Humana Inc. Reports Financial Results for Fourth Quarter and Full Year 2003
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LOUISVILLE, Ky., Feb. 2 /PRNewswire-FirstCall/ -- Humana Inc. (NYSE: HUM) today reported earnings per diluted share of $.41 for the fourth quarter ended December 31, 2003 ("4Q03") compared to a $.01 loss per diluted share for the fourth quarter ended December 31, 2002 ("4Q02"). Net income of $66,309,000 for 4Q03 compares favorably to a net loss of $1,705,000 in 4Q02. Pretax margin of 3.2 percent for 4Q03 increased 330 basis points from the loss in 4Q02.
The increase in year-over-year results for 4Q03 was driven by a significant improvement in operating earnings for the company's Commercial segment, growth in its Government segment operating earnings and the absence of unusual items and charges incurred in 4Q02.
Results for the year ended December 31, 2003 ("FY2003") also improved over those for the year ended December 31, 2002 ("FY2002"). Earnings per diluted share for FY2003 of $1.41 increased 66 percent compared to $.85 for FY2002. Net income of $228,934,000 increased 60 percent for FY2003 versus $142,755,000 in FY2002. The company's pretax margin of 2.8 percent in FY2003 increased 90 basis points over that for FY2002 of 1.9 percent.
"We are pleased that our results for 2003 show meaningful progress in each of our business segments, the result of our sustained commitment to a diversified customer base," said Michael B. McCallister, Humana's president and chief executive officer. "The growth in our Commercial segment results, with an ever-increasing interest in our innovative Smart products, positions us firmly as a leader in health benefits solutions for both employers and employees. In August 2003, the Department of Defense recognized Humana's leadership and dedication to customer service by awarding us the TRICARE South Region contract. In addition, with the Medicare Modernization Act, we anticipate exploring new opportunities to extend our long-term and successful relationship with our nation's seniors."
Results for FY2003 included:
* the writedown of building and equipment of $17,233,000 pretax
($10,529,000 net of income tax benefit, or $.07 per diluted share),
* a gain on the sale of a venture capital investment of $15,200,000
pretax ($10,108,000 net of income taxes, or $.06 per diluted share),
and
* software abandonment charges of $13,527,000 pretax ($8,265,000 net of
income tax benefit, or $.05 per diluted share).
These items were recorded during the six months ended June 30, 2003. The net impact of these items reduced pretax income for FY2003 by $15,560,000 ($8,686,000 net of income taxes, or $.05 per diluted share).
Results for 4Q02 and FY2002 included:
* severance and related employee benefit charges of $32,105,000 pretax
($19,616,000 net of income taxes, or $.12 per diluted share),
* long-lived asset impairment and lease discontinuance costs of
$3,772,000 pretax ($2,305,000 net of income taxes, or $.01 per diluted
share),
* charges due to the impairment in the fair value of certain private debt
and equity investments of $19,571,000 pretax ($17,863,000 net of income
taxes, or $.11 per diluted share), and
* the establishment of reserves for liabilities related to previous
acquisitions of $30,140,000 pretax ($18,416,000 net of income taxes, or
$.11 per diluted share).
The net impact of these items reduced pretax income for 4Q02 and FY2002 by $85,588,000 ($58,200,000 net of income taxes, or $.35 per diluted share).
Segment Results
Commercial segment pretax income increased to $14,062,000 in 4Q03 from a loss of $60,702,000 in 4Q02. Commercial segment pretax margin of 0.8 percent in 4Q03 was 470 basis points higher versus the loss in 4Q02.
The improvement in year-over-year Commercial segment results during 4Q03 was driven by incremental improvements in both the underwriting results and the percent of premiums and administrative services fees spent on selling, general and administrative expenses for the segment, as well as the absence of unusual items and charges incurred in 4Q02.
For FY2003, Commercial segment pretax income increased to $121,010,000 versus a loss of $15,174,000 in FY2002. Pretax margin for FY2003 in the Commercial segment was 1.8 percent, a 210 basis point increase from the loss in FY2002.
Commercial segment pretax results for FY2003 included:
* software abandonment charges of $13,527,000,
* a gain on the sale of a venture capital investment of $12,423,000, and
* the writedown of building and equipment of $4,325,000.
These items were recorded during the six months ended June 30, 2003. The net impact of these items reduced Commercial segment pretax income for FY2003 by $5,429,000.
Commercial segment pretax results for 4Q02 and FY2002 included:
* severance and related employee benefit charges of $21,838,000,
* long-lived asset impairment and lease discontinuance costs of
$2,441,000,
* charges due to the impairment in the fair value of certain private debt
and equity investments of $16,225,000, and
* the establishment of reserves for liabilities related to previous
acquisitions of $28,397,000.
The net impact of these items reduced Commercial segment pretax income for 4Q02 and FY2002 by $68,901,000.
