10

 
Commercial fully-insured: down 210,000 to 215,000 from prior year

 

 
  Commercial ASO: down 115,000 to 125,000 from prior year  

Benefit ratios and benefit expense trend components

Government Segment benefit ratio in the range of 84.0% to 84.5%

Government Segment benefit ratio is Medicare, Medicaid, and Military Services combined and includes an 60 basis point benefit from higher-than-expected favorable prior-period medical claims development

 
Medicare benefit ratio in the range of 83.0% to 83.5%

Medicare benefit ratio is Medicare Advantage and Stand-Alone PDP combined and includes a 70 basis point benefit from higher-than-expected favorable prior-period medical claims development

 

Commercial Segment benefit ratio in the range of 77% to 78%

Commercial Segment benefit ratio is Medical and Specialty combined and includes an 60 basis point benefit from higher-than-expected favorable prior-period medical claims development

 
 

Commercial group fully-insured secular benefit expense trend components: inpatient hospital utilization – flat to down; inpatient and outpatient hospital rates (base rate plus severity adjustments) – low-to-mid single digits; outpatient hospital utilization – low single digits; physician – essentially flat; pharmacy – low to mid single digits

Commercial group fully-insured secular trends of 4% to 5% 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

13.5% to 14.0% Ratio computed as SG&A expenses as a percent of premiums, administrative services fees, and other revenue

 

Includes 40 basis point negative impact from write-down of certain deferred acquisition costs (DAC) in the second quarter 2010

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

Government Segment pretax operating results

Medicare pretax operating margin: approximately 6.5%

 

Military services: pretax operating earnings of approximately $110 million

Medicare margin includes Medicare Advantage and stand-alone PDP combined

Commercial Segment pretax earnings

$165 million to $170 million Commercial Segment results include the impact of investment income and interest expense, approximately $42.1 million in beneficial effect of higher-than-expected favorable prior-year medical claims development and $147.5 million of DAC impairment expenses, as discussed above
Cash flows from operations $2.1 billion to $2.3 billion  
Capital expenditures Approximately $205 million  
Effective tax rate Approximately 37%  

Shares used in computing full-year EPS

    Approximately 170 million     Excludes impact of potential future share repurchases

 

Humana Inc.

Statistical Schedules

And

Supplementary Information

3Q10 Earnings Release

 

S-1

 

 
Humana Inc.
Statistical Schedules and Supplementary Information
3Q10 Earnings Release
 
Contents
 

Page

       

Description

 
S-3-4 Consolidated Statements of Income
S-5 Consolidated Balance Sheets
S-6-7 Consolidated Statements of Cash Flows
S-8 Key Income Statement Ratios and Segment Operating Results
S-9 Membership Detail
S-10-11 Premiums and Administrative Services Fees Detail
S-12 Percentage of Ending Membership under Capitation Arrangements
S-13 Investments
S-14-16 Benefits Payable
S-17 Footnotes
 

S-2

 

 
Humana Inc.
Consolidated Statements of Income
In thousands, except per common share results
             
Three Months Ended September 30,
    Dollar Percentage
2010 2009 Change     Change
Revenues:
Premiums $8,134,645 $7,444,122 $690,523 9.3 %
Administrative services fees 121,815 133,732 (11,917 ) -8.9 %
Investment income 87,250 74,861 12,389 16.5 %
Other revenue 80,938 64,104 16,834   26.3 %
Total revenues 8,424,648 7,716,819 707,829   9.2 %
Operating expenses:
Benefits 6,637,470 6,111,351 526,119 8.6 %
Selling, general and administrative 1,074,188 1,047,773 26,415 2.5 %
Depreciation 54,115 52,897 1,218 2.3 %
Other intangible amortization 10,442 9,191 1,251   13.6 %
Total operating expenses 7,776,215 7,221,212 555,003   7.7 %
Income from operations 648,433 495,607 152,826 30.8 %
Interest expense 26,143 26,259 (116 ) -0.4 %
Income before income taxes 622,290 469,348 152,942 32.6 %
Provision for income taxes 229,069 167,829 61,240   36.5 %
Net income $393,221 $301,519 $91,702   30.4 %
 
