LOUISVILLE, Ky. (April 30, 2012) — Humana Inc. (NYSE: HUM) today reported diluted earnings per common share (EPS) for the quarter ended March 31, 2012 (1Q12) of $1.49, compared to $1.86 per share for the quarter ended March 31, 2011 (1Q11). The company had previously anticipated earnings per share in the range of $1.35 to $1.45 for 1Q12. Lower year-over-year earnings in the company’s Retail and Employer Group business segments were partially offset by higher earnings in the company’s Health and Well-Being Services business segment. EPS for 1Q12 and 1Q11 were positively impacted by $0.03 per share and $0.31 per share, respectively, as a result of favorable development of prior-period medical claims reserves.
“Our compelling senior value proposition and favorable demographics have made Humana one of the fastest growing Medicare Advantage and PDP companies in the nation,” said Michael B. McCallister, Humana’s chairman of the board and chief executive officer. “This growth trajectory has contributed solidly to our results for the first quarter and our continued confidence in our projected results for the full year.”
The company raised EPS guidance for the year ending December 31, 2012 (FY12) to a range of $7.55 to $7.75 versus its previous estimate of $7.50 to $7.70. This increase in FY12 EPS guidance primarily reflects favorable prior-period claims development in the first quarter.
Consolidated highlights
• Revenues – 1Q12 consolidated revenues were $10.22 billion, an increase of 11 percent from $9.19 billion in 1Q11, with total premiums and services revenue up 11 percent compared to the prior year’s quarter. The increase in consolidated revenues was primarily because of increases in the Retail and Employer Group segments driven by increases in average membership of the company’s individual and group Medicare Advantage plans.
• Benefit expenses – The 1Q12 consolidated benefit ratio (benefit expenses as a percent of premiums) of 85.4 percent increased from 83.8 percent for the prior year’s quarter due primarily to a higher year-over-year benefit ratio for the Retail and Employer Group Segments.
• Operating costs – The consolidated operating cost ratio (operating costs as a percent of total revenues less investment income) of 13.7 percent for 1Q12 compares to 13.8 percent in 1Q11. This lower year-over-year ratio primarily reflects improvement in this metric for the Employer Group Segment partially offset by an increase in the Retail Segment operating cost ratio.
Retail segment highlights
Pretax results:
• Retail Segment pretax income of $115 million in 1Q12 decreased from $217 million in 1Q11. This year-over-year decrease was primarily driven by the combined impact of a 180 basis point increase in this segment’s benefit ratio together with a 40 basis point increase in the Retail Segment’s operating cost ratio.
Enrollment:
• Individual Medicare Advantage membership was 1,883,800 at March 31, 2012, an increase of 243,500 members, or 15 percent from 1,640,300 at December 31, 2011 due to a successful enrollment season associated with the 2012 plan year. Membership increased by 289,000, or 18 percent, from 1,594,800 at March 31, 2011. Membership at March 31, 2012 included approximately 62,600 members added at the end of 1Q12 with the acquisition of Arcadian Management Services, Inc. (Arcadian). As previously announced, the company expects to divest approximately 12,600 members acquired with Arcadian effective January 1, 2013 in accordance with the company’s agreement with the United States Department of Justice.
• Membership in the company’s individual stand-alone Prescription Drug Plans (PDPs) totaled 2,863,900 at March 31, 2012, an increase of 323,500, or 13 percent, from 2,540,400 at December 31, 2011. Membership increased by 510,800, or 22 percent, from 2,353,100 at March 31, 2011. This increase resulted primarily from growth in the company’s Humana-Walmart plan offering.
• HumanaOne® medical membership increased to 442,000 at March 31, 2012, an increase of 8,400 or 2 percent, from 433,600 at December 31, 2011 and an increase of 59,100, or 15 percent, from 382,900 at March 31, 2011.
• Membership in individual specialty products (a) of 847,900 at March 31, 2012 increased 8 percent from 782,500 at December 31, 2011 and increased 257,400, or 44 percent, from 590,500 at March 31, 2011. Both the sequential and year-over-year increases were primarily driven by increased sales in dental offerings.
