Note: FLASH REPORT; more details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.
Reason for Report: Flash Update: 1Q18 Earnings Results
Prev. Ed.: 4Q17 Earnings Update, Mar 26, 2018
Flash Update [Note: Only highlighted material has been changed.]
On May 2, 2018, Humana Inc first-quarter 2018 operating earnings per share of $3.36 beat the Zacks Consensus Estimate of $3.21. The bottom line also improved 22.2% year over year.
The company benefited from Medicare Advantage enrollment growth, solid segmental performances, lower taxes as well as a favorable impact of share buybacks.
Operational Update
Revenues of $14.3 billion were up nearly 6% 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 $14.2 billion.
Adjusted consolidated pre-tax income of $384 million declined 8.9%, primarily due to lower earnings in the company’s Retail and Healthcare segments. This was partially offset by higher earnings in the Group and Specialty segment. The prior-year quarter also benefited from net gain associated with terminated merger agreement.
Benefit ratio deteriorated 40 basis points to 84.9% in the reported quarter.
Operating cost ratio deteriorated 70 basis points to 12.4%.
Segment Results
Retail
Revenues from the Retail segment were $12.1 billion, up 6% year over year, primarily owing to higher revenues from the company’s Medicare Advantage business resulting from increased membership.
Benefit ratio of 87.4% improved 70 bps year over year, primarily owing to reinstatement of the non-deductible health fee.
The segment’s operating cost ratio of 10.1% deteriorated 170 bps year over year.
Adjusted pre-tax income was $273 million, down 27% year over year.
Group and Specialty
Revenues from the Group and Specialty segment were $1.97 billion, up 5% from the prior-year quarter, primarily backed by higher stop loss premiums related to small group level funded accounts, stronger service revenues and higher per member premiums.
Benefit ratio improved 240 bps year over year to 73.2% owing to the impact of the reinstatement of the health insurance industry fee.
Operating cost ratio deteriorated 200 bps year over year to 23.6%.
Adjusted pre-tax income of $212 million increased 23% year over year, driven by the company’s higher earnings related to fully insured business.
Healthcare Services
Revenues of $5.7 billion decreased 5% year over year, primarily due to exit from individual commercial business, lower Pharmacy Solutions intersegment revenues and lower revenues from provider service business.
Operating cost ratio deteriorated 70 bps year over year to 96.2%.
Adjusted pre-tax income for the segment was $196 million, down 23% due to optimization process associated with the company’s chronic care management program and higher operating cost ratio.
Individual Commercial
Humana exited this business effective Jan 1, 2018 and thus, the result reflects run out of this business.
The company witnessed a pre-tax gain of $53 million, down 15.9% year over year.
Financial Update
As of Mar 31, 2018, the company had cash, cash equivalents and investment securities of $20.96 billion, up 28% from 2017-end level.
As of Mar 31, 2018, cash and short-term investments held by the parent company were $567 million, down 18% from 2017-end level.
Debt-to-total capitalization as of Mar 31, 2018 was 33.9%, up 60 bps from Dec 31, 2017.
Operating cash flow totaled $351 million, down from $1.1 billion in the year-ago quarter.
Dividend and Share Repurchase Update
The company did not buy back any shares in the quarter under review and has worth $2 billion remaining under its repurchase authorization.
The company paid cash dividends worth $57 million.
2018 Guidance Raised
Humana expects adjusted earnings per share in the range of $13.70- $14.10, up from $13.50-$14, guided earlier. GAAP EPS is projected between $13.54 and $13.94, up from the previous forecast of $13.16 and $13.66.
Total revenues are anticipated in the band of $55.8-$56.4 billion.
Cash flow from operations is estimated between $2.2 billion and $2.6 billion while capital expenditure is likely to be between $500 and $600 million.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON HUM
Portfolio Manager Executive Summary [Note: Only highlighted material has been changed.]
Humana Inc. (HUM) provides healthcare benefits and services through its health maintenance organizations (HMOs), preferred provider organizations (PPOs) and administrative service only (ASO) contracts. The company operates across a wide geographical region with a variety of products for Medicare beneficiaries. It has also built a profitable and growing commercial business, adding diversity to its government business. The company has been positioning itself both geographically and product-wise for several years to capture a large share of the Medicare population.
