Humana fourth quarter consolidated revenues increase 9% to $9.06B

Humana Inc. (NYSE: HUM) today reported diluted earnings per common share (EPS) for the quarter ended December 31, 2011 (4Q11) of $1.20, compared to $0.63 per share for the quarter ended December 31, 2010 (4Q10). The year-over-year increase of $0.57 per share was primarily due to expenses incurred in 4Q10 that did not recur in 4Q11 together with higher favorable medical claims reserves development in 4Q11 than in 4Q10. The 4Q10 expenses were due to reserves strengthening for the company's closed block of long-term care business.

Comparison of operating results for the quarter is affected by the items noted below:

The year-over-year decline in the company's fourth quarter consolidated results of operations on a non-GAAP basis primarily reflected the impact of lower earnings in the company's Employer Group Segment, partially offset by higher earnings in the Retail and Health and Well-Being Services Segments.

For the year ended December 31, 2011 (FY11) the company reported $8.46 in EPS compared to $6.47 for the year ended December 31, 2010 (FY10). The FY11 improved results reflected a lower year-over-year benefit ratio in the company's Retail Segment, higher average Medicare membership and higher earnings in the company's Health and Well-Being Services Segment.

Comparison of operating results for the full year is affected by the items noted below:

The FY11 consolidated EPS on a non-GAAP basis rose 15 percent from FY10, primarily reflecting similar year-over-year increases in earnings for the company's Retail and Health and Well-Being Services Segments more than offsetting lower earnings in the company's Employer Group Segment. Share-repurchase activity during FY11 also contributed to the year-over-year increase in EPS.

"Humana's ongoing operating discipline and attractive Medicare value proposition bode well for a future of favorable senior demographics and the growing need to rein in national health-care spending - especially in Medicare," said Michael B. McCallister, Humana's Chairman of the Board and Chief Executive Officer. "For 2012, we see further growth opportunities in Medicare and, more broadly, in our continuing expansion into adjacencies related to lifelong well-being."

The company now anticipates EPS for the year ending December 31, 2012 (FY12) in the range of $7.50 to $7.70 versus its previous estimate of $7.40 to $7.60. This increase in FY12 EPS guidance primarily reflects an approximately 40,000-member net increase to the company's previous expectation for Medicare Advantage membership based upon the recent annual election period for seniors.

Consolidated Highlights

Revenues - 4Q11 consolidated revenues were $9.06 billion, an increase of 9 percent from $8.28 billion in 4Q10, with total premiums and services revenue also up 9 percent compared to the prior year's quarter. The year-over-year increase in premiums and services revenue was primarily driven by an increase in the company's Retail and Health and Well-Being Services Segments partially offset by lower premiums and services revenue in the company's Employer Group Segment.

FY11 consolidated revenues increased 10 percent to $36.83 billion from $33.60 billion in FY10 with total premiums and services revenue also up 10 percent compared to the prior year's period, as a result of similar segment-level changes as those affecting the fourth quarter year-over-year change.

Benefit expenses - The 4Q11 consolidated benefit ratio (benefit expenses as a percent of premiums) of 81.8 percent decreased by 270 basis points from 84.5 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 FY11 of 82.1 percent decreased by 80 basis points from the FY10 consolidated benefit ratio of 82.9 percent primarily due to the decline in the benefit ratio for the Retail Segment.

The consolidated benefit ratio year-over-year comparisons were impacted as follows:

Operating expenses - The consolidated operating cost ratio (operating costs as a percent of total revenues less investment income) of 17.7 percent for 4Q11 compares to 14.9 percent in 4Q10 primarily reflecting increases in this metric for the company's Retail and Employer Group Segments. A full year of operating expenses for Concentra Inc. (acquired in 4Q10) also contributed to the higher year-over-year ratio since this business carries a higher-than-average operating cost ratio.

