Humana third quarter consolidated revenues increase 11% to $9.30 billion

Humana Inc. (NYSE: HUM) today reported diluted earnings per common share (EPS) for the quarter ended September 30, 2011 (3Q11) of $2.67, compared to $2.32 per share for the quarter ended September 30, 2010 (3Q10). For the nine months ended September 30, 2011 (YTD11) the company reported $7.24 in EPS compared to $5.84 for the nine months ended September 30, 2010 (YTD10). Comparison of operating results for these periods is affected by the items noted below:

The company anticipates EPS of approximately $8.35 to $8.40 for the year ending December 31, 2011 (FY11) versus its previous estimate of $7.50 to $7.60. This increase in FY11 EPS guidance primarily reflects lower projected benefit expense ratios in the company's Retail and Employer Group Segments and higher average Medicare membership.

Looking ahead to the year ending December 31, 2012 (FY12), the company projects EPS to be in the range of $7.40 to $7.60, exclusive of any future share repurchases. The company has strengthened the value proposition to the Medicare beneficiaries it serves through stable premiums and benefits in its Medicare Advantage and stand-alone PDP offerings in FY12 through its usual Medicare bid margin reset. As a result of improving its Medicare value proposition membership gains in these Medicare offerings are anticipated to be strong in the coming year.

"Our favorable results in the third quarter and year to date reflect strong operating performance across multiple businesses," said Michael B. McCallister, Humana's chairman of the board and chief executive officer. "In Medicare, our clear focus on strong financial protection and higher quality coordinated health care for seniors represents a powerful value proposition, and continues to drive membership growth, now nearly 4.5 million people."

Consolidated Highlights

Revenues - 3Q11 consolidated revenues were $9.30 billion, an increase of 11 percent from $8.35 billion in 3Q10, with total premiums and services revenue also up 11 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 the company's Retail and Health and Well-Being Services segments.

YTD11 consolidated revenues rose 10 percent to $27.78 billion from $25.32 billion in YTD10 with total premiums and services revenue also up 10 percent compared to the prior year's period, driven primarily by increases in the same segments as the third quarter year-over-year increase.

Benefit expenses - The 3Q11 consolidated benefit ratio (benefit expenses as a percent of premiums) of 80.7 percent decreased by 90 basis points from 81.6 percent for the prior year's quarter due primarily to a decline in the Retail segment benefit ratio as described below. The consolidated benefit ratio for YTD11 of 82.2 percent decreased by 20 basis points from the YTD10 consolidated benefit ratio of 82.4 percent primarily due to the declines in the benefit ratios for the Retail and Employer Group Segments.

Favorable prior-period medical claims reserve development impacted the consolidated benefit ratio year-over-year comparisons as follows:

Operating costs - The consolidated operating cost ratio (operating costs as a percent of total revenues less investment income) of 14.8 percent for 3Q11 compares to 12.1 percent in 3Q10 primarily reflecting the company's December 2010 acquisition of Concentra Inc. (Concentra) and increased expenses associated with the Medicare sales season for 2012 offerings which began a month earlier than in the prior year.

The YTD11 consolidated operating cost ratio of 13.9 percent increased 130 basis points from that for YTD10 of 12.6 percent primarily due to the same factors impacting the third quarter year-over-year comparison.

The write-down of certain DAC during the second quarter of 2010 impacted the consolidated year-over-year operating cost ratio comparisons as follows:

Retail Segment Highlights

Pretax results:

• Retail Segment pretax income of $541.4 million in 3Q11 compares to $447.9 million in 3Q10. This increase was primarily due to increased average individual Medicare membership and a lower benefit ratio partially offset by a higher operating cost ratio. For YTD11, pretax earnings for the Retail Segment of $1.26 billion increased by $222.9 million versus YTD10 pretax earnings for the segment of $1.04 billion. Comparison of operating results for these periods was also affected by the items noted below:

Enrollment:

• Individual Medicare Advantage membership was 1,613,400 at September 30, 2011, an increase of 151,200 members, or 10 percent from 1,462,200 at September 30, 2010 primarily due to a successful enrollment season associated with the 2011 plan year as well as age-in enrollment throughout the year. Individual Medicare Advantage membership has increased 152,700 or 10 percent through September 2011 from 1,460,700 at December 31, 2010.
• Membership in the company's individual stand-alone Prescription Drug Plans (PDPs) was 2,478,100 at September 30, 2011, up 789,900 or 47 percent compared to 1,688,200 at September 30, 2010 and up 807,800 or 48 percent from 1,670,300 at December 31, 2010. These increases resulted from higher gross sales primarily during the 2011 enrollment season, particularly for the company's low-price-point Humana-Walmart plan offering, supplemented by dual-eligible and age-in enrollments throughout the year.
• HumanaOne® medical membership increased to 424,000 at September 30, 2011, an increase of 49,100, or 13 percent, from 374,900 at September 30, 2010 and an increase of 51,700 or 14 percent, from 372,300 at December 31, 2010.
• Membership in individual specialty products of 755,600 at September 30, 2011 increased 55 percent from 487,000 at September 30, 2010 and up 245,600 or 48 percent from 510,000 at December 31, 2010 driven primarily by increased sales in dental and vision offerings.

Premiums and services revenue:

• 3Q11 premiums and services revenue for the Retail Segment was $5.40 billion, an increase of 13 percent from $4.79 billion in 3Q10. The increase was primarily the result of 10 percent higher average Medicare Advantage membership year over year.

Benefit expenses:

• The 3Q11 benefit ratio for the Retail Segment was 78.7 percent, a decrease of 230 basis points from 81.0 percent in 3Q10. The year over year decrease in the benefit ratio is primarily due to continued progress with cost-reduction and outcome-enhancing strategies, including care coordination and disease management, combined with an increased percent of Retail membership from stand-alone PDPs that carry a lower benefit ratio. Favorable prior-period reserve development impacted the year-over-year comparison of the benefit ratio for this segment as follows:

Operating costs:

• The Retail Segment's operating cost ratio of 11.2 percent in 3Q11 increased 160 basis points from 9.6 percent in 3Q10. The increase was primarily the result of higher expenses associated with the Medicare sales season for 2012 offerings, which began a month earlier than in the prior year, as well as a higher percentage of average membership in stand-alone PDP offerings. Stand-alone PDPs carry a higher operating cost ratio than other Medicare products.

Employer Group Segment Highlights

Pretax results:

• Employer Group Segment pretax income of $45.9 million in 3Q11 compares to $79.0 million in 3Q10. For YTD11, pretax earnings for the Employer Group Segment of $293.0 million increased by $32.8 million versus YTD10 pretax earnings for the segment of $260.2 million. Favorable prior-period reserve development impacted the year-over-year comparisons of the pretax income for this segment as follows:

Enrollment:

• Group Medicare Advantage membership was 315,500 at September 30, 2011, an increase of 12,900 members, or 4 percent, from 302,600 at September 30, 2010, and an increase of 14,200 or 5 percent, from 301,300 at December 31, 2010.
• Group fully-insured commercial medical membership declined to 1,181,300 at September 30, 2011, a decrease of 76,600 or 6 percent, from 1,257,900 at September 30, 2010, and a decrease of 70,900 or 6 percent, from 1,252,200 at December 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. Approximately 56 percent of the company's group fully-insured commercial medical membership was in small group accounts at September 30, 2011 versus 47 percent at September 30, 2010 and 48 percent at December 31, 2010.
• Group administrative services only (ASO) commercial medical membership declined to 1,287,000 at September 30, 2011, a decrease of 173,300 or 12 percent from 1,460,300 at September 30, 2010, and a decrease of 166,600 or 11 percent, from 1,453,600 at December 31, 2010. This decline reflected a continuation of discipline in pricing services for self-funded accounts amid a highly competitive environment.
• Membership in Employer Group specialty products of 6,419,300 at September 30, 2011 decreased 1 percent from 6,502,700 at September 30, 2010, and decreased 98,200 or 2 percent, from 6,517,500 at December 31, 2010.

