Humana Lags on Employer Group Loss - Analyst Blog


Humana Inc. 's ( HUM ) fourth-quarter operating earnings came in at $1.12 per share, lagging the Zacks Consensus Estimate of $1.20 andthe year-ago earnings of $1.14. The fourth quarter earnings of $294 million was also below the year-ago earnings of $310 million.

The earnings decline was attributable to the pretax loss in the company's Employer Group business segment, which was partially offset by higher year-over-year earnings in the Humana's Retail and Health and Well-Being Services business segments.

The operating earnings exclude the positive impact of $54 million or 21 cents per share in the fourth quarter of 2011 and $38 million or 14 cents per share in the prior-year quarter as a result of favorable development of prior-period medical claims reserves. Additionally, the results of both quarters exclude the negative impact of $35 million or 13 cents per share related to contribution toward the Humana Foundation.

On a reported basis, Humana earned $313 million or $1.20 per share in the reported quarter, against $174 million or 63 cents per share in the prior-year quarter. The huge jump is a result of reserve strengthening in the fourth quarter of 2010, which drove up expenses, along with comparatively higher favorable medical claims reserve development in the reported quarter.

Consolidated revenues for the reported quarter climbed 9.0% year over year to $9.06 billion, nominally lagging the Zacks Consensus Estimate of $9.25 billion. Revenues from premium and administrative services also increased 9.0% year over year.

Meanwhile, total medical membership increased 8.7% year over year to 11.18 million at the end of December 31, 2011, while the total specialty membership at the end of 2011 rose 4.1% to 7.32 million.

Humana reported benefit expenses of $7.06 billion, an increase of 4% year over year, while operating costs climbed 29.5% year over year to $1.59 billion. Alongside, depreciation and amortization expenses spurted 11.3% year over year to $69 million.

Consolidated benefit ratio, which reflects the percentage of benefit expenses in premium revenues, fell by 270 basis points to 81.8% from 84.5% in the prior-year quarter, mainly due to a decline in the benefit ratio of the Retail segment.

The consolidated operating cost ratio, which reflects the percentage of operating costs in total revenues less investment income, climbed to 17.7% from 14.9% in the prior-year quarter, primarily as a result of higher operating cost ratio in the Retail and Employer group segment along with the Concentra acquisition in December 2010, which carries a higher-than-average operating cost ratio.

Segment Results

Retail Segment: The retail segment includes Medicare Advantage and prescription drug plans, and individual health insurance business lines.

The segment's pretax income surged to $326 million from $250 million in the prior-year quarter, on the heels of increased average Medicare membership and lower benefit ratio, partly offset by higher operating cost ratio.

Reported premiums and services revenue increased 13% to $5.31 billion in the reported quarter. The upside primarily resulted from an 11% year-over-year growth in average Medicare Advantage membership.

The benefit ratio was 79.0% as compared with 81.7% in the prior-year quarter. Nevertheless, the operating cost ratio, increased 190 basis points to 14.7% in the reported quarter.

Employer Group: The employer group includes employer group coverage and group Medicare Advantage and prescription drug plans.

The segment reported a pretax loss of $51 million in the reported quarter compared to a pretax income of $29 million in the prior-quarter, while reported premiums and services revenue declined 2% to $2.30 billion, primarily on the back of lower group commercial fully-insured membership and rebates associated with the minimum MLR regulations.

The benefit ratio was 86.4%, increasing from 84.4% in the prior-year quarter, whereas the reported operating cost ratio was 18.8%, up 130 bps from 17.5% in the year-ago quarter.

Health and Well-Being Services: Health and well-being services include pharmacy solutions, primary care services, home care services and integrated wellness services.

The segment's reported pretax income increased substantially to $85 million from $44 million in the prior-year quarter, reflecting growth in the company's pharmacy solutions business as well as the addition of the Concentra business acquired in December 2010.

Reported revenue also increased to $2.9 billion from $2.20 billion in the year-ago quarter, again due to growth in the company's pharmacy solutions business along with the acquisition of the Concentra business.

However, reported operating cost ratio decreased 140 basis points to 96.3% in the reported quarter.

Full-Year 2011 Highlights

For full year 2011, Humana generated operating income of $2.07 billion or $7.82 per share, surpassing $1.84 billion or $6.81 per share in 2010. However, earnings per share lagged the Zacks Consensus Estimate of $8.44. Reported net income came in at $2.24 billion or $8.46 per share against $1.75 billion or $6.47 per share in 2010.

The year-over-year growth was attributable to share repurchases, along with higher earnings in the Humana's Retail and Health and Well-Being Services business segments, which were partially offset by lower earnings in the company's Employer Group business segment.

Total revenue was $36.83 billion, up 10% year over year from $33.60 billion, marginally below the Zacks Consensus Estimate of $36.9 billion. Total operating expenses increased 8.7% over 2010 to $34.49 billion.

Financial Update

Cash flow from operations was $2.08 billion in 2011, down from $2.24 billion in 2010, due to changes in working capital, partially offset by higher net income.

Humana exited the quarter with cash and cash equivalents of $1.38 billion and long-term debt of $1.66 billion.

During 2011, Humana repurchased 6.76 million shares at an average price of $72.75. As of December 31, 2011, about $561 million is outstanding under the company's share repurchase program.

As of December 31, 2011, Humana's total assets were $17.7 billion and total shareholders' equity was $8.06 billion.

Dividend Update

On January 31, 2012, Humana paid a cash dividend of 25 cents per share to shareholders of record as of December 30, 2011.


Humana hiked its 2012 earnings forecast to a range of $7.50-7.70 per share from $7.40-7.60 per share provided in the previous year. The company also declared its first quarter EPS guidance of $1.35-1.45. The guidance excludes the impact of future share repurchases on the EPS.

Consolidated revenue for 2012 is expected to lie in the range of $38.75-39.25 billion. Additionally, cash flow from operations is projected to be between $1.8-2.0 billion, while capital expenditure is anticipated to be around $350 million.

Peer Take

Unitedhealth Group Inc. ( UNH ), a rival of Humana, generated fourth-quarter 2011 operating earnings of $1.17 per share substantially higher than the Zacks Consensus Esti mate of $1.02. Earnings also compared favorably with $0.94 per share reported in the prior-year quarter.

Another peer, CIGNA Corp. ( CI ), generated fourth quarter core earnings of $1.11 per share, lagging the Zacks Consensus Estimate of $1.18 as well as $1.15 per share r eported in the comparable period last year.

Currently, Humana carries a Zacks #2 Rank, implying a short-term Buy rating.

CIGNA CORP ( CI ): Free Stock Analysis Report
HUMANA INC NEW ( HUM ): Free Stock Analysis Report

UNITEDHEALTH GP ( UNH ): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: CI , HUM , UNH

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