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Humana Inc.’s (HUM - Analyst Report) third-quarter 2013 operating earnings came in at $2.31 per share. The results substantially surpassed the Zacks Consensus Estimate of $2.16 but lagged the year-ago earnings of $2.62 per share.

The year-over-year decline came on the back of weak performance by the Retail Segment and other businesses, partially offset by growth in Employer Group and Healthcare Service segments.

Revenues of Humana for the reported quarter climbed 6.9% year over year to $10.32 billion, marginally surpassing the Zacks Consensus Estimate of $10.28 billion. Revenues from premium increased 6.7% year over year to $9.7 billion, while services revenues surged 13.1% to $528 million in the reported quarter. However, Humana’s investment income declined 3.1% to $93 million in the third quarter of 2013.

Quarterly Review

Humana’s consolidated benefit ratio, which reflects the percentage of benefit expenses in premium revenues, increased 110 basis points (bps) year over year to 83.3%.

Humana’s consolidated operating cost ratio, which reflects the percentage of operating costs in total revenue less investment income, inched up 40 bps year over year to 15.1%. The increase primarily resulted from the increase in operating cost ratio in the healthcare Services segment, partially mitigated by the enhanced operating leverage in the Retail and Employer Group Segments.

Quarterly Results by Segment

Retail Segment: The segment’s pre-tax income declined 19.1% year over year to $338 million reflecting an increase in benefit ratio.
Reported premiums and services revenues increased 7.4% to $6.72 billion in the reported quarter. The upside primarily resulted from a 6.7% 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 84.1%, deteriorating from 82.4% in the prior-year quarter. Operating cost ratio decreased 10 bps to 10.7% in the reported quarter.

Employer Group: The segment incurred pre-tax income of $69 million, increasing from $47 million incurred in the year-ago quarter, largely driven by increased group Medicare membership. It also reflects better benefit ratio and operating ratio.

The benefit ratio was 84.3%, down 70 bps year over year, whereas the operating cost ratio went down 10 bps to 15.8%.

Meanwhile, reported premiums and services revenues increased 7.3% to $2.84 billion, primarily on the back of higher group Medicare Advantage membership.

Healthcare Services: Pre-tax income for the segment increased to $156 million from $144 million in the third 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 25.6% year over year to $3.99 billion, primarily due to improvement in the pharmacy solutions businesses, along with the Metropolitan and SeniorBridge acquisitions. However, operating cost ratio inched up 40 bps to 95.2% in the reported quarter.

Other Business: Humana’s other business segment reported a pre-tax income of $23 million, contracting from $56 million in the year-ago quarter, due to higher revenues in the third quarter of 2012 that were associated with risk sharing arrangements under the company’s TRICARE South Region contract.

Financial Update

Humana’s cash from operations was $1.15 billion in the third quarter of 2013 compared with cash used in operations of $1.33 billion in the year-ago period. Humana exited the quarter with cash and cash equivalents of $1.26 billion and long-term debt of $2.6 billion.

Share Repurchase Update

During the third quarter of 2013 Humana spent $90 million to buyback 0.95 million shares under its $1 billion share repurchase authorization. Currently the company is left with shares worth $781 million under its authorization.

Outlook

Humana reiterated its earnings guidance for 2013 to $8.65–$8.75 per share. Moreover, capital expenditure guidance is reiterated in the range of $425–$450 million in 2013.

For 2014, EPS is expected to be in the range of $7.25 to $7.75 due to strong performance in the existing operations. This guidance also includes investment spending and startup expenses of Humana’s state-based contracts and healthcare exchange operations of 50 cents to 90 cents.

Revenues are expected to exceed $43 billion in 2014. Additionally, Medicare Advantage membership is anticipated to grow by 260,000 to 305,000 in 2014.

Results at Few Other HMOs

WellPoint Inc. (WLP - Analyst Report) reported third-quarter 2013 adjusted income of $2.10 per share, beating the Zacks Consensus Estimate of $1.83 per share. Adjusted income was a penny higher than the year-ago earnings of $2.09 per share.

UnitedHealth Group Inc. (UNH - Analyst Report) reported its third-quarter 2013 earnings of $1.53 per share, missing the Zacks Consensus Estimate by a penny. Earnings, however, grew 2.0% year over year.

Molina Healthcare Inc. (MOH - Analyst Report) reported third-quarter 2013 operating earnings per share of 31 cents that missed the Zacks Consensus Estimate by a penny. However, earnings per share surpassed the year-ago quarter’s earnings of 8 cents per share.

Zacks Rank

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

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