Humana (HUM) Beats On Earnings, Misses Revenues In Q1

Humana Inc.’s (NYSE:HUM) first-quarter 2017 operating earnings per share of $2.75 beat the Zacks Consensus Estimate by approximately 8%. The bottom line also improved 38% year over year, primarily due to the receipt of the breakup fee from the the terminated merger with Aetna Inc (NYSE:AET). A year-over-year increase in Retail segment earnings also drove the upside.

Operational Update

Adjusted consolidated revenues of $13.48 billion grew 4% on higher Retail segment revenues from the company’s Medicare business, excluding the impact of revenues from the company’s Individual Commercial business. In spite the year-over-year increase, however, revenues missed the Zacks Consensus Estimate of $13.6 billion.

Humana’s adjusted consolidated benefit ratio of 85.2% deteriorated 20 basis points (bps) from the prior-year quarter, primarily due to lower Prior Period Development, margin compression due to stiff competition in the Group Medicare Advantage business, and suspension of the health insurance industry fee in 2017. This was, however, partially offset by planned exits from certain Medicare Advantage markets with higher benefit ratio than other markets.

Adjusted consolidated operating cost ratio of 10.7% improved 150 bps from the year-ago quarter, primarily due to the temporary suspension of the health insurance industry fee for 2017.

Quarterly Segment Results

Retail Segment

Revenues from the Retail segment were $11.43 billion, up 5% year over year, primarily owing to higher revenues from the company’s Medicare Advantage business. This in turn was driven by increased membership as well as higher per-member premiums for the individual Medicare Advantage and state-based contract businesses.

Benefit ratio for the Retail segment of 88.1% improved 50 bps year over year, primarily due to planned exits from certain Medicare Advantage markets with higher benefit ratio than other markets and the seasonal impact of leap day in the first quarter-2016 versus none in the current quarter.

The Retail segment’s operating cost ratio of 8.4% improved 150 bps year over year due to the suspension of the health insurance industry fee in 2017.

Adjusted pretax income for the Retail segment of $376 million soared 156% year over year, primarily due to lower benefit and operating cost ratios.

Group Segment

Revenues from the Group and Specialty segment were $1.88 billion, up 2% from the prior-year quarter, primarily due to an increase in group fully insured commercial medical per-member premiums, partially offset by declines in average group fully insured and ASO commercial medical membership.

Benefit ratio for the Group and Specialty segment deteriorated 200 bps year over year to 75.6%, due to lower Prior Period Development, suspension of the health insurance industry fee in 2017 and an increased proportion of small group members in community rated plans with higher benefit ratio.

Operating cost ratio improved 210 bps year over year to 21.4%, primarily due to suspension of the health insurance industry fee in 2017 and operating cost efficiencies.

Adjusted pretax income of $172 million decreased 1% year over year due to an increase in the segment’s benefit ratio, largely offset by improvement in the segment’s operating cost ratio.

Healthcare Services

Revenues of $5.96 decreased 4% year over year, primarily due to the company’s Pharmacy Solutions business as well as the impact of the optimization process associated with the company’s chronic condition management programs.

Operating cost ratio remained flat year over year at 95.5%.

Adjusted pretax income for the segment was $255 million, down 3% year over year due to the reduction in pharmacy revenues, offset by a similar reduction in operating costs ratio.

Individual Commercial Segment

Individual Commercial membership was0.2 million as of Mar 31, 2017, down 77% year over year, primarily due to a decline in number of counties where the company offers on-exchange coverage as well as the discontinuance of off-exchange products.

Benefit ratio for the Individual Commercial segment was 55.1% as against 81.6% in first-quarter 2016, primarily due to planned exits from certain markets with higher benefit ratio than other markets and per-member premium increases.

The segment’s operating cost ratio deteriorated 300 bps from the year-ago quarter to 21.9%, primarily due to reduced leverage from market exits in 2017, partially offset by the suspension of the health insurance industry fee in 2017.

The company witnessed a pretax income of $63 million, which compared favorably with a pretax loss of $12 million in the prior quarter. This was owing to the exit from certain markets in 2017 and per-member premium increases.

Financial Update

As of Mar 31, 2017, the company had cash, cash equivalents, and investment securities of $19.05 billion, up 39% from $13.68 billion as of Dec 31, 2016. This was primarily due to the early receipt of the Apr 2017 Medicare premium remittance of $3.07 billion in Mar 2017.

As of Mar 31, 2017, cash and short-term investments held by the parent company was $1.71 billion, down 15% from Dec 31, 2016. This was primarily due to the payment of $1.50 billion for the company’s accelerated share repurchase program in Mar 2017 and a capital contribution of $535 million to the company’s long-term care subsidiary.

Debt-to-total capitalization as of Mar 31, 2017 was 33.9%, up 620 bps from year-end 2016. This was primarily due to higher debt balance associated with the company’s recent debt issuance.

Cash flows from operations totaled $1.1 billion compared with cash flow from operations of $502 million in the prior-year quarter. Cash flows from operations were favorably impacted by the receipt of the merger termination fees, net of related expenses, and higher earnings. This was partially offset by working capital changes.

Share Repurchase and Dividend Update

In Feb 2017, Humana’s board of directors approved a $2.25 billion share repurchase authorization, which expired on Dec 31, 2017.

Humana repurchased shares worth approximately 5.83 million shares at an average price of $205.70 per share. The buyback was under the accelerated repurchase program in the first quarter. As of May 2, 2017, Humana had $1.05 billion of the current repurchase authorization remaining.

The company paid cash dividends to its stockholders of $47 million in first quarter.

In Apr 2017, the company’s board declared a cash dividend to stockholders of 40 cents per share, which is payable on Jul 31, to stockholders on record as of Jun 30, 2017.

Zacks Rank and Performance of Other Insurers

Humana presently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among the other firms in the medical sector that have reported first-quarter earnings so far, the bottom line at Centene Corp. (NYSE:CNC) , Quest Diagnostics Inc. (NYSE:DGX) and UnitedHealth Group Inc. (NYSE:UNH) beat their respective Zacks Consensus Estimate.

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