Premiums and services revenue:
• 1Q12 premiums and services revenue for the Retail Segment were $6.04 billion, an increase of 14 percent from $5.31 billion in 1Q11. The increase was primarily the result of year-over-year membership growth for individual Medicare Advantage plans.
• 1Q12 Medicare Advantage premiums per member per month declined to $924 from $947 in 1Q11 primarily driven by higher membership from the quarter-end completion of the Arcadian acquisition and geographic expansion into lower premium counties.
Benefit expenses:
• The 1Q12 benefit ratio for the Retail Segment was 87.6 percent, an increase of 180 basis points from 85.8 percent in 1Q11. The increase was primarily driven by the planned increase associated with positioning for Health Care Reform medical loss ratio requirements, the seasonal impact of an extra day’s claims from leap year in 1Q12 and a year-over-year increase in clinicians and other health care quality expenditures given the company’s continuing growth in membership.
• Retail Segment benefit expenses included the beneficial impact of favorable prior-period medical claims reserve development of $33 million in 1Q12 and $40 million in 1Q11.
Operating costs:
• The Retail Segment’s operating cost ratio of 10.4 percent in 1Q12 increased 40 basis points from 10.0 percent in 1Q11 reflecting higher year-over-year clinical, provider and technological infrastructure spending and increased membership in the company’s stand-alone PDP products which carry a higher operating cost ratio than individual Medicare Advantage products.
Employer group segment highlights
Pretax results:
• Employer Group Segment pretax income of $121 million in 1Q12 compares to $139 million in 1Q11. This decrease was primarily due to a 290 basis point increase in this segment’s benefit ratio partially offset by a 200 basis point decline in the Employer Group Segment’s operating cost ratio.
Enrollment:
• Group Medicare Advantage membership was 385,800 at March 31, 2012, an increase of 67,600 members, or 21 percent, from 318,200 at December 31, 2011 primarily due to the January 2012 addition of a large group Medicare Advantage account. Membership increased 77,200, or 25 percent, from 308,600 at March 31, 2011.
• Group fully-insured commercial medical membership of 1,182,800 at March 31, 2012, increased slightly from 1,180,200 at December 31, 2011 and 1,178,500 at March 31, 2011.
• Group ASO commercial medical membership declined to 1,236,600 at March 31, 2012, a decrease of 55,700 or 4 percent, from 1,292,300 at December 31, 2011 and a decrease of 82,700, or 6 percent, from 1,319,300 at March 31, 2011. This decline reflected a continuation of pricing discipline in a highly competitive environment for self-funded accounts.
• Membership in Employer Group specialty products (a) of 6,849,300 at March 31, 2012 increased 5 percent from 6,532,600 at December 31, 2011 and increased 212,500, or 3 percent, from 6,636,800 at March 31, 2011, as continued cross-selling of these products to employer groups more than offset the loss of a large dental ASO account.
Premiums and services revenue:
• 1Q12 premiums and services revenue for the Employer Group Segment were $2.62 billion, an increase of 13 percent from $2.32 billion in 1Q11. The increase was primarily the result of increased group Medicare Advantage membership year over year.
Benefit expenses:
• 1Q12 benefit ratio for the Employer Group Segment was 81.6 percent, an increase of 290 basis points from 78.7 percent in 1Q11. This increase was primarily due to the change in impact of prior-period medical claims reserve development, an increase in group Medicare Advantage membership, and the seasonal impact of an extra day’s claims from leap year in 1Q12, partially offset by a reduction in prior-year premium rebate estimates.
• The Employer Group Segment’s benefit expenses for 1Q12 included the negative impact of $30 million in unfavorable prior-period medical claims reserve development versus $41 million in favorable prior-period medical claims reserve development in 1Q11. The unfavorable prior-period reserve development experienced during 1Q12 resulted from various items, primarily the timing of certain claims processing changes and a plan design change for one employer group Medicare Advantage account. These same factors are not anticipated to have a material impact on future results.
