Humana Inc.’s (HUM - Analyst Report) first-quarter 2013 operating earnings came in at $407 million or $2.69 per share. The results substantially surpassed the Zacks Consensus Estimate of $1.78 as well as the year-ago earnings of $248 million or $1.49 per share.
Including $66 million or 26 cents per share related to the favorable impact of a litigation settlement and delay in the implementation of sequestration, Humana’s net income amounted to $473 million or $2.95 per share. The strong performance in the company’s Retail, Employer Group and Other Business segments, along with a lower-than-expected tax rate led to the increase in income.
Revenues of Humana for the reported quarter climbed 2.6% year over year to $10.49 billion, surpassing the Zacks Consensus Estimate of $10.25 billion. Revenues from premium increased 1% year over year to $9.87 billion, while services revenue surged 50% to $525 million in the reported quarter. However, Humana’s investment income declined 1.1% to $93 million in the first quarter of 2013.
Total medical membership of Humana increased 4.6% year over year to 12.3 million at the end of Mar 2013, while the total specialty membership increased 7% to 8.23 million.
Humana’s consolidated benefit ratio, which reflects the percentage of benefit expenses in premium revenues, improved 240 basis points (bps) year over year to 83.0%, mainly due to lower benefit ratio of the Retail and Employer Group segments.
Humana’s consolidated operating cost ratio, which reflects the percentage of operating costs in total revenue less investment income, inched up 20 bps year over year to 13.9%. The increase primarily resulted from the impact of the accounting for the new South Region TRICARE contract in Humana’s Other Businesses, which offset the decline in the operating cost ratio of the Retail and Employer Group Segments.
Quarterly Results by Segment
Retail Segment: The segment’s pre-tax income surged 173% year over year to $350 million due to higher membership and premiums, partially offset by a decline in benefit ratio and operating cost ratio.
Reported premiums and services revenue increased 12.2% to $6.91 billion in the reported quarter. The upside primarily resulted from a 9.4% year-over-year surge in individual Medicare Advantage membership and a 2.9% increase in Medicare Advantage per member premium.
The benefit ratio was 85.9%, down 160 bps year over year. Moreover, the operating cost ratio decreased 150 bps to 8.9% in the reported quarter.
Employer Group: The segment incurred pre-tax income of $205 million, increasing from $129 million incurred in the year-ago quarter, largely driven by a better benefit ratio and operating cost ratio in the segment.
Meanwhile, reported premiums and services revenue increased 7.8% to $2.83 billion, primarily on the back of higher group Medicare Advantage and commercial fully-insured membership. The benefit ratio was 79.6%, down 160 bps year over year, whereas the operating cost ratio went down 110 bps to 15.5%.
Healthcare Services: Pre-tax income for the segment stayed flat year over year at $125 million, as the increased revenues and profits from the acquisition of Metropolitan Health Networks Inc. was offset by the expenses incurred in expansion of the integrated care delivery model.
Revenue of this segment of Humana also increased to $3.72 billion, up 13.2% year over year, primarily due to improvement in the pharmacy solutions business and the Metropolitan acquisition. However, operating cost ratio inched up 10 bps to 95.7% in the reported quarter.
Other Business: Humana’s other business segment reported a pre-tax income of $58 million, surging from $5 million in the year-ago quarter.
Humana’s cash from operations was $412 million in the reported quarter compared with $2.35 billion in the year-ago quarter, mainly due to the timing of the payment from the Center for Medicare and Medicaid Services (CMS). Humana exited the quarter with cash and cash equivalents of $1.40 billion and long-term debt of $2.61 billion.
Share Repurchase Update
During the reported quarter, Humana spent $81 million to buyback 1.21 million shares at an average price of $67.60 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 has an outstanding balance of $557 million.
During the reported quarter, Humana spent $42 million on dividend payments.
With effect from Jan 1, 2013, Humana reclassified its HumanaVitality, Lifesynch, Limited Income Newly Eligible Transition (LI-NET) and state-based Medicaid businesses to correspond with internal management reporting changes for the related operations. Moreover, the company renamed its Health and Well-Being Services segment as Healthcare Services.
Humana raised its earnings guidance for 2013 to $8.40–$8.60 per share from $7.60–$7.80. The company expects its second-quarter earnings in the range of $2.40–$2.50 per share.
Consolidated revenue for 2013 is expected in the range of $41–$41.5 billion. Additionally, cash flow from operations would be in the range of $1.9–$2.1 billion for 2013. 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. reported first-quarter 2013 adjusted income of $2.94 per share, beating the Zacks Consensus Estimate of $2.37. Adjusted income also surpassed the year-ago earnings of $2.34 per share by 25.6%.
Health Net Inc.’s first-quarter 2013 operating income came in at $8.2 million or 10 cents per share, rebounding from the year-ago loss of $8.1 million or 10 cents per share. Operating income, however, lagged the Zacks Consensus Estimate of 41 cents per share.
UnitedHealth Group Inc. (UNH - Analyst Report) reported first-quarter 2013 earnings of $1.16 per share, in line with the Zacks Consensus Estimate. Earnings, however, declined 11.4% on a year-over-year basis.
Humana currently carries a Zacks Rank #3 (Hold).