Humana second quarter consolidated revenues rises 10% to $8.65 billion

Humana Inc. (NYSE: HUM) today reported diluted earnings per common share (EPS) for the quarter ended June 30, 2010 (2Q10) of $2.00, above management's guidance of $1.65 to $1.70. The 2Q10 results compared to EPS of $1.67 for the quarter ended June 30, 2009 (2Q09). For the six months ended June 30, 2010 (1H10) the company reported $3.52 in EPS compared to $2.89 for the six months ended June 30, 2009 (1H09).

“We are pleased with this quarter's performance as it is the result of strength in both our Commercial and Government segments”

The company raised its EPS guidance for the year ending December 31, 2010 (FY10E) to a range of $5.65 to $5.75 from its previous range of $5.55 to $5.65 as a result of its 2Q10 performance and its revised forecast for the second half of 2010.

"We are pleased with this quarter's performance as it is the result of strength in both our Commercial and Government segments," said Michael B. McCallister, Humana's president and chief executive officer. "It is clear our value proposition for seniors in Medicare continues to be well received across the country."

The company has included certain non-GAAP^(a) financial measures for 2Q10 and 1H10 throughout this earnings press release. Consolidated non-GAAP^(a) pretax income and EPS were as follows:

Consolidated Highlights

Revenues - 2Q10 consolidated revenues rose 10 percent to $8.65 billion from $7.90 billion in 2Q09, with total premium and administrative services fees also up 10 percent compared to the prior year's quarter. The year-over-year increase in premiums and administrative services fees primarily reflects an 18 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.

1H10 consolidated revenues rose 9 percent to $17.09 billion from $15.61 billion in 1H09 with total premium and administrative services fees also up 9 percent compared to the prior year's period, also driven primarily by the same factors as the second quarter year-over-year increase.

Benefit expenses - The impact of GAAP to non-GAAP^(a) reconciliation items on the consolidated benefit ratio (benefit expenses as a percent of premium revenues) is detailed in the following table:

The 2Q10 consolidated benefit ratio of 81.9 percent compares to 83.3 percent in 2Q09. On a non-GAAP^(a) basis the 2Q10 consolidated benefit ratio of 83.3 percent was unchanged versus the 2Q09 consolidated benefit ratio. The non-GAAP^(a) consolidated benefit ratio for 2Q10 reflected the combined impact of a 120 basis point increase in the non-GAAP^(a) benefit ratio for the Government Segment and a 520 basis point improvement in the non-GAAP^(a) benefit ratio for the Commercial Segment. The drivers of these changes are detailed in the segment discussions below.

The consolidated benefits ratio for 1H10 of 82.6 percent was 100 basis points lower than the 1H09 consolidated benefits ratio of 83.6 percent. On a non-GAAP^(a) basis the 1H10 consolidated benefits ratio of 83.5 percent improved 10 basis points from 83.6 percent for 1H09, the combined impact of a 50 basis point increase in the non-GAAP^(a) benefit ratio for the Government Segment and a 320 basis point improvement in the non-GAAP^(a) benefit ratio for the Commercial Segment. These non-GAAP^(a) changes were primarily driven by the same factors impacting the second quarter year-over-year comparisons.

Selling, general, & administrative (SG&A) expenses - The impact of GAAP to non-GAAP^(a) reconciliation items on the consolidated SG&A expense ratio (SG&A expenses as a percent of premiums, administrative services fees and other revenue) is detailed in the following table:

The 2Q10 consolidated SG&A expense ratio of 13.6 percent increased 80 basis points compared to the 2Q09 ratio of 12.8 percent. On a non-GAAP^(a) basis the consolidated SG&A expense ratio of 11.8 percent improved 100 basis points versus the 2Q09 ratio of 12.8 percent reflecting both scale efficiencies associated with higher average Medicare Advantage membership and the company's continued focus on administrative cost reductions.

The SG&A expense ratio for 1H10 of 13.5 percent also increased 10 basis points from that for 1H09 of 13.4 percent. On a non-GAAP^(a) basis the consolidated SG&A expense ratio for 1H10 of 12.6 percent improved 80 basis points from 13.4 percent for 1H09 primarily reflecting the same factors impacting the second quarter year-over-year comparison.

Government Segment Results

The impact of GAAP to non-GAAP^(a) reconciliation items on Government Segment financial measures is detailed in the following table:

Pretax results:

• On a non-GAAP^(a) basis, Government Segment pretax income increased to $451.2 million in 2Q10 from $404.7 million in 2Q09 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 from higher average membership and a continued focus on administrative cost reductions.
• For 1H10, non-GAAP^(a) pretax earnings for the Government Segment of $696.9 million increased by $126.1 million versus 1H09 pretax earnings for the segment of $570.8 million, primarily reflecting the same factors as those affecting the quarterly year-over-year comparisons.

