Humana Misses Q1 Earnings Expectations, Improves Y/Y

Humana Inc.’s (HUM - Analyst Report) first-quarter 2015 operating earnings came in at $2.47 per share missing the Zacks Consensus Estimate of $2.54. However, results improved from $2.35 earned in the year-ago period.

The year-over-year upside was driven by share repurchases, and improved performance across its segments that was triggered by membership growth.

Humana Inc. - Quarterly EPS | FindTheCompany

Including a 35 cents tax benefit associated with the pending divestiture of Concentra, Humana’s net income was $2.82 per share, which compared favorably with the year-ago income of $2.35.

Revenues at Humana for the reported quarter climbed 18.1% year over year to $13.8 billion. Higher medical membership in the Retail segment led to an increase in premiums and services revenues. These, in turn, drove overall revenues in the reported quarter. The top line also exceeded the Zacks Consensus Estimate of $12.4 billion.

Quarterly Review

Humana’s consolidated benefit ratio, which reflects the percentage of benefit expenses in premium revenues, were 83.1%, deteriorating 80 basis points (bps) year over year. The year-over-year increase of the ratio was largely attributable to an increase in ratios in both the Retail and Group segments.

Humana’s consolidated operating cost ratio, which reflects the percentage of operating costs in total revenue less investment income, decreased 120 bps year over year to 14.2%. The improvement primarily resulted from a decline in ratios in the Retail and Group segment.

Quarterly Results by Segment

In Apr 2015, some of its businesses were reorganized and renamed, per which the Employer Group segment was renamed Group segment. As a result Humana now manages its business through three segments: Retail, Group and Healthcare Services. In addition, the company will continue to report results for those businesses which do not align with the reportable segments described above, mainly the company’s closed block long-term care insurance policies, under the category of Other Businesses.

Retail Segment: The segment’s pre-tax income increased 1.6% year over year to $375 million due to an increase in benefit ratio.  

Reported premiums and services revenues increased 22.2% to $11.6 billion in the reported quarter. The upside primarily reflects a 12.6% year-over-year increase in average Medicare Advantage membership and higher membership associated with the company’s individual commercial, state-based Medicaid businesses, and stand-alone PDP plans.

The benefit ratio was 85.8%, deteriorating from 85.4% in the prior-year quarter. This deterioration stemmed from a decrease in favorable prior period claims development, and higher benefit ratios related to members from state-based contracts.

Operating cost ratio increased 10 bps to 10.8% in the reported quarter. This deterioration stemmed mainly from the higher non-deductible health insurance industry fee mandated by the health care reform.

Group Segment: This segment of Humana generated pre-tax income of $154 million compared with $144 million in the year-ago period. This improvement came from a decrease in the operating cost ratio in the segment.

The benefit ratio was 73.9%, up 140 bps year over year, reflecting the impact of the higher specialty drug costs and a decrease in favorable prior period development. Operating cost ratio decreased 260 bps to 24.5% due to the loss of some large ASO accounts, and operating cost efficiencies related to the fully-insured business that stemmed from cost reduction initiatives.

Meanwhile, reported premiums and services revenues increased 1.6% to $1.9 billion, primarily on the back of an increase in fully-insured commercial medical per member premiums.

Healthcare Services: Pre-tax income for the segment rose to $230 million from $185 million in the first quarter of 2014. The upside was attributable to higher revenues from pharmacy solutions and home-based services.

Revenues at this segment rose 26.3% year over year to $5.9 billion, mainly on higher utilization of the pharmacy solutions and home-based services businesses that led to an improvement in Medicare membership.

Operating cost ratio was 95.4%, up 10 bps.

Financial Update

Humana’s operating cash flow was $107 million in the first quarter compared with $671 million in the year-ago period. Changes in timing of working capital mainly led to the downside.  

As of Mar 31, 2015, cash, cash equivalents and investment securities of Humana were $11.52 billion, higher than $11.48 billion as of Dec 31, 2014.

The debt-to-capital ratio of Humana as of Mar 31, 2015 was 27.6%, representing an 80 bps improvement from 28.4% as of Dec 31, 2014.

Moreover, in Oct 2014, Humana entered into a commercial paper program that required it to issue short-term, unsecured commercial paper notes worth $1 billion or less. Net proceeds from this issuance will be used for share repurchases and other general corporate purposes. As of Mar 31, 2015, the company had no balance outstanding under its commercial paper program.

Share Repurchase Update

In Sep 2014, Humana’s board of directors of replaced the previous $1 billion share repurchase authorization with a new $2 billion program. The new program is scheduled to expire on Dec 31, 2016.

The company intends to repurchase $1 billion worth of shares by the second quarter of 2015. Toward this end, it implemented a $500 million accelerated share repurchase (ASR) program in Nov 2014, which was completed in Mar 2015. This ASR reduced share count, taking the company toward realizing its goal of buying back $1 billion by Jun 30, 2015.

In addition to the ASR, Humana spent $26 million to buyback nearly 0.2 million shares in the first quarter. Moreover, the company repurchased 0.6 million shares for $112 million from Apr 1, 2015 through Apr 28, 2015. As of Apr 28, 2015, the company is left with $1.23 billion for repurchases.

Dividend Update

In Apr 2015, Humana’s Board of directors declared a cash dividend of 29 cents per share that represents an increase of 3.6% from the earlier dividend of 28 cents per share. The increased dividend will be paid on Jul 31, 2015, to shareholders on record as of Jun 30, 2015.

2015 Outlook

Humana reiterated its 2015 earnings range at $8.50–$9.00 per share. The Zacks Consensus Estimate of $8.88 lies within this range. Revenues are now expected to be in the $54.3–$54.8 billion range compared with $54.5–$55 billion guided earlier.

Humana has its views intact regarding investment income. The 2015 guidance for the same lies in the band of $350–$400 million.

Humana projected the 2015 interest expense guidance at $185–$190 million, in line with the earlier guidance.

Operating cash flow is expected to be in the range of $1.5–$1.7 billion, lower than $1.7–$2 billion guided earlier.

Performance of Other HMOs

Among other health maintenance organizations (HMOs), both Aetna Inc. (AET - Analyst Report) and Anthem Inc.’s (ANTM - Analyst Report) first-quarter earnings beat the Zacks Consensus Estimate. Molina Healthcare Inc. (MOH - Analyst Report) is scheduled to report its first-quarter results shortly.

Zacks Rank

Humana currently holds a Zacks Rank #2 (Buy).