Humana reports third quarter 2011 financial results, provides 2012
financial guidance
Louisville, ky.--(business wire)--humana inc. (nyse: hum) today reported diluted earnings per common share (eps) for the quarter ended september 30, 2011 (3q11) of $2.67, compared to $2.32 per share for the quarter ended september 30, 2010 (3q10). for the nine months ended september 30, 2011 (ytd11) the company reported $7.24 in eps compared to $5.84 for the nine months ended september 30, 2010 (ytd10). comparison of operating results for these periods is affected by the items noted below: ($ in millions except eps) 3q11 pretax income 3q10 pretax income ($ in millions except eps) ytd11 pretax income ytd10 pretax income the company anticipates eps of approximately $8.35 to $8.40 for the year ending december 31, 2011 (fy11) versus its previous estimate of $7.50 to $7.60. this increase in fy11 eps guidance primarily reflects lower projected benefit expense ratios in the company’s retail and employer group segments and higher average medicare membership. looking ahead to the year ending december 31, 2012 (fy12), the company projects eps to be in the range of $7.40 to $7.60, exclusive of any future share repurchases. the company has strengthened the value proposition to the medicare beneficiaries it serves through stable premiums and benefits in its medicare advantage and stand-alone pdp offerings in fy12 through its usual medicare bid margin reset. as a result of improving its medicare value proposition membership gains in these medicare offerings are anticipated to be strong in the coming year. “our favorable results in the third quarter and year to date reflect strong operating performance across multiple businesses,” said michael b. mccallister, humana’s chairman of the board and chief executive officer. “in medicare, our clear focus on strong financial protection and higher quality coordinated health care for seniors represents a powerful value proposition, and continues to drive membership growth, now nearly 4.5 million people.” consolidated highlights revenues – 3q11 consolidated revenues were $9.30 billion, an increase of 11 percent from $8.35 billion in 3q10, with total premiums and services revenue also up 11 percent compared to the prior year’s quarter. the year-over-year increase in premiums and services revenue primarily reflected an increase in the revenues in both the company’s retail and health and well-being services segments. ytd11 consolidated revenues rose 10 percent to $27.78 billion from $25.32 billion in ytd10 with total premiums and services revenue also up 10 percent compared to the prior year’s period, driven primarily by increases in the same segments as the third quarter year-over-year increase. benefit expenses – the 3q11 consolidated benefit ratio (benefit expenses as a percent of premiums) of 80.7 percent decreased by 90 basis points from 81.6 percent for the prior year’s quarter due primarily to a decline in the retail segment benefit ratio as described below. the consolidated benefit ratio for ytd11 of 82.2 percent decreased by 20 basis points from the ytd10 consolidated benefit ratio of 82.4 percent primarily due to the declines in the benefit ratios for the retail and employer group segments. favorable prior-period medical claims reserve development impacted the consolidated benefit ratio year-over-year comparisons as follows: operating costs – the consolidated operating cost ratio (operating costs as a percent of total revenues less investment income) of 14.8 percent for 3q11 compares to 12.1 percent in 3q10 primarily reflecting the company’s december 2010 acquisition of concentra inc. (concentra) and increased expenses associated with the medicare sales season for 2012 offerings which began a month earlier than in the prior year. the ytd11 consolidated operating cost ratio of 13.9 percent increased 130 basis points from that for ytd10 of 12.6 percent primarily due to the same factors impacting the third quarter year-over-year comparison. the write-down of certain dac during the second quarter of 2010 impacted the consolidated year-over-year operating cost ratio comparisons as follows: retail segment highlights pretax results: retail segment pretax income of $541.4 million in 3q11 compares to $447.9 million in 3q10. this increase was primarily due to increased average individual medicare membership and a lower benefit ratio partially offset by a higher operating cost ratio. for ytd11, pretax earnings for the retail segment of $1.26 billion increased by $222.9 million versus ytd10 pretax earnings for the segment of $1.04 billion. comparison of operating results for these periods was also affected by the items noted below: ($ in millions) 3q11 pretax income 3q10 pretax income ytd11 pretax income ytd10 pretax income enrollment: individual medicare advantage membership was 1,613,400 at september 30, 2011, an increase of 151,200 members, or 10 percent from 1,462,200 at september 30, 2010 primarily due to a successful enrollment season associated with the 2011 plan year as well as age-in enrollment throughout the