Back to top

Analyst Blog

Zacks Equity Research

Humana (HUM) Earnings, Revenues Beat Estimates in Q3

AET HUM MOH UNH

Trades from $3

Humana Inc.’s (HUM - Free Report) third-quarter 2016 operating earnings per share of $3.18 beat the Zacks Consensus Estimate of $3.06 roughly by 4%. The bottom line also improved 41% year over year on solid performance across all business lines except the individual commercial business.

Operational Update

Revenues inched up 2% year over year to $13.7 billion. The bottom line also surpassed the Zacks Consensus Estimate by 2.2%. Growth in higher premiums and services revenues contributed to top-line growth.

Humana’s consolidated benefit ratio – the percentage of benefit expenses in premium revenues – was 81.5%. This marks an improvement of 240 basis points (bps) year over year. Lower utilization of Humana’s Medicare Advantage business as well as favorable comparisons for prior period development primarily drove the upside.

Consolidated operating cost ratio deteriorated 10 bps year over year to 12.8%. This was mainly due to higher operating cost ratio in both Retail and Group segments.

Segment Results

Retail Segment

The segment’s reported premiums and services revenues increased 4% year over year to $11.76 billion on higher revenues due to an increase in average membership.

Benefit ratio came in at 83.1%, improved 300 bps over the prior-year quarter owing to lower year-over-year Medicare Advantage utilization and favorable comparisons of Prior Period Development.

Operating cost ratio of 11.1% deteriorated 20 basis points year over year due to the unusually low operating expenses incurred in the last year quarter resulting from the temporary suspension of certain administrative costs and the previously-disclosed loss of the large group Medicare Advantage account.

Adjusted pretax income for the segment was $652 million, up 96% year over year. Control on expenses supported the increase.

Group Segment

Reported premiums and services revenues dipped 2% to $1.79 billion, primarily due to reduced medical membership in average fully insured and ASO commercial group. However, an increase in fully insured group medical per-member premiums limited the downside.

Benefit ratio was 82.7%, worsen 30 bps year over year due to the greater negative impact of slightly higher utilization in comparison to the same in the last year quarter.

Operating cost ratio was 24.1% in 3Q 2016, deteriorated 70 basis points from the prior year quarter again due to the comparison to unusually low operating expenses in the prior year

Adjusted pretax income for the segment was $12 million, down 71% year over year, due to higher benefit expenses and operating costs.

Healthcare Services

Revenues of $6.35 billion increased 8% year over year, driven by growth in individual Medicare Advantage and stand-alone PDP membership. This resulted in increased engagement of members in clinical programs and higher utilization of the Healthcare Services businesses.

Operating cost ratio was 95.1%, worsen 40 bps year over year.

Adjusted pretax income for the segment was $299 million, up 1% year over year.

HUMANA INC NEW Price, Consensus and EPS Surprise

Financial Update

As of Sep 30, 2016, cash, cash equivalents and investment securities of Humana were $16.37 billion, up 40% from $11.68 billion as of Dec 31, 2015.

Debt-to-total capitalization as of Sep 30, 2016 was 26.%, down 70 bps on a  sequential basis from 27.3%.

Adjusted cash flows from operations as of Sep 30, 2016 was $1.50 billion, 42% higher than the prior-year quarter. Higher earnings and beneficial working capital changes drove the upside.

Share Repurchase and Dividend Update

Humana suspended its share repurchase program on Jul 2, 2015 due to the pending acquisition by Aetna.

Notably, the company’s board of directors approved a new $2 billion share repurchase plan with an expiration date of Dec 31, 2016.

Humana presently has approximately $1.04 billion of the current $2 billion repurchase authorization remaining.

Humana paid cash dividend worth $43 million in the third quarter.

2016 Guidance Revised

For 2016, Humana expects adjusted earnings per share to be approximately $9.50.

Consolidated revenues are expected to be approximately $55 billion as against $54.0–$54.5 billion guided earlier.

Benefit ratios for Retail segment is now projected within the 84.75%–85.25% range compared with the prior guidance of 85–86%. The metric for the Group segment is guided within the 79.75–80.25% band as against from prior guidance of 79.5–80.5%.Guidance for consolidated operating cost ratio is reiterated at the range of 13.0% to 13.5%.

Expected net membership growth in individual Medicare Advantage is reiterated in the range of 75000–90000 and the membership in stand-alone PDP offerings is expected in the range of 400,000 to 425,000.

Membership in group Medicare Advantage is estimated to be between 125,000 and 130,000 as against the prior guidance of between 120000 and 125000. On the other hand, individual commercial membership is again expected in the range of  200,000 to 300,000.

Guidance for 2017

The company anticipates pretax income for 2017 to be driven primarily by improved operating performance in its individual Medicare Advantage and Healthcare Services businesses. It also expects lower losses in its Individual Commercial business to boost income.

Humana also anticipates a benefit of approximately $2.20 per diluted share due to a lower effective tax rate.

The company projectes net reductions for individual Medicare Advantage of approximately 70,000 members associated with plans no longer offered for 2017.

Humana’s Individual Commercial premiums associated with ACA-compliant offerings are now projected to be in the range of $1 billion to $1.25 billion in 2017 compared with approximately $3.4 billion in 2016.

Zacks Rank

Humana currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among the other firms in the medical sector that have reported their third-quarter earnings so far, the bottom line at Aetna Inc. (AET - Free Report) , Molina Healthcare Inc (MOH - Free Report) and UnitedHealth Group Inc. (UNH - Free Report) beat their respective Zacks Consensus Estimates.

Confidential from Zacks

Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>


In-Depth Zacks Research for the Tickers Above

Normally $25 each - click below to receive one report FREE:

AETNA INC-NEW (AET) - free report >>

HUMANA INC NEW (HUM) - free report >>

MOLINA HLTHCR (MOH) - free report >>

UNITEDHEALTH GP (UNH) - free report >>