Among the firms in the Digest Group covering Humana, almost 35.7% had a neutral outlook, nearly 64.3% had a positive outlook. None of the firms had a bearish outlook. Of the 14 firms covering the stock, 13 brokers provided target price ranging from $242.00 (10% downside from current price) to $338.00 (26% upside from the current price).
Neutral or equivalent outlook – 5/14 firms or 35.7% – These firms remain optimistic on Medicare business. They estimate volumes to increase as Baby boomer generation age into Medicare. This along with penetration gains in MA will likely fuel MA revenue growth through 2020.
Various investments in technology, operating expenses, and organically has provided the company with necessary core competencies to serve the new market.
According to the cautious firms, Humana expects to completely exit from ACA products in 2018.
Positive or equivalent outlook –9/14 firms or 64.3% – Firms note the company has been delivering strong results owing to strong performing MA with better than expected utilization and favorable prior period reserve development.
These firms note that Humana continues to be challenged with its individual business on public exchanges.
A bullish firm believes that Humana’s tax benefit is expected to be invested in social determinants of health, technology and integrated care delivery model. The investments will mostly be in the Retail segment.
A bullish firm expects re-accelerated growth in Medicare Advantage for the next three years and also anticipates Humana to benefit from the rising tide of tax and health policy driven Medicare privatization.
Another bullish firm expects Humana’s enrollment to strengthen in 2018, driven by Florida, Texas, Illinois and Arizona.
Mar 26, 2018
Overview [Note: Only highlighted material has been changed.]
The key positive and negative arguments, as identified by firms, are outlined below:
Key Positive Arguments / Key Negative Arguments· Humana’s Medicare business continues to be strong, which offset the weaker results in the Commercial business.
· Humana continues to enhance and expand its consumer-directed Commercial product portfolio and expand its business platform.
· Management has done a commendable job of building a platform for future growth through investment in information technology and new product development.
· Restructuring initiatives and increased use of technology streamlined the company’s operations and improved its operational efficiencies. / · Medicaid HMOs are facing increased pressure from states experiencing financial difficulties, which may cut reimbursement rates.
· As an HMO, Humana has greater-than-average exposure to new regulatory and legislative actions aimed at the industry.
· Humana is facing increasing pricing pressure from its competitors, particularly BlueCross BlueShield.
· Humana is highly dependent on Government business with about 94% of its pre-tax earnings coming from it.
· Medical costs are subject to a high rate of inflation, attributable to many forces including new high-priced technologies.
· Humana depends on MA for over 50% of its premiums. Thus, an adverse rate cut can significantly reduce the company’s revenues.
Based in Louisville, KY, Humana is a full-service health benefits solutions company that offers coordinated health insurance coverage and related services through a variety of traditional and Internet-based plans for employer groups, government-sponsored programs and individuals.
In April 2015, some of its businesses were reorganized and renamed, per which, the Employer Group segment was renamed Group segment. As a result, Humana now manages its business through three segments – Retail, Group and Healthcare Services. In addition to these, the company will continue to report results for those businesses which do not align with the reportable segments described above, mainly the company’s closed block long-term care insurance policies, under the category of Other Businesses.
Further information on the company can be found at its website: www.humana.com.
Note: Humana’s fiscal year coincides with the calendar year.
Mar 26, 2018
Long-Term Growth [Note: Only highlighted material has been changed.]
Firms remain optimistic about Humana’s core Medicare business. They believe the company’s volume growth potential as Baby Boomers age into Medicare coupled with penetration gains in MA (Medicare Advantage) can support MA revenue growth of $11 billion or 36% through 2020. Though margin compression remains a concern for investors following lower rates from CMS, they see company-specific levers helping to offset rate pressures including trend benders (2-4%), coding improvements (1.5-2%), changes in benefit design and increased vertical integration.
Combined revenues from Medicaid and duals are expected to boost revenues. Lower margin duals business, coupled with higher margin Medicare business, is expected to offset overall Retail segment margin expansion over time. However, pre-tax results of the Retail segment are expected to reflect healthy growth.
