Humana Inc. Reports Financial Results for Third Quarter and First Nine Months of 2005
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- 2005 EPS guidance reaffirmed excluding litigation settlement and hurricane impact
- Medicare membership surpasses 500,000
- 2006 EPS guidance reaffirmed
LOUISVILLE, Ky., Oct. 31 /PRNewswire-FirstCall/ -- Humana Inc. (NYSE: HUM) today reported $0.30 in diluted earnings per common share (EPS) for the quarter ended September 30, 2005 (3Q05) compared to EPS of $0.52 for the quarter ended September 30, 2004 (3Q04). Results for 3Q05 include $0.27 per share in expenses resulting from the settlement of the company's multi- district class action litigation and $0.03 per share for expenses associated with Hurricane Katrina. Excluding these expenses, non-GAAP 3Q05 results of $0.60 per share increased 15 percent over the prior year's quarter.
"Humana's third quarter produced robust expansion of our current Medicare membership with on-track performance in our higher-margin areas of commercial focus - ASO, individual and consumer plans," said Michael B. McCallister, president and chief executive officer of Humana. "The third quarter also produced significant progress in our preparations for the unprecedented Medicare opportunity in 2006 and 2007."
The company's previous EPS guidance for the year ending December 31, 2005 (FY05) of $2.23 to $2.25 has been updated to include expenses of $0.37 per share for the 3Q05 litigation settlement and costs associated with Hurricane Katrina during the second half of the year. Accordingly, the company now anticipates FY05 EPS in the range of $1.86 to $1.88.
The company continues to expect EPS for the year ending December 31, 2006 (FY06) of at least $2.70, which includes approximately $0.10 per share resulting from expensing stock options in connection with new accounting rules to be implemented on January 1, 2006. The company anticipates restating FY05 during 2006 to facilitate comparability for this accounting change. The estimated options expense restatement impact on FY05 EPS is expected to be approximately $0.08 per share.
Compared to our estimate of FY05 EPS of $1.86 to $1.88, this FY06 earnings guidance represents an increase in EPS in excess of 40 percent. Compared to our non-GAAP estimate of FY05 EPS of $2.09 to $2.11, and adjusting for the estimated $0.08 per share impact on FY05 for stock options accounting, this FY06 guidance represents an increase in non-GAAP EPS of over 30 percent.
This news release includes reconciliations of GAAP to non-GAAP financial measures on both a historical and projected basis as well as management's explanation for the use of non-GAAP financial metrics. See the "GAAP to non- GAAP Reconciliations" section within this news release.
Settlement of Class Action Litigation
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 approval from U.S. District Judge Federico Moreno, with final approval anticipated in the first quarter of 2006.
Pursuant to the settlement, Humana has agreed to pay $40 million to the plaintiffs. In addition, the company has agreed to pay up to $18 million in legal fees to be determined by the court. Humana's 3Q05 financial results include pretax expenses of $71.9 million ($44.8 million after tax or $0.27 per share) in connection with the settlement and other related litigation costs.
Hurricane Katrina
During the third quarter of 2005, certain of Humana's operations were affected by the impact of Hurricane Katrina. Given the unusually harsh circumstances associated with this storm, it is also anticipated to impact results for the fourth quarter of 2005. 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 are unable at this time to meet their premium obligations and similar measures.
The company recorded $6.7 million in pretax expenses ($4.2 million after taxes or $0.03 per share) in hurricane-related medical and administrative costs during 3Q05 and anticipates recording an additional approximately $20 million pretax (approximately $12.5 million after taxes or $0.07 per share) in the fourth quarter of 2005. Expenses related to Hurricane Katrina are not expected to significantly impact results for FY06.
Consolidated Results Summary
The Company has included certain non-GAAP financial measures in its summary of financial results below. See the "GAAP to non-GAAP Reconciliations" section of this news release.
EPS:
- 3Q05 EPS of $0.30 compares to $0.52 for 3Q04. Excluding the $0.30 in
litigation and hurricane-related expenses during 3Q05, non-GAAP results
for the quarter of $0.60 per share increased $0.08 or 15 percent,
primarily driven by increases in Medicare membership and improved
Medicare underwriting results.
- 3Q05 EPS varied from the company's prior expectations due to the
receipt of Medicare risk adjustment payments originally anticipated
during the fourth quarter and an acceleration in the timing of Medicare
investment spending.