Basic earnings per common share $2.35 $1.80 $0.55 30.6 %
Diluted earnings per common share $2.32 $1.78 $0.54 30.3 %
 
Shares used in computing basic earnings per common share 167,574 167,404
Shares used in computing diluted earnings per common share 169,582 169,246
 

S-3

 

 
Humana Inc.
Consolidated Statements of Income
In thousands, except per common share results
             
Nine Months Ended September 30,
    Dollar Percentage
2010 2009 Change     Change
Revenues:
Premiums $24,673,259 $22,557,943 $2,115,316 9.4 %
Administrative services fees 374,441 368,308 6,133 1.7 %
Investment income 252,495 219,745 32,750 14.9 %
Other revenue 217,768 181,373 36,395   20.1 %
Total revenues 25,517,963 23,327,369 2,190,594   9.4 %
Operating expenses:
Benefits 20,304,590 18,748,206 1,556,384 8.3 %
Selling, general and administrative 3,363,021 3,115,918 247,103 7.9 %
Depreciation 168,030 152,250 15,780 10.4 %
Other intangible amortization 28,573 28,330 243   0.9 %
Total operating expenses 23,864,214 22,044,704 1,819,510   8.3 %
Income from operations 1,653,749 1,282,665 371,084 28.9 %
Interest expense 78,679 79,605 (926 ) -1.2 %
Income before income taxes 1,575,070 1,203,060 372,010 30.9 %
Provision for income taxes 583,005 414,044 168,961   40.8 %
Net income $992,065 $789,016 $203,049   25.7 %
 
Basic earnings per common share $5.90 $4.72 $1.18 25.0 %
Diluted earnings per common share $5.84 $4.67 $1.17 25.1 %
 
Shares used in computing basic earnings per common share 168,082 167,250
Shares used in computing diluted earnings per common share 169,964 168,858
 

S-4

 

 
Humana Inc.
Consolidated Balance Sheets

Dollars in thousands, except share amounts

 

                 
September 30, June 30, December 31, Sequential Change
2010 2010     2009 Dollar     Percent
Assets    
Current assets:
Cash and cash equivalents $2,922,852 $1,998,982 $1,613,588
Investment securities 7,142,395 6,882,063 6,190,062
Receivables, net:
Premiums 794,197 1,310,269 811,800
Administrative services fees 13,831 14,833 11,820
Securities lending invested collateral 31,921 45,234 119,586
Other 479,417   535,708       505,960  
Total current assets 11,384,613 10,787,089 9,252,816 $597,524 5.5 %
 
Property and equipment, net 670,277 660,223 679,142
Long-term investment securities 1,477,147 1,405,734 1,307,088
Goodwill 1,997,277 1,994,593 1,992,924
Other 861,038   842,931       921,524  
Total assets $16,390,352   $15,690,570       $14,153,494   $699,782 4.5 %
 
Liabilities and Stockholders' Equity
Current liabilities:
Benefits payable $3,726,911 $3,829,723 $3,222,574
Trade accounts payable and accrued expenses 2,041,101 1,666,386 1,307,710
Book overdraft 241,229 239,916 374,464
Securities lending payable 38,106 51,618 126,427
Unearned revenues 213,778   209,346       228,817  
Total current liabilities 6,261,125 5,996,989 5,259,992 $264,136 4.4 %
 
Long-term debt 1,671,222 1,673,565 1,678,166
Future policy benefits payable 1,279,168 1,227,348 1,193,047
Other long-term liabilities 239,868   313,843       246,286  
Total liabilities 9,451,383   9,211,745       8,377,491   $239,638 2.6 %
 
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; 190,107,065 issued at September 30, 2010

31,685 31,674 31,634
Capital in excess of par value 1,720,651 1,704,035 1,658,521
Retained earnings 5,421,676 5,028,455 4,429,611
Accumulated other comprehensive income 259,025 158,428 42,135
Treasury stock, at cost, 21,788,518 shares at September 30, 2010 (494,068 ) (443,767 )     (385,898 )
Total stockholders' equity 6,938,969   6,478,825       5,776,003   $460,144 7.1 %
Total liabilities and stockholders' equity $16,390,352   $15,690,570       $14,153,494   $699,782 4.5 %
 