year. individual medicare advantage membership has increased 152,700 or 10 percent through september 2011 from 1,460,700 at december 31, 2010. membership in the company’s individual stand-alone prescription drug plans (pdps) was 2,478,100 at september 30, 2011, up 789,900 or 47 percent compared to 1,688,200 at september 30, 2010 and up 807,800 or 48 percent from 1,670,300 at december 31, 2010. these increases resulted from higher gross sales primarily during the 2011 enrollment season, particularly for the company’s low-price-point humana-walmart plan offering, supplemented by dual-eligible and age-in enrollments throughout the year. humanaone® medical membership increased to 424,000 at september 30, 2011, an increase of 49,100, or 13 percent, from 374,900 at september 30, 2010 and an increase of 51,700 or 14 percent, from 372,300 at december 31, 2010. membership in individual specialty products(d) of 755,600 at september 30, 2011 increased 55 percent from 487,000 at september 30, 2010 and up 245,600 or 48 percent from 510,000 at december 31, 2010 driven primarily by increased sales in dental and vision offerings. premiums and services revenue: 3q11 premiums and services revenue for the retail segment was $5.40 billion, an increase of 13 percent from $4.79 billion in 3q10. the increase was primarily the result of 10 percent higher average medicare advantage membership year over year. benefit expenses: the 3q11 benefit ratio for the retail segment was 78.7 percent, a decrease of 230 basis points from 81.0 percent in 3q10. the year over year decrease in the benefit ratio is primarily due to continued progress with cost-reduction and outcome-enhancing strategies, including care coordination and disease management, combined with an increased percent of retail membership from stand-alone pdps that carry a lower benefit ratio. favorable prior-period reserve development impacted the year-over-year comparison of the benefit ratio for this segment as follows: operating costs: the retail segment’s operating cost ratio of 11.2 percent in 3q11 increased 160 basis points from 9.6 percent in 3q10. the increase was primarily the result of higher expenses associated with the medicare sales season for 2012 offerings, which began a month earlier than in the prior year, as well as a higher percentage of average membership in stand-alone pdp offerings. stand-alone pdps carry a higher operating cost ratio than other medicare products. employer group segment highlights pretax results: employer group segment pretax income of $45.9 million in 3q11 compares to $79.0 million in 3q10. for ytd11, pretax earnings for the employer group segment of $293.0 million increased by $32.8 million versus ytd10 pretax earnings for the segment of $260.2 million. favorable prior-period reserve development impacted the year-over-year comparisons of the pretax income for this segment as follows: ($ in millions) 3q11 pretax income 3q10 pretax income ytd11 pretax income ytd10 pretax income enrollment: group medicare advantage membership was 315,500 at september 30, 2011, an increase of 12,900 members, or 4 percent, from 302,600 at september 30, 2010, and an increase of 14,200 or 5 percent, from 301,300 at december 31, 2010. group fully-insured commercial medical membership declined to 1,181,300 at september 30, 2011, a decrease of 76,600 or 6 percent, from 1,257,900 at september 30, 2010, and a decrease of 70,900 or 6 percent, from 1,252,200 at december 31, 2010. this decline primarily reflected the company’s continued dedication to pricing discipline in a highly competitive environment for large group business partially offset by small group business membership gains. approximately 56 percent of the company’s group fully-insured commercial medical membership was in small group accounts at september 30, 2011 versus 47 percent at september 30, 2010 and 48 percent at december 31, 2010. group administrative services only (aso) commercial medical membership declined to 1,287,000 at september 30, 2011, a decrease of 173,300 or 12 percent from 1,460,300 at september 30, 2010, and a decrease of 166,600 or 11 percent, from 1,453,600 at december 31, 2010. this decline reflected a continuation of discipline in pricing services for self-funded accounts amid a highly competitive environment. membership in employer group specialty products(d) of 6,419,300 at september 30, 2011 decreased 1 percent from 6,502,700 at september 30, 2010, and decreased 98,200 or 2 percent, from 6,517,500 at december 31, 2010. premiums and services revenue: 3q11 premiums and services revenue for the employer group segment were $2.32 billion, flat from $2.32 billion in 3q10 as reduced commercial fully-insured membership was offset by higher medicare advantage per-member per-month premiums. benefit expenses: 3q11 benefit ratio for the employer group segment was 83.5 percent, an increase of 150 basis points, from 82.0 percent for 3q10. the year over year increase in the benefit ratio primarily reflects both the impact of prior-period reserve development and a higher percentage of members in group medicare