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Humana Reports Second Quarter 2010 Financial Results

  • 2Q10 EPS of $2.00 included asset impairment expenses and favorable prior-period reserve development
  • Improved operating earnings year over year in both business segments
  • YTD cash flow from operations of $1.1 billion
  • June 2010 parent company cash and investments of $1.0 billion

LOUISVILLE, Ky.--(BUSINESS WIRE)--Humana Inc. (NYSE: HUM) today reported diluted earnings per common share (EPS) for the quarter ended June 30, 2010 (2Q10) of $2.00, above management’s guidance of $1.65 to $1.70. The 2Q10 results compared to EPS of $1.67 for the quarter ended June 30, 2009 (2Q09). For the six months ended June 30, 2010 (1H10) the company reported $3.52 in EPS compared to $2.89 for the six months ended June 30, 2009 (1H09).

“We are pleased with this quarter's performance as it is the result of strength in both our Commercial and Government segments”

The company raised its EPS guidance for the year ending December 31, 2010 (FY10E) to a range of $5.65 to $5.75 from its previous range of $5.55 to $5.65 as a result of its 2Q10 performance and its revised forecast for the second half of 2010.

“We are pleased with this quarter's performance as it is the result of strength in both our Commercial and Government segments,” said Michael B. McCallister, Humana’s president and chief executive officer. “It is clear our value proposition for seniors in Medicare continues to be well received across the country.”

The company has included certain non-GAAP(a) financial measures for 2Q10 and 1H10 throughout this earnings press release. Consolidated non-GAAP(a) pretax income and EPS were as follows:

Consolidated Results of Operations

($ in millions except EPS)

 

2Q10

Pretax

Income

 

2Q10

EPS

 

1H10

Pretax

Income

 

1H10

EPS

GAAP   $535.9   $2.00   $952.8   $3.52
Write-down of certain deferred acquisition costs, or DAC (b)   147.5   0.55   147.5   0.55
Higher-than-expected favorable prior-year medical claims reserve development (c)   (37.5)   (0.14)   (137.5)   (0.51)
Higher-than-expected favorable first quarter 2010 (1Q10) medical claims reserve development (c)   (79.5)   (0.30)   -0-   -0-
Non-GAAP (a)   $566.4   $2.11   $962.8   $3.56
       

Consolidated Highlights

Revenues – 2Q10 consolidated revenues rose 10 percent to $8.65 billion from $7.90 billion in 2Q09, with total premium and administrative services fees also up 10 percent compared to the prior year’s quarter. The year-over-year increase in premiums and administrative services fees primarily reflects an 18 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.

1H10 consolidated revenues rose 9 percent to $17.09 billion from $15.61 billion in 1H09 with total premium and administrative services fees also up 9 percent compared to the prior year’s period, also driven primarily by the same factors as the second quarter year-over-year increase.

Benefit expenses – The impact of GAAP to non-GAAP(a) reconciliation items on the consolidated benefit ratio (benefit expenses as a percent of premium revenues) is detailed in the following table:

Consolidated Benefit Ratio   2Q10   1H10
GAAP   81.9%   82.6%
Higher-than-expected favorable prior-year medical claims reserve development (c)   0.4%   0.9%
Higher-than-expected favorable 1Q10 medical claims reserve development (c)   1.0%   -0-
Non-GAAP (a)   83.3%   83.5%
   

The 2Q10 consolidated benefit ratio of 81.9 percent compares to 83.3 percent in 2Q09. On a non-GAAP(a) basis the 2Q10 consolidated benefit ratio of 83.3 percent was unchanged versus the 2Q09 consolidated benefit ratio. The non-GAAP(a) consolidated benefit ratio for 2Q10 reflected the combined impact of a 120 basis point increase in the non-GAAP(a) benefit ratio for the Government Segment and a 520 basis point improvement in the non-GAAP(a) benefit ratio for the Commercial Segment. The drivers of these changes are detailed in the segment discussions below.

The consolidated benefits ratio for 1H10 of 82.6 percent was 100 basis points lower than the 1H09 consolidated benefits ratio of 83.6 percent. On a non-GAAP(a) basis the 1H10 consolidated benefits ratio of 83.5 percent improved 10 basis points from 83.6 percent for 1H09, the combined impact of a 50 basis point increase in the non-GAAP(a) benefit ratio for the Government Segment and a 320 basis point improvement in the non-GAAP(a) benefit ratio for the Commercial Segment. These non-GAAP(a) changes were primarily driven by the same factors impacting the second quarter year-over-year comparisons.

Selling, general, & administrative (SG&A) expenses – The impact of GAAP to non-GAAP(a) reconciliation items on the consolidated SG&A expense ratio (SG&A expenses as a percent of premiums, administrative services fees and other revenue) is detailed in the following table:

Consolidated SG&A expense ratio   2Q10   1H10
GAAP   13.6%   13.5%
Write-down of certain DAC (b)   (1.8%)   (0.9%)
Non-GAAP (a)   11.8%   12.6%
   

The 2Q10 consolidated SG&A expense ratio of 13.6 percent increased 80 basis points compared to the 2Q09 ratio of 12.8 percent. On a non-GAAP(a) basis the consolidated SG&A expense ratio of 11.8 percent improved 100 basis points versus the 2Q09 ratio of 12.8 percent reflecting both scale efficiencies associated with higher average Medicare Advantage membership and the company’s continued focus on administrative cost reductions.

The SG&A expense ratio for 1H10 of 13.5 percent also increased 10 basis points from that for 1H09 of 13.4 percent. On a non-GAAP(a) basis the consolidated SG&A expense ratio for 1H10 of 12.6 percent improved 80 basis points from 13.4 percent for 1H09 primarily reflecting the same factors impacting the second quarter year-over-year comparison.

