Humana announces consolidated revenues of $7.63 billion for fourth-quarter 2009

Humana Inc. (NYSE: HUM) today reported diluted earnings per common share (EPS) for the quarter ended December 31, 2009 (4Q09) of $1.48, as compared to $1.03 per share for the quarter ended December 31, 2008 (4Q08), reflecting lower PDP claim expenses in 4Q09 than in 4Q08.

“Looking ahead, we see multiple revenue growth opportunities across our spectrum of products for 2010.”

For the year ended December 31, 2009 (FY09) the company reported $6.15 in EPS compared to $3.83 for the year ended December 31, 2008 (FY08). The FY09 results reflected both substantially lower stand-alone PDP claim expenses than in FY08 and higher investment income due to significant realized losses on investments during FY08.

"We completed a successful 2009 despite a challenging environment," said Michael B. McCallister, president and chief executive officer of Humana. "Looking ahead, we see multiple revenue growth opportunities across our spectrum of products for 2010."

The company now anticipates EPS for the year ending December 31, 2010 (FY10) in the range of $5.15 to $5.35 versus its previous estimate of $5.05 to $5.25. This increase in FY10 EPS guidance primarily reflects the expected retention of the company’s South Region TRICARE contract for an additional quarter during FY10.

TRICARE Update

In December 2009, Humana Military Healthcare Services, Inc. (HMHS), a wholly-owned subsidiary of the company, was notified by the United States Department of Defense TRICARE Management Activity (TMA) that the TMA intends to exercise its options to extend HMHS’s administration of the TRICARE program in TMA’s South Region for Option Period VII and Option Period VIII. The exercise of these option periods would effectively extend the TRICARE contract through March 31, 2011.

Additionally in December 2009, the TMA notified the Government Accountability Office (GAO) of its intent to take corrective action in response to the GAO’s decision to uphold the company’s protest with respect to the July 2009 award of the third generation TRICARE program South Region contract to another contractor. The company is not able to determine whether the protest resolution will change the ultimate outcome of the contract award.

Consolidated Highlights

Revenues – 4Q09 consolidated revenues rose 2 percent to $7.63 billion from $7.49 billion in 4Q08, with total premium and administrative services fees up 2 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 substantially offset by declines in average Commercial medical membership.

Consolidated revenues for FY09 rose 7 percent to $30.96 billion from $28.95 billion for FY08 with total premiums and administrative services fees up 7 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 4Q09 consolidated benefit ratio (benefit expenses as a percent of premium revenues) of 81.8 percent decreased from 83.3 percent for the prior year’s quarter. This 150 basis point decrease was primarily driven by a decrease of 240 basis points in the Government Segment benefit ratio, partially offset by a 130 basis point increase in the Commercial Segment benefit ratio.

The consolidated benefit ratio for FY09 of 82.8 percent was 170 basis points lower than the FY08 consolidated benefit ratio of 84.5 percent, reflecting a 240 basis point decrease in the Government Segment’s benefit ratio year over year, partially offset by an increase in the Commercial Segment’s benefit ratio of 30 basis points in FY09 compared to FY08.

Selling, general, & administrative (SG&A) expenses – The 4Q09 consolidated SG&A expense ratio (SG&A expenses as a percent of premiums, administrative services fees and other revenue) of 14.7 percent for 4Q09 compares to 14.8 percent in 4Q08 as the effect of a 60 basis point improvement in this ratio for the Government Segment was substantially offset by a 190 basis point increase for the Commercial Segment.

The SG&A expense ratio for FY09 of 13.8 percent was 10 basis points higher than that for FY08 of 13.7 percent primarily driven by a 30 basis point improvement in this ratio for the Government Segment being substantially offset by a 170 basis point increase in the Commercial Segment SG&A expense ratio.

Government Segment Results

Pretax results:

• Government segment pretax income of $452.3 million in 4Q09 compares to $267.3 million in 4Q08. This increase was primarily driven by lower PDP claim expenses, a 6 percent increase in average Medicare Advantage membership, the implementation of member premiums for most of the company’s Medicare Advantage products, and higher net investment income.
• For FY09, pretax income for the Government Segment of $1.50 billion compares favorably to FY08 pretax income for the segment of $785.2 million. The net increase reflects improved stand-alone PDP operating results, higher operating earnings in the company’s Medicare Advantage business and higher net investment income.

Enrollment:

• Medicare Advantage membership grew to 1,508,500 at December 31, 2009, an increase of 72,600 members, or 5 percent from 1,435,900 at December 31, 2008, and relatively unchanged from 1,514,800 at September 30, 2009.
• January 2010 Medicare Advantage membership approximated 1,729,000 with 71 percent of fully-insured members in network-based products, up from 63 percent of Medicare Advantage membership in such products at December 31, 2009 reflecting growth in both PPO and HMO products.
• Membership in the company’s stand-alone PDPs totaled 1,927,900 at December 31, 2009 compared to 3,066,600 at December 31, 2008 and 1,960,400 at September 30, 2009. Both the year-over-year and sequential membership declines resulted primarily from attrition associated with low-income senior members. For 2009, the company realigned its stand-alone PDP premium and benefit designs to correspond with its prescription drug claims experience.
• January 2010 stand-alone PDP membership declined to approximately 1,780,000, a decrease of approximately 148,000 members from December 31, 2009. This decline resulted primarily from the company’s competitive positioning as it continued to align stand-alone PDP premium and benefit structures to correspond with its pharmacy claims experience.
• Military services membership at December 31, 2009 of 3,034,400 was up approximately 2 percent from 2,964,700 at December 31, 2008 and slightly up from 3,015,100 at September 30, 2009.