Debt-to-total capitalization ratio 19.4 % 20.5 % 22.5 %
 

S-5

 

 
Humana Inc.
Consolidated Statements of Cash Flows

Dollars in thousands

 

             
Three Months Ended September 30,
    Dollar Percentage
2010 2009 Change     Change
Cash flows from operating activities
Net income $393,221 $301,519
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 64,557 62,088
Net realized capital gains (4,310 ) (4,184 )
Stock-based compensation 12,477 15,796
(Benefit from) provision for deferred income taxes (34,656 ) 12,072

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

Receivables 517,074 500,386
Other assets 46,045 30,545
Benefits payable (102,812 ) (45,716 )
Other liabilities 301,608 87,766
Unearned revenues 4,398 (25,066 )
Other 11,607   4,905  
Net cash provided by operating activities 1,209,209   940,111   $269,098 28.6 %
 
Cash flows from investing activities
Acquisitions, net of cash acquired (8,451 ) (69 )
Purchases of property and equipment (61,005 ) (39,533 )
Purchases of investment securities (823,184 ) (2,451,044 )
Proceeds from maturities of investment securities 478,569 197,796
Proceeds from sales of investment securities 207,630 1,152,495
Change in securities lending collateral 13,512   115,234  
Net cash used in investing activities (192,929 ) (1,025,121 ) $832,192 81.2 %
 
Cash flows from financing activities
Receipts from CMS contract deposits 439,622 499,987
Withdrawals from CMS contract deposits (473,679 ) (481,123 )
Change in book overdraft 1,313 45,531
Change in securities lending payable (13,512 ) (115,234 )
Common stock repurchases (50,301 ) (2,271 )
Excess tax benefit from stock-based compensation 142 1,473
Proceeds from stock option exercises and other 4,005   3,544  
Net cash used in financing activities (92,410 ) (48,093 ) ($44,317 ) -92.1 %
 
Increase (decrease) in cash and cash equivalents 923,870 (133,103 )
Cash and cash equivalents at beginning of period 1,998,982   1,585,109  
 
Cash and cash equivalents at end of period $2,922,852   $1,452,006  
 

S-6

 

 
Humana Inc.
Consolidated Statements of Cash Flows

Dollars in thousands

 

             
Nine Months Ended September 30,
    Dollar Percentage
2010 2009 Change     Change
Cash flows from operating activities
Net income $992,065 $789,016
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 196,603 180,580
Net realized capital gain (12,286 ) (13,734 )
Stock-based compensation 52,104 48,818
Benefit from deferred income taxes (115,923 ) (22,753 )

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

Receivables 15,592 6,247
Other assets 119,728 11,718
Benefits payable 504,337 159,902
Other liabilities 520,771 (10,681 )
Unearned revenues (15,073 ) (18,309 )
Other 31,253   16,687  
Net cash provided by operating activities 2,289,171   1,147,491   $1,141,680 99.5 %
 
Cash flows from investing activities
Acquisitions, net of cash acquired (10,120 ) (12,436 )
Purchases of property and equipment (152,432 ) (122,135 )
Purchases of investment securities (3,582,352 ) (5,290,819 )
Proceeds from maturities of investment securities 1,492,601 802,331
Proceeds from sales of investment securities 1,298,912 2,903,936
Change in securities lending collateral 88,321   248,925  
Net cash used in investing activities (865,070 ) (1,470,198 ) $605,128 41.2 %
 
Cash flows from financing activities
Receipts from CMS contract deposits 1,319,874 1,534,629
Withdrawals from CMS contract deposits (1,117,655 ) (1,204,536 )
Repayments under credit agreement - (250,000 )
Change in book overdraft (133,235 ) (25,158 )
Change in securities lending payable (88,321 ) (248,925 )
Common stock repurchases (108,170 ) (8,270 )
Excess tax benefit from stock-based compensation 1,406 1,717
Proceeds from stock option exercises and other 11,264   4,833  
Net cash used in financing activities (114,837 ) (195,710 ) $80,873 41.3 %
 