Government Segment Results

The impact of GAAP to non-GAAP(a) reconciliation items on Government Segment financial measures is detailed in the following table:

Government Segment

($ in millions except EPS)

 

2Q10 Pretax

Income

 

1H10 Pretax

Income

 

2Q10 Benefit

Ratio

GAAP   $528.4   $807.6   84.1%
Higher-than-expected favorable prior-year medical claims reserve development (c)   (24.8)   (110.7)   0.4
Higher-than-expected favorable 1Q10 medical claims reserve development (c)   (52.4)   -0-   0.8
Non-GAAP (a)   $451.2   $696.9   85.3%
     

Pretax results:

  • On a non-GAAP(a) basis, Government Segment pretax income increased to $451.2 million in 2Q10 from $404.7 million in 2Q09 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 from higher average membership and a continued focus on administrative cost reductions.
  • For 1H10, non-GAAP(a) pretax earnings for the Government Segment of $696.9 million increased by $126.1 million versus 1H09 pretax earnings for the segment of $570.8 million, primarily reflecting the same factors as those affecting the quarterly year-over-year comparisons.

Enrollment:

  • Medicare Advantage membership grew to 1,761,100 at June 30, 2010, an increase of 261,300 members, or 17 percent, from June 30, 2009, and up 252,600, or 17 percent, during 1H10.
  • As of June 30, 2010, 72 percent of fully-insured Medicare Advantage members were in network-based products, unchanged from the March 31, 2010 percentage and 9 percent higher than the 63 percent of such membership in networked Medicare Advantage options at December 31, 2009.
  • Membership in the company’s stand-alone PDPs totaled 1,793,400 at June 30, 2010 compared to 1,992,000 at June 30, 2009 and 1,927,900 at December 31, 2009. The 2010 year-to-date decline primarily resulted from the company’s continued competitive positioning as it realigned stand-alone PDP premium and benefit designs to correspond with its pharmacy claims experience.
  • Military services membership at June 30, 2010 of 3,030,700 was up approximately 1 percent from 3,008,300 at June 30, 2009 and essentially unchanged from 3,034,400 at December 31, 2009.

Premiums and administrative services fees:

  • Medicare Advantage premiums and administrative service fees of $4.89 billion in 2Q10 increased 18 percent compared to $4.15 billion in 2Q09, primarily due to an 18 percent increase in average Medicare Advantage membership year over year.
  • Medicare stand-alone PDP premiums of $700.2 million in 2Q10 increased 10 percent compared to $638.8 million in 2Q09, reflecting an 18 percent increase in premiums per member per month, partially offset by a 7 percent decline in average membership year over year.
  • Military services premiums and administrative services fees during 2Q10 decreased $38.7 million to $907.9 million compared to $946.6 million in 2Q09.

Benefit Expenses:

  • On a non-GAAP(a) basis the Government Segment benefit ratio of 85.3 percent increased 120 basis points versus the 2Q09 ratio of 84.1 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).

SG&A Expenses:

  • The Government Segment’s SG&A expense ratio decreased 110 basis points to 8.2 percent in 2Q10 compared to 9.3 percent in the prior year’s quarter driven primarily by increased scale efficiencies from higher average medical membership in the company’s Medicare Advantage plans and the company’s continued focus on administrative cost reductions.

Commercial Segment Results

The impact of GAAP to non-GAAP(a) reconciliation items on Commercial Segment financial measures is detailed in the following table:

Commercial Segment

($ in millions except EPS)

 

2Q10 Pretax

Income

 

1H10 Pretax

Income

 

2Q10 Benefit

Ratio

 

2Q10 SG&A

Expense Ratio

GAAP   $7.5   $145.2   73.4%   32.2%
Write-down of certain DAC (b)   147.5   147.5   n/a   (7.8)
Higher-than-expected favorable prior-year medical claims reserve development (c)   (12.7)   (26.8)   0.7   n/a
Higher-than-expected favorable 1Q10 medical claims reserve development (c)   (27.1)   -0-   1.5   n/a
Non-GAAP (a)   $115.2   $265.9   75.6%   24.4%
       

Pretax results:

  • On a non-GAAP(a) basis, Commercial Segment pretax income increased to $115.2 million in 2Q10 compared to $35.3 million in 2Q09 due to pricing discipline, lower levels of health care services utilization and the company’s continued focus on administrative cost reductions.
  • For 1H10, non-GAAP(a) pretax income for the Commercial Segment of $265.9 million compared to earnings of $162.9 million for 1H09 primarily reflecting the same factors as those affecting the quarterly year-over-year comparisons.

Enrollment:

  • Commercial Segment medical membership at June 30, 2010 of 3,285,100 was down 162,800 from June 30, 2009 and down 125,700 year-to-date 2010. The year-over-year declines during both 2Q10 and 1H10 primarily reflected continued pricing discipline across the company’s fully-insured medical lines of business.
  • Membership in Commercial Segment specialty products(d) of 7,297,000 at June 30, 2010 increased 11 percent from 6,585,800 at June 30, 2009 and up 3 percent from 7,109,900 at December 31, 2009.

Premiums and administrative services fees:

  • Premiums and administrative services fees for the Commercial Segment decreased 2 percent to $1.84 billion in 2Q10 compared to $1.87 billion in the prior year’s quarter, reflecting lower average medical membership partially offset by continued pricing discipline.
  • Commercial Segment medical premiums for fully-insured group accounts increased approximately 8 percent on a per-member basis during 2Q10 compared to 2Q09.

Benefit Expenses:

  • The Commercial Segment non-GAAP(a) benefit ratio for 2Q10 of 75.6 percent was 520 basis points lower than the 2Q09 benefit ratio of 80.8 percent, primarily due to lower levels of health care services utilization year over year and continued pricing discipline.

