Humana Inc. Reports Financial Results for Fourth Quarter And Full Year 2005
LOUISVILLE, Ky.--(BUSINESS WIRE)--Feb. 6, 2006--Humana Inc. (NYSE: HUM):
- 2005 consolidated revenues of $14.4 billion
- 4Q05 EPS up 34 percent
- 2005 cash flows from operations of more than $625 million
- Medical membership of 7.1 million at December 31, 2005
Humana Inc. today reported $0.39 in diluted earnings per common share (EPS) for the quarter ended December 31, 2005 (4Q05) compared to EPS of $0.29 for the quarter ended December 31, 2004 (4Q04), an increase of 34 percent.
For the year ended December 31, 2005 (FY05), the company reported EPS of $1.87 versus $1.72 for the year ended December 31, 2004 (FY04), an increase of 9 percent.
"Humana achieved record levels of revenues, net income and membership in 2005, as our Medicare business grew significantly and our Commercial profits improved," said Michael B. McCallister, Humana's president and chief executive officer. "But the real story of 2005 was our successful preparation for unprecedented Medicare expansion in 2006 and beyond. We are now superbly positioned to take advantage of this multi-year growth opportunity."
The company also evaluates its earnings performance on a non-GAAP basis. See management's explanation under item (a) of the "Footnotes" section of this news release. Below is a reconciliation of GAAP to non-GAAP results for 4Q05 and FY05. There were no non-GAAP reconciling items for 4Q04 or FY04.
4Q05 Consolidated Results of EPS Operations Pretax Pretax Net Growth ($ in thousands except EPS) Income Margin Income EPS Rate ---------------------------------------------------------------------- GAAP results $99,216 2.7% $64,607 $0.39 34% ---------------------------------------------------------------------- Expenses related to Hurricane Katrina (b) 20,314 0.6% 12,676 0.07 ---------------------------------------------------------------------- Non-GAAP results (a) $119,530 3.3% $77,283 $0.46 59% ----------------------------------------------------------------------
FY05 Consolidated Results of EPS Operations Pretax Pretax Net Growth ($ in thousands except EPS) Income Margin Income EPS Rate ---------------------------------------------------------------------- GAAP results $421,714 2.9% $308,483 $1.87 9% ---------------------------------------------------------------------- Class action litigation settlement (c) 71,850 44,834 0.27 ---------------------------------------------------------------------- Expenses related to Hurricane Katrina (b) 27,013 16,857 0.10 ---------------------------------------------------------------------- Realization of tax gain contingency (d) - (22,800) (0.14) ---------------------------------------------------------------------- Total reconciling items 98,863 0.7% 38,891 0.23 ---------------------------------------------------------------------- Non-GAAP results (a) $520,577 3.6% $347,374 $2.10 22% ----------------------------------------------------------------------
The company now expects EPS for the year ending December 31, 2006 (FY06) of at least $2.81, including expenses of $0.10 per share resulting from new stock option accounting rules implemented on January 1, 2006. Below is an analysis of the company's projected earnings for FY06 on a non-GAAP basis, as well as the anticipated stock options comparability restatement for FY05.
EPS FY06E FY05 Growth Rate ---------------------------------------------------------------------- GAAP results At least $2.81 $1.87 At least 50% ---------------------------------------------------------------------- Excess net realized capital gains (f) (0.11) - ---------------------------------------------------------------------- Class action litigation settlement (c) - 0.27 ---------------------------------------------------------------------- Expenses related to Hurricane Katrina (b) - 0.10 ---------------------------------------------------------------------- Realization of tax gain contingency (d) - (0.14) ---------------------------------------------------------------------- Projected options expense restatement (e) - (0.08) ---------------------------------------------------------------------- Total reconciling items (0.11) 0.15 ---------------------------------------------------------------------- Non-GAAP results (a) (e) At least $2.70 $2.02 At least 34% ----------------------------------------------------------------------
Increases in Medicare membership and improved Government Segment underwriting results combined with improved Commercial Segment earnings drove the year-over-year increases in both GAAP and non-GAAP EPS during 4Q05 and FY05.
Revenues - 4Q05 consolidated revenues rose 14 percent to $3.66 billion from $3.21 billion in 4Q04, with total premium and administrative services fees also up 14 percent compared to the prior year's quarter. FY05 consolidated revenues were up 10 percent to $14.42 billion versus $13.10 billion for FY04. Continued increases in membership in the company's higher-premium Medicare plans more than offset reduced revenues from its Commercial Segment membership on a year-over-year basis for both the quarter and the full year.
Medical costs - the company's medical expense ratio (medical expenses as a percent of premium revenue or MER) of 82.1 percent in 4Q05 decreased 260 basis points from an MER of 84.7 in 4Q04. Excluding the 60 basis point increase to the MER associated with the hurricane, the related consolidated non-GAAP ratio of 81.5 percent declined 320 basis points with improvements in both the Government and Commercial Segment MERs.