Government segment pretax income of $85,650,000 in 4Q03 compares to 4Q02 Government segment pretax income of $58,195,000. Pretax margin for the Government segment increased to 6.0 percent in 4Q03, a 160 basis point increase compared to 4.4 percent in 4Q02.
The increase in year-over-year Government segment results during 4Q03 was primarily driven by improvements in the operating performance of each of the company's governmental lines of business and the absence of unusual items and special charges incurred in 4Q02.
Government segment pretax income for FY2003 decreased to $223,706,000 from $225,108,000 in FY2002. Government segment pretax margin was 4.1 percent during FY2003 versus 4.3 percent in FY2002.
Government segment pretax results for FY2003 included:
* the writedown of building and equipment of $12,908,000 and
* a gain on the sale of a venture capital investment of $2,777,000.
These items were recorded during the six months ended June 30, 2003. The net impact of these items reduced Government segment pretax income for FY2003 by $10,131,000.
Government segment pretax results for 4Q02 and FY2002 included:
* severance and related employee benefit charges of $10,267,000,
* long-lived asset impairment and lease discontinuance costs of
$1,331,000,
* charges due to the impairment in the fair value of certain private debt
and equity investments of $3,346,000, and
* the establishment of reserves for liabilities related to previous
acquisitions of $1,743,000.
The net impact of these items reduced Government segment pretax income for FY2002 by $16,687,000.
Revenues and Membership
Consolidated revenues for 4Q03 totaled $3,152,872,000, compared to $2,855,032,000 in 4Q02, a 10.4 percent increase. Consolidated revenues for 4Q02 included charges due to the impairment in the fair value of certain private debt and equity investments of $19,571,000.
Medical membership as of December 31, 2003 totaled 6,769,600, an increase of 1.8 percent compared to the 6,647,100 medical members as of December 31, 2002.
For FY2003, consolidated revenues were $12,226,311,000 versus $11,261,181,000 in FY2002, an increase of 8.6 percent.
Consolidated revenues for FY2003 included a gain on the sale of a venture capital investment of $15,200,000 recorded during the six months ended June 30, 2003. Consolidated revenues for FY2002 included charges due to the impairment in the fair value of certain private debt and equity investments of $19,571,000.
Commercial segment premiums and administrative services fees totaled $1,698,284,000 during 4Q03 compared to a total of $1,534,463,000 during 4Q02, or 10.7 percent higher than in the prior year.
Commercial segment premiums and administrative services fees for FY2003 were $6,683,858,000 versus $5,939,531,000 in FY2002, an increase of 12.5 percent.
Commercial segment medical membership was 3,065,200 as of December 31, 2003, an increase of 28,800 members from September 30, 2003 and a growth of 72,700 members, or 2.4 percent from December 31, 2002. Per member premiums for the Commercial segment fully insured medical business, net of benefit changes, increased in the range of 12 to 14 percent during FY2003 compared to FY2002.
Government segment premiums and administrative services fees for 4Q03 totaled $1,426,235,000, or 8.7 percent higher than the related 4Q02 premiums and administrative services fees of $1,312,543,000.
Government segment premiums and administrative services fees for FY2003 were $5,413,101,000 versus $5,235,262,000 in FY2002, an increase of 3.4 percent.
Medicare+Choice membership totaled 328,600 at December 31, 2003, an increase of 4,000 members from September 30, 2003 and a decline of 15,500 members, or 4.5 percent from December 31, 2002. Per member premiums for the Medicare+Choice business, net of benefit changes, increased in the range of 4 to 6 percent during FY2003 compared to FY2002.
TRICARE's insured membership totaled 1,849,700 at December 31, 2003, versus comparable membership at December 31, 2002 of 1,755,800. TRICARE ASO membership was 1,057,200 at December 31, 2003, up 0.8 percent from December 31, 2002 membership of 1,048,700. TRICARE premium revenues and administrative services fees increased by 11.9 percent during FY2003 due primarily to a change in the monthly base revenue effective in July 2003 and additional reimbursement associated with reservist call-ups.
Medicaid membership of 468,900 at December 31, 2003 declined by 7.3 percent from December 31, 2002 due to the carve-out of three municipalities from one of our contracts in Puerto Rico. Approximately 84 percent of the company's Medicaid membership is in Puerto Rico. Per member premiums for the Medicaid business, net of benefit changes, increased in the range of 7 to 9 percent during FY2003 versus FY2002.
Medical and SG&A Expenses
The company's 4Q03 medical expense ratio (medical expenses as a percent of premiums) of 83.0 percent decreased 30 basis points compared to the 4Q02 medical expense ratio of 83.3 percent.
For FY2003, the medical expense ratio was 83.5 percent, a 10 basis point decline from that for FY2002.
