What drove Humana's earnings growth in 2006?

Net income increased to $487.4 million from $296.7 million, driven primarily by higher Government segment income, which rose 62.3% to $513.8 million pretax on Medicare Advantage membership growth. Commercial segment pretax income also rose to $248.2 million from $86.2 million. The filing notes that 2005 results included a $71.9 million class action settlement and $27.0 million in Hurricane Katrina expenses that did not recur in 2006.

What risks are associated with Humana's Medicare Part D business?

The company recorded a net liability of $738.7 million for the Part D risk corridor settlement at December 31, 2006, which depends on reconciliations with CMS in mid-2007 and involves factors that may not be certain. The risk corridor thresholds increase in 2008, meaning Humana will bear more risk. Claims data that does not pass CMS edit processes may also shift risk back to the company.

How is Humana's federal government exposure described in the filing?

Approximately 67% of 2006 premiums and ASO fees came from federal government contracts, including about 17% from CMS Medicare contracts in Florida and about 12% from TRICARE. The TRICARE South Region contract expires March 31, 2009, and the company has received notice of the government's intent to renew the fourth option period. Puerto Rico Medicaid contracts were operating under terms that expired October 31, 2006.

What are Humana's capital and financing plans?

The company expects to contribute $325 million to $425 million of capital to its state-regulated subsidiaries in 2007 as premium growth continues. It maintained $2,066.0 million of aggregate statutory capital and surplus at year-end 2006. Its $1.0 billion revolving credit agreement had $546.6 million of remaining borrowing capacity, and it filed a universal shelf registration on March 31, 2006.

What does the company expect for 2007?

Humana expects the 2007 effective tax rate to be in the range of 36% to 37%, capital expenditures of approximately $200 million excluding acquisitions, and a Medicare Advantage plus stand-alone PDP MER of approximately 82% to 84%. It expects fully insured group claims cost increases of 5% to 6%. The budget neutrality adjustment for Medicare Advantage begins phasing out in 2007 and will be fully eliminated by 2011.

HUM 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 23, 2007. Cited figures are marked; the original filing is the authoritative source.

Humana Inc., headquartered in Louisville, Kentucky, reported 2006 total revenues of $21.4 billion^a and net income of $487.4 million, or $2.90 per diluted common share, up from $296.7 million, or $1.79 per diluted share, in 2005.

The company's growth was driven by its Government segment, where Medicare Advantage membership rose to 1,002,600 at December 31, 2006, up 79.7% from 557,800, and its new Medicare stand-alone prescription drug plans added 3,536,600 members. Government segment premium revenues reached $14.6 billion^b in 2006, and the Government share of total premiums and ASO fees was 67% for 2006, compared with 51% for 2005. Medical expense ratio (MER) rose to 84.0% from 83.2%, with the Government segment MER at 85.0% reflecting the start-up of the stand-alone PDP offerings, including a Complete plan MER of 116% that the company says was redesigned for 2007.

The balance sheet and cash flow position strengthened. Cash from operations was $1,686.7 million^c, up from $610.1 million, helped by $738.7 million in estimated net amounts owed to CMS under Part D risk corridor provisions, which the company expects to settle in mid-2007. Total debt increased to $1,269.1 million, reflecting a $500 million 6.45% senior note issuance in May 2006 and a $450 million credit agreement balance at year-end.

Stockholders' equity was $3,053.9 million^d. The company stated that it does not currently intend to pay dividends and plans to retain earnings for growth. Key risks highlighted in the filing include the Government segment's dependence on federal contracts, particularly CMS Medicare contracts in Florida (about 17% of premiums and ASO fees) and the TRICARE South Region contract (about 12%).

Other risks include the phase-in of CMS risk adjustment payments to 100% in 2007, the phase-out of budget neutrality adjustments by 2011, and a Puerto Rico Medicaid contract that has been operating under expired terms. The company expects its 2007 effective tax rate to be between 36% and 37%, and it projects capital expenditures of approximately $200 million for 2007.

02—Key points

Key Highlights

Total 2006 revenues of $21.4 billion, up from $14.4 billion in 2005; net income of $487.4 million, or $2.90 per diluted share, compared with $1.79 in 2005.
Medicare Advantage membership reached 1,002,600 at year-end 2006, up 79.7%, primarily from PFFS product sales; stand-alone PDP added 3,536,600 members in its first year.
Medical expense ratio (MER) was 84.0% for 2006, up from 83.2%; the Government segment MER rose to 85.0% due to stand-alone PDP results, while the Commercial segment MER improved to 81.7%.
Operating cash flow more than doubled to $1,686.7 million, aided by $738.7 million in estimated amounts owed to CMS under Part D risk corridor provisions, expected to be settled in mid-2007.
Government contracts represented 67% of premiums and ASO fees in 2006; the company expects the Government segment to make up a greater share in 2007.
Total debt rose to $1,269.1 million after issuing $500 million of 6.45% senior notes due 2016 and increasing borrowings under a new $1.0 billion revolving credit agreement.
The company has not paid cash dividends since February 1993 and plans to retain earnings to fund growth.

03—Questions

Frequently Asked Questions

What drove Humana's earnings growth in 2006?
Net income increased to $487.4 million from $296.7 million, driven primarily by higher Government segment income, which rose 62.3% to $513.8 million pretax on Medicare Advantage membership growth. Commercial segment pretax income also rose to $248.2 million from $86.2 million. The filing notes that 2005 results included a $71.9 million class action settlement and $27.0 million in Hurricane Katrina expenses that did not recur in 2006.
What risks are associated with Humana's Medicare Part D business?
The company recorded a net liability of $738.7 million for the Part D risk corridor settlement at December 31, 2006, which depends on reconciliations with CMS in mid-2007 and involves factors that may not be certain. The risk corridor thresholds increase in 2008, meaning Humana will bear more risk. Claims data that does not pass CMS edit processes may also shift risk back to the company.
How is Humana's federal government exposure described in the filing?
Approximately 67% of 2006 premiums and ASO fees came from federal government contracts, including about 17% from CMS Medicare contracts in Florida and about 12% from TRICARE. The TRICARE South Region contract expires March 31, 2009, and the company has received notice of the government's intent to renew the fourth option period. Puerto Rico Medicaid contracts were operating under terms that expired October 31, 2006.
What are Humana's capital and financing plans?
The company expects to contribute $325 million to $425 million of capital to its state-regulated subsidiaries in 2007 as premium growth continues. It maintained $2,066.0 million of aggregate statutory capital and surplus at year-end 2006. Its $1.0 billion revolving credit agreement had $546.6 million of remaining borrowing capacity, and it filed a universal shelf registration on March 31, 2006.
What does the company expect for 2007?
Humana expects the 2007 effective tax rate to be in the range of 36% to 37%, capital expenditures of approximately $200 million excluding acquisitions, and a Medicare Advantage plus stand-alone PDP MER of approximately 82% to 84%. It expects fully insured group claims cost increases of 5% to 6%. The budget neutrality adjustment for Medicare Advantage begins phasing out in 2007 and will be fully eliminated by 2011.

04—Continue

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