SG&A Expenses:

  • The Commercial Segment non-GAAP(a) SG&A expense ratio of 24.4 percent for 2Q10 compares to 23.5 percent in 2Q09 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 June 30, 2010, the company had cash, cash equivalents, and investment securities of $10.29 billion, a 4 percent increase from $9.91 billion at March 31, 2010.
  • Parent company cash and investments of $1.00 billion at June 30, 2010 increased $271.8 million from $729.8 million at March 31, 2010 as dividends from subsidiaries were partially offset primarily by federal income tax and interest payments as well as share repurchases during 2Q10.
  • Debt-to-total capitalization at June 30, 2010 was 20.5 percent, down 110 basis points from March 31, 2010 due primarily to the increase in capitalization associated with increased net income during 2Q10.

Cash Flows from Operations

Cash flows provided by operations for 2Q10 of $325.3 million compared to cash flows provided by operations of $161.9 million in 2Q09 with the year-over-year increase primarily due to higher net income 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 2Q10, the company repurchased 1,025,000 of its outstanding shares at an average price per share of $48.76. As of August 1, 2010, the company had approximately $200 million remaining on the December 2009 authorization, which is effective until December 31, 2011.

Footnotes

(a)   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.
(b) During 2Q10, the company recognized an impairment of deferred acquisition cost (DAC) assets associated with its Individual Major Medical line of business of $147.5 million. These deferred acquisition costs included amounts related to commissions, underwriting and other policy issuance costs. Given impending changes to this business associated with health insurance reform, a substantial portion of the DAC was not recoverable from future income.
(c) 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.
(d) 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.
  • 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 quarter ended March 31, 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 10.3 million medical members and 7.3 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 August 2, 2010

         

(in accordance

  with Generally

  Accepted

  Accounting

  Principles)

  Earnings Guidance for the year ending

December 31, 2010 (FY10E)

  Comments for Clarification

Diluted earnings

  per common

  share

 

FY10E: $5.65 to $5.75

Third quarter 2010: $1.65 to $1.75

 

FY10E EPS includes the following
items recorded in the first half of 2010:
(1) $0.55 in expenses associated with
the write-down of deferred acquisition
costs (DAC) and (2) $0.51 benefit from
higher-than-expected favorable prior-
period reserve development

 

FY10E EPS includes the negative
impact of the following expenses
anticipated in the second half of 2010:
(1) between $0.19 and $0.28 in
expenses related to the anticipated loss
of the TRICARE South Region
contract, (2) approximately $0.28 in
newly projected expenses for Medicare
targeted growth initiatives, and (3)
approximately $0.14 in incremental
policy reserves for individual major
medical claims

 

Revenues   Consolidated revenues: $33.5 billion to  

$34.5 billion

 
Premiums and ASO fees:

Medicare Advantage: $19.0 billion to

$19.5 billion

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

Military Services: $3.5 billion to $3.6
  billion

Military Services assumes a 3/31/11
transition date for the South Region
TRICARE contract

Commercial Segment: $7.25 billion to
$7.35 billion
 
 
Consolidated investment income: $325
million to $340 million
 
Consolidated other revenue: $310 million to
    $320 million    

Ending medical
  membership

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

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

Medicare stand-alone PDPs: down
approximately 215,000 from prior year
 

Military services: no material change from
  prior year

Military Services anticipates the
termination of the South Region
contract on 3/31/11 and includes both
fully-insured and ASO members

Medicaid: no material change from prior
year
 
Commercial:
Fully-insured: down 205,000 to 215,000
from prior year
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 84.5% to 85.0%

Government Segment benefit ratio is
Medicare, Medicaid, and Military
Services combined and includes a 40
basis point benefit from higher-than-
expected favorable prior-period reserve
development during the first half of
2010

 

Medicare benefit ratio in the range of
  83.5% to 84.0%

Medicare benefit ratio is Medicare
Advantage and Stand-Alone PDP
combined and includes a 40 basis
point full year benefit from higher-
than-expected favorable prior-
period reserve development during
the first half of 2010

 

Commercial Segment benefit ratio in the
  range of 78.5% to 79.5%

Commercial Segment benefit ratio is
Medical and Specialty combined and
includes (1) a 40 basis point full year
benefit from higher-than-expected
favorable prior-period reserve
development during the first half of
2010 and (2) an anticipated 60 basis
point negative full year impact from
policy reserves for individual major
medical in the second half of 2010

 
   

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

 

 

Commercial group fully-insured
secular trends of 6% to 7%
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 60 basis point negative impact
on full year from write-down of DAC
and negative impact on full year of
newly projected Medicare growth
initiatives in the second half of 2010

Depreciation &

  amortization

  $250 million to $260 million    
Interest expense   $105 million to $110 million    

Government
  Segment
  operating
  margins

Medicare pretax operating margin:
  approximately 6%

Medicare margin is Medicare
Advantage & stand-alone PDP
combined

 

 

   

Military Services operating earnings: $25
  million to $50 million

 

Military Services anticipates the
termination of the South Region
contract on 3/31/11 and includes $50
million to $75 million (pretax) of
anticipated fourth quarter 2010
expenses related to the loss of
that contract

Commercial

  Segment pretax

  earnings

  $50 million to $75 million  

Commercial Segment results include
the impact of investment income,
interest expense, and $147.5 million of
DAC impairment

Cash flows from

  operations

  $1.3 billion to $1.5 billion    

Capital

  expenditures

 

  Approximately $200 million    
Effective tax rate   37.0% to 37.5%  

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

Shares used in

  computing full-

  year EPS

  Approximately 170 million  

Excludes the impact of potential future
share repurchases

 

 

Humana Inc.

