Humana Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; balance sheet comparisons are to December 31, 2010. Unaudited consolidated interim results. Humana provides health insurance and health and wellness services, with reportable segments Retail, Employer Group, and Health and Well-Being Services. Historical segment results were restated for the 2011 realignment.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenues | $9.191 billion | $8.380 billion | +9.7% |
| Premiums | $8.766 billion | $8.162 billion | +7.4% |
| Operating income | $524.0 million | $443.2 million | +18.2% |
| Net income | $315.2 million | $258.8 million | +21.8% |
| Diluted EPS | $1.86 | $1.52 | +22.4% |
| Operating cash flow | $795.5 million | $754.7 million | +$40.8 million |
- Benefit ratio was 83.8%, up 0.3 percentage points year over year; operating cost ratio was 13.8%, up 1.0 point. Operating margin, calculated as operating income divided by total revenue, was approximately 5.7% versus 5.3%.
- Cash and cash equivalents were $1.756 billion at quarter-end. Current assets were $11.097 billion and current liabilities $6.365 billion.
- Long-term debt was $1.666 billion, broadly unchanged from year-end. The $1.0 billion revolving credit facility had no borrowings outstanding and $988.4 million available; covenant leverage was 0.7:1 and the company reported compliance.
- Investment securities totaled approximately $8.989 billion at fair value. Net unrealized gains were $177.6 million, down from $196.5 million at year-end; management attributed unrealized losses mainly to interest-rate increases and tighter market liquidity and reported no material other-than-temporary impairments.
Changes and segment results
- Revenue growth reflected higher Retail premiums and Concentra-related services revenue. Retail premiums rose 11.6%, primarily with Medicare Advantage enrollment growth; Health and Well-Being Services pretax income increased to $96.4 million, partly reflecting Concentra, acquired in December 2010 for approximately $808 million in total consideration.
- Employer Group pretax income rose to $138.8 million from $73.5 million, while premiums fell 3.6% as commercial group membership declined. Retail pretax income fell 18.0% to $217.0 million despite higher premiums, with a higher benefit ratio. Other Businesses pretax income was $35.2 million, versus $37.2 million.
- Prior-period medical-claims reserve development benefited Q1 2011 diluted EPS by about $0.31, compared with $0.37 in Q1 2010. The 2011 benefit comprised approximately $40 million in Retail and $41 million in Employer Group. This makes year-over-year earnings comparisons less indicative of underlying performance.
- Segment realignment also changed classifications of certain pharmacy costs and revenues; prior periods were conformed and the changes had no effect on net income, cash flows, or equity.
Outlook, risks and unusual items
- Management stated that cash, investments, operating cash flow, and financing access were adequate for operating and regulatory needs, expansion and capital expenditures for at least the next 12 months. Expected 2011 capital expenditures, excluding acquisitions, were approximately $280 million.
- CMS announced an average 0.4% increase in Medicare Advantage payment rates for 2012. Humana said it believed it could design competitive products at that rate while pursuing cost reduction and care-outcome initiatives; execution and payment-rate effects remain uncertain. No specific company earnings guidance is provided in the supplied filing text.
- CMS’s proposed Medicare Advantage risk-adjustment data validation (RADV) audit methodology is a material uncertainty. Six Humana contracts were selected for 2007 audits; the company challenged the proposed methodology and warned that implementation without changes could materially harm results, financial position, and cash flows.
- The TRICARE South Region award to Humana was protested by a competing bidder, and a stop-work order was issued. The award’s outcome remained unresolved at filing; Humana said it no longer expected a goodwill impairment in the second half of 2011 as a result of the award, subject to the protest.
- Humana disclosed an ongoing internal investigation into aspects of its Florida operations, voluntarily reported to federal and state authorities. It also described provider litigation and continuing regulatory reviews; possible losses beyond accrued amounts could not be estimated, and sanctions could be substantial.
- Health reform provisions, including minimum benefit ratios, Medicare payment changes, future industry assessments, and implementation uncertainty, may affect pricing, costs, enrollment, and cash flow. Medicare accounted for approximately 65% of premiums and services revenue.
- After quarter-end, the board declared a $0.25-per-share quarterly dividend and authorized up to $1 billion in share repurchases through June 30, 2013. S&P upgraded Humana’s rating one notch to BBB on April 27, 2011.
Most important facts for investors to verify
- Whether favorable claims-reserve development recurs, and the underlying benefit-ratio and utilization trends by segment.
- Developments in CMS RADV audits, including final methodology and any potential payment adjustments.
- Resolution of the TRICARE protest and any operational or financial impact of the stop-work order.
- Progress and outcomes of the Florida investigation, provider litigation, and regulatory reviews, including any eventual quantified liabilities.
- Medicare Advantage rate and health-reform impacts, plus the sustainability of growth in Medicare membership and returns from Concentra.
- Use of the new repurchase authorization, dividend capacity, and availability of subsidiary cash subject to regulatory limits.