The selling, general and administrative ("SG&A") expense ratio (SG&A expenses as a percent of premiums plus administrative services fees) for 4Q03 of 15.6 percent decreased by 180 basis points from the 4Q02 SG&A ratio of 17.4 percent.
For FY2003, the SG&A expense ratio was 15.4 percent compared to 15.9 percent in FY2002.
SG&A expenses for FY2003 included the writedown of building and equipment of $17,233,000 recorded during the six months ended June 30, 2003. This resulted in an increase to the FY2003 SG&A ratio of 10 basis points.
SG&A expenses for FY2002 included severance and related employee benefit charges of $32,105,000, long-lived asset impairment and lease discontinuance costs of $3,772,000, and the establishment of reserves for liabilities related to previous acquisitions of $30,140,000. These items resulted in an increase to the FY2002 SG&A ratio of 60 basis points.
Cash Flows from Operations
Cash flows provided by operations for 4Q03 of $290,220,000, included the positive impact of $211,899,000 from the timing of the receipt of the premium payment from the Centers for Medicare and Medicaid Services ("CMS").
The fixed monthly Medicare+Choice premium payment from CMS is due to Humana on the first day of each month. However, if the first of the month falls on a weekend or a holiday, the company receives that payment on the last business day of the prior month, often resulting in a significant impact on cash flows from operations.
Cash flows provided by operations for 4Q02 of $422,710,000 included a $205,755,000 benefit from the timing of the premium payment from CMS. The year-over-year decline in the quarter's cash flows is primarily a function of the timing of the collection of TRICARE receivables during 2002.
Cash flows provided by operations for FY2003 totaled $413,140,000 compared to cash flows provided by operations for FY2002 of $321,408,000. FY2003 cash flows from operations included a benefit of $6,144,000 from the timing of the receipt of the premium payment from CMS, while FY2002 cash flows from operations included a $10,873,000 negative impact from such timing.
Non-GAAP Financial Measures
The following is a reconciliation of the most directly comparable financial measures prepared in accordance with accounting principles generally accepted in the United States, or GAAP, to certain non-GAAP financial measures used by the company for 4Q03, 4Q02, FY2003, and FY2002.
4Q03 4Q02 2003 2002
(in thousands)
GAAP operating cash flows $ 290,220 $ 422,710 $ 413,140 $ 321,408
Timing of premium
payment receipt
from CMS (211,899) (205,755) (6,144) 10,873
Non-GAAP operating cash
flows(1) $ 78,321 $ 216,955 $ 406,996 $ 332,281
(1) Management believes the difference in timing of this cash event
between periods may be so significant as to distort a particular
period's trend in operating cash flows. Management believes that
meaningful analysis of our financial performance requires an
understanding of the factors underlying that performance and our
judgments about the relevance of a factor to normal operating results.
In some cases, large factors or events may obscure short-term patterns
and long-term trends. When reviewing and analyzing our cash flow
position, management apportions the CMS premium payment in each month.
To do otherwise would distort a meaningful analysis of our cash flow.
Decisions such as management's forecast or business plans regarding
cash flow, therefore, use this non-GAAP financial measure.
Parent Company Cash and Investments
As of December 31, 2003, the parent company had $399,393,000 in cash, cash equivalents, and short-term investments. This compares to $187,008,000 at December 31, 2002.
Share Repurchase Program
During FY2003, the company acquired 3,670,500 of its common shares for an aggregate price of $44,147,000, or an average cost of $12.03 per share. 1,433,600 of these shares were purchased for $23,330,000 in connection with employee stock plans, at an average price of $16.27 per share and the remaining 2,236,900 shares were purchased in open market transactions for an aggregate purchase price of $20,817,000, or an average of $9.31 per share.
In July 2003, the company announced that its Board of Directors authorized the use of up to $100 million for the repurchase of its common shares, exclusive of shares repurchased in connection with employee stock plans. As of January 31, 2004, substantially all of the July 2003 authorization remains available for share repurchases.
Guidance
The company offers the GAAP guidance detailed below for the investor community. This guidance excludes the company's pending acquisition of Ochsner Health Plan of Louisiana.
For the Quarter Ending March 31, 2004
* Earnings per diluted share of $.40 to $.42.
* A sequential increase in Commercial segment medical membership of over
200 thousand members on a net basis (substantially all of which relates
to Administrative Services Only or "ASO" accounts).
For the Year Ending December 31, 2004
* Earnings per diluted share of $1.60 to $1.65.
* Consolidated revenues of approximately $13 billion.
* Commercial segment pretax income of between $140 million and $170
million.
* Growth in Commercial segment medical membership of 6 to 9 percent for
fully insured and ASO products combined. (Approximately 80 to 90
percent of the 2004 growth is anticipated to be in ASO products.)
* Growth in per member premiums, net of benefit changes, in the range of
8 to 10 percent for Commercial segment fully insured medical business.
