Humana reports first-quarter EPS of $1.52

Humana Inc. (NYSE: HUM) today reported diluted earnings per common share (EPS) for the quarter ended March 31, 2010 (1Q10) of $1.52, ahead of management's guidance of $1.10 to $1.20. EPS for 1Q10 included earnings of approximately $0.37 per share from higher-than-anticipated favorable prior-period development of medical claims reserves as well as $0.04 per share in higher-than-projected income tax expense due to recently enacted health reform legislation. Excluding these items, 1Q10 EPS was at the top end of the company's previous guidance range. The 1Q10 results compared to EPS of $1.22 for the quarter ended March 31, 2009 (1Q09).

“We believe strategic and tactical initiatives over the past several years, together with our continued focus on the consumer, position us well for the remainder of 2010 and for the challenges of the post-health-reform environment.”

The company also announced that it had raised its EPS projection for the year ending December 31, 2010 (FY10) to a range of $5.55 to $5.65 versus its previous EPS estimate of $5.15 to $5.35 primarily to reflect the impact of the favorable prior-period reserve development impacting 1Q10 earnings noted above, partially offset by the higher effective tax rate now anticipated.

"Our first quarter results demonstrate solid execution in both of our business segments," said Michael B. McCallister, Humana's president and chief executive officer. "We believe strategic and tactical initiatives over the past several years, together with our continued focus on the consumer, position us well for the remainder of 2010 and for the challenges of the post-health-reform environment."

Consolidated Highlights

Revenues - 1Q10 consolidated revenues rose 9.5 percent to $8.44 billion from $7.71 billion in 1Q09, with total premium and administrative services fees up 9.2 percent compared to the prior year's quarter. The year-over-year increase in premiums and administrative services fees primarily reflects a 19 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 medical membership.

Benefit expenses - The 1Q10 consolidated benefit ratio (benefit expenses as a percent of premium revenues) of 83.4 percent compares to 83.9 percent in 1Q09. This 50 basis point decrease was driven by declines in the benefit ratio in both of the company's business segments.

Selling, general, & administrative (SG&A) expenses - The 1Q10 consolidated SG&A expense ratio (SG&A expenses as a percent of premiums, administrative services fees and other revenue) of 13.5 percent decreased 40 basis points compared to the 1Q09 ratio of 13.9 percent due primarily to efficiencies associated with higher average Medicare Advantage membership together with the company's continued focus on administrative cost reductions.

Government Segment Results

Pretax results:

• Government segment pretax income increased to $279.2 million in 1Q10 from $166.1 million in 1Q09. The 1Q10 results included the benefit of $85.9 million in favorable prior-period reserve development and also reflected higher average Medicare Advantage membership year over year as well as improved operating metrics.

Enrollment:

• Medicare Advantage membership grew to 1,742,300 at March 31, 2010, an increase of 273,400 members, or 19 percent from March 31, 2009, and up 233,800, or 16 percent versus December 31, 2009.
• April 2010 membership in the company's Medicare Advantage plans approximated 1,750,900, with 72 percent of fully-insured members in network-based products, up from 63 percent at December 31, 2009.
• Membership in the company's stand-alone PDPs totaled 1,917,100 at March 31, 2010 compared to 2,078,900 at March 31, 2009 and 1,927,900 at December 31, 2009. The decline during 1Q10 primarily resulted from the company's continued competitive positioning as it realigned stand-alone PDP premium and benefit designs to correspond with its pharmacy claims experience.
• Military services membership at March 31, 2010 of 3,031,400 was up approximately 1 percent from 2,990,600 at March 31, 2009 and essentially unchanged from 3,034,400 at December 31, 2009.

Premiums and administrative services fees:

• Medicare Advantage premiums and administrative service fees of $4.82 billion in 1Q10 increased 19 percent compared to $4.06 billion in 1Q09, primarily due to a 19 percent increase in average Medicare Advantage membership.
• Medicare stand-alone PDP premiums of $579.0 million in 1Q10 decreased 3 percent compared to $595.7 million in 1Q09, reflecting a 13 percent decline in average membership year over year, partially offset by an 11 percent increase in premiums per member per month.
• Military services premiums and administrative services fees during 1Q10 decreased $22.1 million to $867.3 million compared to $889.4 million in 1Q09.

Benefit Expenses:

• The Government Segment benefit ratio decreased 80 basis points to 86.0 percent in 1Q10 compared to 86.8 percent in the prior year's quarter, primarily driven by a 130 basis point benefit from higher-than-anticipated favorable prior-period reserve development. The increase in the benefit ratio excluding this favorable reserve development is primarily due to growth in the company's Medicare Advantage group business 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 decreased 40 basis points to 10.1 percent in 1Q10 compared to 10.5 percent in the prior year's quarter driven primarily by increased efficiencies from higher average medical membership in the company's Medicare Advantage plans and the company's continued focus on administrative cost reductions.

Commercial Segment Results

Pretax results:

• Commercial Segment pretax earnings increased to $137.8 million in 1Q10 compared to $127.7 million in 1Q09 primarily driven by the benefit of $14.1 million in higher-than-anticipated favorable prior-period reserve development during 1Q10, partially offset by the effect of an 8 percent decline in average fully-insured commercial medical membership from the prior year's quarter.

Enrollment:

• Commercial Segment medical membership at March 31, 2010 of 3,331,500 was down 140,000 from March 31, 2009 and down 79,300 from December 31, 2009. The decline during 1Q10 primarily reflected the impact of the economy across various of the company's fully-insured group medical lines of business.
• The company's individual product line has continued to grow steadily, with membership of 370,500, up 10 percent at March 31, 2010 compared to March 31, 2009.
• Membership in Commercial Segment specialty products^(a) of 7,237,900 at March 31, 2010 increased 11 percent from 6,535,100 at March 31, 2009 and up 2 percent from 7,109,900 at December 31, 2009.

Premiums and administrative services fees:

• Premiums and administrative services fees for the Commercial Segment decreased 2 percent to $1.85 billion in 1Q10 compared to $1.88 billion in the prior year's quarter, reflecting lower average medical membership 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 1Q10 compared to 1Q09.

Benefit Expenses:

• The Commercial Segment benefit ratio for 1Q10 of 74.1 percent was 60 basis points lower than the 1Q09 benefit ratio of 74.7 percent, primarily due to an 80 basis point benefit from higher-than-expected favorable prior-period reserve development during 1Q10.

SG&A Expenses:

• The Commercial Segment SG&A expense ratio of 24.8 percent for 1Q10 compares to 24.1 percent in 1Q09, primarily driven by increases in the company's specialty, ancillary and individual medical businesses that carry a higher administrative expense load as a percent of revenues, partially offset by the company's continued focus on administrative cost reductions.

Balance Sheet

• At March 31, 2010, the company had cash, cash equivalents, and investment securities of $9.91 billion, up 9 percent from $9.11 billion at December 31, 2009 and up 33 percent from $7.43 billion at March 31, 2009.
• Parent company cash and investments of $729.8 million at March 31, 2010 increased $64.2 million from $665.6 million at December 31, 2009.
• Debt-to-total capitalization at March 31, 2010 was 21.6 percent, down 90 basis points from December 31, 2009 due primarily to the increase in capitalization associated with net income during 1Q10.

Cash Flows from Operations

Cash flows provided by operations for 1Q10 of $754.7 million compared to cash flows provided by operations of $45.5 million in 1Q09 with the year-over-year increase primarily due to higher medical claims reserve balances associated with higher average Medicare Advantage membership and increased claims inventories on hand together with other working capital changes during 1Q10 versus the prior year's quarter.