Humana's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Humana (HUM)

Q4 2011 Earnings Call

February 06, 2012 9:00 am ET

Executives

Regina Nethery -

Michael B. McCallister - Chairman, Chief Executive Officer and Chairman of Executive Committee

Bruce D. Broussard - President

James H. Bloem - Chief Financial Officer, Senior Vice President and Treasurer

James E. Murray - Chief Operating Officer and Executive Vice President

Christopher M. Todoroff - Senior Vice President and General Counsel

Analysts

Justin Lake - UBS Investment Bank, Research Division

Joshua R. Raskin - Barclays Capital, Research Division

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Sarah James - Wedbush Securities Inc., Research Division

Christine Arnold - Cowen and Company, LLC, Research Division

David H. Windley - Jefferies & Company, Inc., Research Division

Scott J. Fidel - Deutsche Bank AG, Research Division

Peter H. Costa - Wells Fargo Securities, LLC, Research Division

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division

Carl R. McDonald - Citigroup Inc, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Doug Simpson - Morgan Stanley, Research Division

Charles Andrew Boorady - Crédit Suisse AG, Research Division

Presentation

Operator

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Good morning. My name is Sarah, and I will be the conference operator today. At this time, I'd like to welcome everyone to the Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to our host, Ms. Regina Nethery, Vice President of Investor Relations. You may begin your conference.

Regina Nethery

Thank you. Good morning. In a moment, our senior management team will briefly discuss highlights from our fourth quarter 2011 results, as well as comment on our earnings outlook for 2012.

Participating in today's prepared remarks will be Mike McCallister, our Chairman of the Board and Chief Executive Officer; Bruce Broussard, Humana's President; and Jim Bloem, Senior Vice President and Chief Financial Officer. Following these prepared remarks, we will open up the lines for a question-and-answer session with industry analysts. Joining Mike, Bruce and Jim for the Q&A session will be Jim Murray, Executive Vice President and 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&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 advise call participants of 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 earnings press release, as well as in our filings with the Securities and Exchange Commission.

Today's press release, our historical financial news releases and our filings with the SEC are all available on Humana's Investor Relations 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'll turn the call over to Mike McCallister.

Michael B. McCallister

Good morning, everyone, and thank you for joining us. Today, Humana announced fourth quarter earnings of $1.20 per share compared to $0.63 per share in the year-ago quarter. For full year 2011, the company reported earnings per share of $8.46 compared to $6.47 in 2010. These favorable results reflect the strength in key areas of strategic focus, including additional Medicare membership growth, as well as unusually low commercial medical cost trends industry-wide.

Our operational discipline also led to further progress on our 15 Percent Solution and continued focus on prudent administrative spending. For the fourth quarter, the year-over-year increase of $0.57 per share was primarily due to expenses incurred in the fourth quarter of 2010 that did not recur in the fourth quarter of 2011, together with higher favorable medical claims reserves development in 4Q '11 than in 4Q '10.

For the full year, the earnings improvement was primarily attributable to a lower year-over-year benefit ratio in the company's Retail segment, higher average Medicare membership and higher earnings in the company's Health and Well-Being Services segment. Along with the cost reductions in Medicare I just noted, Humana 2011 achieved a pretty significant progress on quality in our Medicare Advantage plans. Updated Star ratings issued by the Centers for Medicare & Medicaid Services indicated that 98% of Humana's Medicare members are now in plans that will qualify for quality bonus payments in 2013.

We also announced our intent to acquire 2 Medicare HMOs, Arcadian and MD Care, the latter of which closed in late 2011. These increased our provider network strength in several areas of the country and enabled us to enter new geographies, particularly in California. This progress bodes well not just for the company, it has a potentially significant societal benefit. Faced with a $20 trillion unfunded liability over the next 2 generations, the Medicare program must deepen its partnership with the private sector if America has any hope of reining in its Medicare spending.

While traditional Medicare focus is primarily on the payment of claims rather than on beneficiaries' health and well-being, Medicare Advantage plans have proven their ability to reduce cost while improving health outcomes for plan participants. Not insignificantly, as you've heard me say many times, such plans are also extremely popular among seniors. Seniors like the care coordination, the personal attention, the variety of choices and the provider accountability inherent in Medicare Advantage offerings. In Humana's case, very few of our Medicare Advantage members ever choose to return to traditional Medicare, in part because we continue to pass along higher-than-expected earnings back to them in the form of improved benefits.

Turning to Medicare for 2012, during last fall's Annual Election Period, our net Medicare Advantage membership growth was slightly higher than anticipated, as we previously announced. We are, therefore, projecting full year 2012 net individual membership growth in the range of 185,000 to 195,000 compared to the 145,000 to 155,000 forecast that we shared with you in our third quarter call. This, together with our expectations for growth of 65,000 to 75,000 members in our Group Medicare, brings our total expectations for Medicare Advantage growth to over 13% for 2012.

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