* Increases in per member Commercial segment fully insured medical costs
in the range of 9 to 11 percent.
* Commercial segment SG&A ratio of between 15.5 and 16.5 percent.
* MedicareAdvantage (formerly Medicare+Choice) membership of between
340,000 and 360,000 by year end.
* Growth in per member premiums, net of benefit changes, in the range of
8 to 10 percent for MedicareAdvantage business.
* Increases in per member MedicareAdvantage medical costs in the range of
8 to 10 percent.
* TRICARE premiums and administrative services fees of approximately $2.1
billion.
* Pretax margin for the company's TRICARE business in the range of 2 to 4
percent.
* Government segment SG&A ratio of between 11 and 12 percent.
* An effective tax rate of approximately 34 percent.
* Cash flows from operating activities of $475 million to $525 million.
* Capital expenditures of approximately $100 million.
Conference Call
Humana will host a conference call, as well as a virtual slide presentation, at 9:00 a.m. eastern time today to discuss its financial results for the quarter and earnings guidance.
All parties interested in the audio only portion of the conference call are invited to dial 888-625-7430. No password is required. The company suggests participants dial in approximately ten minutes in advance of the call.
A live virtual presentation (audio with slides) will be available and may be accessed via Humana's Investor Relations page at www.humana.com. The company suggests web participants sign on approximately 15 minutes in advance of the call. The company also suggests web participants visit the site well in advance of the call to run a system test and to download any free software needed to view the presentation.
For those unable to participate in the live event, the virtual presentation archive will be available in the Presentations section of the Investor Relations page at www.humana.com, approximately two hours following the live web cast. An audio recording of the conference call will also be available in the Audio Archives located on the Investor Relations page at www.humana.com approximately two hours after the live call.
This news release contains forward-looking statements. The forward- looking statements made in the news release are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be significantly impacted by certain risks and uncertainties described in the following documents, as filed by Humana with the Securities and Exchange Commission:
* Form 10-K for the year ended December 31, 2002;
* Form 10-Qs for the quarters ended March 31, 2003, June 30, 2003, and
September 30, 2003.
Humana Inc., headquartered in Louisville, Kentucky, is one of the nation's largest publicly traded health benefits companies, with approximately 6.8 million medical members located primarily in 18 states and Puerto Rico. Humana offers coordinated health insurance coverage and related services -- through traditional and Internet-based plans -- to employer groups, government-sponsored plans, and individuals.
More information regarding Humana is available via the Internet at www.humana.com, including copies of:
* Annual report to stockholders;
* Securities and Exchange Commission filings;
* Most recent investor conference presentation;
* Quarterly earnings press releases;
* Audio archive of most recent earnings release conference call;
* Calendar of events (includes upcoming earnings conference call dates,
times, and access number, as well as planned participation in investor
conferences)
Humana Inc.
In thousands
December 31, Percent
Ending Medical Membership 2003 2002 Difference Change
Commercial:
Fully insured 2,352.8 2,340.3 12.5 0.5
ASO 712.4 652.2 60.2 9.2
Total Commercial 3,065.2 2,992.5 72.7 2.4
Government:
Medicare+Choice 328.6 344.1 (15.5) (4.5)
Medicaid 468.9 506.0 (37.1) (7.3)
TRICARE 1,849.7 1,755.8 93.9 5.3
TRICARE ASO 1,057.2 1,048.7 8.5 0.8
Total Government 3,704.4 3,654.6 49.8 1.4
Total ending medical
membership 6,769.6 6,647.1 122.5 1.8
December 31, Percent
Ending Specialty Membership 2003 2002 Difference Change
Commercial:
Dental-fully insured 767.6 781.4 (13.8) (1.8)
Dental-ASO 379.8 313.2 66.6 21.3
Total Dental 1,147.4 1,094.6 52.8 4.8
Group life 502.4 523.3 (20.9) (4.0)
Short-term disability 18.3 22.1 (3.8) (17.2)
Total ending specialty
membership 1,668.1 1,640.0 28.1 1.7
Three months ended Twelve months ended
December 31, December 31,
Premiums 2003 2002 2003 2002
Commercial:
Fully insured medical $1,584,950 $1,422,602 $6,240,806 $5,499,033
Specialty 81,469 85,948 320,206 337,295
Total Commercial 1,666,419 1,508,550 6,561,012 5,836,328
Government:
Medicare+Choice 634,332 647,666 2,527,446 2,629,597
Medicaid 129,367 119,609 487,100 462,998
TRICARE 622,513 516,685 2,249,725 2,001,474
Total Government 1,386,212 1,283,960 5,264,271 5,094,069
Total premiums $3,052,631 $2,792,510 $11,825,283 $10,930,397
Three months ended Twelve months ended
December 31, December 31,
Administrative services fees 2003 2002 2003 2002
Commercial $31,865 $25,913 $122,846 $103,203
Government 40,023 28,583 148,830 141,193
Total Administrative
services fees $71,888 $54,496 $271,676 $244,396
Humana Inc.