Premiums and administrative services fees:

• Medicare Advantage premiums of $4.07 billion in 4Q09 increased 12 percent compared to $3.62 billion in 4Q08, primarily the combined result of a 6 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 $514.8 million in 4Q09 decreased 37 percent compared to $817.5 million in 4Q08, reflecting a 37 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 4Q09 increased $12.1 million, or 1 percent, to $858.7 million compared to $846.5 million in 4Q08.

Benefit Expenses:

• The Government Segment benefit ratio decreased 240 basis points to 80.9 percent in 4Q09 compared to 83.3 percent in the prior year’s quarter, primarily driven by a 320 basis point decline in the Medicare benefit ratio primarily from a decrease in the stand-alone PDP benefit ratio together with improved benefit ratios across the company’s Medicare Advantage offerings.

SG&A Expenses:

• The Government Segment SG&A expense ratio decreased 60 basis points to 11.2 percent in 4Q09 compared to 11.8 percent in the prior year’s quarter primarily driven by increased operating leverage associated with higher average Medicare Advantage enrollment.

Commercial Segment Results

Pretax results:

• The Commercial Segment had a pretax loss of $53.6 million in 4Q09 compared to a pretax loss of $6.3 million in 4Q08 primarily reflecting a higher benefit ratio and increased SG&A expenses year over year, partially offset by higher net investment income.
• For FY09, pretax earnings for the Commercial Segment of $104.2 million were $103.4 million, or 50 percent lower than FY08 pretax earnings for the segment of $207.6 million driven by higher benefit expenses as a percent of premiums and lower average medical membership, partially offset by higher net investment income.

Enrollment:

• Commercial Segment medical membership declined to 3,410,800 at December 31, 2009, a decrease of 210,000, or 6 percent, from 3,620,800 at December 31, 2008 and relatively unchanged from 3,426,900 at September 30, 2009. The year-over-year decline primarily reflected the impact of the economic recession and increased unemployment across various of the company’s fully-insured group medical lines of business, a competitive environment including the loss of two large ASO accounts totaling approximately 95,400 members on January 1, 2009.
• The company’s individual medical product line has continued to grow steadily, with membership of 367,400, up 13 percent at December 31, 2009 compared to 325,100 at December 31, 2008 and up 2 percent from 358,800 at September 30, 2009.
• January 2010 Commercial Segment medical membership declined approximately 88,000 from that at the end of 2009, with approximately 42 percent of the decline related to self-insured products.
• Membership in Commercial Segment specialty products of 7,200,100 at December 31, 2009 increased 7 percent from 6,713,200 at December 31, 2008 and was slightly higher than 7,163,700 at September 30, 2009.

Premiums and administrative services fees:

• Premiums and administrative services fees for the Commercial Segment decreased 2 percent to $1.88 billion in 4Q09 compared to $1.92 billion in the prior year’s quarter, reflecting a 5 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 4Q09 compared to 4Q08.

Benefit Expenses:

• In 4Q09, as expected, the Commercial Segment benefits ratio of 84.4 percent increased 130 basis points versus the 4Q08 benefit ratio of 83.1 percent, as an increase in per-member premiums was more than offset by higher utilization primarily associated with the general economy (the average age of smaller 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 24.9 percent for 4Q09 compares to 23.0 percent in 4Q08, primarily driven by increases in certain of the segment’s businesses that carry a higher administrative expense load such as mail-order pharmacy, individual medical products, and specialty benefit products.

Balance Sheet

• At December 31, 2009, the company had cash, cash equivalents, and investment securities of $9.11 billion, up 5 percent from $8.67 billion at September 30, 2009 and up 27 percent from $7.19 billion at December 31, 2008.
• Parent company cash and investments of $665.6 million at December 31, 2009 declined $27.8 million from $693.4 million at September 30, 2009, primarily reflecting subsidiary capital contributions during 4Q09. Cash and investments at the parent increased $415.1 million year over year compared to $250.5 million held at the parent at December 31, 2008 as dividends from subsidiaries more than offset debt repayments and subsidiary capital contributions.
• Debt-to-total capitalization at December 31, 2009 was 22.5 percent, down 70 basis points from 23.2 percent at September 30, 2009, and was down 780 basis points compared to 30.3 percent at December 31, 2008.

Cash Flows from Operations

Cash flows provided by operations for 4Q09 of $274.1 million compared to cash flows provided by operations of $296.6 million in 4Q08 as higher net income was more than offset by uses of cash associated with changes in working capital accounts during 4Q09 compared to 4Q08. FY09 cash flows from operations improved to $1.42 billion versus $982.3 million for FY08 primarily due to higher net income year over year and the positive impact of changes in working capital accounts during FY09 versus those during FY08.

The company also evaluates operating cash flows on a non-GAAP basis.

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. The previous share repurchase authorization was set to expire on December 31, 2009. The renewed authorization is effective until December 31, 2011.

SOURCE Humana Inc.