Humana (HUM) 10-Q 27 Apr 10 2010 Q1 Quarterly report Financial data

Document and Entity Information

Document and Entity Information
	3 Months Ended Mar. 31, 2010
Document Type	10-Q
Amendment Flag	false
Document Period End Date	2010-03-31
Document Fiscal Year Focus	2,010
Document Fiscal Period Focus	Q1
Trading Symbol	HUM
Entity Registrant Name	HUMANA INC
Entity Central Index Key	0000049071
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding	170,197,311

CONDENSED CONSOLIDATED BALANCE

CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands	3 Months Ended Mar. 31, 2010	12 Months Ended Dec. 31, 2009
Current assets:
Cash and cash equivalents	$1,813,993	$1,613,588
Investment securities	6,764,833	6,190,062
Receivables, less allowance for doubtful accounts of $54,758 in 2010 and $50,832 in 2009:
Premiums	1,091,372	811,800
Administrative services fees	13,226	11,820
Securities lending invested collateral	62,013	119,586
Other current assets	514,549	505,960
Total current assets	10,259,986	9,252,816
Property and equipment, net	665,909	679,142
Long-term investment securities	1,333,659	1,307,088
Goodwill	1,992,924	1,992,924
Other long-term assets	956,658	921,524
Total assets	15,209,136	14,153,494
Current liabilities:
Benefits payable	3,707,033	3,222,574
Trade accounts payable and accrued expenses	1,658,985	1,307,710
Book overdraft	236,038	374,464
Securities lending payable	68,221	126,427
Unearned revenues	235,584	228,817
Total current liabilities	5,905,861	5,259,992
Long-term debt	1,675,880	1,678,166
Future policy benefits payable	1,213,179	1,193,047
Other long-term liabilities	328,979	246,286
Total liabilities	9,123,899	8,377,491
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par; 10,000,000 shares authorized; none issued	0	0
Common stock, $0.16 2/3 par; 300,000,000 shares authorized; 189,981,964 shares issued at March 31, 2010 and 189,801,119 shares issued at December 31, 2009	31,664	31,634
Capital in excess of par value	1,688,768	1,658,521
Retained earnings	4,688,379	4,429,611
Accumulated other comprehensive income	69,994	42,135
Treasury stock, at cost, 19,784,653 shares at March 31, 2010 and 19,621,069 shares at December 31, 2009	(393,568)	(385,898)
Total stockholders' equity	6,085,237	5,776,003
Total liabilities and stockholders' equity	$15,209,136	$14,153,494

1_CONDENSED CONSOLIDATED BALANC

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Thousands, except Share data	Mar. 31, 2010	Dec. 31, 2009
Receivables, allowance for doubtful accounts	$54,758	$50,832
Preferred stock, par	$1	$1
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, issued	0	0
Common stock, par	0.1667	0.1667
Common stock, shares authorized	300,000,000	300,000,000
Common stock, shares issued	189,981,964	189,801,119
Treasury stock, shares	19,784,653	19,621,069

CONDENSED CONSOLIDATED STATEMEN

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (USD $)
In Thousands, except Per Share data	3 Months Ended Mar. 31, 2010	3 Months Ended Mar. 31, 2009
Revenues:
Premiums	$8,161,863	$7,471,294
Administrative services fees	125,882	115,882
Investment income	85,455	69,544
Other revenue	67,394	54,941
Total revenues	8,440,594	7,711,661
Operating expenses:
Benefits	6,807,555	6,269,310
Selling, general and administrative	1,127,043	1,063,803
Depreciation and amortization	62,756	58,014
Total operating expenses	7,997,354	7,391,127
Income from operations	443,240	320,534
Interest expense	26,314	26,772
Income before income taxes	416,926	293,762
Provision for income taxes	158,158	88,045
Net income	$258,768	$205,717
Basic earnings per common share	1.54	1.23
Diluted earnings per common share	1.52	1.22