Dollars in thousands, except per share results
Three months ended Twelve months ended
Consolidated Statements December 31, December 31,
of Operations 2003 2002 (a) 2003 (a) 2002 (a)
Revenues:
Premiums $3,052,631 $2,792,510 $11,825,283 $10,930,397
Administrative
services fees 71,888 54,496 271,676 244,396
Investment income 26,777 6,138 122,041 78,833
Other income 1,576 1,888 7,311 7,555
Total revenues 3,152,872 2,855,032 12,226,311 11,261,181
Operating expenses:
Medical 2,534,887 2,326,448 9,879,421 9,138,196
Selling, general
and administrative 486,832 496,553 1,858,028 1,775,069
Depreciation 24,158 26,243 115,167 105,006
Other intangible
amortization 2,389 3,931 11,612 15,724
Total operating
expenses 3,048,266 2,853,175 11,864,228 11,033,995
Income from operations 104,606 1,857 362,083 227,186
Interest expense 4,894 4,364 17,367 17,252
Income (loss) before
income taxes 99,712 (2,507) 344,716 209,934
Provision (benefit)
for income taxes 33,403 (802) 115,782 67,179
Net income (loss) $66,309 ($1,705) $228,934 $142,755
Basic earnings (loss)
per common share $0.41 ($0.01) $1.44 $0.87
Diluted earnings (loss)
per common share $0.41 ($0.01) $1.41 $0.85
Shares used in computing
basic earnings per
common share (000's) 161,225 160,943 158,968 163,489
Shares used in computing
diluted earnings per
common share (000's) 163,724 160,943 161,960 167,801
Operating Results by Segment
Commercial pretax
income (loss) 14,062 (60,702) 121,010 (15,174)
Government pretax income 85,650 58,195 223,706 225,108
Consolidated pretax
income (loss) 99,712 (2,507) 344,716 209,934
Key Ratios
Medical expense ratio
Commercial 83.6% 83.7% 82.9% 83.5%
Government 82.3% 82.8% 84.3% 83.8%
Total 83.0% 83.3% 83.5% 83.6%
Selling, general, and
administrative expense
ratio
Commercial 17.3% 20.7% 16.9% 18.0%
Government 13.5% 13.6% 13.4% 13.5%
Total 15.6% 17.4% 15.4% 15.9%
(a) Refer to the Summary of Unusual Items and Charges of these statistical
pages within this press release for detail of unusual items and
charges included in these results of operations.
Humana Inc.
Dollars in thousands, except per share results
Summary of Unusual Items and Charges
For the twelve months ended December 31, 2003
Pretax Impact After- Diluted
Commer- Govern- Consoli- tax EPS
cial ment dated Impact Impact
Investment Income:
Gain on sale of venture
capital investment $12,423 $2,777 $15,200 $10,108 $0.06
Selling, general, and
administrative expense:
Write-down of building
and equipment (4,325) (12,908) (17,233) (10,529) (0.07)
Depreciation:
Software abandonment
charges (13,527) -- (13,527) (8,265) (0.05)
Total 2003 unusual
items and charges ($5,429)($10,131) ($15,560) ($8,686) ($0.05)
Impact of unusual items
and charges on the SG&A
expense ratio 0.06% 0.24% 0.14%
For the three and twelve months ended December 31, 2002
Pretax Impact After- Diluted
Commer- Govern- Consoli- tax EPS
cial ment dated Impact Impact
Investment Income:
Impairment in the fair
value of certain
private debt and equity
Investments ($16,225) ($3,346) ($19,571)($17,863) ($0.11)
Selling, general, and
administrative expense:
Severance and related
employee benefit charges (21,838) (10,267) (32,105) (19,616) (0.12)
Long-lived asset
impairment and lease
discontinuance costs (2,441) (1,331) (3,772) (2,305) (0.01)
Reserves for liabilities
related to previous
acquisitions (28,397) (1,743) (30,140) (18,416) (0.11)
Total impact on selling,
general and
administrative expense (52,676) (13,341) (66,017) (40,337) (0.24)
Total 2002 unusual items
and charges ($68,901)($16,687) ($85,588)($58,200) ($0.35)
Impact of unusual items
and charges on the SG&A
expense ratio:
For the three months
ended December 31, 2002 3.43% 1.02% 2.32%
For the twelve months
ended December 31, 2002 0.89% 0.25% 0.59%
Humana Inc.