Increase (decrease) in cash and cash equivalents 1,309,264 (518,417 )
Cash and cash equivalents at beginning of period 1,613,588   1,970,423  
 
Cash and cash equivalents at end of period $2,922,852   $1,452,006  
 

S-7

 

 
Humana Inc.
Key Income Statement Ratios and Segment Operating Results
Dollars in thousands
                           
Three Months Ended September 30, Nine Months Ended September 30,
       
Percentage Percentage
2010 2009 Difference     Change 2010 2009 Difference     Change
Benefit ratio
Government Segment 82.2 % 81.9 % 0.3 % 84.1 % 84.3 % -0.2 %
Commercial Segment 79.2 % 82.7 % -3.5 % 75.5 % 79.4 % -3.9 %
Consolidated 81.6 % 82.1 % -0.5 % 82.3 % 83.1 % -0.8 %
 

Selling, general, and administrative expense ratio (A)

Government Segment 9.5 % 10.2 % -0.7 % 9.3 % 10.0 % -0.7 %
Commercial Segment 24.4 % 24.0 % 0.4 % 27.1 % 23.9 % 3.2 %
Consolidated 12.9 % 13.7 % -0.8 % 13.3 % 13.5 % -0.2 %
 
Investment income
Government Segment $56,857 $44,936 $11,921 26.5 % $164,545 $132,894 $31,651 23.8 %
Commercial Segment 30,393   29,925   468   1.6 % 87,950   86,851   1,099   1.3 %
Consolidated $87,250   $74,861   $12,389   16.5 % $252,495   $219,745   $32,750   14.9 %
 
Interest expense
Government Segment $19,899 $17,447 $2,452 14.1 % $59,266 $50,160 $9,106 18.2 %
Commercial Segment 6,244   8,812   (2,568 ) -29.1 % 19,413   29,445   (10,032 ) -34.1 %
Consolidated $26,143   $26,259   ($116 ) -0.4 % $78,679   $79,605   ($926 ) -1.2 %
 
Detail of pretax income (loss)
Government Segment $554,147 $474,501 $79,646 16.8 % $1,361,689 $1,045,277 $316,412 30.3 %
Commercial Segment 68,143   (5,153 ) 73,296   1422.4 % 213,381   157,783   55,598   35.2 %
Consolidated $622,290   $469,348   $152,942   32.6 % $1,575,070   $1,203,060   $372,010   30.9 %
 
Detail of pretax margins
Government Segment 8.5 % 8.2 % 0.3 % 6.9 % 6.0 % 0.9 %
Commercial Segment 3.6 % -0.3 % 3.9 % 3.7 % 2.7 % 1.0 %
Consolidated 7.4 % 6.1 % 1.3 % 6.2 % 5.2 % 1.0 %
 

S-8

 

 
Humana Inc.
Membership Detail

In thousands

 

