Humana Inc. 2009 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended June 30, 2009; filed August 3, 2009. Humana operates Government and Commercial health-benefit businesses. At quarter-end it reported approximately 10.3 million medical members and 6.8 million specialty members.
Financial performance
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Total revenue | $7.899 billion | $7.351 billion | $15.611 billion | $14.311 billion |
| Operating income | $466.5 million | $342.9 million | $787.1 million | $483.1 million |
| Net income | $281.8 million | $209.9 million | $487.5 million | $290.1 million |
| Diluted EPS | $1.67 | $1.24 | $2.89 | $1.71 |
| Operating cash flow | Not separately reported | Not separately reported | $207.4 million | $108.5 million |
- Q2 revenue rose 7.5%; six-month revenue rose 9.1%. Six-month net income increased about 68%, principally reflecting lower Medicare stand-alone prescription-drug claims and improved Government-segment results.
- The consolidated benefit ratio improved to 83.3% in Q2 from 85.0%, and to 83.6% for the first half from 85.8%. The six-month SG&A ratio edged up to 13.4% from 13.2%.
- Government segment pretax income increased 62% in Q2 and 132% for the first half. Commercial pretax income declined 53% in Q2 and 20% for the first half; management cited lower investment income, economic pressure, and higher SG&A.
- Six-month investment income decreased to $144.9 million from $170.8 million, mainly due to lower interest rates. Interest expense increased to $53.3 million from $34.2 million, reflecting higher rates and average debt.
Financial position and liquidity
- At June 30, cash and cash equivalents were $1.585 billion, down from $1.970 billion at year-end 2008. Current and long-term investment securities totaled approximately $5.824 billion.
- Long-term debt was $1.683 billion, down from $1.937 billion; Humana had repaid $250 million drawn under its credit agreement and had no borrowings outstanding on that facility. It reported $996.5 million of remaining capacity.
- Cash from operations was $207.4 million for the first half. Receivables increased $494.1 million in the cash-flow statement, largely reflecting timing of Medicare receipts; the company reported collecting $343 million related to CMS risk adjustment in July.
- Humana reported $196.6 million of gross unrealized investment losses at quarter-end, versus $313.0 million at December 31, 2008, and no material other-than-temporary impairments. Management said it did not intend to sell loss-position securities and did not expect to be forced to sell them before cost recovery.
- Management said cash, investments, operating cash flow, and available financing were adequate for foreseeable needs. State-regulated subsidiaries had $3.6 billion of statutory capital and surplus, $1.4 billion above applicable aggregate requirements.
Changes, outlook, risks and unusual items
- Medicare Advantage membership grew 11.5% year over year to 1.50 million; stand-alone Part D membership fell 35.8% to 1.99 million after Humana realigned premiums and benefits. Total medical membership declined 10.2%, largely reflecting that Part D contraction and the end of a Medicaid ASO contract.
- Commercial medical membership declined 3.1% year over year. Management expected a further decline of 175,000–195,000 Commercial medical members for full-year 2009 from December 31, 2008, citing workforce reductions and losses of larger ASO accounts.
- CMS’s final 2010 Medicare Advantage rates represented an estimated 4%–5% effective industry decrease. Humana said it had designed products to address lower rates and planned to use cost reduction, care coordination, and disease management; execution and profitability remain uncertain.
- In July 2009, the Department of Defense notified Humana it had not won the next-generation TRICARE South contract. Humana protested the award. The existing contract covered services through March 31, 2010; associated first-half premiums and ASO fees were $1.8 billion, or 11.7% of the company total. Potential goodwill impairment, exit costs, asset sales, and strategic changes were under evaluation; the earnings impact was not yet estimable.
- CMS audits of Medicare Advantage risk-adjustment coding could lead to contract-level payment adjustments, potentially material; the audit method and outcome were uncertain. Humana also disclosed ongoing ERISA, provider, and other litigation and regulatory reviews. The federal securities class action was dismissed with prejudice in June 2009, with the appeal period expired; related derivative litigation remained pending.
- Humana expected approximately $225 million of 2009 capital expenditures. Its $250 million share-repurchase authorization had not been used and was due to expire December 31, 2009.
- Investment markets remained a risk: a 1% increase in interest rates was estimated to reduce investment fair value by approximately $246 million. S&P downgraded Humana one notch to BBB- on July 15, 2009; the filing said this did not trigger a senior-note rate increase.
- The company adopted new fair-value, impairment, and interim disclosure accounting guidance in the quarter. It also reduced a $16.8 million unrecognized-tax-benefit liability following tax-audit settlements, contributing to a lower six-month effective tax rate.
Important facts for investors to verify
- Whether Humana’s TRICARE protest succeeds, when the existing contract ends, and the eventual financial impact of losing the follow-on award.
- CMS Medicare Advantage audit results and any resulting payment adjustments, and the effect of the 2010 rate decrease on membership, benefits, and margins.
- Commercial membership trends and whether the projected 175,000–195,000 full-year decline is realized.
- Claims-cost and benefit-ratio trends, particularly whether recent Medicare Part D improvement is sustainable.
- Operating cash conversion, Medicare receivable collections, investment portfolio valuation and impairment risk, and the effect of credit-rating changes on financing costs.
- Developments in remaining litigation and regulatory matters, and any impairment, restructuring, or exit charges tied to the military-services business.