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Humana (HUM) Q4 Earnings Miss on Higher Costs, '25 Target Pulled
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Humana Inc. (HUM - Free Report) delivered weak fourth-quarter 2023 earnings, driven by higher benefits expenses, operating costs and lower medical memberships. The rising costs trend forced the company to let go of the 2025 EPS target it provided earlier. The negatives were partially offset by premium growth, increased investment income and strength witnessed in the CenterWell unit.
It posted adjusted earnings per share (EPS) of 11 cents, missing the Zacks Consensus Estimate of a loss of 7 cents. It reported an earnings of $1.97 per share in the year-ago period.
Humana's adjusted revenues saw substantial growth, rising 20.8% compared with the previous year, reaching $25.7 billion. Also, the top line exceeded the consensus estimate by 1.4%.
Total premiums of Humana amounted to $25.1 billion, which improved 18.1% year over year in the fourth quarter and outpaced the Zacks Consensus Estimate of $24.1 billion and our model estimate of $24.7 billion.
Services revenues increased 3.6% year over year to more than $1 billion and beat the consensus mark of $968.9 million. Investment income of $294 million increased 83.8% year over year in the quarter under review and beat the consensus estimate of $286.8 million.
The benefits expense ratio came in at 90.7%, which deteriorated 340 basis points (bps) year over year due to investments related to the benefit design of Humana’s Medicare Advantage products, as well as increased utilization trends in the Medicare Advantage business. The operating cost ratio improved 130 bps year over year to 14.6%, thanks to improving scale and cost efficiencies.
Total operating expenses of $26.8 billion increased 20.1% year over year and came higher than our model estimate of $25.4 billion. The increase was mainly due to higher overall benefits expenses and operating costs.
Humana reported a loss from operations of $348 million in the fourth quarter against the year-ago income of $124 million and significantly lagged our estimate.
Segmental Update
Insurance
The segment’s adjusted revenues rose 21.2% year over year to $24.8 billion in the quarter under review, higher than our estimate of $24.5 billion.
Adjusted operating loss of $361 million deteriorated from operating income of $112 million and fell short of our expectations. The adjusted benefits expense ratio deteriorated 400 bps year over year to 91.4%. The adjusted operating cost ratio of 10.9% improved 160 bps year over year due to scale efficiencies related to individual Medicare Advantage membership growth and administrative cost efficiencies.
As of Dec 31, 2023, the total medical membership of the segment came in at 16.86 million. The figure dipped 1.3% year over year.
CenterWell
The segment recorded revenues of $4.7 billion in the fourth quarter, which increased 13.7% and beat our estimate of $4.6 billion. Improved Pharmacy Solutions revenues, growth in the Primary Care business and a solid Home Solutions business provided an impetus to the segment's quarterly performance.
Adjusted operating income increased 44.5% year over year to $445 million. The segment’s operating cost ratio of 90.6% improved 200 bps year over year in the quarter under review.
Financial Update (as of Dec 31, 2023)
Humana exited the fourth quarter with cash and cash equivalents of $4.7 billion, which fell from the $5.1 billion figure at 2022 end. Total assets of $47.1 billion climbed from the 2022-end level of $43.1 billion.
Long-term debt amounted to $10.2 billion, which increased from the $9 billion figure as of Dec 31, 2022. Short-term debt came in at $1.4 billion. Debt to capitalization improved 20 bps year over year to 41.8% at the fourth-quarter end.
Total stockholders’ equity of $16.3 billion increased from the $15.3 billion figure at 2022 end.
In 2023, Humana generated operating cash flows of almost $4 billion, which decreased from the prior-year level of $4.6 billion.
Capital Deployment Update
Humana bought back shares worth $1.6 billion in 2023. It had a leftover share repurchase capacity of $1.1 billion as of Jan 24, 2023.
2024 Outlook
Adjusted EPS is projected at around $16, suggesting a decline from the 2023 figure of $26.09. GAAP EPS is estimated to be around $14.87, down from the year-ago level of $20. Humana scratched off its previous target of adjusted EPS of $37 in 2025 to reflect the growing MA medical cost trends. With seniors resuming elective procedures that were put on hold for COVID-related restrictions, costs have significantly risen for insurers. It expects its margin recovery initiatives to provide a $6-$10 per share growth in adjusted EPS in 2025.