Selling, general, & administrative (SG&A) expenses - the company's consolidated SG&A expense ratio (SG&A expenses as a percent of premiums plus administrative services fees or SG&A expense ratio) increased to 16.7 percent for 4Q05 from 14.5 percent in 4Q04, the result of significant Medicare investment spending during 4Q05 to prepare for 2006 Medicare opportunities.
Government Segment Results Summary ---------------------------------- 4Q05 Government Segment Results Pretax Pretax ($ in thousands) MER Income Margin ---------------------------------------------------------------------- GAAP results 81.3% $57,395 2.9% ---------------------------------------------------------------------- Impact of non-GAAP reconciling item (b) (0.2%) 4,388 0.3% ---------------------------------------------------------------------- Non-GAAP results (a) 81.1% $61,783 3.2% ----------------------------------------------------------------------
FY05 Government Segment Results SG&A Pretax Pretax ($ in thousands) MER Expense Ratio Income Margin ---------------------------------------------------------------------- GAAP results 83.1% 12.6% $323,268 4.2% ---------------------------------------------------------------------- Impact of non-GAAP reconciling items (b) (c) (0.1%) (0.5%) 39,277 0.6% ---------------------------------------------------------------------- Non-GAAP results (a) 83.0% 12.1% $362,545 4.8% ----------------------------------------------------------------------
Pretax results:
- Government Segment pretax earnings were $57.4 million in 4Q05
compared to $35.9 million in 4Q04. Non-GAAP pretax income for
the segment of $61.8 million improved year over year by $25.9
million or 72 percent, the result of higher Medicare
membership and the related operational leverage during 4Q05 as
well as improved TRICARE earnings performance.
Enrollment:
- Medicare Advantage membership rose to 557,800 at December 31, 2005, an increase of 180,600 (48 percent) from December 31, 2004 and 54,700 (11 percent) from September 30, 2005. The company's expanded participation in various Medicare programs and markets during the quarter combined with the company's increased marketing efforts for these programs led to the higher membership level.
- The company continues to expect Medicare Advantage geographic expansions to contribute to organic enrollment growth primarily during the first six months of 2006, with projected Medicare Advantage membership in the range of 900,000 to 1.1 million by the end of FY06. Membership in the company's stand-alone Prescription Drug Plans (PDPs) are anticipated to approximate 1.9 million to 2.2 million members by the end of 2006 with enrollment also primarily occurring during the first half of 2006.
- As expected, TRICARE membership of 2,889,100 at December 31, 2005 was essentially unchanged from September 30, 2005. The company also anticipates no material change in TRICARE membership during FY06.
- Medicare Advantage premiums of $1.22 billion in 4Q05 increased 54 percent compared to $791.1 million in 4Q04, the result of substantially higher enrollment and increases in per-member premiums.
- Medicare Advantage premiums per member increased 7 percent year over year during 4Q05 due primarily to higher per-member standard reimbursement rates from the government, the company's effectiveness in demonstrating the risk profile of its membership and the acquisition of CarePlus Health Plans of Florida in February 2005.
- TRICARE premiums and administrative services fees during 4Q05 of $585.3 million compare to $486.9 million in 4Q04. The year-over-year increase reflects a higher negotiated premium for the second option period as well as a full complement of membership under the new contract for the full quarter in 2005.
- The Government Segment MER decreased 440 basis points to 81.3 percent in 4Q05 compared to 85.7 percent in the prior year's quarter, with improvements in the MERs for each of the lines of business within this segment. Excluding the 20 basis point increase in the MER from Hurricane Katrina, the related non-GAAP ratio of 81.1 percent declined 460 basis points reflecting lower inpatient utilization trends in its government portfolio.
- The Government Segment's SG&A expense ratio for 4Q05 of 15.5 percent was 360 basis points higher than that for 4Q04 of 11.9 percent driven by expenses associated with the 2006 Medicare opportunity incurred during 4Q05.
Revenues:
Medical Expenses:
SG&A Expenses:
Commercial Segment Results Summary ---------------------------------- 4Q05 Commercial Segment Results Pretax Pretax ($ in thousands) MER Income Margin ---------------------------------------------------------------------- GAAP results 82.9% $41,821 2.4% ---------------------------------------------------------------------- Impact of non-GAAP reconciling item (b) (1.0%) 15,926 1.0% ---------------------------------------------------------------------- Non-GAAP results (a) 81.9% $57,747 3.4% ----------------------------------------------------------------------
FY05 Commercial Segment Results SG&A Pretax Pretax ($ in thousands) MER Expense Ratio Income Margin ---------------------------------------------------------------------- GAAP results 83.3% 18.3% $98,446 1.4% ---------------------------------------------------------------------- Impact of non-GAAP reconciling items (b) (c) (0.3%) (0.6%) 59,586 0.9% ---------------------------------------------------------------------- Non-GAAP results (a) 83.0% 17.7% $158,032 2.3% ----------------------------------------------------------------------
-
Pretax results:
- Results for the Commercial Segment during 4Q05 reflect pretax
income of $41.8 million compared to $27.3 million in 4Q04.