                           
Ending

Average

Ending Year-over-year Change Ending Sequential Change
September 30, 2010

3Q10

    September 30, 2009 Amount     Percent June 30, 2010 Amount     Percent
Medical Membership:        
Government Segment:
Medicare Advantage - HMO 636.1 636.0 591.0 45.1 7.6 % 634.8 1.3 0.2 %
Medicare Advantage - PPO 645.7 644.6 348.0 297.7 85.5 % 618.3 27.4 4.4 %
Medicare Advantage - PFFS 454.6 456.2     575.8 (121.2 ) -21.0 % 479.3 (24.7 ) -5.2 %
Total MA fully-insured 1,736.4 1,736.8     1,514.8 221.6   14.6 % 1,732.4 4.0   0.2 %
ASO 28.4 28.5     - 28.4   28.7 (0.3 ) -1.0 %
Total Medicare Advantage 1,764.8 1,765.3     1,514.8 250.0   16.5 % 1,761.1 3.7   0.2 %
Medicare stand-alone PDPs 1,785.6 1,789.5     1,960.4 (174.8 ) -8.9 % 1,793.4 (7.8 ) -0.4 %
Total Medicare 3,550.4 3,554.8     3,475.2 75.2   2.2 % 3,554.5 (4.1 ) -0.1 %
Military services insured 1,762.6 1,759.9 1,754.3 8.3 0.5 % 1,759.8 2.8 0.2 %
Military services ASO 1,268.5 1,270.5     1,260.8 7.7   0.6 % 1,270.9 (2.4 ) -0.2 %
Total military services 3,031.1 3,030.4 3,015.1 16.0 0.5 % 3,030.7 0.4 0.0 %
Medicaid 408.0 405.1     399.8 8.2   2.1 % 404.0 4.0   1.0 %
Total Government Segment 6,989.5 6,990.3     6,890.1 99.4   1.4 % 6,989.2 0.3   0.0 %
Commercial Segment:
Fully-insured medical:
Group 1,257.9 1,267.3 1,474.1 (216.2 ) -14.7 % 1,295.4 (37.5 ) -2.9 %
Individual 374.9 373.9 358.8 16.1 4.5 % 371.5 3.4 0.9 %
Medicare supplement 37.8 37.2     27.8 10.0   36.0 % 35.6 2.2   6.2 %
Total fully-insured medical 1,670.6 1,678.4 1,860.7 (190.1 ) -10.2 % 1,702.5 (31.9 ) -1.9 %
ASO 1,460.3 1,471.2     1,566.2 (105.9 ) -6.8 % 1,582.6 (122.3 ) -7.7 %
Total Commercial Segment 3,130.9 3,149.6     3,426.9 (296.0 ) -8.6 % 3,285.1 (154.2 ) -4.7 %
 
Total medical membership 10,120.4 10,139.9     10,317.0 (196.6 ) -1.9 % 10,274.3 (153.9 ) -1.5 %
 
Specialty Membership
Dental - fully-insured 2,605.8 2,599.8 2,650.9 (45.1 ) -1.7 % 2,677.5 (71.7 ) -2.7 %
Dental - ASO 1,236.5 1,225.1     1,197.4 39.1   3.3 % 1,211.6 24.9   2.1 %
Total dental 3,842.3 3,824.9 3,848.3 (6.0 ) -0.2 % 3,889.1 (46.8 ) -1.2 %
Vision 2,208.4 2,196.3 2,337.3 (128.9 ) -5.5 % 2,442.1 (233.7 ) -9.6 %
Other supplemental benefits (B) 988.1 984.1     888.1 100.0   11.3 % 965.8 22.3   2.3 %
Total specialty membership 7,038.8 7,005.3     7,073.7 (34.9 ) -0.5 % 7,297.0 (258.2 ) -3.5 %
 

S-9

 

 
Humana Inc.
Premiums and Administrative Services Fees Detail
Dollars in thousands, except per member per month
                     
  Per Member per Month (C)
Three Months Ended September 30, Three Months Ended September 30,
Dollar Percentage    
2010 2009 Change     Change 2010     2009
Premium revenues
Government Segment:
Medicare Advantage $4,798,910 $4,135,198 $663,712 16.1 % $921 $912
Medicare stand-alone PDPs 579,583 578,142 1,441   0.2 % $108 $98
Total Medicare 5,378,493 4,713,340 665,153 14.1 %
Military services insured (D) 873,588 796,126 77,462 9.7 % $165 $151
Medicaid insured 168,847 162,896 5,951   3.7 % $139 $137
Total Government Segment premiums 6,420,928 5,672,362 748,566   13.2 %
Commercial Segment:
Fully-insured medical 1,465,448 1,540,442 (74,994 ) -4.9 % $291 $276
Specialty 248,269 231,318 16,951   7.3 % $13 $12
Total Commercial Segment premiums 1,713,717 1,771,760 (58,043 ) -3.3 %
Total premium revenues $8,134,645 $7,444,122 $690,523   9.3 %
 
Administrative services fees
Military services ASO (D) $22,169 $22,690 ($521 ) -2.3 % $6 $6
Other government ASO (E) 4,779 15,257 (10,478 ) -68.7 %
Commercial Segment 94,867 95,785 (918 ) -1.0 % $12 $12
Total administrative services fees $121,815 $133,732 ($11,917 ) -8.9 %
 