- EPS for the nine months ended September 30, 2005 (YTD05) of $1.48
compares to $1.43 in EPS for the nine months ended September 30, 2004
(YTD04). Excluding the expenses of $0.30 per share in litigation and
hurricane expenses during 3Q05 and the $0.14 per share tax benefit from
the realization of a gain contingency in the first quarter 2005, non-
GAAP per share results of $1.64 per share increased $0.21 or 15
percent. Improved earnings from the company's Government Segment drove
the increase.
- The company now anticipates EPS for the quarter ending December 31,
2005 (4Q05) to be in the range of $0.38 to $0.40. Excluding
anticipated expenses of approximately $0.07 per share related to
Hurricane Katrina, the company's 4Q05 non-GAAP estimate would range
from $0.45 to $0.47 per share. Additional factors affecting the
updated EPS projection for 4Q05 include (1) a change in the timing
between 3Q05 and 4Q05 for both the receipt of Medicare risk adjustment
revenue and Medicare investment spending, (2) revised expectations for
Commercial Segment performance, and (3) updated projections for
Government Segment earnings.
Other components of earnings:
- 3Q05 consolidated revenues rose 20 percent to $3.82 billion from $3.18
billion in 3Q04, with total premium and administrative services fees
also up 20 percent compared to the prior year's quarter.
- YTD05 consolidated revenues were up 9 percent to $10.76 billion versus
$9.89 billion for YTD04. Continued increases in membership in the
company's higher-premium Medicare plans more than offset reduced
revenues from its Commercial Segment membership.
- The company's medical expense ratio (medical expenses as a percent of
premium revenue or MER) of 83.4 percent increased 70 basis points from
an MER of 82.7 in 3Q04. Excluding the 20 basis point increase to the
MER associated with the hurricane, the related consolidated non-GAAP
ratio of 83.2 percent rose 50 basis points - the combined effect of an
unusually low MER in 3Q04 associated with the TRICARE contract
transition during that period and less favorable results for the
Commercial Segment.
- The company's consolidated selling, general, & administrative (SG&A)
expense ratio (SG&A expenses as a percent of premiums plus
administrative services fees or SG&A expense ratio) increased to 16.2
percent for 3Q05 from 14.6 percent in 3Q04. Excluding litigation and
hurricane expenses during 3Q05, the related non-GAAP ratio of 14.2
percent declined 40 basis points from 3Q04 as operational leverage from
higher Medicare membership more than offset expenses during 3Q05 to
prepare for 2006 Medicare opportunities.
Government Segment Results Summary
The Company has included certain non-GAAP financial measures in its summary of pretax financial results below. See the "GAAP to non-GAAP Reconciliations" section of this news release.
Pretax results:
- Government Segment pretax earnings were $89.5 million in 3Q05 compared
to $88.8 million in 3Q04. Excluding $34.9 million of litigation and
hurricane expenses in 3Q05, non-GAAP pretax income for the segment of
$124.4 million improved year over year by $35.6 million or 40 percent
as a result of higher Medicare membership and the resulting operational
leverage.
Enrollment:
- Medicare Advantage membership reached 503,100 at September 30, 2005, an
increase of 131,800 (35 percent) from September 30, 2004 and 28,800 (6
percent) from June 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.
- Medicare Advantage geographic expansions are anticipated to continue to
contribute to organic enrollment growth, with projected membership in
the range of 540,000 to 550,000 by the end of FY05.
- As expected, TRICARE membership of 2,874,400 at September 30, 2005 was
essentially unchanged from June 30, 2005. The company also anticipates
no material change in TRICARE membership for the remainder of 2005.
Revenues:
- Medicare Advantage premiums of $1.30 billion in 3Q05 increased 59
percent compared to $814.6 million in 3Q04, the result of substantially
higher enrollment and increases in per-member premiums.
- Medicare Advantage premiums per member increased 20 percent year over
year during 3Q05 due primarily to higher per-member standard
reimbursement rates from the government, the company's diligence in
demonstrating the risk profile of its membership and the acquisition of
CarePlus Health Plans of Florida in February 2005. Per-member premiums
for FY05 are now projected to increase in the range of 12 to 14
percent.
- TRICARE premiums and administrative services fees during 3Q05 of $667.8
million reflect a full quarter under the South Region contract.
Related revenues for the prior year's quarter of $405.0 million
reflected the contract transition taking effect during that period.
- For 2005, the company anticipates TRICARE premiums and administrative
services fees to approximate $2.5 billion as the company experiences a
full year under the new South Region contract.
Medical Expenses:
- The Government Segment MER increased 90 basis points to 82.5 percent in
3Q05 compared to 81.6 percent in the prior year's quarter, driven by an
unusually low MER in 3Q04 associated with TRICARE contract transition
timing.