Non-GAAP pretax income for the segment of $57.7 million
increased $30.4 million compared to 4Q04. Commercial Segment
operating earnings in 4Q05 reflect improvements in utilization
trends experienced primarily during the second half of 2005.
Enrollment:
- Commercial Segment medical membership of 3,170,800 at December 31, 2005 decreased approximately 4 percent or 134,300 from the prior year end, driven by a decrease in fully-insured accounts.
- The company's HumanaOne product demonstrated continued growth
during 4Q05, increasing individual medical membership by 3
percent sequentially with a year-to-date growth rate of 25
percent. ASO membership of 1,171,000 and consumer-choice
membership of 371,100 at December 31, 2005 reflect the
company's expanded presence in each of these sectors. ASO
membership grew 15 percent during FY05 while consumer choice
membership grew 52 percent during the same period.
Revenues:
- Premiums and administrative services fees for the Commercial Segment decreased 5 percent to $1.67 billion in 4Q05 compared to $1.77 billion in the prior year's quarter, as an increase in administrative services fees resulting from a 15 percent increase in ASO membership were more than offset by lower premiums due to declines in at-risk enrollment.
- Commercial Segment medical premiums for fully insured groups
increased approximately 8 percent on a per-member basis during
4Q05 compared to 4Q04. The company anticipates FY06 commercial
premiums for fully insured group membership to increase at
least equal to the expected rise in per-member medical costs.
Medical Expenses:
- In 4Q05, the Commercial Segment MER of 82.9 percent was 100 basis points lower than the 4Q04 MER of 83.9 percent. Excluding the 100 basis point increase in the MER from Hurricane Katrina, the related non-GAAP ratio of 81.9 percent declined 200 basis points reflecting lower inpatient utilization trends in its commercial portfolio.
- Per-member medical costs for commercial fully insured group
accounts are forecasted to rise in the range of 7 to 9 percent
for FY06.
SG&A Expenses:
- The Commercial Segment SG&A expense ratio of 18.1 percent for 4Q05 compares to 16.6 percent in 4Q04, the result of lower average fully-insured medical enrollment and an increase in the percentage of ASO commercial membership to 37 percent in 4Q05 versus 31 percent in the prior year.
Cash Flows from Operations
Cash flows used in operations for 4Q05 of $246.5 million compared to $19.5 million cash flows provided by operations in 4Q04. The company also evaluates operating cash flows on a non-GAAP basis, as described in footnote (g) of the "Footnotes" section of this news release.
Cash flows from operations ($ 4Q04 4Q05 FY04 FY05 FY06 in millions) Actual Actual Actual Actual Expected ---------------------------------------------------------------------- GAAP cash flows provided by (used in) operations $19.5 ($246.5) $347.8 $625.6 $750 to $850 ---------------------------------------------------------------------- Timing of premium payment received from CMS (g) - 384.8 211.9 19.8 - ---------------------------------------------------------------------- Non-GAAP cash flows provided by operations (a) (g) $19.5 $138.3 $559.7 $645.4 $750 to $850 ----------------------------------------------------------------------
Non-GAAP cash flows provided by operations increased to $138.3 million in 4Q05 from $19.5 million in 4Q04 driven by improved operating performance in 4Q05 and the negative impact upon cash flows of the final phase of the TRICARE contract transition in 4Q04.
The company now anticipates that cash flows from operations for FY06 will be in the range of $750 million to $850 million driven by expected higher earnings.
Balance Sheet
At December 31, 2005, cash and investment securities comprised 51 percent of the company's total assets compared to 52 percent at September 30, 2005. Debt as a percent of total capitalization (debt plus stockholders' equity) increased 400 basis points to 24.8 percent from 20.8 percent at September 30, 2005 as the company increased its borrowings during 4Q05 primarily in anticipation of funding additional capital into certain subsidiaries during FY06 in conjunction with anticipated growth in revenues.
Cash and investments at the parent company at December 31, 2005 of $419.6 million compared to $439.3 million at December 31, 2004, reflecting the company's use of parent company cash for acquisition activity during FY05.
Footnotes
(a) The Company has included certain financial measures that are not in accordance with Generally Accepted Accounting Principles (GAAP) in its summary of financial results and earnings projections within this news release. The company believes that these non-GAAP measures, when presented in conjunction with comparable GAAP measures, are useful to both management and its investors in analyzing the company's ongoing business and operating performance. Internally, management uses these non-GAAP financial measures as indicators of business performance, as well as for operational planning and decision making purposes. Non-GAAP financial measures should be considered in addition to, but not a substitute for, or superior to, financial measures prepared in accordance with GAAP.
