The FINANCIAL — Humana Inc. (NYSE: HUM) on November 1 reported diluted earnings per common share (EPS) for the quarter ended September 30, 2010 (3Q10) of $2.32, ahead of management's guidance of $1.65 to $1.75.
The company earned $1.78 per share for the quarter ended September 30, 2009 (3Q09). Results for 3Q10 reflect improved performance in the company's operations, the beneficial effect of $0.21 per share in higher-than-expected favorable medical claims development related to prior years(a) and $0.10 per share in higher-than-expected favorable medical claims development related to the first half of 2010(a).
"For the nine months ended September 30, 2010 (YTD10) the company reported $5.84 in EPS compared to $4.67 in EPS for the nine months ended September 30, 2009 (YTD09). Results for YTD10 reflect improved performance in the company's operations and the beneficial effect of $0.72 per share in higher-than-expected favorable medical claims development related to prior years(a), partially offset by $0.55 per share in expenses from the write-down of certain deferred acquisition costs in the second quarter 2010," Humana Inc. informs.
"Our third-quarter results showed strong operating performance in both our Government and Commercial segments," said Michael B. McCallister, Humana's chairman of the board and chief executive officer. "With the success of our one-to-one retail approach to membership growth solidly aligned with the continued expansion of Medicare and potential retail opportunities in the individual market, Humana faces the post-reform future with confidence."
TRICARE Update
As previously disclosed by the company, on October 5, 2010, 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 negotiate with HMHS for an extension of HMHS's administration of the TRICARE program South Region contract for an additional option period from April 1, 2011 through March 31, 2012.
Discussions are still at a preliminary stage, but Humana no longer anticipates incurring the previously expected expenses of between $0.19 and $0.28 per diluted common share during FY10 related to the previously anticipated loss of the TRICARE contract on March 31, 2011. Such expenses may, however, be incurred in future periods, depending on the ultimate disposition of future contract awards, as discussed in the company's Securities and Exchange Commission filings.
Consolidated Highlights
Revenues – 3Q10 consolidated revenues rose 9 percent to $8.42 billion from $7.72 billion in 3Q09, with total premium and administrative services fees also up 9 percent compared to the prior year's quarter. The year-over-year increase in premiums and administrative services fees primarily reflects a 17 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.
Consolidated revenues for YTD10 rose 9 percent to $25.52 billion from $23.33 billion for YTD09 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 third quarter year-over-year increase.
Benefit expenses – The 3Q10 consolidated benefit ratio (benefit expenses as a percent of premium revenues) of 81.6 percent decreased 50 basis points from 82.1 percent for the prior year's quarter and included a 100 basis point beneficial effect of higher-than-expected favorable prior-period medical claims development in 3Q10 (a). The Commercial Segment benefit ratio for 3Q10 improved 350 basis points while that for the Government Segment increased 30 basis points year over year.
The consolidated benefit ratio for YTD10 of 82.3 percent was 80 basis points lower than the YTD09 consolidated benefit ratio of 83.1 percent due primarily to an 80 basis point beneficial effect of higher-than-expected favorable prior-year medical claims development YTD10 (a). The lower consolidated benefit ratio versus the prior year's period included a 390 basis point improvement in the benefit ratio for the Commercial Segment and a 20 basis point improvement for the Government Segment. These changes were primarily driven by the same factors impacting the third quarter year-over-year comparisons.
Selling, general, & administrative (SG&A) expenses – The 3Q10 consolidated SG&A expense ratio (SG&A expenses as a percent of premiums, administrative services fees and other revenue) of 12.9 percent decreased 80 basis points from the 3Q09 ratio of 13.7 percent reflecting both scale efficiencies associated with higher average Medicare Advantage membership and the company's continued focus on administrative cost reductions.
The YTD10 consolidated SG&A expense ratio of 13.3 percent decreased 20 basis points from the YTD09 ratio of 13.5 percent primarily reflecting the same factors impacting the third quarter year-over-year comparison, partially offset by the impact of the write-down of certain deferred acquisition costs in the second quarter of 2010.
Government Segment Results
Pretax results:
Government Segment pretax income increased to $554.1 million in 3Q10 from $474.5 million in 3Q09 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 associated with higher average membership and a continued focus on administrative cost reductions.
For YTD10, pretax earnings for the Government Segment of $1.36 billion increased by $316.4 million versus YTD09 pretax earnings for the segment of $1.05 billion, primarily reflecting the same factors as those affecting the quarterly year-over-year comparisons.
