How did Humana's earnings change in 2002?

Net income rose to $142.8 million, or $0.85 per diluted share, from $117.2 million, or $0.70 per diluted share, in 2001. The filing attributes the increase primarily to premium revenues growing faster than operating costs in both segments and to the cessation of goodwill amortization, partly offset by the fourth-quarter 2002 restructuring charge.

What is the outlook for the Commercial segment in 2003?

Humana has priced 2003 premiums assuming medical cost trends will accelerate slightly and anticipates 2003 Commercial premium yields in the 13% to 15% range. It expects fully insured and ASO medical membership to grow approximately 4% to 5% during 2003.

What risks do the TRICARE contracts present?

The Regions 2 and 5 contracts expire April 30, 2003, and the Regions 3 and 4 contracts expire June 30, 2003; Humana is negotiating extensions. Under the T-Nex program, the Department of Defense plans to consolidate prime contracts from seven to three, with awards expected in mid to late 2003. If Humana wins the South region, TRICARE revenues and expenses would decline by approximately 20%, though the company does not expect a material change in consolidated results.

What is the status of the major litigation?

Humana is a defendant in the In re Managed Care Litigation, including subscriber track cases with a trial date set for September 22, 2003, and a provider track case with a global class certified and a trial date of December 8, 2003. The company also faces antitrust suits in Ohio and Kentucky and investigations by the Florida and Texas Attorneys General. Management does not believe these actions will have a material adverse effect on its financial position, results of operations or cash flows, though outcomes cannot be predicted with certainty.

What cost savings does the restructuring plan target?

The plan affects approximately 2,600 positions, with a net reduction of about 2,300 employees after hiring about 300 for consolidated operations. Management expects the reduction in compensation expense to improve pretax results by approximately $70 million in 2003 and $110 million annually thereafter, and it expects the total SG&A expense ratio to decline by about 80 basis points in 2003.

HUM 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 21, 2003. Cited figures are marked; the original filing is the authoritative source.

Humana Inc., headquartered in Louisville, Kentucky, reported 2002 total revenues of $11.26 billion^a, up from $10.19 billion in 2001, and net income of $142.8 million, or $0.85 per diluted share, compared with $117.2 million, or $0.70 per diluted share, in 2001.

Premium revenues rose 10.1% to $10.9 billion^b, driven by commercial premium yields of 12% to 14% on fully insured business and a sharp increase in TRICARE premiums to $2.0 billion. Medicare+Choice premiums fell 9.6% to $2.6 billion as the company exited counties and membership declined 12.6% to 344,100 members. The medical expense ratio rose to 83.6% from 83.3%, while the SG&A expense ratio rose to 15.6% from 15.3%, partly due to $30.1 million of PCA-related administrative charges.

The company recorded an $85.6 million^c pretax charge in the fourth quarter of 2002 tied to a restructuring plan that consolidates seven customer service centers into four and reduces about 2,300 net positions. Management expects the plan to improve 2003 pretax results by approximately $70 million and reduce the SG&A expense ratio by about 80 basis points in 2003. Management also anticipates 2003 Commercial premium yields of 13% to 15% and a 2003 effective tax rate of about 36%.

The filing highlights risk concentrated in government contracts: about 44%^d of premiums and administrative services fees came from federal contracts in 2002, and the TRICARE contracts face renewal and the T-Nex competitive rebid, with an award announcement expected in mid to late 2003. Litigation remains significant, including the In re Managed Care Litigation class actions and the provider track case, though management does not believe pending actions will have a material adverse effect on financial position.

02—Key points

Key Highlights

Total revenues of $11.26 billion in 2002, up from $10.19 billion in 2001; net income of $142.8 million, or $0.85 per diluted share, versus $0.70 in 2001.
Premium revenues rose 10.1% to $10.9 billion, led by commercial premium yields of 12% to 14% and TRICARE premiums up $660 million, or 49.2%.
Medicare+Choice membership fell 12.6% to 344,100 after county exits, and Medicare+Choice premium revenues declined 9.6% to $2.6 billion.
Medical expense ratio increased to 83.6% from 83.3%; SG&A expense ratio increased to 15.6% from 15.3%, including $30.1 million of PCA-related charges.
Restructuring charge of $35.9 million (with $85.6 million total pretax charges in Q4 2002) to consolidate seven customer service centers into four; management expects roughly $70 million pretax benefit in 2003.
Approximately 44% of premiums and administrative services fees came from federal government contracts in 2002, including TRICARE (about 19%) and a Florida Medicare+Choice contract (about 16%).
Stock repurchase program: 6.4 million shares bought for $74.0 million in 2002, with $5.2 million of the $100 million authorization remaining as of February 26, 2003.

03—Questions

Frequently Asked Questions

How did Humana's earnings change in 2002?
Net income rose to $142.8 million, or $0.85 per diluted share, from $117.2 million, or $0.70 per diluted share, in 2001. The filing attributes the increase primarily to premium revenues growing faster than operating costs in both segments and to the cessation of goodwill amortization, partly offset by the fourth-quarter 2002 restructuring charge.
What is the outlook for the Commercial segment in 2003?
Humana has priced 2003 premiums assuming medical cost trends will accelerate slightly and anticipates 2003 Commercial premium yields in the 13% to 15% range. It expects fully insured and ASO medical membership to grow approximately 4% to 5% during 2003.
What risks do the TRICARE contracts present?
The Regions 2 and 5 contracts expire April 30, 2003, and the Regions 3 and 4 contracts expire June 30, 2003; Humana is negotiating extensions. Under the T-Nex program, the Department of Defense plans to consolidate prime contracts from seven to three, with awards expected in mid to late 2003. If Humana wins the South region, TRICARE revenues and expenses would decline by approximately 20%, though the company does not expect a material change in consolidated results.
What is the status of the major litigation?
Humana is a defendant in the In re Managed Care Litigation, including subscriber track cases with a trial date set for September 22, 2003, and a provider track case with a global class certified and a trial date of December 8, 2003. The company also faces antitrust suits in Ohio and Kentucky and investigations by the Florida and Texas Attorneys General. Management does not believe these actions will have a material adverse effect on its financial position, results of operations or cash flows, though outcomes cannot be predicted with certainty.
What cost savings does the restructuring plan target?
The plan affects approximately 2,600 positions, with a net reduction of about 2,300 employees after hiring about 300 for consolidated operations. Management expects the reduction in compensation expense to improve pretax results by approximately $70 million in 2003 and $110 million annually thereafter, and it expects the total SG&A expense ratio to decline by about 80 basis points in 2003.

04—Continue

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