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Humana (HUM) Surpasses on Q2 Earnings, Raises EPS Guidance

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Humana Inc.’s HUM second-quarter 2018 operating earnings per share of $3.96 beat the Zacks Consensus Estimate of $3.21. The bottom line also improved 13.4% year over year.

Humana Inc. Price and EPS Surprise

Humana Inc. Price and EPS Surprise | Humana Inc. Quote

The company benefited from solid strategies, Medicare Advantage enrollment growth, lower inpatient medical utilization in Retail segment and significant operating cost efficiencies.

Operational Update

Revenues of $14.2 billion were up nearly 7.2% on higher Retail revenues from the company’s Medicare Advantage business plus Group and Specialty segment. Moreover, the top line surpassed the Zacks Consensus Estimate of $14.1 billion.

Adjusted consolidated pretax income of $812 million declined 13.8%, primarily due to lower earnings in the company’s Retail plus Group and Specialty segments.

Benefit ratio deteriorated 90 basis points to 84.3% in the reported quarter.

Operating cost ratio deteriorated 180 basis points to 12.5%.

Segment Results


Revenues from the Retail segment were $12.0 billion, up 7% year over year, primarily owing to higher revenues from the company’s individual and group Medicare Advantage business resulting from increased membership and higher per-member premiums for a few segment’s products.

Benefit ratio of 85.5% deteriorated 30 bps year over year, due to reinstatement of the non-deductible health fee.

The segment’s operating cost ratio of 10.1% deteriorated 160 bps year over year.

Adjusted pre-tax income was $493 million, down 19% year over year.

Group and Specialty

Revenues from the Group and Specialty segment were $1.91 billion, up 4% from the prior-year quarter’s count. This upside is primarily backed by transition to the East Region TRICARE contract on Jan 1, 2018, increased stop???loss premiums related to the company’s small group level funded accounts and high per member premiums across most business lines in the segment.  

Benefit ratio improved 200 bps year over year to 80.4% owing to the negative impact of seasonality on fully-insured group commercial medical claims, an unfavorable comparison with the Prior Period Development in the second quarter as well as lower premiums and membership mix.

Operating cost ratio deteriorated 190 bps year over year to 23.5%.

Adjusted pre-tax income of $80 million decreased 21% year over year, driven by the segment’s higher benefit ratio.

Healthcare Services

Revenues of $5.9 billion inched up 1% year over year, primarily banking on strong Medicare Advantage membership growth and higher intersegment revenues.

Operating cost ratio deteriorated 120 bps year over year to 96.2%.

Adjusted pretax income for the segment was $206 million, down 24% due to impact of the optimization process associated with the company’s chronic care management programs and the investments made in the second quarter as a result of the Tax Reform Law.    

Individual Commercial

Humana exited this business effective Jan 1, 2018 and thus, the result reflects its running out.

The company witnessed a pretax income of $18 million, down 85% year over year.

Financial Update

As of Jun 30, 2018, the company had cash, cash equivalents and investment securities of $17.5billion, down 15% from the 2017-end level.

Debt-to-total capitalization as of Jun 30, 2018 was 33.6%, up 30 bps from the level as of Dec 31, 2017.

Operating cash flow totaled $99 million in the quarter under review, up from $83 million a year ago.

Dividend and Share Repurchase Update

The company bought back shares worth $23.5 million during the first half of 2018. The company currently has shares worth $1.98 million left under its authorization program.

The company paid cash dividends worth $69 million.

2018 Guidance Raised

Humana expects adjusted earnings per share to be around $14.15, up from its previous range of $13.70-$14.10. GAAP EPS is projected to be around $11.52, down from the earlier projection of $13.54-$13.94.

Zacks Rank and Performance of Other Players

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

Among other players in the HMO industry, which have already reported first-quarter earnings, the bottom line of Centene Corp. CNC, Anthem Inc. ANTM and UnitedHealth Group Inc. UNH outshined the respective Zacks Consensus Estimate.

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