- Medicare Advantage medical costs per member continue to be expected to
increase in the range of 9 to 11 percent for FY05.
SG&A Expenses:
- The Government Segment's SG&A expense ratio for 3Q05 of 13.2 percent
was 70 basis points higher than that for 3Q04 of 12.5 percent.
Excluding expenses related to the litigation settlement and Hurricane
Katrina, the related non-GAAP ratio of 11.5 percent declined 100 basis
points, as planned expenses to prepare for 2006 Medicare opportunities
were more than offset by operational leverage associated with higher
Medicare membership.
Commercial Segment Results Summary
The Company has included certain non-GAAP financial measures in its summary of pretax financial results below. See the "GAAP to non-GAAP Reconciliations" section of this news release.
Pretax results:
- Results for the Commercial Segment during 3Q05 reflect a pretax loss of
$18.1 million compared to pretax income of $38.7 million in 3Q04.
Excluding $43.7 million of litigation and hurricane expenses in 3Q05,
non-GAAP pretax income for the segment of $25.6 million declined $13.1
million compared to 3Q04. Commercial segment operating earnings were
negatively affected year over year by continued medical membership
attrition driven by the pricing environment in the 2 to 300 case-size
accounts and an increase in the segment's MER.
Enrollment:
- Commercial Segment medical membership of 3,177,900 at September 30,
2005 decreased approximately 1 percent or 21,800 from June 30, 2005,
driven by a decrease in fully-insured accounts.
- The company's HumanaOne product demonstrated continued growth during
3Q05, increasing individual medical membership by 6 percent
sequentially with a year-to-date growth rate of 21 percent. As
expected, September 30, 2005 ASO membership of 1,170,500 and consumer-
choice membership of 350,600 were essentially unchanged from June 30,
2005. On a year-to-date basis, ASO membership grew 15 percent while
consumer-choice membership increased 43 percent.
Revenues:
- Premiums and administrative services fees for the Commercial Segment
decreased 7 percent to $1.67 billion in 3Q05 compared to $1.79 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 7 percent on a per-member basis during 3Q05. The company
anticipates FY05 commercial premiums for fully insured group membership
to increase in the range of 7 to 9 percent on a per-member basis.
Medical Expenses:
- In 3Q05, the Commercial Segment MER of 84.4 percent was 80 basis points
higher than the 3Q04 MER of 83.6 percent. Excluding the 30 basis point
increase in the MER from Hurricane Katrina, the related non-GAAP ratio
of 84.1 percent rose 50 basis points reflecting higher inpatient
utilization trends in its commercial portfolio.
- Per-member medical costs for commercial fully insured group accounts
are now forecasted to rise in the range of 7 to 9 percent for FY05.
SG&A Expenses:
- The Commercial Segment SG&A expense ratio of 20.0 percent for 3Q05
compares to 16.3 percent in 3Q04. Excluding litigation and hurricane-
related expenses, the related non-GAAP ratio of 17.7 percent increased
140 basis points, the result of lower average fully-insured medical
enrollment and a significantly higher percentage of ASO business in
3Q05 than in the prior year.
Cash Flows from Operations
Cash flows provided by operations for 3Q05 of $591.0 million compared to $303.5 million cash flows provided by operations in 3Q04. The company also evaluates operating cash flows on a non-GAAP basis, as described in the "GAAP to non-GAAP Reconciliations" section of this news release.
Non-GAAP cash flows provided by operations declined to $206.3 million in 3Q05 from $303.5 million in 3Q04 due to the collection of substantial TRICARE bid price adjustment receivables in 3Q04.
The company continues to anticipate that cash flows from operations for FY05 will be in the range of $625 million to $675 million driven by expected higher earnings.
Balance Sheet
At September 30, 2005, cash and investment securities comprised 52 percent of the company's total assets compared to 51 percent at June 30, 2005. Debt as a percent of total capitalization (debt plus stockholders' equity) decreased 670 basis points to 20.8 percent from 27.5 percent at June 30, 2005 as the company paid down certain of its outstanding debt obligations during the quarter.
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 and June 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 7 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.
Over its 44-year history, Humana has consistently seized opportunities to meet changing customer needs. Today, the company is a leader in consumer engagement, providing guidance that leads to lower costs and a better health plan experience throughout its diversified customer portfolio.
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
GAAP Earnings
Guidance Points
Humana Inc. - GAAP Earnings Guidance Points
For the year ending December 31, 2005
As of October 31, 2005
The Company also projects certain non-GAAP financial measures. See the
"GAAP to non-GAAP Reconciliations" section of this news release.