Statistical Schedules

And

Supplementary Information

2Q10 Earnings Release

 

S-1

 

Humana Inc.
Statistical Schedules and Supplementary Information
2Q10 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 GAAP to Non-GAAP Reconciliation
S-18 Footnotes
 

S-2

 

Humana Inc.
Consolidated Statements of Income
In thousands, except per common share results
         
Three Months Ended June 30,
Dollar Percentage
2010   2009 Change   Change
Revenues:
Premiums $8,376,751 $7,642,527 $734,224 9.6 %
Administrative services fees 126,744 118,694 8,050 6.8 %
Investment income 79,790 75,340 4,450 5.9 %
Other revenue 69,436   62,328 7,108   11.4 %
Total revenues 8,652,721   7,898,889 753,832   9.5 %
Operating expenses:
Benefits 6,859,565 6,367,545 492,020 7.7 %
Selling, general and administrative 1,161,790 1,004,342 157,448 15.7 %
Depreciation 60,726 50,677 10,049 19.8 %
Other intangible amortization 8,564   9,801 (1,237 ) -12.6 %
Total operating expenses 8,090,645   7,432,365 658,280   8.9 %
Income from operations 562,076 466,524 95,552 20.5 %
Interest expense 26,222   26,574 (352 ) -1.3 %
Income before income taxes 535,854 439,950 95,904 21.8 %
Provision for income taxes 195,778   158,170 37,608   23.8 %
Net income $340,076   $281,780 $58,296   20.7 %
 
Basic earnings per common share $2.02 $1.68 $0.34 20.2 %
Diluted earnings per common share $2.00 $1.67 $0.33 19.8 %
 
Shares used in computing basic earnings per common share 168,472 167,301
Shares used in computing diluted earnings per common share 170,229 168,669
 

S-3

 

Humana Inc.
Consolidated Statements of Income
In thousands, except per common share results
         
Six Months Ended June 30,
Dollar Percentage
2010   2009 Change   Change
Revenues:
Premiums $16,538,614 $15,113,821 $1,424,793 9.4 %
Administrative services fees 252,626 234,576 18,050 7.7 %
Investment income 165,245 144,884 20,361 14.1 %
Other revenue 136,830   117,269 19,561   16.7 %
Total revenues 17,093,315   15,610,550 1,482,765   9.5 %
Operating expenses:
Benefits 13,667,120 12,636,855 1,030,265 8.2 %
Selling, general and administrative 2,288,833 2,068,145 220,688 10.7 %
Depreciation 113,915 99,353 14,562 14.7 %
Other intangible amortization 18,131   19,139 (1,008 ) -5.3 %
Total operating expenses 16,087,999   14,823,492 1,264,507   8.5 %
Income from operations 1,005,316 787,058 218,258 27.7 %
Interest expense 52,536   53,346 (810 ) -1.5 %
Income before income taxes 952,780 733,712 219,068 29.9 %
Provision for income taxes 353,936   246,215 107,721   43.8 %
Net income $598,844   $487,497 $111,347   22.8 %
 
Basic earnings per common share $3.56 $2.92 $0.64 21.9 %
Diluted earnings per common share $3.52 $2.89 $0.63 21.8 %
 
Shares used in computing basic earnings per common share 168,336 167,172
Shares used in computing diluted earnings per common share 170,154 168,664
 

S-4

 

Humana Inc.
Consolidated Balance Sheets
Dollars in thousands, except share amounts
  June 30,   December 31,   Year to Date Change
2010   2009   Dollar   Percent
Assets  
Current assets:
Cash and cash equivalents $1,998,982 $1,613,588
Investment securities 6,882,063 6,190,062
Receivables, net:
Premiums 1,310,269 811,800
Administrative services fees 14,833 11,820
Securities lending invested collateral 45,234 119,586
Other 535,708     505,960  
Total current assets 10,787,089 9,252,816 $1,534,273 16.6 %
Property and equipment, net 660,223 679,142
Long-term investment securities 1,405,734 1,307,088
Goodwill 1,994,593 1,992,924
Other 842,931     921,524  
Total assets $15,690,570     $14,153,494   $1,537,076 10.9 %
 
Liabilities and Stockholders' Equity
Current liabilities:
Benefits payable $3,829,723 $3,222,574
Trade accounts payable and accrued expenses 1,666,386 1,307,710
Book overdraft 239,916 374,464
Securities lending payable 51,618 126,427
Unearned revenues 209,346     228,817  
Total current liabilities 5,996,989 5,259,992 $736,997 14.0 %
Long-term debt 1,673,565 1,678,166
Future policy benefits payable 1,227,348 1,193,047
Other long-term liabilities 313,843     246,286  
Total liabilities 9,211,745     8,377,491   $834,254 10.0 %
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; 190,046,852 issued at June 30, 2010

31,674 31,634
Capital in excess of par value 1,704,035 1,658,521
Retained earnings 5,028,455 4,429,611
Accumulated other comprehensive income 158,428 42,135
Treasury stock, at cost, 20,814,426 shares at June 30, 2010 (443,767 )   (385,898 )
Total stockholders' equity 6,478,825     5,776,003   $702,822 12.2 %
Total liabilities and stockholders' equity $15,690,570     $14,153,494   $1,537,076 10.9 %
 
Debt-to-total capitalization ratio 20.5 % 22.5 %
 

S-5

 

Humana Inc.
Consolidated Statements of Cash Flows
Dollars in thousands
    Three Months Ended June 30,    
  Dollar Percentage
2010   2009 Change   Change
Cash flows from operating activities
Net income $340,076 $281,780
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 69,290 60,478
Net realized capital loss (gain) 718 (8,507 )
Stock-based compensation 12,288 17,346
Benefit from deferred income taxes (60,405 ) (54,512 )

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

Receivables (220,504 ) (239,041 )
Other assets 102,860 43,080
Benefits payable 122,690 172,698
Other liabilities (26,905 ) (120,822 )
Unearned revenues (26,238 ) 3,393
Other 11,441     5,967  
Net cash provided by operating activities 325,311     161,860   $163,451 101.0 %
 