Enrollment:
Medicare Advantage membership grew to 1,764,800 at September 30, 2010, an increase of 250,000 members, or 17 percent, from 1,514,800 at September 30, 2009, and up 256,300, or 17 percent, versus 1,508,500 at December 31, 2009. As of September 30, 2010, approximately 74 percent of the company's fully-insured Medicare Advantage members were in network-based products versus 62 percent at September 30, 2009 and 63 percent at December 31, 2009.
Membership in the company's stand-alone PDPs totaled 1,785,600 at September 30, 2010 compared to 1,960,400 at September 30, 2009 and 1,927,900 at December 31, 2009. 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.
Military services membership at September 30, 2010 of 3,031,100 was essentially unchanged from 3,015,100 at September 30, 2009 and 3,034,400 at December 31, 2009.
Premiums and administrative services fees:
Medicare Advantage premiums of $4.80 billion in 3Q10 increased 16 percent compared to $4.14 billion in 3Q09, primarily the result of a 17 percent increase in average Medicare Advantage membership.
Medicare stand-alone PDP premiums of $579.6 million in 3Q10 were up slightly compared to $578.1 million in 3Q09, reflecting the generally offsetting impacts of a 10 percent increase 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 3Q10 increased $77.0 million, or 9 percent, to $895.8 million compared to $818.8 million in 3Q09.
Benefit Expenses:
The Government Segment benefit ratio of 82.2 percent increased 30 basis points versus the 3Q09 ratio of 81.9 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). The segment's benefit ratio for 3Q10 also included the beneficial effect of 100 basis points from higher-than-expected favorable prior-period medical claims development(a), 70 basis points related to the prior year and 30 basis points related to the first half of 2010.
SG&A Expenses:
The Government Segment's SG&A expense ratio of 9.5 percent decreased from 10.2 percent in 3Q09 reflecting continued scale efficiencies associated with higher average Medicare Advantage membership and a continued focus on administrative cost reductions.
Commercial Segment Results
Pretax results:
Commercial Segment pretax income increased to $68.1 million in 3Q10 compared to a pretax loss of $5.2 million in 3Q09 due to lower levels of health care services utilization as well as the company's continued focus on pricing discipline and administrative cost reductions.
For YTD10, pretax income for the Commercial Segment of $213.4 million compared to earnings of $157.8 million for YTD09 primarily reflecting the same factors as those affecting the quarterly year-over-year comparisons partially offset by $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 3,130,900 at September 30, 2010, a decrease of 296,000, or 9 percent, from 3,426,900 at September 30, 2009 and a decline of 279,900, or 8 percent, from 3,410,800 at December 31, 2009. The year-over-year declines during both 3Q10 and YTD10 primarily reflected continued pricing discipline across the company's fully-insured medical lines of business.
Membership in Commercial Segment specialty products(b) of 7,038,800 at September 30, 2010 decreased less than 1 percent from 7,073,700 at September 30, 2009 and 1 percent from 7,109,900 at December 31, 2009.
Premiums and administrative services fees:
Premiums and administrative services fees for the Commercial Segment decreased 3 percent to $1.81 billion in 3Q09 compared to $1.87 billion in the prior year's quarter, reflecting an 8 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 8 percent on a per-member basis during 3Q10 compared to 3Q09.
Benefit Expenses:
The Commercial Segment benefit ratio for 3Q10 of 79.2 percent was 350 basis points lower than the 3Q09 benefit ratio of 82.7 percent, primarily due to lower levels of health care services utilization year over year and continued pricing discipline. The segment's benefit ratio for 3Q10 also included the beneficial effect of 120 basis points from higher-than-expected favorable prior-period medical claims development(a), 90 basis points related to the prior year and 30 basis points related to the first half of 2010.
SG&A Expenses:
The Commercial SegmentSG&A expense ratio of 24.4 percent for 3Q10 compares to 24.0 percent in 3Q09, 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 September 30, 2010, the company had cash, cash equivalents, and investment securities of $11.54 billion, up 12 percent from $10.29 billion in such assets at June 30, 2010. Parent company cash and investments at September 30, 2010 were $1.27 billion, up $270.4 million from $1.00 billion at June 30, 2010.
Debt-to-total capitalization at September 30, 2010 was 19.4 percent, down 110 basis points from 20.5 percent at June 30, 2010 due primarily to increased net income during 3Q10.
Cash Flows from Operations
Cash flows provided by operations for 3Q10 of $1.21 billion compared to cash flows provided by operations of $940.1 million in 3Q09 with the increase primarily due to higher net income and changes in working capital balances 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 3Q10, the company repurchased 968,000 of its outstanding shares at an average price per share of $51.66. As of November 1, 2010, the company had approximately $150 million remaining on the December 2009 authorization, which is effective until December 31, 2011.
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