Humana reports EPS of $1.86 for quarter ended March 31, 2011

Humana Inc. (NYSE: HUM) today reported diluted earnings per common share (EPS) for the quarter ended March 31, 2011 (1Q11) of $1.86, compared to $1.52 per share for the quarter ended March 31, 2010 (1Q10). Higher year-over-year earnings in the company's Employer Group and Health and Well-Being Services business segments were partially offset by lower earnings in the company's Retail business segment. EPS for 1Q11 and 1Q10 were positively impacted by $0.31 per share and $0.37 per share, respectively, as a result of favorable development of prior-period medical claims reserves.

"Our favorable first-quarter results reflect operational discipline in our core businesses and a growing focus on a broader array of businesses designed to help people achieve lifelong well-being," said Michael B. McCallister, Humana's chairman of the board and chief executive officer. "Humana's financial strength allows us to begin a more aggressive capital deployment program while still fully supporting the continued execution of our corporate strategy overall."

On April 26, 2011, the company raised EPS guidance for the year ending December 31, 2011 (FY11) to a range of $6.70 to $6.90 versus its previous estimate of $5.95 to $6.15. This increase in FY11 EPS guidance primarily reflects favorable prior-period claims development in the first quarter, lower projected benefit expense ratios in the company's Retail and Employer Group Segments and higher projected earnings for the company's Health and Well-Being Services Segment.

Consolidated Highlights

Revenues - 1Q11 consolidated revenues were $9.19 billion, an increase of 10 percent from $8.38 billion in 1Q10, with total premiums and services revenue up 10 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 our Retail and Health and Well-Being Services segments, partially offset by a decline in Employer Group revenues. Increases in Retail revenues were driven primarily by an 11 percent increase in average membership in the company's Medicare Advantage plans. Increases in Health and Well-Being Services revenues were driven primarily by the acquisition of Concentra in December 2010. The decrease in Employer Group revenues resulted from lower average commercial group medical membership.

Benefit expenses - The 1Q11 consolidated benefit ratio (benefit expenses as a percent of premiums) of 83.8 percent increased from 83.5 percent for the prior year's quarter due primarily to a higher year-over-year benefit ratio for the Retail Segment, partially offset by a lower year-over-year benefit ratio for the Employer Group Segment.

Operating costs - The consolidated operating cost ratio (operating costs as a percent of total revenues less investment income) of 13.8 percent for 1Q11 compares to 12.8 percent in 1Q10. This higher year-over-year ratio primarily reflects the greater percentage of the company's revenues derived from its Health and Well-Being Services Segment, which carries a higher operating cost ratio than the company's other business segments.

Retail Segment Highlights

Pretax results:

• Retail Segment pretax income of $217.0 million in 1Q11 compares to $264.8 million in 1Q10. This decrease was primarily due to lower favorable prior-period medical claims reserve development in 1Q11 than in the prior year's quarter and the impact of health insurance reform on our HumanaOne® business. The segment's pretax income for 1Q11 included the beneficial impact of $40 million in favorable development of prior-period medical claims reserves versus $92 million in 1Q10.

Enrollment:

• Individual Medicare Advantage membership was 1,594,800 at March 31, 2011, an increase of 134,100 members, or 9 percent from 1,460,700 at December 31, 2010 due to a successful enrollment season associated with the 2011 plan year. Membership increased by 148,700, or 10 percent, compared with the prior year's quarter.
• Membership in the company's individual stand-alone Prescription Drug Plans (PDPs) totaled 2,353,100 at March 31, 2011 compared to 1,670,300 at December 31, 2010 and 1,733,700 at March 31, 2010. This increase resulted primarily from higher gross sales year over year, particularly for the company's low-price-point Humana-Walmart plan offering.
• HumanaOne medical membership increased to 382,900 at March 31, 2011, an increase of 10,600 or 3 percent, from 372,300 at December 31, 2010 and an increase of 12,400, or 3 percent, from 370,500 at March 31, 2010.
• Membership in individual specialty products of 590,500 at March 31, 2011 increased 16 percent from 510,000 at December 31, 2010 driven primarily by increased sales in dental and vision offerings. Membership increased 191,800, or 48 percent, from 398,700 at March 31, 2010.

Premiums and services revenue:

• 1Q11 premiums and services revenue for the Retail Segment were $5.31 billion, an increase of 12 percent from $4.76 billion in 1Q10. The increase was primarily the result of higher average Medicare Advantage membership year over year.

Benefit expenses:

• The 1Q11 benefit ratio for the Retail Segment was 85.8 percent, an increase of 190 basis points from 83.9 percent in 1Q10. The increase was primarily the result of lower favorable development of prior-period medical claims reserves in 1Q11 than in the prior year's quarter together with a higher benefit ratio for the HumanaOne product as a result of health insurance reform.