Cash flows from investing activities
Acquisitions, net of cash acquired (1,669 ) -
Purchases of property and equipment (52,399 ) (43,555 )
Purchases of investment securities (1,233,819 ) (1,435,869 )
Proceeds from maturities of investment securities 580,244 199,584
Proceeds from sales of investment securities 546,116 1,029,153
Change in securities lending collateral 16,603     62,408  
Net cash used in investing activities (144,924 )   (188,279 ) $43,355 23.0 %
 
Cash flows from financing activities
Receipts from CMS contract deposits 442,144 505,677
Withdrawals from CMS contract deposits (377,327 ) (388,885 )
Repayments under credit agreement - (250,000 )
Change in book overdraft 3,878 (104,209 )
Change in securities lending payable (16,603 ) (62,408 )
Common stock repurchases (50,199 ) -
Excess tax benefit from stock-based compensation 530 96
Proceeds from stock option exercises and other 2,179     55  
Net cash provided by (used in) financing activities 4,602     (299,674 ) $304,276 101.5 %
 
Increase (decrease) in cash and cash equivalents 184,989 (326,093 )
Cash and cash equivalents at beginning of period 1,813,993     1,911,202  
 
Cash and cash equivalents at end of period $1,998,982     $1,585,109  
 

S-6

 

Humana Inc.
Consolidated Statements of Cash Flows
Dollars in thousands
    Six Months Ended June 30,    
  Dollar Percentage
2010   2009 Change   Change
Cash flows from operating activities
Net income $598,844 $487,497
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 132,046 118,492
Net realized capital gain (7,976 ) (9,550 )
Stock-based compensation 39,627 33,022
Benefit from deferred income taxes (81,267 ) (34,825 )

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

Receivables (501,482 ) (494,139 )
Other assets 73,683 (18,827 )
Benefits payable 607,149 205,618
Other liabilities 219,163 (98,447 )
Unearned revenues (19,471 ) 6,757
Other 19,646     11,782  
Net cash provided by operating activities 1,079,962     207,380   $872,582 420.8 %
 
Cash flows from investing activities
Acquisitions, net of cash acquired (1,669 ) (12,367 )
Purchases of property and equipment (91,427 ) (82,602 )
Purchases of investment securities (2,759,168 ) (2,839,775 )
Proceeds from maturities of investment securities 1,014,032 604,535
Proceeds from sales of investment securities 1,091,282 1,751,441
Change in securities lending collateral 74,809     133,691  
Net cash used in investing activities (672,141 )   (445,077 ) ($227,064 ) -51.0 %
 
Cash flows from financing activities
Receipts from CMS contract deposits 880,252 1,034,642
Withdrawals from CMS contract deposits (643,976 ) (723,413 )
Repayments under credit agreement - (250,000 )
Change in book overdraft (134,548 ) (70,689 )
Change in securities lending payable (74,809 ) (133,691 )
Common stock repurchases (57,869 ) (5,999 )
Excess tax benefit from stock-based compensation 1,264 244
Proceeds from stock option exercises and other 7,259     1,289  
Net cash used in financing activities (22,427 )   (147,617 ) $125,190 84.8 %
 
Increase (decrease) in cash and cash equivalents 385,394 (385,314 )
Cash and cash equivalents at beginning of period 1,613,588     1,970,423  
 
Cash and cash equivalents at end of period $1,998,982     $1,585,109  
 

S-7

 

Humana Inc.
Key Income Statement Ratios and Segment Operating Results
Dollars in thousands
                 
Three Months Ended June 30, Six Months Ended June 30,
 
Percentage Percentage
2010   2009 Difference   Change 2010   2009 Difference   Change
Benefit ratio
Government Segment 84.1 % 84.1 % 0.0 % 85.0 % 85.4 % -0.4 %
Commercial Segment 73.4 % 80.8 % -7.4 % 73.7 % 77.7 % -4.0 %
Consolidated 81.9 % 83.3 % -1.4 % 82.6 % 83.6 % -1.0 %
 

Selling, general, and administrative
  expense ratio (A)

Government Segment 8.2 % 9.3 % -1.1 % 9.2 % 9.9 % -0.7 %
Commercial Segment 32.2 % 23.5 % 8.7 % 28.5 % 23.8 % 4.7 %
Consolidated 13.6 % 12.8 % 0.8 % 13.5 % 13.4 % 0.1 %
 
Investment income
Government Segment $51,519 $47,176 $4,343 9.2 % $107,688 $87,958 $19,730 22.4 %
Commercial Segment 28,271     28,164   107   0.4 % 57,557     56,926   631   1.1 %
Consolidated $79,790     $75,340   $4,450   5.9 % $165,245     $144,884   $20,361   14.1 %
 
Interest expense
Government Segment $19,586 $16,225 $3,361 20.7 % $39,367 $32,713 $6,654 20.3 %
Commercial Segment 6,636     10,349   (3,713 ) -35.9 % 13,169     20,633   (7,464 ) -36.2 %
Consolidated $26,222     $26,574   ($352 ) -1.3 % $52,536     $53,346   ($810 ) -1.5 %
 
Detail of pretax income
Government Segment $528,369 $404,675 $123,694 30.6 % $807,542 $570,776 $236,766 41.5 %
Commercial Segment 7,485     35,275   (27,790 ) -78.8 % 145,238     162,936   (17,698 ) -10.9 %
Consolidated $535,854     $439,950   $95,904   21.8 % $952,780     $733,712   $219,068   29.9 %
 
Detail of pretax margins
Government Segment 7.9 % 6.8 % 1.1 % 6.1 % 4.9 % 1.2 %
Commercial Segment 0.4 % 1.8 % -1.4 % 3.7 % 4.2 % -0.5 %
Consolidated 6.2 % 5.6 % 0.6 % 5.6 % 4.7 % 0.9 %
 

S-8

 

