Humana fourth quarter diluted EPS decreases to $0.63

Humana Inc. (NYSE: HUM) today reported diluted earnings per common share (EPS) for the quarter ended December 31, 2010 (4Q10) of $0.63, compared to $1.48 per share for the quarter ended December 31, 2009 (4Q09). The year-over-year decline in EPS resulted primarily from $1.02 per share of incremental 4Q10 expenses, including reserves strengthening for the company's closed block of long-term care business, incremental spending associated with the change in Medicare Advantage enrollment periods, the launch of the Humana Walmart-Preferred Rx Plan (the Humana-Walmart Plan), a contribution to The Humana Foundation, and transaction costs associated with the company's acquisition of Concentra Inc. (Concentra). These incremental 4Q10 expenses were partially offset primarily by improved year-over-year performance in the company's operations.

“Our fourth-quarter and full-year results showed operating strength in key areas of strategic focus”

For the year ended December 31, 2010 (FY10) the company reported $6.47 in EPS compared to $6.15 for the year ended December 31, 2009 (FY09). The FY10 results reflected higher average Medicare Advantage membership, lower-than-normal commercial medical costs trends, improved performance in the company's operations and the beneficial effect of $0.86 per share in higher-than-expected favorable medical claims development related to prior years, partially offset by the $1.02 per share of incremental 4Q10 expenses described above and $0.55 per share in expenses from the write-down of certain deferred acquisition costs in the second quarter of 2010.

"Our fourth-quarter and full-year results showed operating strength in key areas of strategic focus," said Michael B. McCallister, chairman of the board and chief executive officer of Humana. "Looking forward, better-than-expected sales at the end of 2010 increased our Medicare Advantage and PDP membership growth estimates for 2011 and, together with continued improvements in our operations, enable us to raise 2011 EPS guidance this morning."

The company now anticipates EPS for the year ending December 31, 2011 (FY11) in the range of $5.70 to $5.90 versus its previous estimate of $5.45 to $5.65. This increase in FY11 EPS guidance primarily reflects better-than-expected sales for the company's Medicare Advantage and stand-alone Prescription Drug Plan (PDP) offerings during the recently completed 2011 open enrollment period as well as an increase in expected Commercial Segment earnings.

Consolidated Highlights

Revenues - 4Q10 consolidated revenues rose 9 percent to $8.35 billion from $7.63 billion in 4Q09, with total premium and administrative services fees up 9 percent compared to the prior year's quarter. The year-over-year increase in premiums and administrative services fees primarily reflected a 17 percent increase in average membership for the company's Medicare Advantage plans, partially offset by lower average stand-alone PDP and commercial fully-insured group medical membership.

Consolidated revenues for FY10 rose 9 percent to $33.87 billion from $30.96 billion for FY09 with total premiums and administrative services fees up 9 percent compared to the prior year's period, also driven primarily by the same factors as the fourth quarter year-over-year increase.

Benefit expenses - The 4Q10 consolidated benefit ratio (benefit expenses as a percent of premium revenues) of 84.4 percent increased from 81.8 percent for the prior year's quarter. The Commercial Segment benefit ratio for 4Q10 increased by 370 basis points while that for the Government Segment increased 250 basis points year over year. The primary drivers of these fourth quarter year-over-year changes are detailed in the segment discussions below.

The consolidated benefit ratio for FY10 of 82.8 percent was unchanged from the FY09 consolidated benefit ratio. A 70 basis point beneficial effect in FY10 of higher-than-expected favorable prior-year medical claims development was generally offset by reserves strengthening for the company's closed block of long-term care business.

The FY10 consolidated benefit ratio included a 200 basis point decrease in the benefit ratio for the Commercial Segment versus FY09 partially offset by a 40 basis point increase for the Government Segment versus FY09. The lower year-over-year benefit ratio for the Commercial Segment was primarily driven by unusually low commercial medical cost trends more than offsetting reserves strengthening for the company's closed block of long-term care business. The increase in the Government Segment ratio primarily reflects growth in the company's Medicare Advantage group business (which generally carries a higher benefit ratio than the company's individual Medicare Advantage business).