(b) During the latter half of 2005, certain of Humana's operations were affected by the unusually harsh impact of Hurricane Katrina. Expenses related to Hurricane Katrina primarily stem from the company's efforts, in close cooperation with Departments of Insurance in the affected states, to help our members by offering participating-provider benefits at non-participating providers, paying claims for members who were unable at that time to meet their premium obligations and similar measures. Expenses related to Hurricane Katrina are not expected to have a material impact upon the company's results for FY06.
(c) On October 18, 2005, the company announced it had reached an agreement to settle a nationwide class action suit that has been pending in U.S. District Court in Miami for more than six years. The agreement has received preliminary court approval with final approval anticipated in 1Q06.
(d) In the first quarter of 2005 the company realized a federal income tax benefit from a contingency item that was resolved in February 2005.
(e) On January 1, 2006, the company adopted the provisions of Statement of Financial Accounting Standards No. 123R, "Share-Based Payment" using the retrospective transition model outlined therein. Thus, the company anticipates restating its FY05 results during FY06 to allow for comparability.
(f) During 1Q06 the company realized a gain on the sale of an investment totaling approximately $52 million (pretax) or $0.20 in EPS, which is $34 million (pretax) or $0.13 per share higher than the capital gains assumed in the company's 2006 non-GAAP EPS guidance of at least $2.70, and $34 million (pretax) higher than the capital gains realized in 2005. The company, in turn, donated $0.02 per share of the excess gains to the Humana Foundation.
(g) When reviewing and analyzing Humana's operating cash flows, company management applies the CMS premium payment in each month to match the corresponding disbursements. To do otherwise distorts meaningful analysis of the company's operating cash flow. Therefore, decisions such as management's forecasting and business plans regarding cash flow use this non-GAAP financial measure.
Conference Call & Virtual Slide Presentation
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 the company's expectations for future earnings.
A live virtual presentation (audio with slides) 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.
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. 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.
Cautionary Statement
This news release contains forward-looking statements. The forward-looking statements herein 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 company's Form 10-K for the year ended December 31, 2004 and its Form 10-Qs for the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005, as filed by Humana with the Securities and Exchange Commission.
About Humana
Humana Inc., headquartered in Louisville, Ky., is one of the nation's largest publicly traded health benefits companies, with approximately 9 million medical members. Humana offers a diversified portfolio of health insurance products and related services - through traditional and consumer-choice plans - to employer groups, government-sponsored plans, and individuals.
More information regarding Humana is available to investors via the Investor Relations page of the company's web site at http://www.humana.com, including copies of:
- Annual report to stockholders;
- Securities and Exchange Commission filings;
- Most recent investor conference presentation;
- Quarterly earnings news releases;
- Replay of most recent earnings release conference call;
- Calendar of events (includes upcoming earnings conference call dates, times, and access number, as well as planned interaction with research analysts and institutional investors);
- Corporate Governance information.
Humana Inc. - GAAP Earnings Guidance Points
For the year ending December 31, 2006
As of February 6, 2006
Diluted earnings FY06: At least $2.81 per share
per common share 1Q06: $0.50 to $0.55 per share
----------------------------------------------------------------------
Revenues Consolidated: $21 billion to $22 billion
Medicare Advantage: $8.5 billion to $10.2 billion
Medicare stand-alone PDPs: $1.9 billion to $2.5
billion
TRICARE: $2.5 billion to $2.9 billion
Commercial: $6.5 billion to $7.0 billion
----------------------------------------------------------------------
Year-end medical Medicare Advantage: 900,000 to 1.1 million
membership Medicare stand-alone PDPs: 1.9 million to 2.2
million
TRICARE: No material change from prior year
Medicaid: No material change from prior year
Commercial: No material change from prior year
----------------------------------------------------------------------
Selling, general Consolidated SG&A expense ratio of 12% to 13%
& administrative
expenses
----------------------------------------------------------------------
Pretax earnings Medicare Advantage: 3% to 5% pretax margin(1)
(1)excluding Medicare stand-alone PDPs: 1% to 3% pretax
allocation of margin(1)
investment TRICARE: Approximately 3% to 4% pretax margin(1)
and other Commercial Segment: $140 million to $180 million
income and pretax income
interest
expense
----------------------------------------------------------------------
Cash flows from $750 million to $850 million
operations
----------------------------------------------------------------------
Capital $125 million to $135 million
expenditures
----------------------------------------------------------------------
Effective tax Approximately 35% to 37%
rate
----------------------------------------------------------------------
Weighted average Approximately 168 million
shares
outstanding
used to compute
diluted
earnings per
common share
----------------------------------------------------------------------
Statistical Schedules
and Supplementary
Information
Humana Inc.