Dollars in thousands, except per share results
December 31, September 30, December 31,
Consolidated Balance Sheets 2003 2003 2002
Assets
Current assets:
Cash and cash equivalents $931,404 $635,837 $721,357
Investment securities 1,676,642 1,688,679 1,395,068
Receivables, net:
Premiums 452,404 461,684 321,135
Administrative services fees 13,583 10,952 68,316
Other 247,298 288,836 250,857
Total current assets 3,321,331 3,085,988 2,756,733
Property and equipment, net 416,472 413,402 459,842
Other assets:
Long-term investment securities 319,167 314,187 299,489
Goodwill 776,874 776,874 776,874
Other 459,479 431,360 586,999
Total other assets 1,555,520 1,522,421 1,663,362
Total assets $5,293,323 $5,021,811 $4,879,937
Liabilities and Stockholders'
Equity
Current liabilities:
Medical and other
expenses payable $1,272,156 $1,296,566 $1,142,131
Trade accounts payable
and accrued expenses 440,340 438,926 552,689
Book overdraft 219,054 218,751 94,882
Unearned premium revenues 333,071 108,161 335,757
Short-term debt -- -- 265,000
Total current liabilities 2,264,621 2,062,404 2,390,459
Long-term debt 642,638 644,440 339,913
Other long-term liabilities 550,115 555,843 543,091
Total liabilities 3,457,374 3,262,687 3,273,463
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par;
10,000,000 shares authorized;
none issued -- -- --
Common stock, $0.16 2/3 par;
300,000,000 shares authorized;
173,909,127 shares issued at
December 31, 2003 28,984 28,854 28,556
Capital in excess of par value 974,975 961,015 931,089
Retained earnings 949,811 883,502 720,877
Accumulated other comprehensive
income 16,909 20,086 22,455
Unearned stock compensation (754) (357) (6,516)
Treasury stock, at cost,
12,018,281 shares at December
31, 2003 (133,976) (133,976) (89,987)
Total stockholders' equity 1,835,949 1,759,124 1,606,474
Total liabilities and
stockholders' equity $5,293,323 $5,021,811 $4,879,937
Debt to total capitalization ratio 25.9% 26.8% 27.4%
Humana Inc.
Dollars in thousands
Three months ended Twelve months ended
December 31, December 31,
Consolidated Statements
of Cash Flows 2003 2002 2003 2002
Cash flows from operating
activities
Net income (loss) $66,309 ($1,705) $228,934 $142,755
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Building and equipment writedown -- 2,448 17,233 2,448
Depreciation and amortization 26,547 30,174 126,779 120,730
Provision for deferred
income taxes 2,038 15,340 32,251 49,561
Changes in operating assets
and liabilities:
Receivables (28,736) 53,931 (15,220) (177,081)
Other assets (17,325) (2,732) 25,110 (2,464)
Medical and other
expenses payable (24,410) (22,300) 130,025 55,745
Other liabilities 43,931 79,605 (107,432) 84,347
Unearned revenues 224,910 245,780 (2,686) 10,717
Other (3,044) 22,169 (21,854) 34,650
Net cash provided by
operating activities 290,220 422,710 413,140 321,408
Cash flows from investing
activities
Purchases of property
and equipment (36,288) (28,243) (101,268) (112,136)
Proceeds from sales of
property and equipment 8,699 428 11,182 1,849
Purchases of investment
securities (913,183) (929,275) (4,572,577)(2,569,078)
Proceeds from maturities
of investment securities 183,975 219,736 769,436 492,935
Proceeds from sales of
investment securities 751,618 719,149 3,520,064 2,058,273
Net cash used in investing
activities (5,179) (18,205) (373,163) (128,157)
Cash flows from financing activities
Proceeds from swap exchange -- -- 31,556 --
Proceeds from issuance of
senior notes -- -- 299,139 --
Net commercial paper conduit
(repayments) borrowings -- -- (265,000) 2,000
Change in book overdraft 303 (9,520) 124,172 (57,875)
Common stock repurchases -- (48,596) (44,147) (74,035)
Debt issue costs (648) (990) (3,331) (1,549)
Other 10,871 222 27,681 8,145
Net cash provided by (used
in) financing activities 10,526 (58,884) 170,070 (123,314)
Increase in cash and
cash equivalents 295,567 345,621 210,047 69,937
Cash and cash equivalents
at beginning of period 635,837 375,736 721,357 651,420
Cash and cash equivalents
at end of period $931,404 $721,357 $931,404 $721,357
Humana Inc.
Percentage of Ending Membership Under Capitation Arrangements
Commercial Segment
Fully Total
Insured ASO Segment
December 31, 2003
Capitated HMO
hospital system based A 5.4% -- 4.2%
Capitated HMO
physician group based A 3.0% -- 2.3%
Risk-sharing B 2.9% -- 2.2%
All other membership 88.7% 100.0% 91.3%
Total 100.0% 100.0% 100.0%
December 31, 2002
Capitated HMO
hospital system based A 6.3% -- 4.9%
Capitated HMO
physician group based A 3.2% -- 2.5%
Risk-sharing B 2.9% -- 2.3%
All other membership 87.6% 100.0% 90.3%
Total 100.0% 100.0% 100.0%
Government Segment Consol.
