Humana Reports Third Quarter Financial Results, Provides 2010 Financial Guidance

LOUISVILLE, Ky.--(BUSINESS WIRE)--Humana Inc. (NYSE: HUM) today reported diluted earnings per common share (EPS) for the quarter ended September 30, 2009 (3Q09) of $1.78, consistent with management's guidance of $1.75 to $1.80. The company earned $1.09 per share for the quarter ended September 30, 2008 (3Q08) which reflected $0.40 per share in realized losses primarily associated with other-than-temporary impairments in investments and sales of distressed financial institution securities. The 3Q08 results also included high stand-alone Prescription Drug Plan (PDP) claim expenses.

For the nine months ended September 30, 2009 (YTD09) the company reported $4.67 in EPS compared to $2.79 in EPS for the nine months ended September 30, 2008 (YTD08). The YTD08 results reflected both high stand-alone PDP claim expenses and lower investment income primarily due to significant realized losses on investments.

"Our results this quarter reflect continued solid performance in our Government businesses, offsetting continuing challenges in our Commercial Segment," said Michael B. McCallister, president and chief executive officer of Humana. "We continue to anticipate consolidated results in line with our previous expectations and thus are reaffirming our 2009 EPS guidance."

The company anticipates EPS of approximately $6.15 for the year ending December 31, 2009 (FY09). Looking ahead to the year ending December 31, 2010 (FY10), the company projects EPS to be in the range of $5.05 to $5.25. The 2010 estimate includes military services EPS between breakeven and $0.10 per share (including the impact of asset write-downs and other charges) and excludes any potential impact from pending health legislation or regulatory reform.

"Looking to 2010, we're forecasting substantial net-new Medicare Advantage member growth, attributable to both large-group and individual customers," McCallister said. "In addition, as we've said in the past, we target an overall Medicare pretax operating margin of approximately 5 percent, which next year will include a significant increase in group membership, a traditionally lower margin business, a moderating margin for our stand-alone PDPs, and an individual Medicare margin that approximates the overall target. We also anticipate stabilizing our Commercial operating results with administrative cost reductions and continuation of pricing actions."

TRICARE Update

As previously disclosed, on July 22, 2009, Humana Military Healthcare Services (HMHS), a wholly owned subsidiary of the company, filed a protest with the Government Accountability Office (GAO) in connection with the award of the third generation TRICARE program contract for the South Region to another contractor. In its protest, Humana cited discrepancies between the award criteria and procedures prescribed in the request for proposals issued by the Department of Defense (DoD) and those that appear to have been used by the DoD in making its contractor selection. On October 28, 2009, the company learned that the GAO had upheld HMHS' protest. Humana anticipates the GAO will publicly release a detailed version of its protest decision expeditiously to include the grounds for the decision and the nature of relief recommended by the GAO to the DoD. At this time, Humana is not able to determine what actions the DoD will take in response to recommendations by the GAO, nor can it determine whether or not the protest decision by the GAO will have any effect upon the ultimate disposition of the contract award, and therefore whether or not the protest decision is material.

Consolidated Highlights

Revenues - 3Q09 consolidated revenues rose 8 percent to $7.72 billion from $7.15 billion in 3Q08, with total premium and administrative services fees up 7 percent compared to the prior year's quarter. The increase in premiums and administrative services fees primarily reflects an increase in both average Medicare Advantage membership and per-member premiums for these products.

Consolidated revenues for YTD09 rose 9 percent to $23.33 billion from $21.46 billion for YTD08 with total premiums and administrative services fees up 8 percent compared to the prior year's period, also driven primarily by the increases in average Medicare Advantage enrollment and per-member premiums.

Benefit expenses - The 3Q09 consolidated benefit ratio (benefit expenses as a percent of premium revenues) of 82.1 percent decreased from 83.1 percent for the prior year's quarter, as expected. This 100 basis point decrease was primarily driven by a decrease of 220 basis points in the Government Segment, partially offset by a 250 basis point increase in the Commercial Segment benefit ratio.