----------------------------------------------------------------------
In thousands
Ending Medical December 31, Percent
Membership 2005 2004 Difference Change
----------------------------------------------------------------------
Commercial:
Fully insured 1,999.8 2,286.5 (286.7) (12.5)
ASO 1,171.0 1,018.6 152.4 15.0
----------------------------------------------------------------------
Total Commercial 3,170.8 3,305.1 (134.3) (4.1)
----------------------------------------------------------------------
Government:
Medicare Advantage 557.8 377.2 180.6 47.9
Medicaid 457.9 478.6 (20.7) (4.3)
TRICARE 1,750.9 1,789.4 (38.5) (2.2)
TRICARE ASO 1,138.2 1,082.4 55.8 5.2
----------------------------------------------------------------------
Total TRICARE 2,889.1 2,871.8 17.3 0.6
----------------------------------------------------------------------
Total Government 3,904.8 3,727.6 177.2 4.8
----------------------------------------------------------------------
Total ending medical
membership 7,075.6 7,032.7 42.9 0.6
----------------------------------------------------------------------
----------------------------------------------------------------------
Ending Specialty December 31, Percent
Membership 2005 2004 Difference Change
----------------------------------------------------------------------
Commercial:
Dental-fully insured 960.5 825.8 134.7 16.3
Dental-ASO 496.0 420.9 75.1 17.8
----------------------------------------------------------------------
Total Dental 1,456.5 1,246.7 209.8 16.8
Group life 429.2 444.6 (15.4) (3.5)
Short-term disability 16.4 16.9 (0.5) (3.0)
----------------------------------------------------------------------
Total ending
specialty membership 1,902.1 1,708.2 193.9 11.4
----------------------------------------------------------------------
----------------------------------------------------------------------
Three months ended Twelve months ended
December 31, December 31,
Premiums 2005 2004 2005 2004
----------------------------------------------------------------------
Commercial:
Fully insured
medical $1,518,472 $1,633,240 $6,068,115 $6,614,482
Specialty 101,149 89,632 386,747 349,564
----------------------------------------------------------------------
Total Commercial 1,619,621 1,722,872 6,454,862 6,964,046
----------------------------------------------------------------------
Government:
Medicare Advantage 1,218,036 791,064 4,590,362 3,086,598
TRICARE 575,127 475,751 2,407,653 2,127,595
Medicaid 139,609 133,298 548,714 511,193
----------------------------------------------------------------------
Total Government 1,932,772 1,400,113 7,546,729 5,725,386
----------------------------------------------------------------------
Total premiums $3,552,393 $3,122,985 $14,001,591 $12,689,432
----------------------------------------------------------------------
----------------------------------------------------------------------
Three months ended Twelve months ended
Administrative services December 31, December 31,
fees 2005 2004 2005 2004
----------------------------------------------------------------------
Commercial $53,008 $42,244 $209,378 $166,032
Government 10,189 11,132 50,059 106,764
----------------------------------------------------------------------
Total administrative
services fees $63,197 $53,376 $259,437 $272,796
----------------------------------------------------------------------
Humana Inc.
----------------------------------------------------------------------
Dollars in thousands, except per share results
Three months ended Twelve months ended
Consolidated Statements December 31, December 31,
of Income 2005 (a) 2004 2005 (a) 2004
----------------------------------------------------------------------
Revenues:
Premiums $3,552,393 $3,122,985 $14,001,591 $12,689,432
Administrative
services fees 63,197 53,376 259,437 272,796
Investment income 42,856 31,375 142,976 132,838
Other income 4,634 1,889 14,123 9,259
----------------------------------------------------------------------
Total revenues 3,663,080 3,209,625 14,418,127 13,104,325
----------------------------------------------------------------------
Operating expenses:
Medical 2,914,831 2,645,480 11,651,470 10,669,647
Selling, general and
administrative 604,977 461,169 2,176,770 1,877,864
Depreciation 28,769 30,640 105,051 107,286
Other intangible
amortization 4,958 2,437 23,807 10,506
----------------------------------------------------------------------
Total operating
expenses 3,553,535 3,139,726 13,957,098 12,665,303
----------------------------------------------------------------------
Income from operations 109,545 69,899 461,029 439,022
Interest expense 10,329 6,648 39,315 23,172
----------------------------------------------------------------------
Income before income
taxes 99,216 63,251 421,714 415,850
Provision for income
taxes 34,609 16,125 113,231 135,838
----------------------------------------------------------------------
Net income $64,607 $47,126 $308,483 $280,012
----------------------------------------------------------------------
Basic earnings per
common share $0.40 $0.30 $1.91 $1.75
Diluted earnings per
common share $0.39 $0.29 $1.87 $1.72
Shares used in
computing basic
earnings per common
share (000's) 162,405 159,598 161,714 160,421
Shares used in
computing diluted
earnings per common
share (000's) 166,371 162,138 165,374 162,456
Operating Results by
Segment
----------------------------------------------------------------------
Pretax income
Commercial $41,821 $27,306 $98,446 $142,010
Government 57,395 35,945 323,268 273,840
----------------------------------------------------------------------
Consolidated $99,216 $63,251 $421,714 $415,850
----------------------------------------------------------------------
Key Ratios
----------------------------------------------------------------------
Medical expense ratio
Commercial 82.9% 83.9% 83.3% 83.9%
Government 81.3% 85.7% 83.1% 84.3%
----------------------------------------------------------------------
Consolidated 82.1% 84.7% 83.2% 84.1%
----------------------------------------------------------------------
Selling, general, and
administrative expense
ratio
Commercial 18.1% 16.6% 18.3% 16.4%
Government 15.5% 11.9% 12.6% 12.2%
----------------------------------------------------------------------
Consolidated 16.7% 14.5% 15.3% 14.5%
----------------------------------------------------------------------
(a) The company also evaluates its earnings performance on a
non-GAAP basis as described more fully within this news release.
