Humana Inc.’s (HUM - Free Report) third-quarter 2018 operating earnings per share of $4.58 beat the Zacks Consensus Estimate of $4.29 by 6.8%. The bottom line also improved 35.1% year over year. The upside can primarily be attributed to Medicare Advantage membership growth, lower impatient medical utilization, favorable prior period medical claims reserve development and significant operating efficiency of the company.

Humana Inc. Price, Consensus and EPS Surprise

Humana Inc. Price, Consensus and EPS Surprise | Humana Inc. Quote

Operational Update

Revenues of $14.2 billion were up nearly 7% on the back of the company’s Medicare Advantage business plus Group and Specialty segment. Moreover, the top line surpassed the Zacks Consensus Estimate of $13.9 billion.
Adjusted consolidated pre-tax income of $922 million improved 0.8%, primarily due to higher membership. 

Benefit ratio was 82% in the quarter under review.

Operating cost ratio deteriorated 170 basis points to 13.5%.

Segment Results

Retail

Revenues from the Retail segment were $12.7 billion, up 9% year over year. This can primarily be attributed to higher revenues from the company’s individual and group Medicare Advantage business resulting from increased membership, and improved per-member premiums for a few segment’s products.

Benefit ratio of 83.2% declined 110 bps year over year, primarily due to reinstatement of the non-deductible health insurance industry fee. 

The segment’s operating cost ratio of 11.2% deteriorated 140 bps year over year.

Group and Specialty

Revenues from the Group and Specialty segment were $1.89 billion, up 2% from the prior-year quarter, primarily backed by transition to the East Region TRICARE contract on Jan 1, 2018, increased stop-loss premiums related to the company’s level-funded ASO accounts, and high per member premiums across the commercial fully-insured business. 
Benefit ratio increased 110 bps year over year to 80.7% driven by retroactive contractual rate adjustments, membership mix, negative impact of seasonality on fully-insured group commercial medical claims and lesser Prior Period Development.

Operating cost ratio deteriorated 270 bps year over year to 23.6%.

Healthcare Services

Revenues of $5.97 billion decreased 1% year over year, primarily owing to the company’s exit from individual commercial business, decline in pharmacy solutions intersegment revenues and the company’s provider services business of the lower Medicare rates in areas where the Humana’s provider assets are mainly located.

Operating cost ratio deteriorated 50 bps year over year to 96.1%.

Individual Commercial

Humana exited this business effective Jan 1, 2018, and consequently, the result reflects run out of this business.

Financial Update

As of Sep 30, 2018, the company had cash, cash equivalents and investment securities of $13.8 billion, up 1.7% from 2017-end level.

Debt-to-total capitalization as of Sep 30, 2018, was 32.8%, up 50 bps from Dec 31, 2017.

Operating cash flow totaled $225 million in the third quarter, down 19% from year ago quarter.

Capital Deployment

The company paid cash dividends worth $69 million in the third quarter of 2018.

2018 Guidance Raised

Humana now expects adjusted earnings per share to be around $14.40, up from the prior guidance of $14.15. GAAP EPS is projected around $11.92, up from the prior projection of $11.52.

Zacks Rank and Performance of Other Players

Humana carries a Zacks Rank #2 (Buy). 

Among other players in the HMO industry that have reported first-quarter earnings, the bottom line of Centene Corp. (CNC - Free Report), Anthem Inc. (ANTM - Free Report) and UnitedHealth Group Inc. (UNH - Free Report) beat the respective Zacks Consensus Estimate.