Humana Inc. Q1 2010 Earnings Call Transcript

Humana Inc. Q1 2010 Earnings Call Transcript
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Humana Inc. (HUM)

Q1 2010 Earnings Call

April 26, 2010 9:00 am ET

Executives

Regina Nethery – Vice President of Investor Relations

Michael B. McCallister – President and Chief Executive Officer

James H. Bloem – Senior Vice President and Chief Financial Officer

James E. Murray – Chief Operating Officer

Analysts

Matthew Borsch – Goldman Sachs

Josh Raskin – Barclays Capital

Christine Arnold – Cowen and Company

Scott Fidel – Deutsche Bank

Kevin Fischbeck – BofA Merrill Lynch

John Rex – JP Morgan

Ana Gupte – Sanford Bernstein

Justin Lake – UBS

Doug Simpson – Morgan Stanley

Presentation

Operator

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Good morning. My name is Andrea, and I will be your conference

operator today. At this time, I would like to welcome everyone to the Humana first quarter 2010 earnings release conference call. (Operator Instructions) I would now like to turn the call over to our host, Ms. Regina Nethery, Vice President of Investor Relations. Please go ahead.

Regina Nethery

Good morning. Thank you for joining us. In a moment, Mike McCallister, Humana's President and Chief Executive Officer, and Jim Bloem, Senior Vice President and Chief Financial Officer, will briefly discuss highlights from our first quarter 2010 results as well as comment on our earnings outlook.

Following these prepared remarks, we will open up the lines for a

question-and-answer session with industry analysts. Joining Mike and Jim for the Q and A session will be Jim Murray, our Chief Operating Officer, and Chris Todoroff, Senior Vice President and General Counsel.

We encourage the investing public and media to listen in to both management's prepared remarks and the related Q and A with analysts. This call is being recorded for replay purposes. That replay will be available on the investor relations page of Humana's website, humana.com, later today. This call is also being simulcast via the Internet along with a virtual slide presentation. For those of you who have company firewall issues and cannot access the live presentation, an adobe version of the slides has been posted to the investor relations section of Humana's website.

Before we begin our discussion, I need to cover a few other items. First, our cautionary statement. Certain of the matters discussed in this conference call are forward looking and involve a number of risks and uncertainties. Actual results could differ materially. Investors are advised to read the detailed risk factors discussed in this morning's press release as well as in our most recent filings with the Securities and Exchange Commission.

Today's press release and other historical financial news releases are available on our investor relations website. All of our SEC filings are also available via the investor relations page of Humana's website as well as on the SEC's website. Finally, any references made to earnings per share, or EPS, in this morning's call refer to diluted earnings per common share. With that, I will turn the call over to Mike McCallister.

Michael McCallister

Good morning, everyone, and thank you for joining us. Today I will comment briefly on our first quarter results and then speak to why we believe that change brings opportunity – in our case an opportunity to grow, not only in existing areas like Medicare Advantage, despite the challenges of the new reform law, but also in new products and services around our strategy of helping all consumers achieve lifelong well being.

We have long operated in a challenging environment and believe our focus on the consumer has been the driver of our success in Medicare Advantage. Going forward, this same focus exemplified in our perfect service initiative, our member guidance and our wellness programs will remain in Medicare Advantage and will be increasingly evident in our commercial products.

Well being includes our health insurance business, but also embraces emerging opportunities in consumer rewards, financial protection products, aging in place for seniors, and other areas you will hear more about throughout the year.

Let me begin by offering a summary of the first quarter's results and operational highlights from our Commercial and Government Segments. Today Humana reported earnings per share of $1.52 for the first quarter, an increase of $0.30 over the prior year's first quarter results of $1.22 per share.

This quarter's results are significantly higher than our previous forecast of $1.10 to $1.20, reflecting both a higher-than-anticipated favorable prior period reserve development and a higher effective tax rate. Were it not for these items, our results would have been near the top end of our previous guidance. Jim will elaborate more on the quarter in a few moments as part of his comments.

Moving now to our business operations, let's start with our Commercial Segment. First, we've raised our 2010 commercial pretext guidance to $150 million to $175 million, primarily the result of favorable prior period development of $14 million. Additionally, we saw favorable progress on three important fronts: A leaner administrative cost structure, accelerated growth in our ancillary and specialty businesses, and the beneficial effects of taking premium actions in 2009.

At March 31, 2010, our specialty membership stood at 7.2 million compared to 6.5 million special members at March 31, 2009, an increase of 11% year-over-year. Overall commercial medical membership at the end of the quarter was 3.3 million compared to 3.5 million a year ago, reflecting the general economy.

Turning now to our Government Segment, I will start with our TRICARE business. Our Humana military associates continue to deliver exceptional service to our TRICARE beneficiaries. Relative to our contract, there's been no further word from the Department of Defense since the end of December. It was then that the DOD notified us it would be taking action in response to our protest being upheld by the Government Accountability Office, though we still don't know the type of action to be taken. Until we hear otherwise, we continue to anticipate that this contract will end on March 31, 2011.

Moving to our Medicare business, we experienced a successful open enrollment period for Medicare Advantage and followed that up with the execution of an alliance with Cigna this month, which we believe provides meaningful opportunity for expanding our group Medicare presence going forward.

Progress around our 15% Solution helped drive the higher-than-anticipated favorable prior period development we recognized in earnings this quarter. As we have said in the past, we believe our 15% Solution allows the economic value we deliver to seniors to remain strong during periods of reduced government funding. We believe members continue to choose our plans due to the better value proposition they provide compared to their alternatives.

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