Operating costs:
• The Employer Group Segment’s operating cost ratio of 16.3 percent in 1Q12 decreased 200 basis points from 18.3 percent in 1Q11 reflecting increased year-over-year membership in the company’s group Medicare Advantage products which generally carry a lower operating cost ratio than the company’s fully-insured commercial group products and continued savings from operating cost reduction initiatives.
Health and well-being services segment highlights
Pretax results:
• Health and Well-Being Services Segment pretax income of $132 million in 1Q12 rose $35 million, or 36 percent, compared to $97 million in 1Q11 reflecting growth in the company’s pharmacy solutions business, including higher utilization of the company’s RightSourceRx® mail-order pharmacy by the company’s members.
Script volume:
• Script volumes for the Retail and Employer Group Segments’ membership increased to approximately 58 million in 1Q12, up 19 percent, versus 1Q11 scripts of approximately 49 million. The year-over-year increase primarily reflects growth associated with higher average medical membership for 1Q12 than in 1Q11.
Services revenue:
• Services revenue of $3.31 billion in 1Q12 for the Health and Well-Being Services Segment increased from $2.77 billion in 1Q11. This increase was primarily driven by growth in the company’s Medicare Advantage membership and related member utilization of the company’s pharmacy benefit management services and RightSourceRx mail-order pharmacy.
Operating costs:
• The Health and Well-Being Services Segment’s operating cost ratio of 95.4 percent in 1Q12 declined 40 basis points from 95.8 percent in 1Q11 reflecting scale efficiencies associated with growth in the company’s pharmacy solutions business.
Balance sheet
• At March 31, 2012, the company had cash, cash equivalents, and investment securities of $13.25 billion, up 22 percent from $10.83 billion at December 31, 2011 primarily due to the early receipt of the April CMS premium payment.
• Parent company cash and investments of $225 million at March 31, 2012 decreased $269 million from $494 million at December 31, 2011, primarily reflecting the acquisition of Arcadian, share repurchases, and the payment of a cash dividend to stockholders during the quarter.
• Days in claims payable were 50.1 at March 31, 2012, down 2.4 days from 52.5 at December 31, 2011. This reduction primarily reflects the impact of the sequential increase in Medicare Advantage HMO membership, for which a significant portion of the medical services provided are covered by capitation payments versus the establishment of medical claims reserves, combined with the payout of certain risk-sharing settlements during 1Q12 that related to prior-year dates of service.
• Debt-to-total capitalization at March 31, 2012 was 16.4 percent, down 70 basis points compared to 17.1 percent at December 31, 2011 primarily driven by higher capitalization associated with first quarter earnings.
Cash flows from operations
Cash flows provided by operations for 1Q12 totaled $2.35 billion compared to cash flows provided by operations of $796 million in 1Q11. The company also evaluates operating cash flows on a non-GAAP(c) basis:
The year over year decrease in the non-GAAP(c) cash flows from operations is because of the effect on cash flows of changes in working capital accounts.
Share repurchase program and cash dividend
• During 1Q12, the company repurchased 1,150,000 of its outstanding shares at an average price per share of $86.95 in connection with a share repurchase authorization for up to $1 billion approved by the company’s Board of Directors in April 2011. In April 2012, the company’s Board of Directors authorized a new share repurchase program of up to $1 billion, replacing its previous share repurchase authorization. Under this share repurchase authorization, shares could be purchased from time to time at prevailing prices in the open market, by block purchases, or in privately negotiated transactions. The new share repurchase authorization expires June 30, 2014.
• A cash dividend payment of approximately $41 million, or $0.25 per share, for stockholders of record as of March 30, 2012, was paid on April 27, 2012 as approved by the company’s Board of Directors in accordance with its quarterly cash dividend policy. In April 2012, the company’s Board of Directors increased the company’s quarterly cash dividend to $0.26 per share for stockholders of record as of June 29, 2012 payable on July 27, 2012.
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