Humana Inc. — 2011 Form 10-K Summary
Business context and reporting period
Humana is a health insurer and health-services company, with Retail, Employer Group, Health and Well-Being Services, and Other Businesses operations. This filing covers the fiscal year ended December 31, 2011; it also reports unaudited fourth-quarter results. Humana served approximately 11.2 million medical members at year-end. Its business is substantially government-program dependent: 76% of premiums and services revenue came from federal contracts, and Medicare products represented approximately 65% of total premiums and services revenue.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $36.832 billion | $33.596 billion |
| Premiums revenue | $35.106 billion | $32.712 billion |
| Net income | $1.419 billion | $1.099 billion |
| Diluted EPS | $8.46 | $6.47 |
| Operating cash flow | $2.079 billion | $2.242 billion |
| Benefit ratio | 82.1% | 82.9% |
| Operating cost ratio | 14.8% | 13.2% |
Operating income was $2.344 billion, up 26.4%; pretax income was $2.235 billion, up 27.8%. Total operating expenses rose 8.7% to $34.488 billion, including benefits expense of $28.823 billion and operating costs of $5.395 billion. The effective tax rate was 36.5%.
At December 31, 2011, cash and cash equivalents were $1.377 billion, investment securities were $9.453 billion, total assets were $17.708 billion, debt was $1.659 billion, and stockholders’ equity was $8.063 billion. The company had $986 million of undrawn capacity under its $1.0 billion revolving credit agreement. It reported compliance with its credit covenants and stated liquidity was adequate for at least the next 12 months. Operating cash flow decreased from 2010; cash and cash equivalents fell by $296 million during 2011.
Fourth-quarter 2011 revenue was $9.056 billion, pretax income $313 million, net income $199 million, and diluted EPS $1.20, compared with $8.276 billion, $174 million, $107 million, and $0.63, respectively, in fourth-quarter 2010.
Material changes versus 2010
- Revenue increased 9.6% and net income increased 29.1%. Growth reflected higher Retail Medicare premiums and Health and Well-Being Services revenue, including the full-year contribution from Concentra, acquired in December 2010.
- Retail segment premiums rose 12.3%; individual Medicare Advantage membership grew 12.3% to 1.64 million, while stand-alone Part D membership rose 52.1% to 2.54 million, supported by the Humana Walmart-Preferred Rx Plan.
- Employer Group premiums declined 2.2%, and segment pretax income fell 16.0% to $242 million. Commercial group membership declined amid pricing discipline and competitive pressure; minimum-benefit-ratio rebates also affected results.
- Health and Well-Being Services pretax income increased 61.2% to $353 million, supported by pharmacy growth and Concentra. Other Businesses reported $84 million pretax income versus a $2 million loss in 2010.
- The benefit ratio improved 80 basis points, while the operating cost ratio worsened 160 basis points. The latter reflected higher costs, including Concentra’s business mix and expenses to serve growing Medicare membership.
- 2011 earnings included $205 million of favorable prior-period medical-claims reserve development, or $0.77 per diluted share, versus $231 million, or $0.86 per share, in 2010. The 2010 comparison also included a $147 million deferred-acquisition-cost write-down and a $139 million long-term-care reserve charge, neither repeated in 2011.
- Humana initiated a quarterly dividend in 2011, declaring $0.25 per share for each of three quarters, and repurchased approximately $492 million of shares under its repurchase plans.
Outlook, commentary, risks and unusual items
- Management said the February 2012 CMS advance notice suggested Medicare Advantage payment rates for 2013 would remain relatively unchanged from 2012, excluding potential automatic reductions. Final rates were pending; the filing gives no clear numerical earnings guidance.
- Management expected the new TRICARE South contract, anticipated to begin April 1, 2012, to be accounted for more like an administrative-services arrangement. It expected lower reported TRICARE revenue and a higher operating cost ratio in 2012 compared with 2011.
- Humana identified significant uncertainty from health reform implementation, including Medicare payment changes, minimum benefit ratios, insurer assessments and fees, and additional regulation. Potential 2014 insurer fees and assessments could affect earnings and cash flows.
- CMS risk-adjustment data validation audits covered six Humana contracts for the 2007 contract year. Humana disputed the proposed audit methodology and warned that retroactive payment adjustments could materially affect Medicare Advantage revenue; the potential amount was not clear in the filing.
- The company disclosed an ongoing internal investigation into aspects of its Florida operations, voluntary disclosure to federal and state authorities, a related qui tam suit, and government requests for information. It stated that outcomes and possible losses could not be reliably estimated and could be material.
- Other key exposures include medical-cost and claims-reserve estimation, Medicare and government-contract concentration, provider coding and documentation, regulatory or contract changes, competition, cybersecurity and systems risks, and the long-term-care block. The closed-block long-term-care liability was $938 million at year-end.
- Humana entered agreements to acquire Arcadian and SeniorBridge, subject to regulatory approval. It also acquired Anvita and MD Care in 2011. No impairment loss was recorded in the annual goodwill tests.
Most important facts for investors to verify
- How much of 2011 earnings growth remains after considering the $205 million favorable reserve development and the nonrecurrence of 2010 charges.
- Final 2013 Medicare payment rates, any automatic federal reductions, and outcomes and financial effects of the CMS risk-adjustment audits.
- The financial and operating impact of the TRICARE contract transition, including the expected revenue presentation and margins.
- Developments, accruals, or potential exposures from the Florida investigation, qui tam litigation, and other legal and regulatory matters.
- Whether Medicare growth can be sustained while containing benefit and administrative costs, and how health-reform requirements and fees affect margins and cash flow.
- Liquidity, debt, and capital returns alongside regulated-subsidiary dividend restrictions; the filing reports an unmodified audit opinion and effective internal control over financial reporting.