Humana Inc.
Membership Detail
In thousands
    Ending  

Average

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

2Q10

  June 30, 2009

Amount

 

Percent

March 31, 2010 Amount   Percent
Medical Membership:    
Government Segment:
Medicare Advantage - HMO 634.8 634.3 586.1 48.7 8.3 % 629.8 5.0 0.8 %
Medicare Advantage - PPO 618.3 616.8 338.9 279.4 82.4 % 602.6 15.7 2.6 %
Medicare Advantage - PFFS 479.3   480.0   574.8 (95.5 ) -16.6 % 480.9 (1.6 ) -0.3 %
Total MA fully-insured 1,732.4   1,731.1   1,499.8 232.6   15.5 % 1,713.3 19.1   1.1 %
ASO 28.7   28.7   - 28.7   29.0 (0.3 ) -1.0 %
Total Medicare Advantage 1,761.1   1,759.8   1,499.8 261.3   17.4 % 1,742.3 18.8   1.1 %
Medicare stand-alone PDPs 1,793.4   1,872.6   1,992.0 (198.6 ) -10.0 % 1,917.1 (123.7 ) -6.5 %
Total Medicare 3,554.5   3,632.4   3,491.8 62.7   1.8 % 3,659.4 (104.9 ) -2.9 %
Military services insured 1,759.8 1,759.0 1,753.4 6.4 0.4 % 1,756.8 3.0 0.2 %
Military services ASO 1,270.9   1,272.3   1,254.9 16.0   1.3 % 1,274.6 (3.7 ) -0.3 %
Total military services 3,030.7 3,031.3 3,008.3 22.4 0.7 % 3,031.4 (0.7 ) 0.0 %
Medicaid 404.0   402.0   393.6 10.4   2.6 % 398.6 5.4   1.4 %
Total Government Segment 6,989.2   7,065.7   6,893.7 95.5   1.4 % 7,089.4 (100.2 ) -1.4 %
Commercial Segment:
Fully-insured medical:
Group 1,295.4 1,309.7 1,499.6 (204.2 ) -13.6 % 1,338.8 (43.4 ) -3.2 %
Individual 371.5 370.0 347.2 24.3 7.0 % 370.5 1.0 0.3 %
Medicare supplement 35.6   35.1   24.9 10.7   43.0 % 33.7 1.9   5.6 %
Total fully-insured medical 1,702.5 1,714.8 1,871.7 (169.2 ) -9.0 % 1,743.0 (40.5 ) -2.3 %
ASO 1,582.6   1,584.9   1,576.2 6.4   0.4 % 1,588.5 (5.9 ) -0.4 %
Total Commercial Segment 3,285.1   3,299.7   3,447.9 (162.8 ) -4.7 % 3,331.5 (46.4 ) -1.4 %
 
Total medical membership 10,274.3   10,365.4   10,341.6 (67.3 ) -0.7 % 10,420.9 (146.6 ) -1.4 %
 
Specialty Membership
Dental - fully-insured 2,677.5 2,673.0 2,466.3 211.2 8.6 % 2,656.3 21.2 0.8 %
Dental - ASO 1,211.6   1,210.9   980.3 231.3   23.6 % 1,213.9 (2.3 ) -0.2 %
Total dental 3,889.1 3,883.9 3,446.6 442.5 12.8 % 3,870.2 18.9 0.5 %
Vision 2,442.1 2,447.5 2,282.5 159.6 7.0 % 2,439.5 2.6 0.1 %
Other supplemental benefits (B) 965.8   961.9   856.7 109.1   12.7 % 928.2 37.6   4.1 %
Total specialty membership 7,297.0   7,293.3   6,585.8 711.2   10.8 % 7,237.9 59.1   0.8 %
 

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 June 30, Three Months Ended June 30,
Dollar Percentage
2010   2009 Change   Change 2010   2009
Premium revenues
Government Segment:
Medicare Advantage $4,885,209 $4,145,129 $740,080 17.9 % $941 $925
Medicare stand-alone PDPs 700,222   638,813 61,409   9.6 % $125 $106
Total Medicare 5,585,431 4,783,942 801,489 16.8 %
Military services insured (D) 885,368 924,308 (38,940 ) -4.2 % $168 $176
Medicaid insured 168,055   160,529 7,526   4.7 % $139 $137
Total Government Segment premiums 6,638,854   5,868,779 770,075   13.1 %
Commercial Segment:
Fully-insured medical 1,484,020 1,544,093 (60,073 ) -3.9 % $288 $274
Specialty 253,877   229,655 24,222   10.5 % $12 $12
Total Commercial Segment premiums 1,737,897   1,773,748 (35,851 ) -2.0 %
Total premium revenues $8,376,751   $7,642,527 $734,224   9.6 %
 
Administrative services fees
Military services ASO (D) $22,543 $22,254 $289 1.3 % $6 $6
Other government ASO (E) 4,708 901 3,807 422.5 % n/a n/a
Commercial Segment 99,493   95,539 3,954   4.1 % $12 $12
Total administrative services fees $126,744   $118,694 $8,050   6.8 %
 

S-10

 

Humana Inc.
Premiums and Administrative Services Fees Detail
Dollars in thousands, except per member per month
             
Per Member per Month (C)
Six Months Ended June 30, Six Months Ended June 30,
Dollar Percentage
2010   2009 Change   Change 2010   2009
Premium revenues
Government Segment:
Medicare Advantage $9,702,189 $8,205,588 $1,496,601 18.2 % $941 $927
Medicare stand-alone PDPs 1,279,247   1,234,496 44,751   3.6 % $115 $100
Total Medicare 10,981,436 9,440,084 1,541,352 16.3 %
Military services insured (D) 1,730,362 1,795,479 (65,117 ) -3.6 % $164 $171
Medicaid insured 332,758   317,189 15,569   4.9 % $139 $136
Total Government Segment premiums 13,044,556   11,552,752 1,491,804   12.9 %
Commercial Segment:
Fully-insured medical 2,990,838 3,102,762 (111,924 ) -3.6 % $287 $274
Specialty 503,220   458,307 44,913   9.8 % $12 $12
Total Commercial Segment premiums 3,494,058   3,561,069 (67,011 ) -1.9 %
Total premium revenues $16,538,614   $15,113,821 $1,424,793   9.4 %
 