The consolidated benefit ratio for YTD09 of 83.1 percent was 180 basis points lower than the YTD08 consolidated benefit ratio of 84.9 percent, reflecting a 250 basis point decrease in the Government Segment's benefit ratio year over year while the Commercial Segment's benefit ratio was unchanged YTD09 compared to YTD08.

Selling, general, & administrative (SG&A) expenses - The 3Q09 consolidated SG&A expense ratio (SG&A expenses as a percent of premiums, administrative services fees and other revenue) of 13.7 percent remained unchanged from 3Q08. The YTD09 consolidated SG&A expense ratio of 13.5 percent increased 10 basis points from the YTD08 ratio of 13.4 percent.

Government Segment Results

Pretax results:

  • Government segment pretax income of $474.5 million in 3Q09 compares to $271.7 million in 3Q08. This increase was primarily driven by lower PDP claim expenses, an 11 percent increase in average Medicare Advantage membership, the implementation of member premiums for most of the company's Medicare Advantage products, and higher investment income.

Enrollment:

  • Medicare Advantage membership grew to 1,514,800 at September 30, 2009, an increase of 146,800 members, or 11 percent, from September 30, 2008, and up 78,900, or 5 percent, versus December 31, 2008. As of September 30, 2009, approximately 62 percent of the company's Medicare Advantage members were in network-based products versus 49 percent at September 30, 2008 and 51 percent at December 31, 2008.
  • Membership in the company's stand-alone PDPs totaled 1,960,400 at September 30, 2009 compared to 3,089,000 at September 30, 2008 and 3,066,600 at December 31, 2008. Both the year-over-year and year-to-date membership declines resulted primarily from attrition associated with low-income seniors opting to join competitor plans with lower or no member premiums as well as stand-alone PDP members choosing Medicare Advantage plans. For 2009, the company realigned its stand-alone PDP premium and benefit designs to correspond with its prescription drug claims experience.
  • Military services membership at September 30, 2009 of 3,015,100 was up approximately 2 percent from 2,953,900 at September 30, 2008 and 2,964,700 at December 31, 2008.

Premiums and administrative services fees:

  • Medicare Advantage premiums of $4.14 billion in 3Q09 increased 18 percent compared to $3.50 billion in 3Q08, primarily the combined result of an 11 percent increase in average Medicare Advantage membership and the introduction of member premiums for most of the company's Medicare Advantage products.
  • Medicare stand-alone PDP premiums of $578.1 million in 3Q09 decreased 26 percent compared to $782.9 million in 3Q08, reflecting a 36 percent decline in average membership year over year primarily due to members choosing competitor offerings given the premium and benefit design changes discussed above.
  • Military services premiums and administrative services fees during 3Q09 increased $30.7 million, or 4 percent, to $818.8 million compared to $788.1 million in 3Q08.

Benefit Expenses:

  • The Government Segment benefit ratio decreased 220 basis points to 81.9 percent in 3Q09 compared to 84.1 percent in the prior year's quarter, primarily driven by a 340 basis point decline in the Medicare benefit ratio with decreases in both the Medicare Advantage and stand-alone PDP benefit ratios.

SG&A Expenses:

  • The Government Segment's SG&A expense ratio of 10.2% remained unchanged from 3Q08.

Commercial Segment Results

Pretax results:

  • The Commercial Segment had a pretax loss of $5.2 million in 3Q09 compared to pretax income of $11.2 million in 3Q08 primarily driven by higher benefit expenses as a percent of premiums and lower average medical membership, partially offset by higher investment income.