S-10

 

 
Humana Inc.
Premiums and Administrative Services Fees Detail
Dollars in thousands, except per member per month
                     
  Per Member per Month (C)
Nine Months Ended September 30, Nine Months Ended September 30,
Dollar Percentage    
2010 2009 Change     Change 2010     2009
Premium revenues
Government Segment:
Medicare Advantage $14,501,099 $12,340,786 $2,160,313 17.5 % $934 $922
Medicare stand-alone PDPs 1,858,830 1,812,638 46,192   2.5 % $113 $99
Total Medicare 16,359,929 14,153,424 2,206,505 15.6 %
Military services insured (D) 2,603,950 2,591,605 12,345 0.5 % $165 $165
Medicaid insured 501,605 480,085 21,520   4.5 % $139 $136
Total Government Segment premiums 19,465,484 17,225,114 2,240,370   13.0 %
Commercial Segment:
Fully-insured medical 4,456,286 4,643,204 (186,918 ) -4.0 % $288 $274
Specialty 751,489 689,625 61,864   9.0 % $12 $12
Total Commercial Segment premiums 5,207,775 5,332,829 (125,054 ) -2.3 %
Total premium revenues $24,673,259 $22,557,943 $2,115,316   9.4 %
 
Administrative services fees
Military services ASO (D) $67,010 $63,140 $3,870 6.1 % $6 $6
Other government ASO (E) 14,717 18,295 (3,578 ) -19.6 %
Commercial Segment 292,714 286,873 5,841   2.0 % $12 $12
Total administrative services fees $374,441 $368,308 $6,133   1.7 %
 

S-11

 

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

September 30, 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 % 0.4 %
Capitated HMO physician group based (F) 2.5 % - - 28.0 % 2.3 % 1.6 % - 0.8 % 1.8 %
Risk-sharing (G) 18.3 % - - 67.8 % 8.6 % 1.4 % - 0.8 % 6.2 %
All other membership 78.4 %     100.0 %     100.0 %     4.2 %     88.9 %     95.7 %     100.0 %     97.7 %     91.6 %
Total medical membership 100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
 

September 30, 2009

 
Capitated HMO hospital system based (F) 1.9 % - - - 0.4 % 1.2 % - 0.7 % 0.5 %
Capitated HMO physician group based (F) 3.2 % - - 29.3 % 2.4 % 1.5 % - 0.8 % 1.9 %
Risk-sharing (G) 18.8 % - - 69.9 % 8.2 % 1.0 % - 0.6 % 5.7 %
All other membership 76.1 %     100.0 %     100.0 %     0.8 %     89.0 %     96.3 %     100.0 %     97.9 %     91.9 %
Total medical membership 100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
 

S-12

 

     
Humana Inc. Fair value
Investments        
Dollars in thousands
9/30/2010 6/30/2010     12/31/2009
Investment Portfolio:
Cash & cash equivalents $2,922,852 $1,998,982 $1,613,588
Investment securities 7,142,395 6,882,063 6,190,062
Long-term investment securities 1,477,147 1,405,734     1,307,088
Total investment portfolio $11,542,394 $10,286,779     $9,110,738
         
Duration (H) 3.27 3.36     3.78
Average Credit Rating AA AA     AA+
 
Securities Lending Invested Collateral Portfolio:
Cash & cash equivalents $6,396 $12,527 $53,569
Corporate floating rate - - 32,375
Asset-backed securities 25,525 32,707     33,642
$31,921 $45,234     $119,586
         