Administrative services fees
Military services ASO (D) $44,841 $40,450 $4,391 10.9 % $6 $6
Other government ASO (E) 9,938 3,038 6,900 227.1 % n/a n/a
Commercial Segment 197,847   191,088 6,759   3.5 % $12 $12
Total administrative services fees $252,626   $234,576 $18,050   7.7 %
 

S-11

 

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

June 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) 1.0% - - - 0.2% 1.3% - 0.7% 0.4%
Capitated HMO physician group based (F) 2.5% - - 28.5% 2.3% 1.6% - 0.8% 1.8%
Risk-sharing (G) 18.2% - - 67.3% 8.5% 1.4% - 0.7% 6.0%
All other membership 78.3%   100.0%   100.0%   4.2%   89.0%   95.7%   100.0%   97.8%   91.8%
Total medical membership 100.0%   100.0%   100.0%   100.0%   100.0%   100.0%   100.0%   100.0%   100.0%
 

June 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% - - 30.3% 2.4% 1.4% - 0.8% 1.9%
Risk-sharing (G) 18.9% - - 68.5% 8.0% 1.1% - 0.7% 5.6%
All other membership 76.0%   100.0%   100.0%   1.2%   89.2%   96.3%   100.0%   97.8%   92.0%
Total medical membership 100.0%   100.0%   100.0%   100.0%   100.0%   100.0%   100.0%   100.0%   100.0%
 

S-12

 

Humana Inc.   Fair value
Investments    
Dollars in thousands
    6/30/2010   3/31/2010   12/31/2009
Investment Portfolio:
Cash & cash equivalents $1,998,982 $1,813,993 $1,613,588
Investment securities 6,882,063 6,764,833 6,190,062
Long-term investment securities 1,405,734   1,333,659   1,307,088
Total investment portfolio $10,286,779   $9,912,485   $9,110,738
 
Duration (H) 3.36   3.60   3.78
Average Credit Rating AA   AA   AA+
         
Securities Lending Invested Collateral Portfolio:
Cash & cash equivalents $12,527 $28,823 $53,569
Corporate floating rate - - 32,375
Asset-backed securities 32,707   33,190   33,642
$45,234   $62,013   $119,586
 
Average Credit Rating AAA   AAA   AAA-
 
Investment Portfolio Detail:
Cash and cash equivalents $1,998,982   $1,813,993   $1,613,588
U.S. Government and agency obligations
U.S. Treasury and agency obligations 905,531 968,631 1,009,352
U.S. Government residential mortgage-backed 1,916,433 1,847,196 1,662,246
U.S. Government commercial mortgage-backed 30,037   27,152   26,417
Total U.S. Government and agency obligations 2,852,001   2,842,979   2,698,015
Tax-exempt municipal securities
Pre-refunded 341,435 346,485 346,937
Insured 583,805 581,215 587,203
Other 1,187,734 1,150,634 1,221,087
Auction rate securities 51,473   63,902   68,814
Total tax-exempt municipal securities 2,164,447   2,142,236   2,224,041
Residential mortgage-backed
Prime residential mortgages 70,897 72,338 89,956
Alt-A residential mortgages 2,419 2,551 3,856
Sub-prime residential mortgages 1,420   1,502   1,600
Total residential mortgage-backed 74,736   76,391   95,412
Commercial mortgage-backed 287,310   289,615   279,626
Asset-backed securities 227,900   201,358   107,188
Corporate securities
Financial services 828,813 811,713 775,990
Other 1,847,590   1,732,200   1,303,578
Total corporate securities 2,676,403 2,543,913 2,079,568
Redeemable preferred stocks 5,000   2,000   13,300
Total investment portfolio $10,286,779   $9,912,485   $9,110,738
 

S-13

 

Humana Inc.
Detail of Benefits Payable Balance and Year-to-Date Changes
Dollars in thousands
       
June 30, March 31, December 31,
2010   2010   2009
Detail of benefits payable
IBNR and other benefits payable (I) $2,869,801 $2,755,876 $2,377,324
Unprocessed claim inventories (J) 433,800 426,200 323,000
Processed claim inventories (K) 109,348 126,581 48,358
Payable to pharmacy benefit administrator (L) 115,043     136,688     194,697  
Benefits payable, excluding military services 3,527,992 3,445,345 2,943,379
 
Military services benefits payable (M) 301,731     261,688     279,195  
Total Benefits Payable $3,829,723     $3,707,033     $3,222,574  
 
 
Six Months Ended Six Months Ended Year Ended
June 30, 2010   June 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 12,438,531 11,239,097 21,934,973
Prior years (O) (345,310 )   (219,517 )   (252,756 )
Total incurred 12,093,221     11,019,580     21,682,217  
 
Paid related to:
Current year (9,432,518 ) (9,306,788 ) (19,572,740 )
Prior years (2,076,090 )   (1,543,763 )   (2,064,880 )
Total paid (11,508,608 )   (10,850,551 )   (21,637,620 )
 
Balances at end of period $3,527,992     $3,067,811     $2,943,379  
 
 
Six Months Ended Six Months Ended Year Ended
June 30, 2010   June 30, 2009   December 31, 2009
Summary of Consolidated Benefit Expense:
Total benefit expense incurred, per above $12,093,221 $11,019,580 $21,682,217
Military services benefit expense 1,536,428 1,585,959 3,019,655
Future policy benefit expense (P) 37,471     31,316     73,130  
Consolidated Benefit Expense $13,667,120     $12,636,855     $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 - 13.7 n/a n/a
4th Quarter Average -   13.6   n/a n/a
Full Year Average 13.8   14.0   (0.2) -1.4%
 