advantage plans which carry a higher benefit ratio than commercial fully-insured accounts. favorable prior-period reserve development impacted the year-over-year comparison of the benefit ratio for this segment as follows: operating costs: the employer group segment’s operating cost ratio of 17.5 percent in 3q11 improved from 17.6 percent in 3q10 primarily reflecting administrative scale efficiencies associated with a 5 percent increase in average fully-insured medicare advantage group membership. health and well-being services segment highlights pretax results: health and well-being services segment pretax income of $83.6 million in 3q11 increased 11 percent compared to $75.5 million in 3q10 reflecting growth in the company’s pharmacy solutions business as well as the addition of the concentra business acquired in december 2010. for ytd11, pretax earnings for the health and well-being services segment of $267.7 million increased by $93.1 million versus ytd10 pretax earnings for the segment of $174.6 million, reflecting the same factors as those affecting the quarterly year-over-year comparisons. revenues: revenues of $2.83 billion in 3q11 for the health and well-being services segment increased 29 percent from $2.19 billion in 3q10. this increase was primarily due to growth in the company’s pharmacy solutions business together with the december 2010 acquisition of the company’s concentra business. operating costs: the health and well-being services segment’s operating cost ratio of 96.3 percent in 3q11 was relatively unchanged from 96.2 percent in 3q10. balance sheet at september 30, 2011, the company had cash, cash equivalents, and investment securities of $13.58 billion compared to $10.77 billion at june 30, 2011 which included a $1.80 billion benefit from the early receipt of the october 2011 medicare premium payment from the centers for medicare and medicaid services (cms) (e). parent company cash and investments of $634.4 million at september 30, 2011 decreased $356.0 million from $990.4 billion at june 30, 2011 primarily due to share repurchases during 3q11. debt-to-total capitalization at september 30, 2011 was 17.5 percent, down 50 basis points compared to 18.0 percent at june 30, 2011 primarily driven by higher capitalization associated with 3q11 earnings. cash flows from operations cash flows provided by operations for 3q11 of $2.92 billion compared to $1.21 billion in 3q10. cash flows provided by operations for ytd11 totaled $3.88 billion compared to $2.29 billion in ytd10. the company also evaluates operating cash flows on a non-gaap basis: (in millions) 3q11 cash flows cash flows cash flows cash flows - - the year over year decrease in the non-gaap cash flows from operations is due to the negative effect on cash flows of changes in working capital accounts, partially offset by higher net income year over year. share repurchase program and cash dividend in april 2011, the company’s board of directors replaced its previous share repurchase authorization with a new authorization for share repurchases of up to $1 billion. during 3q11, the company repurchased 3,381,200 of its outstanding shares at an average price per share of $70.62. as of october 31, 2011, approximately $561 million of the april 2011 share repurchase authorization was remaining, with an expiration date of june 30, 2013. in april 2011, the company’s board of directors also initiated a quarterly cash dividend policy. a cash dividend payment of $40.7 million, or $0.25 per share, for stockholders of record as of september 30, 2011, was paid on october 28, 2011. in october 2011, the company’s board of directors also approved a cash dividend of $0.25 per share payable january 31, 2012 to stockholders of record as of december 30, 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, we disclose the amount that is not in the ordinary course of business. (b) the company has included certain financial measures that are not in accordance with generally accepted accounting principles (gaap) in its summary of financial results within this earnings press release. the company believes that these non-gaap measures, when presented in conjunction with comparable gaap measures, are useful to both management and its investors in analyzing the company's ongoing business and operating performance. internally, management uses these non-gaap financial measures as indicators of business performance, as well as for operational planning and decision making purposes. non-gaap financial measures should be considered in addition to, but not as a substitute for, or superior to, financial measures prepared in accordance with gaap. (c) during the second quarter of 2010, the company recognized an impairment of deferred acquisition cost (dac) assets associated with its individual major medical line of business of $147.5 million. the related dac included amounts associated with commissions, underwriting and other policy issuance costs. given then impending changes to this business associated with health insurance reform, a substantial portion of the dac was determined to be not recoverable from future income. (d) the company provides a full range of insured specialty products including dental, vision and other supplemental health and financial protection 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. (e) generally, when the first day of a month falls on a weekend or holiday, with the exception of january 1 (new year’s day), the company receives this payment at the end of the previous month. therefore the year-to-date 2011 period included ten monthly medicare payments compared to only nine monthly medicare payments during the 2010 period. 