Management currently projects individual Medicare Advantage membership to witness growth of around 100,000 this year. Group Medicare Advantage membership is expected to increase by around 45,000. Membership from the Medicare stand-alone prescription drug plan is estimated to decline by around 650,000 members.
Revenues are expected to be around $113 billion, which indicates an improvement from the 2023 figure of $106.4 billion. The Insurance segment’s revenues are forecasted to be around $110 billion. Revenues of the CenterWell segment, on a GAAP basis, are expected to be around $19 billion.
The benefit ratio of the Insurance unit is expected to stay around 90% for 2024. The consolidated Non-GAAP operating cost ratio is anticipated to be approximately 11.4%. The effective tax rate is expected to be around 24.5%. Cash flow from operations is expected to be around $2 billion this year. Meanwhile, capital expenditures are projected to be roughly $800 million.
Zacks Rank & Key Picks
Humana currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader medical space are Motus GI Holdings, Inc. (MOTS - Free Report) , Brookdale Senior Living Inc. (BKD - Free Report) and Centene Corporation (CNC - Free Report) . While Motus GI currently sports a Zacks Rank #1 (Strong Buy), Brookdale Senior and Centene carry a Zacks Rank #2 (Buy) each. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Motus GI’s 2023 bottom line suggests a 67.2% year-over-year improvement. MOTS has witnessed one upward estimate revision over the past 60 days against no movement in the opposite direction. It beat earnings estimates in all the last four quarters, with an average surprise of 40.2%.
The Zacks Consensus Estimate for Brookdale Senior’s full-year 2023 earnings indicates a 49.6% year-over-year improvement. BKD beat earnings estimates in three of the past four quarters and missed once, with an average surprise of 23.5%.
The Zacks Consensus Estimate for Centene’s 2023 full-year earnings implies a 15.1% increase from the year-ago reported figure. The consensus mark for its current-year revenues is pegged at $150.8 billion, up 4.3% year over year. CNC beat earnings estimates in two of the last four quarters and missed twice, with an average surprise of 5.6%.
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Humana (HUM) Q4 Earnings Miss on Higher Costs, '25 Target Pulled
Humana Inc. (HUM - Free Report) delivered weak fourth-quarter 2023 earnings, driven by higher benefits expenses, operating costs and lower medical memberships. The rising costs trend forced the company to let go of the 2025 EPS target it provided earlier. The negatives were partially offset by premium growth, increased investment income and strength witnessed in the CenterWell unit.
It posted adjusted earnings per share (EPS) of 11 cents, missing the Zacks Consensus Estimate of a loss of 7 cents. It reported an earnings of $1.97 per share in the year-ago period.
Humana's adjusted revenues saw substantial growth, rising 20.8% compared with the previous year, reaching $25.7 billion. Also, the top line exceeded the consensus estimate by 1.4%.
Humana Inc. Price, Consensus and EPS Surprise
Humana Inc. price-consensus-eps-surprise-chart | Humana Inc. Quote
Operational Update
Total premiums of Humana amounted to $25.1 billion, which improved 18.1% year over year in the fourth quarter and outpaced the Zacks Consensus Estimate of $24.1 billion and our model estimate of $24.7 billion.
Services revenues increased 3.6% year over year to more than $1 billion and beat the consensus mark of $968.9 million. Investment income of $294 million increased 83.8% year over year in the quarter under review and beat the consensus estimate of $286.8 million.
The benefits expense ratio came in at 90.7%, which deteriorated 340 basis points (bps) year over year due to investments related to the benefit design of Humana’s Medicare Advantage products, as well as increased utilization trends in the Medicare Advantage business. The operating cost ratio improved 130 bps year over year to 14.6%, thanks to improving scale and cost efficiencies.
Total operating expenses of $26.8 billion increased 20.1% year over year and came higher than our model estimate of $25.4 billion. The increase was mainly due to higher overall benefits expenses and operating costs.
Humana reported a loss from operations of $348 million in the fourth quarter against the year-ago income of $124 million and significantly lagged our estimate.
Segmental Update
Insurance
The segment’s adjusted revenues rose 21.2% year over year to $24.8 billion in the quarter under review, higher than our estimate of $24.5 billion.