Medicare TRICARE Total Total
+Choice Medicaid TRICARE ASO Segment Medical
December 31, 2003
Capitated HMO
hospital system
based A 11.8% 2.9% -- -- 1.4% 2.7%
Capitated HMO
physician group
based A 1.8% 46.9% -- -- 6.1% 4.4%
Risk-sharing B 47.9% 43.7% -- -- 9.8% 6.4%
All other membership 38.5% 6.5% 100.0% 100.0% 82.7% 86.5%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
December 31, 2002
Capitated HMO
hospital system
based A 13.7% 2.4% -- -- 1.6% 3.1%
Capitated HMO
physician group
based A 3.1% 57.9% -- -- 8.3% 5.7%
Risk-sharing B 46.6% 32.4% -- -- 8.9% 5.9%
All other membership 36.6% 7.3% 100.0% 100.0% 81.2% 85.3%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
A - In a limited number of circumstances, we contract with hospitals and
physicians to accept financial risk for a defined set of HMO
membership. In transferring this risk, we prepay these providers a
monthly fixed-fee per member to coordinate substantially all of the
medical care for their capitated HMO membership, including some
health benefit Administrative functions and claims processing. For
these capitated HMO arrangements, we generally agree to Reimbursement
rates that target a medical expense ratio ranging from 82% to 89%.
Providers participating in hospital-based capitated HMO arrangements
generally receive a monthly payment for all of the services within
their system for their HMO membership. Providers participating in
physician-based capitated HMO arrangements generally have
Subcontracted specialist physicians and are responsible for
reimbursing such hospitals and physicians for services rendered to
their HMO membership.
B - In some circumstances, we contract with physicians under risk-sharing
arrangements whereby physicians have assumed some level of risk for
all or a portion of the medical costs of their HMO membership.
Although these arrangements do include capitation payments for
services rendered, we process substantially all of the claims under
these arrangements.
Humana Inc.
Medical Claim Reserves - Details and Statistics
Change in medical and other expenses payable:
The change in medical and other expenses payable is summarized as follows:
For the Twelve For the Twelve
Months Ended Months Ended
December 31, 2003 December 31, 2002
Balances at January 1 $1,142,131 $1,086,386
Incurred related to:
Current year 9,955,491 9,125,915
Prior years - non-TRICARE (1) (33,432) (13,404)
Prior years - TRICARE (2) (42,638) 25,685
Total incurred 9,879,421 9,138,196
Paid related to:
Current year (8,710,393) (8,002,610)
Prior years (1,039,003) (1,079,841)
Total paid (9,749,396) (9,082,451)
Balances at end of period $1,272,156 $1,142,131
The impact of any reduction of "incurred related to prior years"
claims may be offset as we re-establish the "incurred related to
current year." Our reserving practice is to consistently recognize the
actuarial best estimate of our ultimate liability for our claims
within a level of confidence required to meet actuarial Standards.
Thus, only when the release of a prior year reserve is not offset with
the same level of conservatism in estimating the current year reserve
will the redundancy reduce medical expense. We have consistently
applied this methodology in determining our best estimate for unpaid
claims liability in each period.
(1) Changes in estimates of non-TRICARE incurred claims for prior years
recognized during 2003 and 2002 related primarily to our commercial
lines of business.
(2) Changes in estimates of TRICARE incurred claims for prior years
recognized during 2003 resulted primarily from utilization levels
developing favorably from the levels originally estimated for the
second half of 2002. As a result of substantial risk-sharing
provisions with the Department of Defense and with subcontractors,
any resulting impact on current period operations is substantially
mitigated. Changes in estimates of medical Expenses payable for
TRICARE also may result from issues that entitle us to additional
revenues derived from change orders or the bid price adjustment
process, which was the case with substantially all of the unfavorable
Development for prior periods recognized during 2002.
Humana Inc.
Dollars in thousands
Medical Claim Reserves - Details and Statistics
Medical and Other Expenses Payable Detail:
December 31, September 30, December 31,
2003 2003 2002
A IBNR and other medical
expenses payable $767,712 $788,124 $650,606
B TRICARE IBNR 267,146 280,429 212,826
C TRICARE other medical
expenses payable 37,849 25,941 37,793
D Unprocessed claim inventories 109,700 106,800 92,300
E Processed claim inventories 74,262 47,515 105,422
F Payable to pharmacy benefit
administrator 15,487 47,757 43,184
Total medical and other
expenses payable $1,272,156 $1,296,566 $1,142,131
A IBNR represents an estimate of medical expenses payable for claims
incurred but not reported (IBNR) at the balance sheet date. The level
of IBNR is primarily impacted by membership levels, medical claim
trends and the receipt cycle time, which represents the length of time
between when a claim is initially incurred and when the claim form is
received (i.e. a shorter time span results in lower reserves for claims
IBNR).