2_CONDENSED CONSOLIDATED STATEM

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands	3 Months Ended Mar. 31, 2010	3 Months Ended Mar. 31, 2009
Cash flows from operating activities
Net income	$258,768	$205,717
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized capital gains	(8,694)	(1,043)
Stock-based compensation	27,339	15,676
Depreciation and amortization	62,756	58,014
(Benefit) provision for deferred income taxes	(20,862)	19,687
Changes in operating assets and liabilities, net of effect of businesses acquired:
Receivables	(280,978)	(255,098)
Other assets	(29,177)	(61,907)
Benefits payable	484,459	32,920
Other liabilities	246,068	22,375
Unearned revenues	6,767	3,364
Other, net	8,205	5,815
Net cash provided by operating activities	754,651	45,520
Cash flows from investing activities
Acquisitions, net of cash acquired	0	(12,367)
Purchases of property and equipment	(39,028)	(39,047)
Purchases of investment securities	(1,525,349)	(1,403,906)
Maturities of investment securities	433,788	404,951
Proceeds from sales of investment securities	545,166	722,288
Change in securities lending collateral	58,206	71,283
Net cash used in investing activities	(527,217)	(256,798)
Cash flows from financing activities
Receipts from CMS contract deposits	438,108	528,965
Withdrawals from CMS contract deposits	(266,649)	(334,528)
Change in securities lending payable	(58,206)	(71,283)
Change in book overdraft	(138,426)	33,520
Common stock repurchases	(7,670)	(5,999)
Excess tax benefit from stock-based compensation	734	148
Proceeds from stock option exercises and other	5,080	1,234
Net cash (used in) provided by financing activities	(27,029)	152,057
Increase (decrease) in cash and cash equivalents	200,405	(59,221)
Cash and cash equivalents at beginning of period	1,613,588	1,970,423
Cash and cash equivalents at end of period	1,813,993	1,911,202
Supplemental cash flow disclosures:
Interest payments	10,486	10,943
Income tax payments, net	$5,210	$26,147

BASIS OF PRESENTATION

BASIS OF PRESENTATION
	3 Months Ended Mar. 31, 2010
BASIS OF PRESENTATION	1. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements are presented in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America, or those normally made in an Annual Report on Form 10-K. For further information, the reader of this Form 10-Q should refer to our Form 10-K for the year ended December31, 2009, that was filed with the Securities and Exchange Commission, or the SEC, on February19, 2010. References throughout this document to we, us, our, Company, and Humana mean Humana Inc. and its subsidiaries. The preparation of our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The areas involving the most significant use of estimates are the estimation of benefits payable, the impact of risk sharing provisions related to our Medicare and TRICARE contracts, the valuation and related impairment recognition of investment securities, and the valuation and related impairment recognition of long-lived assets, including goodwill. These estimates are based on knowledge of current events and anticipated future events, and accordingly, actual results may ultimately differ materially from those estimates. Refer to Note 2 to the consolidated financial statements included in our Form 10-K for the year ended December31, 2009 for information on accounting policies that the Company considers in preparing its consolidated financial statements. The financial information has been prepared in accordance with our customary accounting practices and has not been audited. In our opinion, the information presented reflects all adjustments necessary for a fair statement of interim results. All such adjustments are of a normal and recurring nature.

RECENTLY ISSUED ACCOUNTING PRON

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
	3 Months Ended Mar. 31, 2010
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS	2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In January 2010, the FASB issued new guidance that expands and clarifies existing disclosures about fair value measurements. Under the new guidance, we are required to disclose additional information about movements of assets among the three-tier fair value hierarchy, present separately (that is, on a gross basis) information about purchases, sales, issuances, and settlements of financial instruments in the reconciliation of fair value measurements using significant unobservable inputs (Level 3), and expand disclosures regarding the determination of fair value measurements. We adopted the new disclosure provisions for the quarter ended March31, 2010, except for the gross disclosures regarding purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for us beginning with the filing of our Form 10-Q for the three months ended March31, 2011.