Adjusted operating loss of $361 million deteriorated from operating income of $112 million and fell short of our expectations. The adjusted benefits expense ratio deteriorated 400 bps year over year to 91.4%. The adjusted operating cost ratio of 10.9% improved 160 bps year over year due to scale efficiencies related to individual Medicare Advantage membership growth and administrative cost efficiencies.
As of Dec 31, 2023, the total medical membership of the segment came in at 16.86 million. The figure dipped 1.3% year over year.
CenterWell
The segment recorded revenues of $4.7 billion in the fourth quarter, which increased 13.7% and beat our estimate of $4.6 billion. Improved Pharmacy Solutions revenues, growth in the Primary Care business and a solid Home Solutions business provided an impetus to the segment's quarterly performance.
Adjusted operating income increased 44.5% year over year to $445 million. The segment’s operating cost ratio of 90.6% improved 200 bps year over year in the quarter under review.
Financial Update (as of Dec 31, 2023)
Humana exited the fourth quarter with cash and cash equivalents of $4.7 billion, which fell from the $5.1 billion figure at 2022 end. Total assets of $47.1 billion climbed from the 2022-end level of $43.1 billion.
Long-term debt amounted to $10.2 billion, which increased from the $9 billion figure as of Dec 31, 2022. Short-term debt came in at $1.4 billion. Debt to capitalization improved 20 bps year over year to 41.8% at the fourth-quarter end.
Total stockholders’ equity of $16.3 billion increased from the $15.3 billion figure at 2022 end.
In 2023, Humana generated operating cash flows of almost $4 billion, which decreased from the prior-year level of $4.6 billion.
Capital Deployment Update
Humana bought back shares worth $1.6 billion in 2023. It had a leftover share repurchase capacity of $1.1 billion as of Jan 24, 2023.
2024 Outlook
Adjusted EPS is projected at around $16, suggesting a decline from the 2023 figure of $26.09. GAAP EPS is estimated to be around $14.87, down from the year-ago level of $20. Humana scratched off its previous target of adjusted EPS of $37 in 2025 to reflect the growing MA medical cost trends. With seniors resuming elective procedures that were put on hold for COVID-related restrictions, costs have significantly risen for insurers. It expects its margin recovery initiatives to provide a $6-$10 per share growth in adjusted EPS in 2025.
Management currently projects individual Medicare Advantage membership to witness growth of around 100,000 this year. Group Medicare Advantage membership is expected to increase by around 45,000. Membership from the Medicare stand-alone prescription drug plan is estimated to decline by around 650,000 members.
Revenues are expected to be around $113 billion, which indicates an improvement from the 2023 figure of $106.4 billion. The Insurance segment’s revenues are forecasted to be around $110 billion. Revenues of the CenterWell segment, on a GAAP basis, are expected to be around $19 billion.
The benefit ratio of the Insurance unit is expected to stay around 90% for 2024. The consolidated Non-GAAP operating cost ratio is anticipated to be approximately 11.4%. The effective tax rate is expected to be around 24.5%. Cash flow from operations is expected to be around $2 billion this year. Meanwhile, capital expenditures are projected to be roughly $800 million.
Zacks Rank & Key Picks
Humana currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader medical space are Motus GI Holdings, Inc. (MOTS - Free Report) , Brookdale Senior Living Inc. (BKD - Free Report) and Centene Corporation (CNC - Free Report) . While Motus GI currently sports a Zacks Rank #1 (Strong Buy), Brookdale Senior and Centene carry a Zacks Rank #2 (Buy) each. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Motus GI’s 2023 bottom line suggests a 67.2% year-over-year improvement. MOTS has witnessed one upward estimate revision over the past 60 days against no movement in the opposite direction. It beat earnings estimates in all the last four quarters, with an average surprise of 40.2%.
The Zacks Consensus Estimate for Brookdale Senior’s full-year 2023 earnings indicates a 49.6% year-over-year improvement. BKD beat earnings estimates in three of the past four quarters and missed once, with an average surprise of 23.5%.
The Zacks Consensus Estimate for Centene’s 2023 full-year earnings implies a 15.1% increase from the year-ago reported figure. The consensus mark for its current-year revenues is pegged at $150.8 billion, up 4.3% year over year. CNC beat earnings estimates in two of the last four quarters and missed twice, with an average surprise of 5.6%.