The FY11 consolidated operating cost ratio of 14.8 percent increased 160 basis points from 13.2 percent for FY10 primarily due to the same factors impacting the fourth quarter year-over-year comparison together with those described as follows:

Retail Segment Highlights

Pretax results:

• Retail Segment pretax income of $326 million in 4Q11 compares to $250 million in 4Q10. 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 FY11, pretax earnings for the Retail Segment of $1.59 billion increased by $298 million from FY10 pretax earnings of $1.29 billion. Comparison of operating results for these periods was also affected by the items noted below:

Enrollment:

• Individual Medicare Advantage membership was 1,640,300 at December 31, 2011, an increase of 179,600 members, or 12 percent from 1,460,700 at December 31, 2010 primarily due to a successful enrollment season associated with the 2011 plan year as well as age-in enrollment throughout the year. Year-end 2011 membership included approximately 12,100 members associated with the company's acquisition of MD Care on December 30, 2011.
• January 2012 individual Medicare Advantage membership approximated 1,813,000, up approximately 173,000 from December 31, 2011 reflecting higher-than-anticipated net membership additions from the recently completed 2012 annual election period.
• Membership in the company's individual stand-alone Prescription Drug Plans (PDPs) was 2,540,400 at December 31, 2011, up 870,100 or 52 percent compared to 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 innovative Humana-Walmart plan offering, supplemented by dual-eligible and age-in enrollments throughout the year.
• January 2012 individual stand-alone PDP membership grew to approximately 2,825,000, an increase of approximately 285,000 from December 31, 2011, in the range of the company's expectations.
• HumanaOne® medical membership increased to 433,600 at December 31, 2011, an increase of 61,300, or 16 percent, from 372,300 at December 31, 2010.
• Membership in individual specialty products of 782,500 at December 31, 2011 increased 53 percent from 510,000 at December 31, 2010 driven primarily by increased sales in dental offerings.

Premiums and services revenue:

• 4Q11 premiums and services revenue for the Retail Segment was $5.31 billion, an increase of 13 percent from $4.69 billion in 4Q10. The increase was primarily the result of 11 percent higher average Medicare Advantage membership year over year.

Benefit expenses:

• The 4Q11 benefit ratio for the Retail Segment was 79.0 percent, a decrease of 270 basis points from 81.7 percent in 4Q10. 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 14.7 percent in 4Q11 increased 190 basis points from 12.8 percent in 4Q10. The increase was primarily the result of expenses incurred in preparation for anticipated higher year-over-year Medicare membership additions associated with the 2012 plan year together with a higher percentage of average membership in stand-alone PDP offerings that carry a higher operating cost ratio than other Medicare products.

Employer Group Segment Highlights

Pretax results:

• Employer Group Segment pretax loss of $51 million in 4Q11 compares to a pretax income of $29 million in 4Q10 due primarily to higher year-over-year benefit and operating cost ratios.
• For FY11, pretax earnings for the Employer Group Segment of $242 million decreased by $46 million versus FY10 pretax earnings of $288 million. Favorable prior-period reserve development impacted the year-over-year comparisons of the pretax results for this segment as follows:

Enrollment:

• Group Medicare Advantage membership was 318,200 at December 31, 2011, an increase of 16,900 members, or 6 percent, from 301,300 at December 31, 2010.
• January 2012 group Medicare Advantage membership approximated 386,000, up approximately 68,000 members from December 31, 2011.
• Group fully-insured commercial medical membership declined to 1,180,200 at December 31, 2011, a decrease of 72,000 or 6 percent, from 1,252,200 at December 31, 2010. This decline primarily reflected 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 group fully-insured commercial medical membership was in small group accounts at December 31, 2011 versus 48 percent at December 31, 2010.
• Group administrative services only (ASO) commercial medical membership declined to 1,292,300 at December 31, 2011, a decrease of 161,300, 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 6,532,600 at December 31, 2011 remained essentially flat from 6,517,500 at December 31, 2010.