Diluted earnings per 4Q05: $0.38 to $0.40, including $0.07 per share
common share related to Hurricane Katrina
Full Year: $1.86 to $1.88, including $0.27 per
share for litigation settlement and related
expenses, $0.14 per share income from the
realization of a tax gain contingency
benefit, and $0.10 per share for Hurricane
Katrina expenses
Revenues Consolidated: Approximately $14.5 billion
Medicare: $4.5 billion to $4.7 billion
TRICARE: Approximately $2.5 billion
Year-end medical Medicare: 540,000 to 550,000
membership Commercial: Down 1% to 2% excluding loss of
89,000 member account in January 2005 and
losses associated with Hurricane Katrina
Medicaid: Decline of approximately 20,000 from
prior year
TRICARE: No material change from prior year
Medical underwriting Medicare: Premium yields 12% to 14%; medical
trends cost trends 9% to 11%
Commercial - group accounts: Premium yields 7%
to 9%;
medical cost trends 7% to 9%
Selling, general & Consolidated: SG&A expense ratio of
administrative approximately 15% (including 50 basis points
expenses related to litigation and hurricane expenses)
Government segment: Includes approximately $80
million of Medicare Advantage investment
spending
Commercial Segment Approximately $58 million to $68 million
pretax income (including approximately $62 million in
litigation and hurricane related expenses)
Cash flows from $625 million to $675 million
operations
Capital expenditures $155 million to $165 million
Effective tax rate Full year: 27% to 28%
4Q05: 34% to 36%
Weighted average shares Approximately 166 million
outstanding used to
compute diluted
earnings per common
share
Humana Inc. - GAAP Earnings Guidance Points
For the year ending December 31, 2006
As of October 31, 2005
Diluted earnings per common At least $2.70, including approximately
share $0.10 per share in stock options
expense
Revenues Consolidated: Over $20 billion
Medicare - MA: $8.5 billion to $10.2
billion
Medicare - PDP: $1.7 billion to $2.5
billion
Commercial: $6.5 billion to $7.0
billion
TRICARE: $2.5 billion to $2.9 billion
Year-end medical membership Medicare - MA: 900,000 to 1.1 million
Medicare - PDP: 1.7 million to 2.2
million
Commercial: No material change from
prior year
TRICARE: No material change from prior
year
Medicaid: No material change from prior
year
Medical underwriting trends Medicare: Premium yields in line with
medical cost trends
Commercial - group accounts: Premium
yields in line with medical cost
trends; medical cost trends in line
with those for FY05
Selling, general & Consolidated: SG&A expense ratio of 12%
administrative expenses to 13%
Pretax margin percentages Medicare - MA: low to mid single digits
Medicare - PDP: low single digits
Commercial: Approximately 2%
TRICARE: Approximately 3% to 4%
Cash flows from operations $725 million to $800 million, including
payments related to the 3Q05
litigation settlement
Effective tax rate Approximately 35% to 37%
Weighted average shares Approximately 168 million
outstanding used to compute
diluted earnings per common
share
GAAP to non-GAAP
Reconciliations
Humana Inc.
GAAP to non-GAAP Reconciliations
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. These non-GAAP financial measures exclude the settlement of a multi-district class action lawsuit and the financial effect of Hurricane Katrina, both of which occurred during 3Q05, as well as the recognition of a Federal income tax gain contingency during the first quarter of 2005. 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 this non-GAAP information as an indicator 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. Reconciliations of the related GAAP to non-GAAP financial measures are included below.
FY05 EPS Guidance GAAP Adjustments Non-GAAP
Previous FY05 Guidance $2.23 - ($0.14)(a) $2.09 -
$2.25 $2.11
3Q05 update:
Class action litigation
settlement (0.27) 0.27 0.00
Hurricane Katrina:
3Q05 impact (0.03) 0.03 0.00
4Q05 impact (0.07) 0.07 0.00
FY05 Hurricane Katrina impact (0.10) 0.10 0.00
Subtotal 3Q05 changes (0.37) 0.37 0.00
Current FY05 Guidance $1.86 - $0.23 $2.09 -
$1.88 $2.11
Adjustments
Litigation Hurricane
GAAP settlement Katrina Non-GAAP
$0.38 - $0.45 -
4Q05 EPS Guidance $0.40 $0.00 $0.07 $0.47
FY05 Commercial Segment $58 million $38 $24 $120 million
Pretax Income Guidance to $68 million million million to 130 million
(a) Realization of tax gain contingency in the first quarter of 2005.