INVESTMENT SECURITIES

INVESTMENT SECURITIES
	3 Months Ended Mar. 31, 2010
INVESTMENT SECURITIES	3. INVESTMENT SECURITIES Investment securities classified as current and long-term were as follows at March31, 2010 and December31, 2009, respectively: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses FairValue (in thousands) March31, 2010 U.S. Treasury and other U.S. government corporations and agencies: U.S. Treasury and agency obligations $ 962,351 $ 8,223 $ (1,943 ) $ 968,631 Mortgage-backed securities 1,851,452 32,783 (9,887 ) 1,874,348 Tax-exempt municipal securities 2,116,790 45,908 (20,462 ) 2,142,236 Mortgage-backed securities: Residential 83,171 383 (7,163 ) 76,391 Commercial 282,759 7,341 (485 ) 289,615 Asset-backed securities 200,713 1,032 (387 ) 201,358 Corporate debt securities 2,484,253 71,584 (11,924 ) 2,543,913 Redeemable preferred stock 2,000 2,000 Total debt securities $ 7,983,489 $ 167,254 $ (52,251 ) $ 8,098,492 December31, 2009 U.S. Treasury and other U.S. government corporations and agencies: U.S. Treasury and agency obligations $ 1,005,203 $ 6,683 $ (2,534 ) $ 1,009,352 Mortgage-backed securities 1,675,667 24,324 (11,328 ) 1,688,663 Tax-exempt municipal securities 2,195,077 52,381 (23,417 ) 2,224,041 Mortgage-backed securities: Residential 106,191 220 (10,999 ) 95,412 Commercial 285,014 3,252 (8,640 ) 279,626 Asset-backed securities 106,471 824 (107 ) 107,188 Corporate debt securities 2,043,721 57,173 (21,326 ) 2,079,568 Redeemable preferred stock 8,400 4,900 13,300 Total debt securities $ 7,425,744 $ 149,757 $ (78,351 ) $ 7,497,150 We participate in a securities lending program where we loan certain investment securities for short periods of time in exchange for collateral, consisting of cash or U.S. Government securities, initially equal to at least 102% of the fair value of the investment securities on loan. Investment securities with a fair value of $66.5 million at March31, 2010 and $126.1 million at December31, 2009 were on loan. At March31, 2010, all collateral from lending our investment securities was in the form of cash which has been reinvested in money market funds, certificates of deposit, and short-term corporate and asset-backed securities. Gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows at March31, 2010 and December31, 2009, respectively: Less than 12 months 12 months or more Total Fair Value Gross Unrealized Losses Fair Value Gros

FAIR VALUE

FAIR VALUE
	3 Months Ended Mar. 31, 2010
FAIR VALUE	4. FAIR VALUE Assets and liabilities measured at fair value are categorized into a fair value hierarchy based on whether the inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our own assumptions about the assumptions market participants would use. The fair value hierarchy includes three levels of inputs that may be used to measure fair value as described below. Level 1 Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities that are traded in an active exchange market. Level 2 Observable inputs other than Level 1 prices such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments as well as debt securities and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Level 3 Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Level 3 includes assets and liabilities whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques reflecting our own assumptions about the assumptions market participants would use as well as those requiring significant management judgment. Fair value of actively traded debt securities are based on quoted market prices. Fair value of other debt securities are based on quoted market prices of identical or similar securities or based on observable inputs like interest rates generally using a market valuation approach, or, less frequently, an income valuation approach and are generally classified as Level 2. We generally obtain one quoted price for each security from a third party pricing service. These prices are generally derived from recently reported trades for identical or similar securities, including adjustments through the reporting date based upon observable market information. When quoted prices are not available, the third party pricing service may use quoted market prices of comparable securities or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. Inputs that are often used in the valuation methodologies include benchmark yields, reported trades, credit spreads, broker quotes, default rates and prepayment speeds. We are responsible for the determination of fair value and as such we perform analysis on the prices received from the third party pricing service to determine whether the prices are reasonable estimates of fair value. Our analysis includes a review of monthly price f

MEDICARE PART D

MEDICARE PART D
	3 Months Ended Mar. 31, 2010
MEDICARE PART D	5. MEDICARE PART D We cover prescription drug benefits in accordance with Medicare Part D under multiple contracts with the Centers for Medicare and Medicaid Services, or CMS. The condensed consolidated balance sheets include the following amounts associated with Medicare Part D as of March31, 2010 and December31, 2009. The risk corridor settlement includes amounts classified as long-term because settlement associated with the 2010 provision will exceed 12 months as of March31, 2010. March31, 2010 December31, 2009 Risk Corridor Settlement CMS Subsidies Risk Corridor Settlement CMS Subsidies (in thousands) Other current assets $ 2,815 $ 14,295 $ 2,165 $ 11,660 Trade accounts payable and accrued expenses (193,593 ) (576,948 ) (146,750 ) (402,854 ) Net current liability (190,778 ) (562,653 ) (144,585 ) (391,194 ) Other long-term assets 1,390 Other long-term liabilities (76,229 ) Net long-term liability (74,839 ) Total net liability $ (265,617 ) $ (562,653 ) $ (144,585 ) $ (391,194 )

