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Humana Inc.’s (HUM - Analyst Report) fourth-quarter 2012 operating earnings per share (EPS) came in at $1.19. The result substantially surpassed the Zacks Consensus Estimate of $1.07 but the lagged the year-ago EPS by a penny. The year-over-year decline in earnings was attributable to lower pre-tax income in the company’s Retail, and Health and Well-Being Services segments, which were nearly offset by lower loss at Employer Group.

Revenues for the reported quarter climbed 6.0% year over year to $9.56 billion, but lagged the Zacks Consensus Estimate of $9.76 billion. Revenues from premium increased 4.0% year over year to $8.98 billion, while services revenue surged 46.2% to $475 million in the reported quarter. Additionally, investment income grew 9.7% to $102 million in the fourth quarter of 2012.

Full-Year Highlights

Operating profit in 2012 was $6.99 per share, which fell short of the Zacks Consensus Estimate of $7.52 as well as the year-ago income of $7.69.

Including a benefit of 48 cents from the favorable prior-period medical claims reserve development, net income came in at $7.47 in 2012, lower than $8.46 earned in 2011.

Revenue improved 6.2% year over year to $39.13 billion but fell marginally short of the Zacks Consensus Estimate of $39.18 billion.

Quarterly Review

Total medical membership increased 8.1% year over year to 12.09 million at the end of Dec 31, 2012, while the total specialty membership at the end of the Dec 31, 2012 increased 10.5% to 8.08 million.

Consolidated benefit ratio, which reflects the percentage of benefit expenses in premium revenues, increased 190 basis points (bps) year over year to 83.7%, mainly due to a hike in the benefit ratio of the Retail segment.

The consolidated operating cost ratio, which reflects the percentage of operating costs in total revenues less investment income, inched down 20 bps year over year to 17.5%, primarily as a result of improvement in operating metric at the Retail and Employer Group Segments, offset by the impact of the accounting for the new South Region TRICARE contract in the company’s Other Businesses.

Quarterly Results by Segment

Retail Segment: The segment’s pre-tax income plummeted 21.5% year over year to $256 million due to higher benefit ratio, partially offset by lower operating cost ratio.

Reported premiums and services revenue increased 15% to $6.11 billion in the reported quarter. The upside primarily resulted from a 19% year-over-year increase in individual Medicare Advantage membership.

The benefit ratio was 82.6%, up 360 bps year over year. However, operating cost ratio decreased 160 bps to 13.1% in the reported quarter.

Employer Group: The segment incurred pre-tax loss of $25 million, narrower than the loss of $51 million incurred in the year-ago quarter, largely driven by better operating cost ratio.

Meanwhile, reported premiums and services revenue increased 14% to $2.63 billion, primarily on the back of higher group Medicare Advantage membership. The benefit ratio was 87.1%, up 70 bps year over year, whereas reported operating cost ratio was 16.7%, down 210 bps.

Health and Well-Being Services: Pre-tax income for the segment decreased 12% year over year to $75 million, due to transaction costs associated with the closings of the Metropolitan and MCCI Holdings buy.

Reported services revenue also increased to $3.26 billion, up 13% year over year, primarily due to growth in the pharmacy solutions business. However, operating cost ratio increased 50 bps to 96.8% in the reported quarter.

Financial Update

Cash from operations was $1.92 billion in 2012 compared with cash flow of $2.08 billion in the year-ago quarter, mainly due to reduced net income. Humana exited the quarter with cash and cash equivalents of $1.31 billion and long-term debt of $2.61 billion.

Share Repurchase Update

During 2012, Humana spent $460 million to buyback 6.25 million shares at an average price of $73.66 per share. As of Feb 4, 2013, the company had shares outstanding worth $640 million under its share repurchase program, which will expire on Jun 30, 2014.

Business Update

Humana completed the acquisition of Metropolitan Health Networks Inc., a Florida-based medical services organization, for $850 million. The deal was announced in Nov 2012. The acquisition is expected to moderately improve Humana’s earnings from this year.

2013 Outlook

The company affirmed the EPS guidance of $7.60–$7.80 for 2013 and expects first-quarter earnings in the range of $1.75–$1.85.

Consolidated revenue for 2013 is expected in the range of $41–$41.5 billion. Additionally, cash flow from operations is in the range of $1.8–$2.0 billion for 2013. Moreover, capital expenditure is anticipated in the range of $425–$459 million in 2013.

Results at Few Other HMOs

UnitedHealth Group Inc. (UNH - Analyst Report) reported fourth-quarter 2012 earnings of $1.20 per share, in line with the Zacks Consensus Estimate but increased 2.6% on a year-over-year basis.

Health Net Inc.’s (HNT - Analyst Report) fourth-quarter 2012 operating income, which comprises combined net earnings from the Western Region Operations and Government Contracts segments, came in at 36 cents per share, declining substantially from the year-ago level of 72 cents per share.

Aetna Inc. ‘s (AET - Analyst Report) fourth-quarter 2012 earnings of 94 cents fell short of the Zacks Consensus Estimate of 96 cents by a couple of pennies. Earnings also decreased 3% year over year.

Zacks Rank

Humana currently carries a Zacks Rank #4 (Sell).
 

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