Humana Inc.
----------------------------------------------------------------------
Dollars in thousands
December September December
31, 30, 31,
Consolidated Balance Sheets 2005 2005 2004
----------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $732,016 $978,936 $580,079
Investment securities 2,354,904 2,228,424 2,145,645
Receivables, net:
Premiums 723,190 695,344 554,661
Administrative services fees 15,462 15,796 24,954
Securities lending collateral 47,610 117,553 77,840
Other 333,004 247,083 212,958
----------------------------------------------------------------------
Total current assets 4,206,186 4,283,136 3,596,137
----------------------------------------------------------------------
Property and equipment, net 484,412 457,078 399,506
Other assets:
Long-term investment securities 391,035 365,634 348,465
Goodwill 1,264,575 1,220,461 885,572
Other 523,406 506,112 427,937
----------------------------------------------------------------------
Total other assets 2,179,016 2,092,207 1,661,974
----------------------------------------------------------------------
Total assets $6,869,614 6,832,421 $5,657,617
----------------------------------------------------------------------
Liabilities and Stockholders'
Equity
Current liabilities:
Medical and other expenses
payable $1,909,682 $1,817,226 $1,422,010
Trade accounts payable and
accrued expenses 560,550 509,438 488,332
Book overdraft 280,005 258,433 192,060
Securities lending payable 47,610 117,553 77,840
Unearned revenues 120,489 533,908 146,326
Current portion of long-term
debt 301,254 302,366 -
----------------------------------------------------------------------
Total current liabilities 3,219,590 3,538,924 2,326,568
----------------------------------------------------------------------
Long-term debt 513,790 317,210 636,696
Other long-term liabilities 662,129 610,317 604,229
----------------------------------------------------------------------
Total liabilities 4,395,509 4,466,451 3,567,493
----------------------------------------------------------------------
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;
179,062,807 shares issued at
December 31, 2005 29,843 29,768 29,340
Capital in excess of par value 1,098,117 1,083,631 1,017,156
Retained earnings 1,538,306 1,473,699 1,229,823
Accumulated other comprehensive
income (loss) 24,832 (3,504) 16,526
Unearned stock compensation (13,629) (14,553) (1,721)
Treasury stock, at cost,
15,846,384 shares at December
31, 2005 (203,364) (203,071) (201,000)
----------------------------------------------------------------------
Total stockholders' equity 2,474,105 2,365,970 2,090,124
----------------------------------------------------------------------
Total liabilities and
stockholders' equity $6,869,614 6,832,421 $5,657,617
----------------------------------------------------------------------
----------------------------------------------------------------------
Debt to total capitalization ratio 24.8% 20.8% 23.3%
----------------------------------------------------------------------
Humana Inc.
----------------------------------------------------------------------
Dollars in thousands
Three months ended Twelve months ended
Consolidated Statements December 31, December 31,
of Cash Flows 2005 (a) 2004 2005 (a) 2004 (a)
----------------------------------------------------------------------
Cash flows from
operating activities
Net income $64,607 $47,126 $308,483 $280,012
Adjustments to
reconcile net income
to net cash (used in)
provided by operating
activities:
Depreciation and
amortization 33,727 33,077 128,858 117,792
(Benefit) provision
for deferred income
taxes (9,300) 26,063 (38,362) 53,608
Changes in operating
assets and
liabilities excluding
the effects of
acquisitions:
Receivables (27,512) (151,334) (156,748) (44,625)
Other assets (32,675) 22,767 (63,962) 3,991
Medical and other
expenses payable 92,456 (14,125) 450,297 78,791
Other liabilities 51,760 39,057 47,598 65,732
Unearned revenues (413,419) 13,667 (45,610) (190,759)
Other (6,141) 3,187 (4,927) (16,733)
----------------------------------------------------------------------
Net cash (used in)
provided by operating
activities (246,497) 19,485 625,627 347,809
----------------------------------------------------------------------
Cash flows from
investing activities
Acquisitions, net of
cash acquired (50,028) (25,838) (402,844) (141,810)
Purchases of property
and equipment (53,528) (41,196) (165,846) (114,096)
Proceeds from sales of
property and
equipment 1,849 1,519 4,497 30,491
Purchases of
investment securities (2,023,793) (491,429) (3,717,916) (4,106,210)
Proceeds from
maturities of
investment securities 1,165,312 174,869 1,761,588 1,015,144
Proceeds from sales of
investment securities 730,595 479,896 1,723,015 2,683,749
Change in securities
lending collateral 69,943 4,502 30,230 8,651
----------------------------------------------------------------------
Net cash (used in)
provided by investing
activities (159,650) 102,323 (767,276) (624,081)
----------------------------------------------------------------------
Cash flows from
financing activities
Borrowings under
credit agreement 200,000 - 494,000 -
Repayments under
credit agreement - - (294,000) -
Change in book
overdraft 21,572 75,954 87,945 (26,994)
Change in securities
lending payable (69,943) (4,502) (30,230) (8,651)
Common stock
repurchases (293) (2,552) (2,364) (67,024)
Proceeds from stock
option exercises and
other 7,891 14,281 38,235 27,616
----------------------------------------------------------------------
Net cash provided by
(used in) financing
activities 159,227 83,181 293,586 (75,053)
----------------------------------------------------------------------
(Decrease) increase in
cash and cash
equivalents (246,920) 204,989 151,937 (351,325)
Cash and cash
equivalents at
beginning of period 978,936 375,090 580,079 931,404
----------------------------------------------------------------------
Cash and cash
equivalents at end of
period $732,016 $580,079 $732,016 $580,079
----------------------------------------------------------------------
(a) Refer to the "Cash Flows from Operations" section within this
news release for an evaluation of operating cash flows on a
non-GAAP basis.