Premiums and services revenue:

• 3Q11 premiums and services revenue for the Employer Group Segment were $2.32 billion, flat from $2.32 billion in 3Q10 as reduced commercial fully-insured membership was offset by higher Medicare Advantage per-member per-month premiums.

Benefit expenses:

• 3Q11 benefit ratio for the Employer Group Segment was 83.5 percent, an increase of 150 basis points, from 82.0 percent for 3Q10. The year over year increase in the benefit ratio primarily reflects both the impact of prior-period reserve development and a higher percentage of members in group Medicare Advantage plans which carry a higher benefit ratio than commercial fully-insured accounts. Favorable prior-period reserve development impacted the year-over-year comparison of the benefit ratio for this segment as follows:

Operating costs:

• The Employer Group Segment's operating cost ratio of 17.5 percent in 3Q11 improved from 17.6 percent in 3Q10 primarily reflecting administrative scale efficiencies associated with a 5 percent increase in average fully-insured Medicare Advantage group membership.

Health and Well-Being Services Segment Highlights

Pretax results:

• Health and Well-Being Services Segment pretax income of $83.6 million in 3Q11 increased 11 percent compared to $75.5 million in 3Q10 reflecting growth in the company's pharmacy solutions business as well as the addition of the Concentra business acquired in December 2010.
• For YTD11, pretax earnings for the Health and Well-Being Services Segment of $267.7 million increased by $93.1 million versus YTD10 pretax earnings for the segment of $174.6 million, reflecting the same factors as those affecting the quarterly year-over-year comparisons.

Revenues:

• Revenues of $2.83 billion in 3Q11 for the Health and Well-Being Services Segment increased 29 percent from $2.19 billion in 3Q10. 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 96.3 percent in 3Q11 was relatively unchanged from 96.2 percent in 3Q10.

Balance Sheet

• At September 30, 2011, the company had cash, cash equivalents, and investment securities of $13.58 billion compared to $10.77 billion at June 30, 2011 which included a $1.80 billion benefit from the early receipt of the October 2011 Medicare premium payment from the Centers for Medicare and Medicaid Services (CMS).
• Parent company cash and investments of $634.4 million at September 30, 2011 decreased $356.0 million from $990.4 billion at June 30, 2011 primarily due to share repurchases during 3Q11.
• Debt-to-total capitalization at September 30, 2011 was 17.5 percent, down 50 basis points compared to 18.0 percent at June 30, 2011 primarily driven by higher capitalization associated with 3Q11 earnings.

Cash Flows from Operations

• Cash flows provided by operations for 3Q11 of $2.92 billion compared to $1.21 billion in 3Q10. Cash flows provided by operations for YTD11 totaled $3.88 billion compared to $2.29 billion in YTD10. The company also evaluates operating cash flows on a non-GAAP basis:

The year over year decrease in the non-GAAP cash flows from operations is due to the negative effect on cash flows of changes in working capital accounts, partially offset by higher net income year over year.

Share Repurchase Program and Cash Dividend

• 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. During 3Q11, the company repurchased 3,381,200 of its outstanding shares at an average price per share of $70.62. As of October 31, 2011, approximately $561 million of the April 2011 share repurchase authorization was remaining, with an expiration date of June 30, 2013.
• In April 2011, the company's Board of Directors also initiated a quarterly cash dividend policy. A cash dividend payment of $40.7 million, or $0.25 per share, for stockholders of record as of September 30, 2011, was paid on October 28, 2011. In October 2011, the company's Board of Directors also approved a cash dividend of $0.25 per share payable January 31, 2012 to stockholders of record as of December 30, 2011.