Humana Inc.
Dollars in thousands, except per share results
GAAP to non-GAAP Reconciliations (continued)
For the three months ended September 30, 2005
Pretax Consolidated
Consoli- Net of Diluted
Commercial Government dated Taxes EPS
GAAP income (loss) ($18,053) $89,557 $71,504 $49,944 $0.30
Adjustments to medical
expense:
Hurricane Katrina 4,543 256 4,799 2,995 0.02
Adjustments to SG&A
expense:
Class action litigation
settlement 38,490 33,360 71,850 44,834 0.27
Hurricane Katrina 627 1,273 1,900 1,186 0.01
Total SG&A expense
adjustments 39,117 34,633 73,750 46,020 0.28
Total reconciling
items 43,660 34,889 78,549 49,015 0.30
Non-GAAP income $25,607 $124,446 $150,053 $98,959 $0.60
GAAP Medical Expense
Ratio 84.4 % 82.5 % 83.4 %
Impact of GAAP to
non-GAAP
reconciling items -0.3 % 0.0 % -0.2 %
Non-GAAP Medical
Expense Ratio 84.1 % 82.5 % 83.2 %
GAAP SG&A Expense Ratio 20.0 % 13.2 % 16.2 %
Impact of GAAP to
non-GAAP reconciling
items -2.3 % -1.7 % -2.0 %
Non-GAAP SG&A Expense
Ratio 17.7 % 11.5 % 14.2 %
For the nine months ended September 30, 2005
Pretax Consolidated
Consoli- Net of Diluted
Commercial Government dated Taxes EPS
GAAP income $56,625 $265,873 $322,498 $243,876 $1.48
Adjustments to medical
expense:
Hurricane Katrina 4,543 256 4,799 2,995 0.02
Adjustments to SG&A
expense:
Class action litigation
settlement 38,490 33,360 71,850 44,834 0.27
Hurricane Katrina 627 1,273 1,900 1,186 0.01
Total SG&A expense
adjustments 39,117 34,633 73,750 46,020 0.28
Adjustments to income
taxes:
Realization of tax gain
contingency (22,800) (0.14)
Total reconciling
items 43,660 34,889 78,549 26,215 0.16
Non-GAAP income $100,285 $300,762 $401,047 $270,091 $1.64
GAAP Medical Expense
Ratio 83.5 % 83.7 % 83.6 %
Impact of GAAP to
non-GAAP
reconciling items -0.1 % 0.0 % 0.0 %
Non-GAAP Medical
Expense Ratio 83.4 % 83.7 % 83.6 %
GAAP SG&A Expense Ratio 18.4 % 11.6 % 14.8 %
Impact of GAAP to
non-GAAP reconciling
items -0.8 % -0.6 % -0.7 %
Non-GAAP SG&A Expense
Ratio 17.6 % 11.0 % 14.1 %
Humana Inc.
Dollars in millions
GAAP to non-GAAP Reconciliations (continued)
The following is a reconciliation of the most directly comparable historical
and projected cash flows from operations prepared in accordance with GAAP to
the historical and projected non-GAAP financial measures. When reviewing and
analyzing Humana's operating cash flows, company management applies the
Centers for Medicare and Medicaid Services (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.
Cash Flows from
Operations
3Q05 3Q04 YTD05 YTD04 FY05
Actual Actual Actual Actual Expected
GAAP cash flows
provided by $625 to
operations $591.0 $303.5 $872.1 $328.3 $675
Timing of premium
payment receipt
from CMS (384.7) - (365.0) 211.9 19.8
Non-GAAP cash flows $625 to
provided by operations $206.3 $303.5 $507.1 $540.2 $675
Statistical Schedules and
Supplementary Information
Humana Inc.