Average Credit Rating AAA AAA     AAA-
 
Investment Portfolio Detail:
Cash and cash equivalents $2,922,852 $1,998,982     $1,613,588
U.S. Government and agency obligations
U.S. Treasury and agency obligations 745,680 905,531 1,009,352
U.S. Government residential mortgage-backed 1,889,185 1,916,433 1,662,246
U.S. Government commercial mortgage-backed 31,065 30,037     26,417
Total U.S. Government and agency obligations 2,665,930 2,852,001     2,698,015
Tax-exempt municipal securities
Pre-refunded 340,903 341,435 346,937
Insured 636,887 583,805 587,203
Other 1,382,742 1,187,734 1,221,087
Auction rate securities 51,369 51,473     68,814
Total tax-exempt municipal securities 2,411,901 2,164,447     2,224,041
Residential mortgage-backed
Prime residential mortgages 70,094 70,897 89,956
Alt-A residential mortgages 2,324 2,419 3,856
Sub-prime residential mortgages 1,333 1,420     1,600
Total residential mortgage-backed 73,751 74,736     95,412
Commercial mortgage-backed 291,581 287,310     279,626
Asset-backed securities 176,425 227,900     107,188
Corporate securities
Financial services 904,426 828,813 775,990
Other 2,090,361 1,847,590     1,303,578
Total corporate securities 2,994,787 2,676,403 2,079,568
Redeemable preferred stocks 5,167 5,000     13,300
Total investment portfolio $11,542,394 $10,286,779     $9,110,738
 

S-13

 

 
Humana Inc.
Detail of Benefits Payable Balance and Year-to-Date Changes
Dollars in thousands
 
    September 30,     June 30,     December 31,
2010 2010     2009
Detail of benefits payable
IBNR and other benefits payable (I) $2,711,282 $2,869,801 $2,377,324
Unprocessed claim inventories (J) 428,900 433,800 323,000
Processed claim inventories (K) 155,193 109,348 48,358
Payable to pharmacy benefit administrator (L) 116,070   115,043       194,697  
Benefits payable, excluding military services 3,411,445 3,527,992 2,943,379
 
Military services benefits payable (M) 315,466   301,731       279,195  
Total Benefits Payable $3,726,911   $3,829,723       $3,222,574  
 
 
Nine Months Ended Nine Months Ended Year Ended
September 30, 2010 September 30, 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 18,307,363 16,639,799 21,934,973
Prior years (O) (401,250 ) (221,887 )     (252,756 )
Total incurred 17,906,113   16,417,912       21,682,217  
 
Paid related to:
Current year (15,306,536 ) (14,707,443 ) (19,572,740 )
Prior years (2,131,511 ) (1,554,643 )     (2,064,880 )
Total paid (17,438,047 ) (16,262,086 )     (21,637,620 )
 
Balances at end of period $3,411,445   $3,054,608       $2,943,379  
 
 
Nine Months Ended Nine Months Ended Year Ended
September 30, 2010 September 30, 2009     December 31, 2009
Summary of Consolidated Benefit Expense:
Total benefit expense incurred, per above $17,906,113 $16,417,912 $21,682,217
Military services benefit expense 2,307,618 2,279,918 3,019,655
Future policy benefit expense (P) 90,859   50,376       73,130  
Consolidated Benefit Expense $20,304,590   $18,748,206       $24,775,002  
 

S-14

 

 
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 13.9 14.0 (0.1 ) -0.7 %
3rd Quarter Average 13.9 13.7 0.2 1.5 %
4th Quarter Average - 13.6     n/a   n/a
Full Year Average 13.9 14.0     (0.1 ) -0.7 %
 
 
 
Unprocessed Claims Inventories
 
Date    

Estimated Valuation

(000s)

   

Claim Item

Counts

   

Number of Days

on Hand

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
6/30/2010     $433,800     1,009,200     4.9  
9/30/2010     $428,900     1,064,200     5.2  
 

S-15

 

 
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

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 %
6/30/2010     57.1     1.0       1.8 %     64.5       3.0       4.9 %
9/30/2010     57.9     1.7       3.0 %     64.5       1.8       2.9 %
 
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 1.8 0.6
Change in processed claims inventories 1.8 (1.5 )
Change in pharmacy payment cutoff (1.3 ) (1.3 )
Impact of Cariten acquisition in 4Q08 - (0.9 )
All other 0.2   (0.1 )
DCP - end of period 57.9   56.2  
 

S-16

 

 
Humana Inc.

Footnotes to Statistical Schedules and Supplementary Information

3Q10 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 96% 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-17

Contact:

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