 
 
Unprocessed Claims Inventories
 
Date  

Estimated Valuation

(000's)

 

Claim Item

Counts

 

Number of Days

on Hand

6/30/2008 $228,700 742,800 4.6
9/30/2008 $293,600 946,500 6.0
12/31/2008 $247,200 745,500 4.3
3/31/2009 $258,800 740,600 4.2
6/30/2009 $258,000 709,900 4.0
9/30/2009 $317,100 856,500 4.9
12/31/2009 $323,000 775,500 4.3
3/31/2010   $426,200   1,091,700   5.6
6/30/2010   $433,800   1,009,200   4.9

 

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

6/30/2008 57.2 (2.8 ) -4.7 % 63.3 (5.2 ) -7.6 %
9/30/2008 58.1 (3.7 ) -6.0 % 65.1 (5.1 ) -7.3 %
12/31/2008 59.4 (0.8 ) -1.3 % 66.5 (1.8 ) -2.6 %
3/31/2009 54.6 (2.3 ) -4.0 % 60.9 (2.4 ) -3.8 %
6/30/2009 56.1 (1.1 ) -1.9 % 61.5 (1.8 ) -2.8 %
9/30/2009 56.2 (1.9 ) -3.3 % 62.7 (2.4 ) -3.7 %
12/31/2009 55.4 (4.0 ) -6.7 % 62.1 (4.4 ) -6.6 %
3/31/2010   57.0   2.4     4.4 %   64.3     3.4     5.6 %
6/30/2010   57.1   1.0     1.8 %   64.5     3.0     4.9 %
 
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 1.0 (2.7 )
Change in pharmacy payment cutoff (1.3 ) (1.1 )
Impact of Cariten acquisition in 4Q08 - (0.9 )
All other 0.2     0.1  
DCP - end of period 57.1     55.4  
 

S-16

 

Humana Inc.
GAAP to Non-GAAP Reconciliation (U)
In thousands, except per common share results
               
 
                             
2Q10 2Q10 YTD 2010E
 
Consolidated EPS Pretax

Income

Benefit

Ratio

SG&A

Ratio

EPS Pretax

Income

Benefit

Ratio

SG&A

Ratio

EPS
 
GAAP $ 2.00 $ 535,854 81.9 % 13.6 % $ 3.52 $ 952,780 82.6 % 13.5 % $5.65 to $5.75
 
Prior-year reserve development (V) (0.14 ) (37,455 ) 0.4 % - (0.51 ) (137,506 ) 0.9 % - (0.51 )
 
1Q 2010 reserve development (V) (0.30 ) (79,465 ) 1.0 % - - - - - -
 
DAC write-down (W)   0.55     147,461   -   -1.8 %   0.55     147,461   -   -0.9 % 0.55  
 
Non-GAAP (U) $ 2.11   $ 566,395   83.3 % 11.8 % $ 3.56   $ 962,735   83.5 % 12.6 % $5.69 to $5.79
 
                   
2Q10 2Q10 YTD
 
Government Pretax

Income

Benefit

Ratio

SG&A

Ratio

Pretax

Income

Benefit

Ratio

SG&A

Ratio

 
GAAP $ 528,369 84.1 % 8.2 % $ 807,542 85.0 % 9.2 %
 
Prior-year reserve development (V) (24,755 ) 0.4 % - (110,672 ) 0.9 % -
 
1Q 2010 reserve development (V)   (52,409 )

0.8

%

-     -   -   -  
 
Non-GAAP (U) $ 451,205   85.3 % 8.2 % $ 696,870   85.9 % 9.2 %
 
                   
2Q10 2Q10 YTD
 
Commercial Pretax

Income

Benefit

Ratio

SG&A

Ratio

Pretax

Income

Benefit

Ratio

SG&A

Ratio

 
GAAP $ 7,485 73.4 % 32.2 % $ 145,238 73.7 % 28.5 %
 
Prior-year reserve development (V) (12,700 ) 0.7 % - (26,834 ) 0.8 % -
 
1Q 2010 reserve development (V) (27,056 ) 1.5 % - - - -
 
DAC write-down (W)   147,461   -   -7.8 %   147,461   -   -3.9 %
 
Non-GAAP (U) $ 115,190   75.6 % 24.4 % $ 265,865   74.5 % 24.6 %
 

S-17

 

Humana Inc.

Footnotes to Statistical Schedules and Supplementary Information

2Q10 Earnings Release

 

(A)

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

(B)

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

(C)

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

(D)

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

(E)

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

(F)

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

(G)

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

(H)

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

(I)

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

(J)

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

(K)

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

(L)

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

(M)

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

(N)

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

(O)

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

(P)

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

(Q)

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

(R)

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

(S)

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

(T)

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

(U)

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.

(V)

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 we recognize a release of the redundancy, we disclose the amount that is not in the ordinary course of business. We experienced prior year favorable reserve releases not in the ordinary course of business in both our Government and Commercial segments during 2Q10 and 1H10 primarily as a result of improvements in the claims processing environment and to a lesser extent, better than originally estimated utilization. In addition, during 2Q10, we experienced first quarter 2010 favorable reserve releases not in the ordinary course of business in both our Government and Commercial segments that did not affect year-to-date results primarily as a result of better than originally estimated utilization. We believe we have consistently applied our methodology in determining our best estimate of benefits payable.

(W)

As a result of significant reforms to the U.S. health insurance industry, a substantial portion of deferred acquisition costs associated with our individual major medical block of business was not recoverable from future income and we recorded a charge to selling, general, and administrative expense of $147.5 million during 2Q10.

 

S-18

Contacts

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