GOODWILL AND OTHER INTANGIBLE A

GOODWILL AND OTHER INTANGIBLE ASSETS
	3 Months Ended Mar. 31, 2010
GOODWILL AND OTHER INTANGIBLE ASSETS	6. GOODWILL AND OTHER INTANGIBLE ASSETS There were no changes in the carrying amount of goodwill for the three months ended March31, 2010. The carrying amount of goodwill by segment was as follows at March31, 2010: Commercial Government Total (in thousands) Balance at March31, 2010 $ 1,281,625 $ 711,299 $ 1,992,924 The following table presents details of our other intangible assets included in other long-term assets in the accompanying condensed consolidated balance sheets at March31, 2010 and December31, 2009: Weighted Average Life March31, 2010 December31, 2009 Cost Accumulated Amortization Net Cost Accumulated Amortization Net (in thousands) Other intangible assets: Customer contracts 11.2yrs $ 314,885 $ 125,974 $ 188,911 $ 314,885 $ 117,748 $ 197,137 Provider contracts 16.0 yrs 42,753 9,125 33,628 42,753 8,281 34,472 Trade names and other 11.6 yrs 16,986 5,624 11,362 16,986 5,127 11,859 Total other intangible assets 11.7 yrs $ 374,624 $ 140,723 $ 233,901 $ 374,624 $ 131,156 $ 243,468 Amortization expense for other intangible assets was approximately $9.6 million for the three months ended March31, 2010 and $9.3 million for the three months ended March31, 2009. The following table presents our estimate of amortization expense for 2010 and each of the five next succeeding fiscal years: (inthousands) For the years ending December 31,: 2010 $ 34,960 2011 31,501 2012 29,959 2013 27,035 2014 24,298 2015 18,966

COMPREHENSIVE INCOME

COMPREHENSIVE INCOME
	3 Months Ended Mar. 31, 2010
COMPREHENSIVE INCOME	7. COMPREHENSIVE INCOME The following table presents details supporting the computation of comprehensive income, net of tax, for the three months ended March31, 2010 and 2009: Forthethreemonthsended March31, 2010 2009 (in thousands) Net income $ 258,768 $ 205,717 Net unrealized investment gains and other, net of tax 27,859 318 Comprehensive income, net of tax $ 286,627 $ 206,035

EARNINGS PER COMMON SHARE COMPU

EARNINGS PER COMMON SHARE COMPUTATION
	3 Months Ended Mar. 31, 2010
EARNINGS PER COMMON SHARE COMPUTATION	8. EARNINGS PER COMMON SHARE COMPUTATION Detail supporting the computation of basic and diluted earnings per common share was as follows for the three months ended March31, 2010 and 2009: Forthethreemonthsended March31, 2010 2009 (inthousands,exceptpershareresults) Net income available for common stockholders $ 258,768 $ 205,717 Weighted average outstanding shares of common stock used to compute basic earnings per common share 168,200 167,043 Dilutive effect of: Employee stock options 599 631 Restricted stock 1,281 984 Shares used to compute diluted earnings per common share 170,080 168,658 Basic earnings per common share $ 1.54 $ 1.23 Diluted earnings per common share $ 1.52 $ 1.22 Number of antidilutive stock options and restricted stock excluded from computation 5,038 7,064

STOCK REPURCHASE AUTHORIZATION

STOCK REPURCHASE AUTHORIZATION
	3 Months Ended Mar. 31, 2010
STOCK REPURCHASE AUTHORIZATION	9. STOCK REPURCHASE AUTHORIZATION In December 2009, the Board of Directors authorized the repurchase of up to $250 million of our common shares exclusive of shares repurchased in connection with employee stock plans. Under this share repurchase authorization, shares may be purchased from time to time at prevailing prices in the open market, by block purchases, or in privately-negotiated transactions, subject to certain restrictions on volume, pricing and timing. We have not yet repurchased any shares under the December 2009 authorization. The share repurchase authorization expires on December31, 2011. In connection with employee stock plans, we acquired 0.2million common shares for $7.7 million and 0.2million common shares for $6.0 million during the three months ended March31, 2010 and 2009, respectively.

INCOME TAXES

INCOME TAXES
	3 Months Ended Mar. 31, 2010
INCOME TAXES	10. INCOME TAXES The effective income tax rate was 37.9% for the three months ended March31, 2010, compared to 30.0% for the three months ended March31, 2009. The reduction of the $16.8 million liability for unrecognized tax benefits as a result of settlements associated with the completion of the audit of our U.S. income tax returns for 2005 and 2006 reduced the effective income tax rate by 5.7% during the first quarter of 2009. In addition, the tax rate for the three months ended March31, 2010 reflects the estimated impact of new limitations on the deductibility of annual employee compensation in excess of $500,000 as mandated by health care reforms enacted in March 2010.