In thousands
Ending Medical September 30, Percent
Membership 2005 2004 Difference Change
Commercial:
Fully insured 2,007.4 2,296.4 (289.0) (12.6)
ASO 1,170.5 1,018.8 151.7 14.9
Total Commercial 3,177.9 3,315.2 (137.3) (4.1)
Government:
Medicare Advantage 503.1 371.3 131.8 35.5
Medicaid 459.4 475.8 (16.4) (3.4)
TRICARE 1,747.1 1,138.6 608.5 53.4
TRICARE ASO 1,127.3 674.7 452.6 67.1
Total TRICARE 2,874.4 1,813.3 1,061.1 58.5
Total Government 3,836.9 2,660.4 1,176.5 44.2
Total ending
medical
membership 7,014.8 5,975.6 1,039.2 17.4
Ending Specialty September 30, Percent
Membership 2005 2004 Difference Change
Commercial:
Dental-fully
insured 918.3 808.4 109.9 13.6
Dental-ASO 493.0 419.4 73.6 17.5
Total Dental 1,411.3 1,227.8 183.5 14.9
Group life 427.7 469.2 (41.5) (8.8)
Short-term
disability 16.5 17.3 (0.8) (4.6)
Total ending
specialty
membership 1,855.5 1,714.3 141.2 8.2
Three months ended Nine months ended
September 30, September 30,
Premiums 2005 2004 2005 2004
Commercial:
Fully insured
medical $1,519,971 $1,663,363 $4,549,643 $4,981,242
Specialty 96,670 87,822 285,598 259,932
Total Commercial 1,616,641 1,751,185 4,835,241 5,241,174
Government:
Medicare
Advantage 1,296,743 814,612 3,372,326 2,295,534
TRICARE 659,019 386,439 1,832,526 1,651,844
Medicaid 139,961 131,318 409,105 377,895
Total Government 2,095,723 1,332,369 5,613,957 4,325,273
Total premiums $3,712,364 $3,083,554 $10,449,198 $9,566,447
Three months ended Nine months ended
September 30, September 30,
Administrative 2005 2004 2005 2004
services fees
Commercial $54,996 $41,324 $156,370 $123,788
Government 8,821 18,513 34,084 95,632
Total administrative
services fees $63,817 $59,837 $190,454 $219,420
Humana Inc.
Dollars in thousands, except per share results
Three months ended Nine months ended
September 30, September 30,
Consolidated Statements 2005(a) 2004 2005(a) 2004
of Income
Revenues:
Premiums $3,712,364 $3,083,554 $10,449,198 $9,566,447
Administrative services
fees 63,817 59,837 190,454 219,420
Investment income 38,778 30,146 100,120 101,463
Other income 6,502 2,736 15,275 7,370
Total revenues 3,821,461 3,176,273 10,755,047 9,894,700
Operating expenses:
Medical 3,094,397 2,550,911 8,736,639 8,024,167
Selling, general and
administrative 611,300 460,171 1,571,793 1,416,695
Depreciation 26,661 28,451 76,282 76,646
Other intangible
amortization 7,458 2,787 18,849 8,069
Total operating
expenses 3,739,816 3,042,320 10,403,563 9,525,577
Income from operations 81,645 133,953 351,484 369,123
Interest expense 10,141 6,480 28,986 16,524
Income before income taxes 71,504 127,473 322,498 352,599
Provision for income
taxes 21,560 43,170 78,622 119,713
Net income $49,944 $84,303 $243,876 $232,886
Basic earnings per common
share $0.31 $0.53 $1.51 $1.45
Diluted earnings per common
share $0.30 $0.52 $1.48 $1.43
Shares used in computing
basic earnings per common
share (000's) 162,048 159,308 161,484 160,697
Shares used in computing
diluted earnings per common
share (000's) 166,037 160,997 165,041 162,564
Operating Results by Segment
Pretax income (loss)
Commercial ($18,053) $38,706 $56,625 $114,704
Government 89,557 88,767 265,873 237,895
Consolidated $71,504 $127,473 $322,498 $352,599
Key Ratios
Medical expense ratio
Commercial 84.4 % 83.6 % 83.5 % 83.9 %
Government 82.5 % 81.6 % 83.7 % 83.8 %
Consolidated 83.4 % 82.7 % 83.6 % 83.9 %
Selling, general, and
administrative expense ratio
Commercial 20.0 % 16.3 % 18.4 % 16.3 %
Government 13.2 % 12.5 % 11.6 % 12.3 %
Consolidated 16.2 % 14.6 % 14.8 % 14.5 %
(a) Refer to the "GAAP to non-GAAP Reconciliations" section within this
news release for detail of non-standard items included in these
results of operations.
Humana Inc.
