Business Context and Reporting Period
Company: Humana Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: Humana is a major health and supplemental benefits company operating in two primary segments: Government (Medicare, Military, Medicaid) and Commercial (employer groups and individuals). As of September 30, 2008, the company served approximately 11.5 million medical members and 6.7 million specialty product members.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenues | $7,148.2 million | $21,458.7 million |
| Net Income | $183.0 million | $473.1 million |
| Diluted EPS | $1.09 | $2.79 |
| Operating Cash Flow | N/A | $685.7 million |
| Cash and Equivalents | $1,542.9 million | $1,542.9 million (Balance Sheet) |
| Long-Term Debt | $1,668.2 million | $1,668.2 million (Balance Sheet) |
| Benefits Ratio | 83.1% | 84.9% |
| SG&A Expense Ratio | 13.7% | 13.4% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 13.1% for the quarter and 13.2% for the nine-month period compared to 2007, driven by growth in Medicare Advantage and Commercial specialty products.
- Profitability Decline: Net income decreased 39.5% for the quarter and 20.0% for the nine-month period. This decline was primarily due to realized investment losses and higher-than-expected expenses in Medicare stand-alone Prescription Drug Plans (PDPs).
- Investment Losses: The company recorded $108.3 million in realized investment losses for the quarter, including $68.7 million in other-than-temporary impairments related to Lehman Brothers Holdings Inc. and other distressed financial securities.
- Membership Trends: Medicare Advantage membership grew 20.2% year-over-year, while Medicare stand-alone PDP membership declined 10.7% due to bid adjustments and market conditions.
- Acquisitions: Significant acquisitions included SecureHorizons (Las Vegas), OSF Health Plans (Illinois), and Metcare (Florida), expanding Medicare and commercial footprints.
Outlook, Risks, and Management Commentary
- 2008 Outlook: Management expects a decrease in consolidated earnings for the full year 2008 compared to 2007, primarily due to lower-than-expected operating results in stand-alone PDP products.
- Financial Market Turmoil: The company faces continued risk of further declines in fair value of its investment portfolio. Gross unrealized losses totaled $286.7 million as of September 30, 2008. Management terminated all interest rate swap agreements in October 2008, fixing the interest rate on senior notes at 6.08%.
- Regulatory Risks: CMS has announced audits of Medicare Advantage plans regarding risk adjustment data, which could result in material payment adjustments. The Medicare Improvements for Patients and Providers Act of 2008 may impact operations starting in 2009 and 2010.
- Liquidity: Despite market volatility, Humana maintains $1.5 billion in cash and equivalents and $996.9 million in available borrowing capacity under its credit agreement. The company recently borrowed $250 million to fund the Cariten Healthcare acquisition.
- Legal Proceedings: The company is subject to multiple class action lawsuits regarding securities, ERISA, and provider reimbursement practices, as well as regulatory investigations.
Investor Verification Checklist
- Investment Portfolio Exposure: Verify the extent of exposure to subprime and distressed financial institution securities and the potential for future other-than-temporary impairments.
- Medicare PDP Performance: Assess the sustainability of the Medicare stand-alone PDP bid assumptions and the impact of the expected loss of 308,000 dual-eligible members in 2009.
- Regulatory Audit Impact: Monitor the outcome of CMS risk adjustment audits and potential retroactive payment adjustments.
- Debt Structure: Review the implications of terminating interest rate swaps and the fixed interest rate of 6.08% on future interest expense.
- Legal Liabilities: Track the status of pending securities class actions and provider litigation (e.g., Sacred Heart Health System) for potential financial exposure.