What is driving the decline in underlying earnings?

Management attributed the decline to higher medical cost trends that were not adequately anticipated when 1999 premium rates were set. These trends stemmed from rapid growth of open access products, ineffective provider risk-sharing arrangements, higher pharmacy costs, and an unfavorable Florida Columbia/HCA provider contract.

What steps is management taking to improve results in 2000?

Management is pursuing large group commercial rate increases, re-contracting with or eliminating certain risk-sharing providers, three-tier pharmacy benefit designs, and exits from unprofitable Medicare counties. It expects commercial and Medicare HMO premium yields to rise approximately 10 to 12 percent and 6 to 7 percent, respectively, in 2000, and it is selling non-core businesses.

What litigation could materially affect Humana?

The Chipps case produced a jury verdict of approximately $79 million, mostly punitive damages, which the company is appealing and which its excess carriers have indicated may not be covered. Six securities class actions and twelve managed care class actions alleging RICO violations are also pending. Management believes these suits are without merit.

Is Humana's liquidity sufficient to fund operations and acquisitions?

Management believes that planned divestitures, future operating cash flows, and funds available under the $1.0 billion Credit Agreement and commercial paper program are sufficient to meet future liquidity needs, to pursue selected acquisitions, and to fund capital requirements. Planned 2000 capital spending excluding acquisitions is $130 million to $140 million.

HUM 10-K FY1999 Annual Report — Revenue, Net Income, EPS

Q: Why did Humana post a net loss in 1999?

The 1999 net loss of $382 million reflected $585 million of pretax expenses, including a $342 million goodwill and long-lived asset impairment, $118 million in losses on non-core asset sales, a $50 million premium deficiency, $35 million of medical reserve strengthening, and $35 million of professional liability and other costs. Excluding these items, adjusted net income was $117 million.

01—Abstract

Summary

Summary of the 10-K filed March 30, 2000. Cited figures are marked; the original filing is the authoritative source.

Humana Inc. reported a net loss of $382 million^a for 1999, compared with net income of $129 million in 1998, on premium revenues of $9.959 billion and total revenues of $10.113 billion.

The loss was driven by $585 million^b of pretax expenses in 1999, including a $342 million long-lived asset impairment (primarily goodwill in the Austin, Dallas and Milwaukee markets), $118 million in losses on non-core asset sales, a $50 million premium deficiency, $35 million of reserve strengthening, and $35 million of professional liability and other costs. Excluding these items, adjusted net income was $117 million, or $0.69 per diluted share, versus $213 million, or $1.27 per diluted share, in 1998. The adjusted medical expense ratio rose to 84.8 percent from 83.0 percent, driven by commercial medical cost increases that exceeded premium rate increases.

Management attributed the decline to higher medical cost trends not adequately anticipated in 1999 premium pricing, including open access product growth, ineffective risk-sharing arrangements, higher pharmacy costs, and an unfavorable Florida Columbia/HCA provider contract. The company is restructuring its portfolio. It has agreed to sell its workers' compensation, Medicare supplement and North Florida Medicaid businesses for approximately $115 million^c, and it acquired Memorial Sisters of Charity Health Network in Houston for about $50 million in cash on January 31, 2000.

Management expects 2000 commercial HMO and PPO premium yields to rise approximately 10 to 12 percent and Medicare HMO yields to rise 6 to 7 percent, while expecting membership to decline. The company exited 31 Medicare counties on January 1, 2000, and it began charging Medicare HMO member premiums in additional markets. Management stated that the company's liquidity is sufficient, citing planned divestitures, operating cash flows, and access to a $1.0 billion^d credit agreement and its commercial paper program.

Litigation remains a significant risk. Six securities class action complaints relate to statements about the Columbia/HCA contract renewal.

Twelve managed care class actions allege RICO violations, and a January 2000 jury verdict in the Chipps case awarded approximately $79 million, most of it punitive damages, which the company is appealing. Management believes the securities and managed care suits are without merit and does not expect them to have a material adverse effect, though it acknowledges that outcomes cannot be accurately predicted.

02—Key points

Key Highlights

Net loss of $382 million, or $(2.28) per share, in 1999, versus net income of $129 million, or $0.77 per share, in 1998, driven by $585 million of pretax special charges.
Adjusted net income (excluding special charges) fell to $117 million, or $0.69 per diluted share, from $213 million, or $1.27 per diluted share, in 1998.
Premium revenues rose 3.8 percent to a record $9.96 billion, supported by commercial premium yields up 7.4 percent and Medicare HMO yields up 3.4 percent.
Adjusted medical expense ratio increased to 84.8 percent from 83.0 percent, as commercial medical cost increases exceeded premium rate increases.
Asset write-downs included a $342 million long-lived asset impairment and $118 million in losses on the sale of non-core businesses, which include workers' compensation, Medicare supplement and North Florida Medicaid.
Operating cash flow improved to $217 million in 1999 from $55 million in 1998, and the company had $978 million in cash and cash equivalents at year-end.
Management expects 2000 commercial HMO and PPO premium yields to rise 10 to 12 percent, and the company has no plans to pay cash dividends.

03—Questions

Frequently Asked Questions

Why did Humana post a net loss in 1999?
The 1999 net loss of $382 million reflected $585 million of pretax expenses, including a $342 million goodwill and long-lived asset impairment, $118 million in losses on non-core asset sales, a $50 million premium deficiency, $35 million of medical reserve strengthening, and $35 million of professional liability and other costs. Excluding these items, adjusted net income was $117 million.
What is driving the decline in underlying earnings?
Management attributed the decline to higher medical cost trends that were not adequately anticipated when 1999 premium rates were set. These trends stemmed from rapid growth of open access products, ineffective provider risk-sharing arrangements, higher pharmacy costs, and an unfavorable Florida Columbia/HCA provider contract.
What steps is management taking to improve results in 2000?
Management is pursuing large group commercial rate increases, re-contracting with or eliminating certain risk-sharing providers, three-tier pharmacy benefit designs, and exits from unprofitable Medicare counties. It expects commercial and Medicare HMO premium yields to rise approximately 10 to 12 percent and 6 to 7 percent, respectively, in 2000, and it is selling non-core businesses.
What litigation could materially affect Humana?
The Chipps case produced a jury verdict of approximately $79 million, mostly punitive damages, which the company is appealing and which its excess carriers have indicated may not be covered. Six securities class actions and twelve managed care class actions alleging RICO violations are also pending. Management believes these suits are without merit.
Is Humana's liquidity sufficient to fund operations and acquisitions?
Management believes that planned divestitures, future operating cash flows, and funds available under the $1.0 billion Credit Agreement and commercial paper program are sufficient to meet future liquidity needs, to pursue selected acquisitions, and to fund capital requirements. Planned 2000 capital spending excluding acquisitions is $130 million to $140 million.

04—Continue

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