Dollars in thousands, except per share results
September 30, June 30, December 31,
2005 2005 2004
Consolidated Balance Sheets
Assets
Current assets:
Cash and cash equivalents $978,936 $603,790 $580,079
Investment securities 2,228,424 2,217,698 2,145,645
Receivables, net:
Premiums 695,344 588,706 554,661
Administrative services fees 15,796 19,448 24,954
Securities lending collateral 117,553 76,998 77,840
Other 247,083 236,430 212,958
Total current assets 4,283,136 3,743,070 3,596,137
Property and equipment, net 457,078 437,393 399,506
Other assets:
Long-term investment securities 365,634 358,643 348,465
Goodwill 1,220,461 1,221,663 885,572
Other 506,112 517,138 427,937
Total other assets 2,092,207 2,097,444 1,661,974
Total assets $6,832,421 $6,277,907 $5,657,617
Liabilities and Stockholders' Equity
Current liabilities:
Medical and other expenses payable $1,817,226 $1,677,551 $1,422,010
Trade accounts payable and accrued
expenses 509,438 385,313 488,332
Book overdraft 258,433 182,493 192,060
Securities lending payable 117,553 76,998 77,840
Unearned revenues 533,908 121,148 146,326
Current portion of long-term debt 302,366 - -
Total current liabilities 3,538,924 2,443,503 2,326,568
Long-term debt 317,210 878,388 636,696
Other long-term liabilities 610,317 639,828 604,229
Total liabilities 4,466,451 3,961,719 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;
178,608,482 shares issued at
September 30, 2005 29,768 29,677 29,340
Capital in excess of par value 1,083,631 1,068,406 1,017,156
Retained earnings 1,473,699 1,423,755 1,229,823
Accumulated other comprehensive
income (3,504) 13,115 16,526
Unearned stock compensation (14,553) (16,074) (1,721)
Treasury stock, at cost,
15,840,173 shares at
September 30, 2005 (203,071) (202,691) (201,000)
Total stockholders' equity 2,365,970 2,316,188 2,090,124
Total liabilities and
stockholders' equity $6,832,421 $6,277,907 $5,657,617
Debt to total capitalization ratio 20.8 % 27.5 % 23.3 %
Humana Inc.
Dollars in thousands
Three months ended Nine months ended
September 30, September 30,
Consolidated Statements of 2005(a) 2004 2005(a) 2004(a)
Cash Flows
Cash flows from operating
activities
Net income $49,944 $84,303 $243,876 $232,886
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization 34,119 31,238 95,131 84,715
(Benefit) provision
for deferred income
taxes (39,981) (2,419) (29,062) 27,545
Changes in operating
assets and liabilities
excluding the effects of
acquisitions:
Receivables (102,986) 122,227 (129,236) 106,709
Other assets (2,773) 5,108 (31,287) (18,776)
Medical and other
expenses payable 139,675 (18,090) 357,841 92,916
Other liabilities 103,571 58,850 (4,162) 26,675
Unearned revenues 412,760 23,593 367,809 (204,426)
Other (3,290) (1,341) 1,214 (19,920)
Net cash provided by
operating activities 591,039 303,469 872,124 328,324
Cash flows from investing
activities
Acquisitions, net of
cash acquired (90) (47,237) (352,816) (115,972)
Purchases of property
and equipment (45,091) (24,854) (112,318) (72,900)
Proceeds from sales of
property and equipment 2,610 244 2,648 28,972
Purchases of
investment
securities (448,518) (1,373,585) (1,694,123) (3,614,781)
Proceeds from
maturities
of investment
securities 202,664 494,088 596,276 840,275
Proceeds from sales
of investment
securities 232,585 887,029 992,420 2,203,853
Change in securities
lending collateral (40,555) (21,527) (39,713) 4,149
Net cash used in
investing
activities (96,395) (85,842) (607,626) (726,404)
Cash flows from financing
activities
Borrowings under
credit agreement - - 294,000 -
Repayments under
credit agreement (244,000) - (294,000) -
Change in book
overdraft 75,940 (55,956) 66,373 (102,948)
Change in securities
lending payable 40,555 21,527 39,713 (4,149)
Common stock
repurchases (381) (15,670) (2,072) (64,472)
Proceeds from stock
option exercises
and other 8,388 3,926 30,345 13,335
Net cash (used in)
provided by financing
activities (119,498) (46,173) 134,359 (158,234)
Increase (decrease) in
cash and cash
equivalents 375,146 171,454 398,857 (556,314)
Cash and cash
equivalents
at beginning
of period 603,790 203,636 580,079 931,404
Cash and cash
equivalents
at end of period $978,936 $375,090 $978,936 $375,090
(a) Refer to the "GAAP to non-GAAP Reconciliations" 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 Government Segment
-------------------- ----------------------------------
Total Consol.