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 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: health insurance reform legislation, 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 and governmental and internal investigations, including without limitation, an ongoing internal investigation related to certain aspects of its florida subsidiary operations, the outcome of any of which could result in substantial monetary damages, penalties, fines or other sanctions. increased litigation or regulatory action and any related negative publicity could increase the company’s cost of doing business. humana’s business activities are subject to substantial government regulation and related audits for compliance, including, among others, existing audits regarding medicare risk adjustment data. new laws or regulations, or changes in existing laws or regulations or their manner of application, including the methodology that may be used by the government in implementing results of risk adjustment audits, 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 february 25, 2011, the department of defense tricare management activity, or tma, awarded the tricare south region contract to humana. on march 7, 2011, the competing bidder filed a protest of the award with the government accountability office. also on march 7, 2011, as provided in the federal acquisition regulations, tma issued a stop work order to humana in connection with the award. on june 14, 2011, the gao upheld the award of the contract to humana and tma subsequently lifted the stop work order. on june 21, 2011, the competing bidder filed a complaint in the united states court of federal claims objecting to the award of the contract to humana. on october 14, 2011, the court upheld the award of the contract to humana, and the competing bidder has until december 13, 2011, to appeal in the court of appeals for the federal circuit. as a result of the award of the tricare south region contract to the company, humana no longer expects a goodwill impairment to occur during the second half of 2011. ultimate disposition of the contract award is, however, subject to the resolution of any additional actions the unsuccessful bidder may take. 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. federal government contracts account for a substantial portion of humana’s revenue and earnings. a delay by congress in raising the federal government’s debt ceiling, should it occur, could lead to a reduction, suspension or cancellation of federal government spending that could, in turn, have a material adverse effect on humana’s business and profitability. 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, 2010; form 10-q for the quarters ended march 31, 2011 and june 30, 2011; form 8-ks filed during 2011. about humana humana inc., headquartered in louisville, kentucky, is a leading health care company that offers a wide range of insurance products and health and wellness services that incorporate an integrated approach to lifelong well-being. by leveraging the strengths of its core businesses, humana believes it can better explore opportunities for existing and emerging adjacencies in health care that can further enhance wellness opportunities for the millions of people across the nation with whom the company has relationships. 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 common share (eps) 155,000 155,000 885,000 600,000 15,000 50,000 to 60,000 50,000 and amortization (cash flows statement) consolidated interest expense effective tax rate total retail segment changes (a) (b) s-1 page description s-2 s-3 s-4 s-5 s-6 s-7 s-8 common stock, $0.16 2/3 par; 300,000,000 shares authorized; 192,804,649 issued at september 30, 2011 s-9 adjustments to reconcile net income to net cash provided by operating activities: changes in operating assets and liabilities excluding the effects of acquisitions: s-10 adjustments to reconcile net income to net cash provided by operating activities: changes in operating assets and liabilities excluding the effects of acquisitions: s-11 $ $ $ 1,922,018 $ s-12 s-13 s-14 s-15 $ 921 $ 108 $ 934 $ 113 s-16 s-17 year-to-date changes in benefits payable, excluding military services (o) s-18 percentage change estimated valuation (000's) claim item counts number of days on hand s-19 days in claims payable (dcp) change last 4 quarters percentage change dcp excluding capitation change last 4 quarters percentage change s-20 (t) 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. s-21