Selling, general, & administrative (SG&A) expenses - The 4Q10 consolidated SG&A expense ratio (SG&A expenses as a percent of premiums, administrative services fees and other revenue) of 15.7 percent for 4Q10 compares to 14.7 percent in 4Q09 as savings from scale efficiencies associated with higher average Medicare Advantage membership and the company's continued focus on administrative cost reductions, were more than offset primarily by the incremental 4Q10 Medicare spending, the charitable contribution and the acquisition transaction costs described above.

The SG&A expense ratio for FY10 of 13.9 percent was 10 basis points higher than that for FY09 of 13.8 percent as scale efficiencies associated with higher average Medicare Advantage membership and the company's continued focus on administrative cost reductions were generally offset by the impact of the incremental 4Q10 administrative expenses described above together with the write-down of certain deferred acquisition costs in the second quarter of 2010.

Government Segment Results

Pretax results:

• Government segment pretax income of $286.3 million in 4Q10 compares to $452.3 million in 4Q09. This decrease was primarily due to incremental 4Q10 expenses of $40.0 million associated with the change in the Medicare enrollment period, $37.0 million for the launch of the Humana-Walmart plan, and $26.2 million of the company's contribution to The Humana Foundation, all partially offset by higher average Medicare Advantage membership and the related economies of scale.
• For FY10, pretax income for the Government Segment of $1.65 billion compares favorably to FY09 pretax income for the segment of $1.50 billion. The net increase primarily reflects higher operating earnings in the company's Medicare Advantage business.

Enrollment:

• Medicare Advantage membership was 1,762,000 at December 31, 2010, an increase of 253,500 members, or 17 percent from 1,508,500 at December 31, 2009, and relatively unchanged from 1,764,800 at September 30, 2010.
• January 2011 Medicare Advantage membership approximated 1,892,000, up approximately 130,000 from December 31, 2010 reflecting better-than-expected sales during the recently completed 2011 enrollment period.
• Membership in the company's stand-alone PDPs totaled 1,758,800 at December 31, 2010 compared to 1,927,900 at December 31, 2009 and 1,785,600 at September 30, 2010. Both the year-over-year and year-to-date membership declines resulted primarily from attrition due to the company's competitive positioning as it realigned stand-alone PDP premium and benefit designs to correspond with its pharmacy claims experience.
• January 2011 stand-alone PDP membership grew to approximately 2,390,800, an increase of over 630,000 members from December 31, 2010. This increase resulted primarily from higher-than-expected gross sales, particularly for the Humana-Walmart plan. This plan includes a low, uniform member premium and a single benefit design nationwide.
• Military services membership at December 31, 2010 of 3,027,800 was slightly down from 3,034,400 at December 31, 2009 and 3,031,100 at September 30, 2010.

Premiums and administrative services fees:

• Medicare Advantage premiums of $4.79 billion in 4Q10 increased 17 percent compared to $4.07 billion in 4Q09, primarily the result of a 15 percent increase in average fully-insured Medicare Advantage membership.
• Medicare stand-alone PDP premiums of $461.2 million in 4Q10 decreased 10 percent compared to $514.8 million in 4Q09, reflecting the combined impacts of a 2 percent decrease in premiums per member per month and a 9 percent decline in average membership year over year.
• Military services premiums and administrative services fees during 4Q10 increased $18.0 million, or 2 percent, to $876.6 million compared to $858.7 million in 4Q09.

Benefit Expenses:

• The Government Segment benefit ratio increased 250 basis points to 83.4 percent in 4Q10 compared to 80.9 percent in the prior year's quarter, primarily due to an increase in Medicare Advantage group business during 2010 (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 of 12.4 percent increased from 11.2 percent in 4Q09 reflecting the incremental 4Q10 administrative expenses described above, partially offset by continued scale efficiencies associated with higher average Medicare Advantage membership and a continued focus on administrative cost reductions.