GUARANTEES AND CONTINGENCIES

GUARANTEES AND CONTINGENCIES
	3 Months Ended Mar. 31, 2010
GUARANTEES AND CONTINGENCIES	11. GUARANTEES AND CONTINGENCIES Government Contracts Our Medicare business, which accounted for approximately 65% of our total premiums and ASO fees for the three months ended March31, 2010, primarily consisted of products covered under the Medicare Advantage and Medicare Part D Prescription Drug Plan contracts with the federal government. These contracts are renewed generally for a one-year term each December31 unless CMS notifies us of its decision not to renew by August1 of the calendar year in which the contract would end, or we notify CMS of our decision not to renew by the first Monday in June of the calendar year in which the contract would end. All material contracts between Humana and CMS relating to our Medicare business have been renewed for 2010. CMS is continuing to perform audits of selected Medicare Advantage plans of various companies to validate the provider coding practices and resulting economics under the actuarial risk-adjustment model used to calculate the individual member capitation paid to Medicare Advantage plans. Several Humana contracts have been selected by CMS for audit and we expect that CMS will continue conducting audits for the 2007 contract year and beyond. We generally rely on providers to appropriately document all medical data including risk-adjustment data in their medical records and appropriately code their claim submissions, which we send to CMS as the basis for our payment received from CMS under the actuarial risk-adjustment model. The CMS audits involve a review of a sample of provider medical records for the contracts being audited. Rates paid to Medicare Advantage plans are established under a bid model, the actuarial process whereby our premium is based on a comparison of our beneficiaries risk scores, derived from medical diagnoses, to those enrolled in the governments original Medicare program. As a result, we believe that an actuarially sound adjustment of payments from these audits would need to take into account the level of coding accuracy and provider medical record documentation completeness under the governments original Medicare program, since the risk adjustment system, bids, benefit structures and payment rates were premised on that data. This would help to ensure that the audit methodology applied to Medicare Advantage plans accurately calculates the economic impact of the audit findings. Additionally, our payment received from CMS, as well as benefits offered and premiums charged to members, is based on bids that did not, by CMS design, include any assumption of retroactive audit payment adjustments. We believe that applying a retroactive audit adjustment after CMS acceptance of bids would improperly alter this process of establishing member benefits and premiums. CMS has not formally announced its audit payment adjustment methodology, nor has CMS formally indicated whether the audit payment adjustment methodology will be based on a comparison to original Medicare coding accuracy. CMS has further indicated that it may make retroactive contract-level payment adjustments. Any such payment adjustments could occur as early as 2010, and could be effected prior to our,

SEGMENT INFORMATION

SEGMENT INFORMATION
	3 Months Ended Mar. 31, 2010
SEGMENT INFORMATION	12. SEGMENT INFORMATION We manage our business with two segments: Government and Commercial. The Government segment consists of beneficiaries of government benefit programs, and includes three lines of business: Medicare, Military, and Medicaid. The Commercial segment consists of members enrolled in our medical and specialty products marketed to employer groups and individuals. When identifying our segments, we aggregated products with similar economic characteristics. These characteristics include the nature of customer groups as well as pricing, benefits, and underwriting requirements. These segment groupings are consistent with information used by our Chief Executive Officer. The accounting policies of each segment are the same and are described in Note 2 to the consolidated financial statements included in our Form 10-K for the year ended December31, 2009. The results of each segment are measured by income before income taxes. We allocate all selling, general and administrative expenses, investment and other revenue, interest expense, and goodwill, but no other assets or liabilities, to our segments. Members served by our two segments often utilize the same provider networks, in some instances enabling us to obtain more favorable contract terms with providers. Our segments also share indirect overhead costs and assets. As a result, the profitability of each segment is interdependent. Our segment results were as follows for the three months ended March31, 2010 and 2009: Government Segment For the three monthsended March31, 2010 2009 (in thousands) Revenues: Premiums: Medicare Advantage $ 4,816,980 $ 4,060,459 Medicare stand-alone PDP 579,025 595,683 Total Medicare 5,396,005 4,656,142 Military services 844,994 871,171 Medicaid 164,703 156,660 Total premiums 6,405,702 5,683,973 Administrative services fees 27,528 20,333 Investment income 56,169 40,782 Other revenue 1,446 1,194 Total revenues 6,490,845 5,746,282 Operating expenses: Benefits 5,505,828 4,933,913 Selling, general and administrative 649,877 597,211 Depreciation and amortization 36,186 32,569 Total operating expenses 6,191,891 5,563,693 Income from operations 298,954 182,589 Interest expense 19,781 16,488 Income before income taxes $ 279,173 $ 166,101 Commercial Segment Forthethreemonths ended March31, 2010 2009 (in thousands) Revenues: Premiums: Fully-insured PPO $ 742,481 $ 820,639 HMO 764,337 738,030 Total fully-insured 1,506,818 1,558,669 Specialty 249,343 228,652 Total premiums 1,756,161 1,787,321 Administrative services fees 98,354 95,549 Investment income 29,286 28,762