Humana Inc.
----------------------------------------------------------------------
----------------------------------------------------------------------
Percentage of Ending Membership Under Capitation Arrangements
----------------------------------------------------------------------
Commercial Segment
----------------------
Fully Total
Insured ASO Segment
----------------------
December 31, 2005
-----------------
Capitated HMO
hospital system based A 2.1% 1.3%
Capitated HMO
physician group based A 2.0% 1.2%
Risk-sharing B 2.5% 1.6%
All other membership 93.4% 100.0% 95.9%
----------------------
Total 100.0% 100.0% 100.0%
======================
----------------------------------------------------------------------
December 31, 2004
-----------------
Capitated HMO
hospital system based A 3.1% - 2.1%
Capitated HMO
physician group based A 2.5% - 1.7%
Risk-sharing B 3.0% - 2.1%
All other membership 91.4% 100.0% 94.1%
----------------------
Total 100.0% 100.0% 100.0%
======================
Government Segment
------------------------------------------ Consol.
Medicare TRICARE Total Total
Advantage Medicaid TRICARE ASO Segment Medical
------------------------------------------ -------
December 31, 2005
-----------------
Capitated HMO
hospital system
based A 6.3% 0.9% 1.1%
Capitated HMO
physician group
based A 4.2% 37.2% 5.0% 3.3%
Risk-sharing B 41.3% 59.9% 12.9% 7.8%
All other
membership 48.2% 2.9% 100.0% 100.0% 81.2% 87.8%
------------------------------------------- ------
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
=========================================== ======
----------------------------------------------------------------------
December 31, 2004
-----------------
Capitated HMO
hospital system
based A 10.2% 3.6% - - 1.5% 1.8%
Capitated HMO
physician group
based A 1.1% 39.3% - - 5.2% 3.5%
Risk-sharing B 55.2% 50.4% - - 12.0% 7.4%
All other
membership 33.5% 6.7% 100.0% 100.0% 81.3% 87.3%
------------------------------------------- ------
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.
----------------------------------------------------------------------
Dollars in thousands
----------------------------------------------------------------------
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 For the
Twelve Twelve
Months Ended Months Ended
December 31, December 31,
2005 2004
--------------------------
Balances at January 1 $1,422,010 $1,272,156
Acquisitions 37,375 71,063
Incurred related to:
Current year 11,765,662 10,763,105
Prior years - non-TRICARE (72,868) (68,448)
Prior years - TRICARE (2) (41,324) (25,010)
--------------------------
Total incurred 11,651,470 10,669,647
--------------------------
Paid related to:
Current year (9,979,449) (9,504,331)
Prior years (1,221,724) (1,086,525)
--------------------------
Total paid (11,201,173) (10,590,856)
--------------------------
Balances at end of period $1,909,682 $1,422,010
==========================
The impact of any change in "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.
(2) Changes in estimates of TRICARE incurred claims for prior years
recognized during 2004 and 2005 resulted primarily from claim costs
and utilization levels developing favorably from the levels
originally estimated for the second half of the prior year. As a
result of substantial risk-sharing provisions with the Department of
Defense and with subcontractors, any resulting impact on operations
from the change in estimates of incurred related to prior years is
substantially reduced, whether positive or negative.
Humana Inc.