Commercial Segment Results

Pretax results:

• The Commercial Segment had a pretax loss of $111.8 million in 4Q10 compared to a pretax loss of $53.6 million in 4Q09 primarily due to incremental 4Q10 expenses including $139 million of reserves strengthening for the company's closed block of long-term care business, $8.8 million of the company's contribution to The Humana Foundation, and $15.0 million in transaction costs associated with the company's acquisition of Concentra. These incremental expenses in 2010 were significantly offset by lower levels of health care services utilization as well as the company's continued focus on pricing discipline and administrative cost reductions.
• For FY10, pretax earnings for the Commercial Segment of $101.6 million were $2.6 million lower than FY09 pretax earnings of $104.2 million, primarily reflecting the same factors as those affecting the fourth quarter year-over-year comparisons together with $147.5 million in expenses during the second quarter of 2010 associated with the write-off of certain deferred acquisition costs.

Enrollment:

• Commercial Segment medical membership declined to 3,117,000 at December 31, 2010, a decrease of 293,800, or 9 percent, from 3,410,800 at December 31, 2009 and relatively unchanged from 3,130,900 at September 30, 2010. The year-over-year declines during both 4Q10 and FY10 primarily reflected continued pricing discipline across the company's fully-insured medical lines of business.
• Membership in Commercial Segment specialty products of 7,076,100 at December 31, 2010 decreased less than 1 percent from 7,109,900 at December 31, 2009 and was slightly higher than 7,038,800 at September 30, 2010.

Premiums and administrative services fees:

• Premiums and administrative services fees for the Commercial Segment decreased 4 percent to $1.81 billion in 4Q10 compared to $1.88 billion in the prior year's quarter, reflecting a 9 percent decline in average medical membership year over year, partially offset by continued pricing discipline.
• Commercial Segment medical premiums for fully-insured group accounts increased approximately 7 percent on a per-member basis during 4Q10 compared to 4Q09.

Benefit Expenses:

• The Commercial Segment benefit ratio for 4Q10 of 88.1 percent was 370 basis points higher than the 4Q09 benefit ratio of 84.4 percent, primarily due to reserves strengthening for the company's closed block of long-term care business, partially offset by lower levels of health care services utilization year over year and continued pricing discipline.

SG&A Expenses:

• The Commercial Segment SG&A expense ratio of 26.7 percent for 4Q10 increased from 24.9 percent in 4Q09, primarily due to the contribution to The Humana Foundation and transaction costs associated with the company's acquisition of Concentra described above. Additionally, 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 December 31, 2010, the company had cash, cash equivalents, and investment securities of $10.05 billion, down 13 percent from $11.54 billion at September 30, 2010 and up 10 percent from $9.11 billion at December 31, 2009.
• Parent company cash and investments of $553.6 million at December 31, 2010 declined $718.3 million from $1.27 billion at September 30, 2010, primarily reflecting the company's acquisition of Concentra during 4Q10. Cash and investments at the parent decreased $112.0 million year over year compared to $665.6 million held at the parent at December 31, 2009 as dividends from subsidiaries were more than offset by capital used for the acquisition of Concentra and share repurchases during FY10.
• Debt-to-total capitalization at December 31, 2010 was 19.4 percent, unchanged from September 30, 2010, and down 310 basis points compared to 22.5 percent at December 31, 2009 primarily driven by higher earnings year over year.

Cash Flows from Operations

Cash flows used in operations for 4Q10 were $47.4 million compared to cash flows provided by operations of $274.1 million in 4Q09 due to lower net income year over year and uses of cash associated with changes in working capital accounts during 4Q10 compared to 4Q09. FY10 cash flows from operations improved to $2.24 billion versus $1.42 billion for FY09 primarily due to higher net income year over year, partially offset by changes in working capital accounts.

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 FY10, the company repurchased 1,993,000 of its outstanding shares at an average price per share of $50.17. As of February 4, 2011, the company had approximately $150 million remaining on the December 2009 authorization, which is effective until December 31, 2011.