Premiums and services revenue:

• 4Q11 premiums and services revenue for the Employer Group Segment were $2.30 billion, down approximately 2 percent from $2.35 billion in 4Q10 primarily reflecting the impacts of reduced group commercial fully-insured membership and rebates associated with minimum medical loss ratio regulatory requirements which became effective in 2011. Rebates result in the recognition of lower premium revenues, as amounts are set aside for payments to commercial customers during the following year.

Benefit expenses:

• 4Q11 benefit ratio for the Employer Group Segment was 86.4 percent, an increase of 200 basis points, from 84.4 percent for 4Q10. The year-over-year increase in the benefit ratio primarily reflects rebates associated with minimum medical loss ratio regulatory requirements which became effective in 2011, together with a higher percentage of members in group Medicare Advantage plans (which carry a higher benefit ratio than commercial fully-insured accounts). These items were partially offset by the impact of prior-period reserve development, which 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 was 18.8 percent in 4Q11, an increase of 130 basis points from 17.5 percent in 4Q10 primarily reflecting the impact of lower premium revenues due to rebates associated with minimum medical loss ratio requirements which became effective in 2011.

Health and Well-Being Services Segment Highlights

Pretax results:

• Health and Well-Being Services Segment pretax income of $85 million in 4Q11 increased 93 percent compared to $44 million in 4Q10 reflecting growth in the company's pharmacy solutions business as well as the addition of the Concentra business acquired in December 2010.
• For FY11, pretax earnings for the Health and Well-Being Services Segment of $353 million increased by $134 million from FY10 pretax earnings of $219 million, reflecting the same factors as those affecting the quarterly year-over-year comparisons.

Revenues:

• Revenues of $2.90 billion in 4Q11 for the Health and Well-Being Services Segment increased 32 percent from $2.20 billion in 4Q10. This increase was primarily due to growth in the company's pharmacy solutions business together with the addition of the Concentra business acquired in December 2010.

Operating costs:

• The Health and Well-Being Services Segment's operating cost ratio of 96.3 percent in 4Q11 decreased by 140 basis points from 97.7 percent in 4Q10 primarily due to scale efficiencies related to growth in the pharmacy solutions business.

Balance Sheet

• At December 31, 2011, the company had cash, cash equivalents, and investment securities of $10.83 billion, up 8 percent from $10.05 billion at December 31, 2010 reflecting higher balances associated with increased earnings for FY11 versus FY10.
• Parent company cash and investments of $494 million at December 31, 2011 decreased $140 million from $634 million at September 30, 2011, primarily reflecting cash dividends to stockholders and acquisition activity during 4Q11. Cash and investments at the parent decreased $59 million year over year compared to $553 million held at the parent at December 31, 2010 as increased dividends from subsidiaries during FY11 were more than offset by share repurchases, cash dividends to stockholders and acquisition activity.
• Days in claims payable of 52.5 at December 31, 2011 decreased 1.7 days from 54.2 days at September 30, 2011 primarily due to a significant decline in unprocessed claims inventories. The days unprocessed claims on hand declined to 2.8 days at December 31, 2011 from 5.7 days at September 30, 2011.
• Debt-to-total capitalization at December 31, 2011 was 17.1 percent, down 40 basis points from 17.5 percent at September 30, 2011, and down 230 basis points compared to 19.4 percent at December 31, 2010 primarily driven by higher earnings for FY11 versus FY10.

Cash Flows from Operations

Cash flows used in operations for 4Q11 were $1.80 billion compared to cash flows used in operations of $47 million in 4Q10. The company also evaluates operating cash flows on a non-GAAP basis:

The year-over-year increase in the non-GAAP cash flows from operations is due to the effect on cash flows of changes in working capital accounts, including higher net income year over year.

FY11 cash flows from operations of $2.08 billion compared to $2.24 billion for FY10 primarily due to 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 FY11, the company repurchased 6,755,400 of its outstanding shares at an average price per share of $72.75. As of December 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 approximately $41 million, or $0.25 per share, for stockholders of record as of December 30, 2011, was paid on January 31, 2012. Stockholders received cash dividend payments of approximately $82 million in 2011.