----------------------------------------------------------------------
Dollars in thousands
Medical Claim Reserves - Details and Statistics
----------------------------------------------------------------------
Medical and Other Expenses Payable Detail:
------------------------------------------
December September December
31, 30, 31,
2005 2005 2004
-------------------------------------
A IBNR and other medical expenses
payable $1,125,205 $1,101,066 $910,525
B TRICARE IBNR 409,413 416,259 284,647
C TRICARE other medical expenses
payable 88,443 72,474 6,970
D Unprocessed claim inventories 148,200 136,700 115,300
E Processed claim inventories 83,635 54,907 97,801
F Payable to pharmacy benefit
administrator 54,786 35,820 6,767
-------------------------------------
Total medical and other
expenses payable $1,909,682 $1,817,226 $1,422,010
=====================================
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). Other medical expenses payable
includes amounts payable to providers under capitation
arrangements.
B TRICARE IBNR has increased at December 31, 2005 versus the prior
year due to the transition to the new South region contract in the
fourth quarter 2004 lowering medical expenses during that quarter.
C TRICARE other medical expenses 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.
Humana Inc.
----------------------------------------------------------------------
Dollars in thousands
-
Medical Claim Reserves - Details and Statistics
----------------------------------------------------------------------
Receipt Cycle Time:
-------------------
The receipt cycle time measures the average length of time between
when a claim was initially incurred and when the claim form was
received. Below is a summary:
Average Number of Days from Incurred Date
to Receipt Date (a)
2005 2004 Change % Change
--------------------------------------------
1st Quarter Average 16.6 17.4 (0.8) -4.6%
2nd Quarter Average 15.9 16.7 (0.8) -4.8%
3rd Quarter Average 16.7 16.9 (0.2) -1.2%
4th Quarter Average 16.9 16.4 0.5 3.0%
--------------------------------------------
Full Year Average 16.5 16.9 (0.4) -2.4%
============================================
(a) Receipt cycle time data for our largest claim processing
platforms representing approximately 90% of our fully insured
claims volume.
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
-----------------------------------------------------------
12/31/2003 $109,700 443,000 4.9
3/31/2004 $94,800 400,900 3.9
6/30/2004 $98,100 387,000 3.7
9/30/2004 $122,300 453,300 4.4
12/31/2004 $115,300 394,400 3.7
3/31/2005 $111,200 393,200 3.6
6/30/2005 $119,500 443,600 4.0
9/30/2005 $136,700 512,800 4.7
-----------------------------------------------------------
12/31/2005 $148,200 498,400 4.6
-----------------------------------------------------------
Humana Inc.
----------------------------------------------------------------------
Medical Claim Reserves - Details and Statistics
----------------------------------------------------------------------
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
in Claims Annual % Excluding Annual %
Quarter Ended Payable (DCP) Change Change Capitation Change Change
----------------------------------------------------------------------
12/31/2003 46.2 1.0 2.2% 53.2 (0.1) -0.2%
3/31/2004 47.4 0.9 1.9% 54.3 (0.4) -0.7%
6/30/2004 47.4 (0.5) -1.0% 54.1 (2.1) -3.7%
9/30/2004 51.8 4.6 9.7% 59.1 4.6 8.4%
12/31/2004 49.5 3.3 7.1% 54.8 1.6 3.0%
3/31/2005 50.5 3.1 6.5% 56.1 1.8 3.3%
6/30/2005 52.8 5.4 11.4% 58.6 4.5 8.3%
9/30/2005 54.0 2.2 4.2% 60.8 1.7 2.9%
----------------------------------------------------------------------
12/31/2005 60.3 10.8 21.8% 66.6 11.8 21.5%
----------------------------------------------------------------------
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, the
timing of our bi-weekly payment to our pharmacy benefits
administrator and the timing of settlements with providers under
risk-sharing arrangements. Additionally growth in certain product
lines which carry a different level of DCP will impact our overall
DCP. For example, individual and Medicare private fee-for-service
(PFFS) product lines carry a higher level of DCP, resulting in an
increase to our overall DCP as we grow in those product lines.
Conversely, as we expand into Medicare PDPs during 2006, we expect a
decline in DCP as a result of the rapid processing, or "short-tail"
associated with prescription drug claims. An annual recap follows:
2005 2004
-------------------
4th quarter-
prior year 49.5 46.2
Impact of change in claim
receipt cycle time 0.2 (0.2)
Impact of change in unprocessed
claim inventories 1.0 0.2
Impact of change in processed
claim inventories (0.4) 0.9
Impact of changing TRICARE
reserve balances 3.9 1.6
Impact of change in pharmacy
payment cutoff 1.5 (0.4)
Impact of growth in Medicare
PFFS membership 1.2
Impact of growth in individual
membership 0.9 0.7
Impact of change in provider payables
under risk arrangements 1.4 -
All other 1.1 0.5
-------------------
Year to date-current year 60.3 49.5
===================
CONTACT: Humana Inc., Louisville
Investor Relations:
Regina Nethery, 502-580-3644
e-mail: Rnethery@humana.com
or
Corporate Communications:
Tom Noland, 502-580-3674
e-mail: Tnoland@humana.com
SOURCE: Humana Inc.