Enrollment:

  • Commercial Segment medical membership declined to 3,426,900 at September 30, 2009, a decrease of 127,100, or 4 percent, from 3,554,000 at September 30, 2008 and a decline of 193,900, or 5 percent, from 3,620,800 at December 31, 2008. The decline during 2009 primarily reflected the impact of the economic recession and increased unemployment across various of the company's fully-insured group medical lines of business as well as the loss of two large ASO accounts totaling approximately 95,400 members on January 1, 2009.
  • The company's individual product line has continued to grow steadily, with membership of 358,800, up 13 percent at September 30, 2009 compared to 316,800 at September 30, 2008 and up 10 percent from 325,100 at December 31, 2008.
  • Membership in Commercial Segment specialty products (a) of 7,262,900 at September 30, 2009 increased 8 percent from 6,727,400 at September 30, 2008 and 7 percent from 6,817,000 at December 31, 2008.

Premiums and administrative services fees:

  • Premiums and administrative services fees for the Commercial Segment decreased 1 percent to $1.87 billion in 3Q09 compared to $1.88 billion in the prior year's quarter, reflecting a 4 percent decline in average medical membership year over year.
  • Commercial Segment medical premiums for fully-insured group accounts increased approximately 5 percent on a per-member basis during 3Q09 compared to 3Q08.

Benefit Expenses:

  • In 3Q09, the Commercial Segment benefits ratio of 82.7 percent increased 250 basis points versus the 3Q08 benefit ratio of 80.2 percent, as an increase in per-member premiums was more than offset by higher utilization primarily associated with the general economy (aging of small group membership, higher utilization prior to termination, and increased COBRA participation) as well as the impact of the H1N1 virus.

SG&A Expenses:

  • The Commercial Segment SG&A expense ratio of 24.0 percent for 3Q09 compares to 23.0 percent in 3Q08, primarily driven by increases in certain of the segment's businesses that carry a higher administrative expense load such as mail-order pharmacy and individual medical products.

Balance Sheet

  • At September 30, 2009, the company had cash, cash equivalents, and investment securities of $8.67 billion, up 17 percent from $7.41 billion in such assets at June 30, 2009.
  • Debt-to-total capitalization at September 30, 2009 was 23.2 percent, down 180 basis points from 25.0 percent at June 30, 2009 due primarily to the favorable operating results during 3Q09.

Cash Flows from Operations

Cash flows provided by operations for 3Q09 of $940.1 million compared to cash flows provided by operations of $577.3 million in 3Q08 with the increase primarily due to higher net income as well as the positive impact of changes in working capital accounts.

Share Repurchase Program

In the third quarter of 2008, the company's Board of Directors authorized the repurchase of up to $250 million of the company's common shares exclusive of shares repurchased in connection with employee stock plans. Due to volatility in the financial markets, the company has not repurchased any shares under the third quarter 2008 authorization. The share repurchase program expires on December 31, 2009.

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 at least 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 at least 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 our executive officers, the words or phrases like "expects," "anticipates," "believes," "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 our SEC filings, a summary of which includes but is not limited to the following:

  • 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 benefits payable or future policy benefits payable based upon its estimates of future benefit claims 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 changes in medical cost trends.
  • If Humana fails to effectively implement its operational and strategic initiatives, including its Medicare initiatives, the company's business could be materially adversely affected.
  • 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 could 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 enforcement, could increase the company's cost of doing business and could materially affect its business, profitability and financial condition. In addition, as a government contractor, the comapny is exposed to additional risks that could adversely affect its business or its 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 could have a material adverse effect on its financial results, business and prospects.
  • If Humana fails to develop and maintain satisfactory relationships with the providers of care to its members, the company's business could 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.
  • Humana's ability to obtain funds from its subsidiaries is restricted.
  • 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 could adversely affect the company'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 we are 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, 2008;
  • Form 10-Q for the quarters ended March 31, 2009 and June 30, 2009;
  • Form 8-Ks filed during 2009.

About Humana

Humana Inc., headquartered in Louisville, Kentucky, is one of the nation's largest publicly traded health and supplemental benefits companies, with approximately 10.3 million medical members and approximately 7.3 million specialty-benefit members. Humana is a full-service benefits solutions company, offering a wide array of health and supplemental benefit plans for employer groups, government programs and individuals.

Over its 48-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.

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