B TRICARE IBNR has increased from 2002 primarily due to an increase in
claim inventories at our third party claim administrator for claims not
submitted electronically.
C TRICARE other medical expense payable may include liabilities to
subcontractors and/or risk share payables to the Department of Defense.
The level of these balances may fluctuate from period to period due to
the timing of payment (cutoff) and whether or not the balances are
payables or receivables (receivables from the Department of Defense are
classified as "receivables" in our balance sheet).
D Unprocessed claim inventories represent the estimated valuation of
claims received but not yet fully processed. TRICARE claim inventories
are not included in this amount as an independent third party
administrator processes all TRICARE medical claims on our
behalf. Reserves for TRICARE claims inventory are included in TRICARE
IBNR.
E Processed claim inventories represent the estimated valuation of
processed claims that are in the post claim Adjudication process, which
consists of administrative functions such as audit and check batching
and handling.
F The balance due to our pharmacy benefit administrator fluctuates due to
bi-weekly payments and the month-end cutoff.
Receipt Cycle Time:
Due to increasing electronic connectivity and other efficiencies gained by our providers with regards to the claim submission process, the average length of time between when a claim was initially incurred and when the claim form was received has generally shortened over the past several years. Below is a summary:
Average # of Days from Incurred Date to Receipt Date (1)
2003 2002 Change % Change
1st Quarter Average 17.1 19.0 (1.9) -10.0%
2nd Quarter Average 16.7 18.1 (1.4) -7.7%
3rd Quarter Average 16.6 17.3 (0.7) -4.0%
4th Quarter Average 16.6 16.9 (0.3) -1.8%
Full Year Average 16.7 17.8 (1.1) -6.2%
(1) Receipt cycle time data for our 3 largest claim processing platforms
representing approximately 90% of our claims volume.
Humana Inc.
Medical Claim Reserves - Details and Statistics
Unprocessed Claim Inventories:
The estimated valuation and number of claims on hand that are yet to be processed are as follows:
Estimated Number
Valuation Claim Item of Days
Date (000) Counts On Hand
12/31/2001 $125,400 518,100 5.0
3/31/2002 $121,000 559,600 5.2
6/30/2002 $110,300 513,100 4.8
9/30/2002 $108,800 496,200 4.8
12/31/2002 $92,300 424,200 4.5
3/31/2003 $99,000 421,700 4.4
6/30/2003 $92,100 446,600 4.7
9/30/2003 $106,800 528,400 5.8
12/31/2003 $109,700 443,000 4.9
Days in Claims Payable (Quarterly):
A common metric for monitoring medical claim reserve levels relative to the medical claim expenses is days in claims payable, or DCP, which represents the medical claim liabilities at the end of the period divided by average medical expenses per day in the quarterly period. Since we have some providers under capitation payment arrangements (which do not require a medical claim IBNR reserve), we have also summarized this metric excluding capitation expenses.
Days DCP
Quarter in Claims Annual Excluding Annual
Ended Payable (DCP) Change % Change Capitation Change % Change
12/31/2001 47.4 (3.9) -7.6% 57.1 (4.4) -7.2%
3/31/2002 47.2 (2.3) -4.6% 56.2 (3.4) -5.7%
6/30/2002 46.8 (3.1) -6.2% 55.3 (4.7) -7.8%
9/30/2002 46.6 (2.5) -5.1% 55.3 (3.9) -6.6%
12/31/2002 45.2 (2.2) -4.6% 53.3 (3.8) -6.7%
3/31/2003 46.5 (0.7) -1.5% 54.7 (1.5) -2.7%
6/30/2003 47.9 1.1 2.4% 56.2 0.9 1.6%
9/30/2003 47.2 0.6 1.3% 54.5 (0.8) -1.4%
12/31/2003 46.2 1.0 2.2% 53.2 (0.1) -0.2%
This metric fluctuates due to all of the issues reviewed above, including the change in the receipt cycle time, the change in medical claim inventories, the change in TRICARE liability balances, and the timing of our bi-weekly payment to our pharmacy benefits administrator. An annual recap follows:
2003 2002
4th quarter-prior year 45.2 47.4
Impact of change in claim receipt cycle time (0.5) (2.6)
Impact of change in unprocessed claim inventories 0.6 (1.3)
Impact of change in processed claim inventories (1.1) 0.2
Impact of changing TRICARE reserve balances 2.0 0.3
Impact of change in pharmacy payment cutoff (1.0) 0.7
All other 1.0 0.5
Year to date-current year 46.2 45.2
SOURCE Humana Inc.