Business Context and Reporting Period
Company: Humana Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: Humana is a major health benefits company offering insurance products for government-sponsored programs (Medicare, TRICARE, Medicaid) and commercial employer groups. As of September 30, 2007, the company served approximately 11.3 million medical members and 1.9 million specialty product members.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended 9/30/07 | Nine Months Ended 9/30/07 | Nine Months Ended 9/30/06 |
|---|---|---|---|
| Total Revenues | $6,319,584 | $18,951,194 | $15,761,318 |
| Net Income | $302,378 | $590,465 | $332,402 |
| Diluted EPS | $1.78 | $3.48 | $1.98 |
| Operating Cash Flow | N/A | $1,414,094 | $1,151,811 |
| Cash and Equivalents | $2,585,670 | $2,585,670 | $1,181,234 |
| Long-Term Debt | $1,292,858 | $1,292,858 | $1,269,100 |
| Medical Expense Ratio (MER) | 81.3% | 83.8% | 84.3% |
| SG&A Expense Ratio | 13.3% | 13.2% | 14.2% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 11.1% for the quarter and 20.0% for the nine-month period compared to 2006. This was driven primarily by a 14.6% increase in Government segment premiums, fueled by a 14.6% rise in Medicare Advantage membership.
- Profitability: Net income for the nine months ended September 30, 2007, rose 78.6% to $590.5 million. Income before taxes for the Government segment increased 121.4% year-over-year.
- Expense Ratios: The consolidated Medical Expense Ratio (MER) improved (decreased) by 50 basis points to 83.8% for the nine-month period. The SG&A expense ratio also improved by 100 basis points to 13.2%.
- Acquisitions: The company acquired CompBenefits Corporation (dental/vision) for $368.7 million in October 2007 and DefenseWeb Technologies (government software) for $26.9 million in March 2007. An agreement to acquire KMG America Corporation for approximately $155 million was signed in September 2007.
Guidance, Outlook, and Risks
- Outlook: Management expects the consolidated SG&A expense ratio to range between 13.5% and 14.0% for the full year 2007. Capital expenditures for 2007 are expected to approximate $220 million.
- Government Contracts: All material Medicare contracts have been renewed for 2008. The TRICARE South Region contract was extended through March 31, 2008. However, the company faces uncertainty regarding Medicaid contracts in Puerto Rico, where the government has delayed the bid process for new contracts until potentially 2009.
- Unusual Items: Year-over-year comparisons were favorably impacted by $68.9 million in pretax income from changes in estimates related to the 2006 Medicare Part D reconciliation and TRICARE settlements. The prior year (2006) included a $51.7 million gain from the sale of a venture capital investment.
- Risks: Key risks include medical cost inflation, regulatory changes to government programs (particularly Medicare), the outcome of legal proceedings, and the ability to manage the integration of recent acquisitions.
Investor Verification Checklist
- Medicare Part D Reconciliation: Verify the final settlement amount with CMS for the 2006 contract year, which is expected to be settled in Q4 2007 and currently represents a significant liability ($725.5 million).
- Puerto Rico Medicaid Status: Monitor the status of rate negotiations and contract renewals in Puerto Rico, as the delay in the bid process creates revenue uncertainty.
- Acquisition Integration: Assess the financial impact and integration progress of the CompBenefits and KMG America acquisitions.
- Medical Cost Trends: Review the trajectory of the Medical Expense Ratio (MER) to ensure it remains within the projected range, given the high inflationary pressure on healthcare costs.
- Liquidity Position: Confirm the company's ability to fund the expected $275 million to $300 million in capital contributions to state-regulated subsidiaries for 2007.