As the company’s revenues from the MA business are dependent on government reimbursement, any reimbursement rate cut can substantially reduce Humana’s top line. The cost-reduction initiatives of the company are yielding results while acquisitions are increasing both earnings and market share.
Humana’s investment in care delivery is expected to continue. The company has also announced the consolidation of its provider brands in South FL and TX under one brand. The company’s strategy with CONVIVA seems to be focused on driving greater growth opportunities in Medicare Advantage and Healthcare Services through greater member engagement. Dec 28, 2017
Mar 26, 2018
Target Price/Valuation [Note: Only highlighted material has been changed.]
Rating DistributionPositive / 64.3 %↑
Neutral / 35.7%↓
Negative / 0.0%
Avg. Target Price / $268.10↑
Digest High / $338.00↑
Digest Low / $242.00↑
No. of Analysts with Target Price / 13/14
Risks to target price include narrow margins in Medicare and Commercial, reimbursement risks in Medicare and greater HC reform risks, resulting from higher commercial business mix in the small group and individual segments. The earning power of Humana is highly elastic in response to the variation in cost trends. This may lead to volatility in earnings. The recent strict regulatory scrutiny of the health insurers by the government may also affect profitability owing to certain regulatory changes.
Recent Events [Note: Only highlighted material has been changed.]
On Feb 7, 2018, Humana reported fourth-quarter 2017 operating earnings per share of $2.06, beating the Zacks Consensus Estimate by approximately 3%. The bottom line, however, declined 12% year over year.
Financial Update
As of Dec 31, 2017, the company had cash, cash equivalents and investment securities of $16.34 billion, down 23% sequentially.
As of Dec 31, 2017, cash and short-term investments held by the parent company were $688 million, down 70% sequentially.
Debt-to-total capitalization as of Dec 31, 2017 was 33.3%, up 280 bps from Sep 30, 2017.
Cash flows provided by operations totalled $4.05 billion for 2017 compared with $1.94 billion in the prior year. The improvement was positively impacted by the receipt of merger termination fee, higher earnings and the timing of working capital items.
2018 Guidance
Cash flow from operations is expected to range within $2.2-$2.6 billion.
Share Repurchase
In December 2017, Humana’s board of directors approved a $3-billion share repurchase authorization, schedueld to expire on Dec 31, 2020.
The company subsequently entered into an agreement with a third-party financial institution on Dec 21, 2017 to bring into effect a $1-billion ASR program under the authorization.
In 2017, the company bought back shares worth $3.1 billion.
As of Feb 6, 2018, the company had nearly $2 billion of current share repurchase authorization remaining.
Dividend Update
The company paid cash dividends worth $58 million to its stockholders in the fourth quarter. During 2017, total amount of dividends paid was $220 million.
In November 17, the company announced a cash dividend of 40 cents per share, paid on Jan 26, 2018 to the shareholders of record on Dec 29, 2017.
Revenues [Note: Only highlighted material has been changed.]
In the fourth quarter, the company reported revenues of $13.2 billion, up 2.4% on higher Retail segment revenues from the company’s Medicare Advantage business and Group and Specialty segment. The top line also surpassed the Zacks Consensus Estimate by 1.2%.
Guidance for 2018
Total revenues are expected in the $55.8-$56.4 billion band.
Segment Details
Retail Segment:
Revenues from the Retail segment were $10.95 billion, up 3% year over year, primarily owing to higher revenues from the company’s Medicare Advantage business resulting from increased membership.
Group and Specialty Segment:
Revenues from the Group and Specialty segment were $1.89 billion, up 3% from the prior-year quarter, primarily on the back of higher performance incentives earned under the previous TRICARE contract and increased group fully insured commercial medical premiums.
Healthcare Services Segment:
Revenues of $6.02 billion decreased 6% year over year, primarily due to the company’s Pharmacy Solutions business as well as the impact of the optimization process associated with its chronic condition management programs.
Individual Commercial Segment:
Individual Commercial membership was 128,800 as of Dec 31, 2017, down 80% year over year, primarily due to a decline in the number of countries where the company offers on-exchange coverage as well as the discontinuance of off-exchange products.