Enrollment:

• Medicare Advantage membership grew to 1,761,100 at June 30, 2010, an increase of 261,300 members, or 17 percent, from June 30, 2009, and up 252,600, or 17 percent, during 1H10.
• As of June 30, 2010, 72 percent of fully-insured Medicare Advantage members were in network-based products, unchanged from the March 31, 2010 percentage and 9 percent higher than the 63 percent of such membership in networked Medicare Advantage options at December 31, 2009.
• Membership in the company's stand-alone PDPs totaled 1,793,400 at June 30, 2010 compared to 1,992,000 at June 30, 2009 and 1,927,900 at December 31, 2009. The 2010 year-to-date decline 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 June 30, 2010 of 3,030,700 was up approximately 1 percent from 3,008,300 at June 30, 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 $4.89 billion in 2Q10 increased 18 percent compared to $4.15 billion in 2Q09, primarily due to an 18 percent increase in average Medicare Advantage membership year over year.
• Medicare stand-alone PDP premiums of $700.2 million in 2Q10 increased 10 percent compared to $638.8 million in 2Q09, reflecting an 18 percent increase in premiums per member per month, partially offset by a 7 percent decline in average membership year over year.
• Military services premiums and administrative services fees during 2Q10 decreased $38.7 million to $907.9 million compared to $946.6 million in 2Q09.

Benefit Expenses:

• On a non-GAAP^(a) basis the Government Segment benefit ratio of 85.3 percent increased 120 basis points versus the 2Q09 ratio of 84.1 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).

SG&A Expenses:

• The Government Segment's SG&A expense ratio decreased 110 basis points to 8.2 percent in 2Q10 compared to 9.3 percent in the prior year's quarter driven primarily by increased scale 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

The impact of GAAP to non-GAAP^(a) reconciliation items on Commercial Segment financial measures is detailed in the following table:

Pretax results:

• On a non-GAAP^(a) basis, Commercial Segment pretax income increased to $115.2 million in 2Q10 compared to $35.3 million in 2Q09 due to pricing discipline, lower levels of health care services utilization and the company's continued focus on administrative cost reductions.
• For 1H10, non-GAAP^(a) pretax income for the Commercial Segment of $265.9 million compared to earnings of $162.9 million for 1H09 primarily reflecting the same factors as those affecting the quarterly year-over-year comparisons.

Enrollment:

• Commercial Segment medical membership at June 30, 2010 of 3,285,100 was down 162,800 from June 30, 2009 and down 125,700 year-to-date 2010. The year-over-year declines during both 2Q10 and 1H10 primarily reflected continued pricing discipline across the company's fully-insured medical lines of business.
• Membership in Commercial Segment specialty products^(d) of 7,297,000 at June 30, 2010 increased 11 percent from 6,585,800 at June 30, 2009 and up 3 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 $1.84 billion in 2Q10 compared to $1.87 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 2Q10 compared to 2Q09.

Benefit Expenses:

• The Commercial Segment non-GAAP^(a) benefit ratio for 2Q10 of 75.6 percent was 520 basis points lower than the 2Q09 benefit ratio of 80.8 percent, primarily due to lower levels of health care services utilization year over year and continued pricing discipline.

SG&A Expenses:

• The Commercial Segment non-GAAP^(a) SG&A expense ratio of 24.4 percent for 2Q10 compares to 23.5 percent in 2Q09 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 June 30, 2010, the company had cash, cash equivalents, and investment securities of $10.29 billion, a 4 percent increase from $9.91 billion at March 31, 2010.
• Parent company cash and investments of $1.00 billion at June 30, 2010 increased $271.8 million from $729.8 million at March 31, 2010 as dividends from subsidiaries were partially offset primarily by federal income tax and interest payments as well as share repurchases during 2Q10.
• Debt-to-total capitalization at June 30, 2010 was 20.5 percent, down 110 basis points from March 31, 2010 due primarily to the increase in capitalization associated with increased net income during 2Q10.

Cash Flows from Operations

Cash flows provided by operations for 2Q10 of $325.3 million compared to cash flows provided by operations of $161.9 million in 2Q09 with the year-over-year increase primarily due to higher net income 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 2Q10, the company repurchased 1,025,000 of its outstanding shares at an average price per share of $48.76. As of August 1, 2010, the company had approximately $200 million remaining on the December 2009 authorization, which is effective until December 31, 2011.