Operating costs:

• The Retail Segment's operating cost ratio of 10.0 percent in 1Q11 decreased 40 basis points from 10.4 percent in 1Q10 reflecting scale efficiencies associated with higher year-over-year membership in every line of the segment's business.

Employer Group Segment Highlights

Pretax results:

• Employer Group Segment pretax income of $138.8 million in 1Q11 compares to $73.5 million in 1Q10. This increase was primarily due to higher favorable prior-period development of medical claims reserves in 1Q11 versus the prior year's quarter. The segment's pretax income for 1Q11 included the beneficial impact of $41 million in favorable development of prior-period medical claims reserves versus only $8 million in 1Q10.

Enrollment:

• Group Medicare Advantage membership was 280,700 at March 31, 2011, an increase of 7,600 members, or 3 percent, from 273,100 at December 31, 2010. Membership increased 13,500, or 5 percent, from 267,200 at March 31, 2010.
• Group fully-insured commercial medical membership declined to 1,178,500 at March 31, 2011, a decrease of 73,700 or 6 percent, from 1,252,200 at December 31, 2010 and a decrease of 160,300, or 12 percent, from 1,338,800 at March 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.
• Group ASO commercial medical membership declined to 1,319,300 at March 31, 2011, a decrease of 134,300 or 9 percent, from 1,453,600 at December 31, 2010 and a decrease of 269,200, or 17 percent, from 1,588,500 at March 31, 2010. This decline reflected the loss of a large ASO account in July 2010 and a continuation of discipline in pricing services for self-funded accounts amid a highly competitive environment.
• Membership in Employer Group specialty products of 6,636,800 at March 31, 2011 increased 2 percent from 6,517,500 at December 31, 2010 and decreased 152,100, or 2 percent, from 6,788,900 at March 31, 2010, reflecting recent gains associated with the cross-selling of these products to employer groups.

Premiums and services revenue:

• 1Q11 premiums and services revenue for the Employer Group Segment were $2.32 billion, a decrease of 4 percent from $2.41 billion in 1Q10. The decrease was primarily the result of lower average commercial group medical membership year over year.

Benefit expenses:

• 1Q11 benefit ratio for the Employer Group Segment was 78.7 percent, a decrease of 350 basis points from 82.2 percent in 1Q10. The decrease was primarily the result of higher prior-period favorable development of medical claims reserves in 1Q11 than in 1Q10 and lower 1Q11 utilization of benefits combined with a higher percentage of the segment's membership in small group accounts which generally have a lower benefit ratio than larger group accounts.

Operating costs:

• The Employer Group Segment's operating cost ratio of 18.3 percent in 1Q11 increased from 17.8 percent in 1Q10 reflecting a heavier mix of small group membership, which generally carries a higher operating cost ratio than that for larger accounts.

Health and Well-Being Services Segment Highlights

Pretax results:

• Health and Well-Being Services Segment pretax income of $96.4 million in 1Q11 compares to $48.2 million in 1Q10 reflecting growth in the company's pharmacy solutions business as well as the addition of the Concentra business acquired in December 2010.

Services revenue:

• Services revenue of $2.77 billion in 1Q11 for the Health and Well-Being Services Segment increased from $2.20 billion in 1Q10. 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 95.8 percent in 1Q11 declined 180 basis points from 97.6 percent in 1Q10 reflecting scale efficiencies associated with growth in the company's pharmacy solutions business together with the addition of operating costs for the company's newly acquired Concentra operations.

Balance Sheet

• At March 31, 2011, the company had cash, cash equivalents, and investment securities of $10.75 billion, up 7 percent from $10.05 billion at December 31, 2010.
• Parent company cash and investments of $367.8 million at March 31, 2011 decreased $185.8 million from $553.6 million at December 31, 2010, primarily reflecting the timing of subsidiary capital contributions in 1Q11 ahead of dividends from subsidiaries expected in the second quarter of 2011. Parent company cash and investments was also lower from share repurchases during 1Q11.
• Debt-to-total capitalization at March 31, 2011 was 18.7 percent, down 70 basis points compared to 19.4 percent at December 31, 2010 primarily driven by higher capitalization associated with first quarter earnings.

Cash Flows from Operations

Cash flows provided by operations for 1Q11 totaled $795.5 million compared to cash flows provided by operations of $754.7 million in 1Q10 primarily due to higher net income, year over year.

Share Repurchase Program and Cash Dividend

• 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 1Q11, the company repurchased 825,000 of its outstanding shares at an average price per share of $63.73.
• 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. The new share repurchase authorization expires June 30, 2013.
• In April 2011, the company's Board of Directors also initiated a quarterly cash dividend to stockholders, declaring a cash dividend of $0.25 per share for stockholders of record as of June 30, 2011, payable on July 28, 2011.