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Humana Inc.’s (HUM - Analyst Report) second-quarter 2013 operating earnings came in at $420 million or $2.63 per share. The results substantially surpassed the Zacks Consensus Estimate of $2.46 as well as the year-ago earnings of $356 million or $2.16 per share.

The strong performance in the company’s Retail, Employer Group, Healthcare Services and Other Business segments led to the increase in income.

Revenues of Humana for the reported quarter climbed 6.4% year over year to $10.32 billion, marginally lagging the Zacks Consensus Estimate of $10.33 billion. Revenues from premium increased 5.8% year over year to $9.7 billion, while services revenues surged 21.7% to $528 million in the reported quarter. However, Humana’s investment income declined 7.1% to $92 million in the second quarter of 2013.

Quarterly Review

Total medical membership of Humana increased 3.6% year over year to 12.4 million at the end of Jun 2013, while the total specialty membership increased 5.1% to 8.3 million. Humana’s consolidated benefit ratio, which reflects the percentage of benefit expenses in premium revenues, improved 10 basis points (bps) year over year to 83.4%.

Humana’s consolidated operating cost ratio, which reflects the percentage of operating costs in total revenue less investment income, inched down 10 bps year over year to 14.3%. The increase primarily resulted from the enhanced operating leverage in the Retail and Employer Group Segments, which offset the impact of costs related to the exit of the Puerto Rico Medicaid business.

Quarterly Results by Segment

Retail Segment: The segment’s pre-tax income surged 14% year over year to $418 million due to higher membership and lower operating cost ratio, partially offset by higher investment spending.

Reported premiums and services revenues increased 5.8% to $6.77 billion in the reported quarter. The upside primarily resulted from a 7.1% year-over-year surge in individual Medicare Advantage membership, partially offset by a decline in per-member premium due to the effect of sequestration.

The benefit ratio was 84.2%, at par with the year-ago quarter. Moreover, the operating cost ratio decreased 50 bps to 9.5% in the reported quarter.

Employer Group: The segment incurred pre-tax income of $127 million, increasing from $117 million incurred in the year-ago quarter, largely driven by a better operating cost ratio and increased group Medicare membership.

Meanwhile, reported premiums and services revenues increased 7.2% to $2.81 billion, primarily on the back of higher group Medicare Advantage membership. The benefit ratio was 82.5%, up 70 bps year over year, whereas the operating cost ratio went down 100 bps to 15.3%.

Healthcare Services: Pre-tax income for the segment increased to $131 million from $128 million in the second quarter of 2012. The upside was attributable to higher revenues and profits from the acquisition of Metropolitan Health Networks Inc. and the home care services business of Humana. However, these were partly offset by investment spending.

Revenues of this segment of Humana also increased to $3.86 billion, up 20.9% year over year, primarily due to improvement in the pharmacy solutions and provider services businesses, along with the Metropolitan and SeniorBridge acquisitions. However, operating cost ratio inched up 30 bps to 95.7% in the reported quarter.

Other Business: Humana’s other business segment reported a pre-tax loss of $30 million, contracting from $56 million in the year-ago quarter.

Financial Update

Humana’s cash from operations was $173 million in the reported quarter compared with $706 million in the year-ago quarter, mainly due to the timing of the payment from the Center for Medicare and Medicaid Services (CMS) and changes in working capital accounts. Humana exited the quarter with cash and cash equivalents of $1.52 billion and long-term debt of $2.61 billion.

Share Repurchase Update

During the reported quarter, Humana spent $130 million to buyback 1.6 million shares at an average price of $79.92 per share. In Apr 2013, Humana replaced its old share repurchase authorization with a new repurchase authorization worth $1 billion, which will expire in Jun 2015. The old authorization had an outstanding balance of $557 million.

Dividend Update

During the reported quarter, Humana spent $41 million on dividend payments.

Outlook

Humana raised its earnings guidance for 2013 to $8.65–$8.75 per share from $8.40–$8.60 due to better-than-expected results in the second quarter.

Consolidated revenue guidance for 2013 was reduced to $40.75–$41.25 billion from $41–$41.5 billion. Additionally, the guidance for cash flow from operations for 2013 was increased to $2.0–$2.2 billion from $1.9–$2.1 billion. Moreover, capital expenditure is anticipated in the range of $425–$450 million in 2013.

Results at Few Other HMOs

Another health maintenance organization (HMO), WellPoint Inc. (WLP - Analyst Report) reported second-quarter 2013 adjusted income of $2.60 per share, beating the Zacks Consensus Estimate of $2.08. Adjusted income also surpassed the year-ago earnings of $2.04 per share by 27.5%.

UnitedHealth Group Inc. (UNH - Analyst Report) reported its second-quarter 2013 earnings of $1.40 per share, higher than the Zacks Consensus Estimate of 1.26 per share. Earnings were also up 7.4% on a year-over-year basis.

Molina Healthcare Inc. (MOH - Analyst Report) reported second-quarter 2013 operating earnings per share of 34 cents, surpassing the Zacks Consensus Estimate of 31 cents. Earnings per share rebounded from the year-ago quarter’s loss of 71 cents.

Zacks Rank

Humana currently carries a Zacks Rank #1 (Strong Buy).

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