Fully Total Medicare Medi- TRICARE Seg- Total
Insured ASO Segment Advantage caid TRICARE ASO ment Medical
September 30,
2005
Capitated HMO
hospital
system based
A 2.6% - 1.6% 7.0% - - - 0.9% 1.2%
Capitated HMO
physician
group based
A 2.2% - 1.4% 4.6% 37.2% - - 5.1% 3.4%
Risk-sharing
B 2.6% - 1.6% 44.1% 59.1% - - 12.9% 7.8%
All other
membership 92.6% 100.0% 95.4% 44.3% 3.7% 100.0% 100.0% 81.1% 87.6%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
September 30,
2004
Capitated HMO
hospital
system based
A 3.2% - 2.2% 10.3% 3.5% - - 2.1% 2.1%
Capitated
HMO physician
group based
A 2.5% - 1.7% 1.2% 41.7% - - 7.6% 4.3%
Risk-sharing
B 2.5% - 1.7% 55.9% 47.3% - - 16.3% 8.2%
All other
membership 91.8% 100.0% 94.4% 32.6% 7.5% 100.0% 100.0% 74.0% 85.4%
Total 100.0% 100.0% 100.0% 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 Nine For the Twelve
Months Ended Months Ended
September 30, December 31,
2005 2004
Balances at January 1 $1,422,010 $1,272,156
Acquisition 37,375 71,063
Incurred related to:
Current year 8,849,176 10,763,105
Prior years - non-TRICARE (70,854) (68,448)
Prior years - TRICARE (1) (41,683) (25,010)
Total incurred 8,736,639 10,669,647
Paid related to:
Current year (7,173,141) (9,504,331)
Prior years (1,205,657) (1,086,525)
Total paid (8,378,798) (10,590,856)
Balances at end of period $1,817,226 $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.
(1) 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
Hurricane Katrina Impact on Medical Claims Reserves
Hurricane Katrina has impacted claims submission from providers in the
affected areas. This has resulted in an increase in our medical and
other expenses payable of approximately $25 million, or approximately 0.8
days in claims payable. This increase resides primarily in our
unprocessed claim inventories (number of days on hand) and IBNR.
Additionally, this slow down in claim submission results in an increase
in our claim receipt cycle time, as shown below.
Medical and Other Expenses Payable
Detail:
September 30, June 30, December 31,
2005 2005 2004
A IBNR and other medical
expenses payable $1,101,066 $981,395 $910,525
B TRICARE IBNR 416,259 329,558 284,647
C TRICARE other medical
expenses payable 72,474 69,865 6,970
D Unprocessed claim inventories 136,700 119,500 115,300
E Processed claim inventories 54,907 128,204 97,801
F Payable to pharmacy benefit
administrator 35,820 49,029 6,767
Total medical and other
expenses payable $1,817,226 $1,677,551 $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. Approximately two-thirds of
the $120 million increase during the quarter is attributable to the
increase in Medicare HMO capitation payable resulting from the receipt
of Medicare Risk Adjuster payments towards the end of the quarter. See
preceding table of "Percentage of Ending Membership Under Capitation
Arrangements." We anticipate paying these amounts to providers during
the fourth quarter.
B TRICARE IBNR has increased from higher medical expenses due to the
transition to the new South region contract.
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.
See Hurricane Katrina note above.
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 (b) 16.7 16.9 (0.2) -1.2 %
4th Quarter Average - 16.4 N/A N/A
Full Year Average 16.4 16.9 (0.5) -3.0 %
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
9/30/2003 $106,800 528,400 5.8
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 (b) $136,700 512,800 4.7
(a) Receipt cycle time data for our largest claim processing platforms
representing approximately 90% of our fully insured claims volume.
(b) See "Hurricane Katrina Impact on Medical Claims Reserve" section
within these statistical pages.
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
in Claims DCP
Quarter Payable Annual Excluding Annual %
Ended (DCP) Change % Change Capitation Change Change
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 %
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 %
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:
2005 2004
4th quarter-prior year 49.5 46.2
Impact of change in claim receipt cycle time 0.4 (0.2)
Impact of change in unprocessed claim inventories (a) 0.6 0.2
Impact of change in processed claim inventories (1.3) 0.9
Impact of changing TRICARE reserve balances 1.4 1.6
Impact of change in pharmacy payment cutoff 0.9 (0.4)
All other (b) 2.5 1.2
Year to date-current year 54.0 49.5
(a) See "Hurricane Katrina Impact on Medical Claims Reserves" section
within these statistical pages.
(b) Increase primarily results from the increase in Medicare capitation
payable, as described above.
SOURCE: Humana Inc.
CONTACT: Regina Nethery, Investor Relations, +1-502-580-3644, or Rnethery@humana.com , or Tom Noland, Corporate Communications, +1-502-580-3674, or Tnoland@humana.com , both of Humana Inc.