Humana Q1 Earnings Beat Ests but Down Y/Y - Analyst Blog

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Humana Inc. 's ( HUM ) first-quarter 2014 operating earnings came in at $2.35 per share. The results substantially surpassed the Zacks Consensus Estimate of $1.94 but compared unfavorably with the $2.95 per share earned in the year-ago quarter.

Shares of Humana gained about 0.19% in the pre-market session, indicating that the market has taken this release positively.

The year-over-year decline was due to the effects of sequestration for Humana's Medicare business that was absent in the first quarter of 2013 and higher expenses. Moreover, the last comparable quarter included a benefit from the settlement of contract claims with the Department of Defense (DoD).

Revenues at Humana for the reported quarter climbed 11.7% year over year to $11.7 billion and marginally beat the Zacks Consensus Estimate of $11.5 billion. Revenues from premium increased 12.3% to $11.1 billion, while services revenues rose 2.5% to $538 million, both on a year-over-year basis.

Higher premiums and service revenues reflect revenue growth in the Retail and Employer Group segments. However, Humana's investment income declined 2.2% to $91 million in the first quarter of 2014.

Quarterly Review

Humana's consolidated benefit ratio, which reflects the percentage of benefit expenses in premium revenues, decreased 70 basis points (bps) year over year to 82.3%, reflecting a decline in Retail and Employer Group benefit ratios.

Humana's consolidated operating cost ratio, which reflects the percentage of operating costs in total revenue less investment income, rose 150 bps year over year to 15.4%. The increase primarily resulted from a rise in the Retail, Employer Group and Other Businesses ratios.

Quarterly Results by Segment

Retail Segment: The segment's pre-tax income declined 25.1% year over year to $262 million. The decrease was due to weak results in the stand-alone Prescription Drug Plans (PDPs) and decreased investment spending for healthcare exchanges and new state-based contracts. However, these factors were partially offset by favorable medical cost utilization in Medicare Advantage and membership growth across Medicare Advantage, stand-alone PDP and individual commercial medical offerings.

Reported premiums and services revenues increased 17.1% to $8.09 billion in the reported quarter. The upside primarily reflects a 15.6% year-over-year increase in individual Medicare Advantage membership and higher membership associated with the healthcare exchanges. However, this was partially offset by the effect of sequestration.

The benefit ratio was 85.3%, showing slight improvement from 85.9% in the prior-year quarter due to addition of the health insurance industry fee in Humana's products' pricing and a decline in the utilization of the Medicare Advantage business.  However, absence of the sequestration of the year-ago quarter, rise in specialty drug costs and new healthcare exchange offerings in the reported quarter were setbacks.

Operating cost ratio deteriorated 250 basis points (bps) to 11.4% in the reported quarter. This deterioration stemmed from the acquisition expenses for new Medicare Advantage members, investment spending for healthcare exchanges and new state-based contracts, and non-deductible health insurance industry fee as per the healthcare reform.

Employer Group: This segment of Humana incurred pre-tax income of $226 million, comparing favorably with a pre-tax income of $212 million in the year-ago period. This improvement was driven by a decline in benefit ratio, partially offset by deterioration in the operating cost ratio.

The benefit ratio was 78.8%, down 80 bps year over year, reflecting inclusion of the health insurance industry fee and other taxes and fees associated with the healthcare reform, a decline in medical cost trends in group Medicare Advantage and commercial group businesses. Operating cost ratio increased 80 bps to 16.1% due to the effect of the non-deductible health insurance industry fee and other fees.

Meanwhile, reported premiums and services revenues increased 9.2% to $3.10 billion, primarily on the back of an increase in average group Medicare Advantage membership.

Healthcare Services: Pre-tax income for the segment increased to $185 million from $118 million in the first quarter of 2013. The upside was attributable to higher revenues and profits from the pharmacy solutions business and the home-based services businesses of Humana.

Revenues at this segment also rose 22.3% year over year to $4.61 billion, primarily due to improvement in the pharmacy solutions and home-based services businesses. Growth in these businesses also improved the operating cost ratio by 70 bps year over year to 95.2% in the reported quarter.

Other Business: The other business segment reported a pre-tax income of $25 million, comparing unfavorably with $58 million in the year-ago quarter.

Financial Update

Humana's cash from operations was $671 million in the first quarter of 2014 against $412 million in the first quarter of 2013. Changes in working capital items mainly led to the upside. However, this was partly offset by lower net income.

As of March 31, 2014, cash, cash equivalents, and investment securities of Humana were $11.7 billion, higher than $10.94 billion as of Dec 31, 2013. The improvement was attributable to an increase in balances related to revenue growth and a surge in unrealized gains due to lower market interest rates in the first quarter of 2014.

The debt-to-capital ratio of Humana as of March 31, 2014 was 21.1%, representing a 70 bps improvement from 21.8% as of Dec 31, 2013. The improvement was due to higher capitalization related to earnings in the first quarter of 2014.

Share Repurchase Update

During the first quarter of 2014, Humana spent $11 million to buy back 0.1 million shares. In April 2014, management replaced the previous $1 billion share repurchase authorization with a new $1 billion program. The previous authorization had $569 million remaining. The new program is scheduled to expire on June 30, 2016.

2014 Outlook

Humana reiterated its earnings per share (EPS) guidance for 2014 in the range of $7.25 to $7.75 on revenues of $47 billion to $49 billion. This is on expectations of a consistently strong performance by the existing operations of Humana, higher-than-expected specialty drug costs for Hepatitis C treatment, increase in planned investments in clinical initiatives and a decline in investment spending and startup costs for the healthcare exchange business. The guidance lies below the Zacks Consensus Estimate of $7.82 for full-year 2014.

Zacks Rank and Other HMOs

Humana currently carries a Zacks Rank #2 (Buy). The bottom line of Molina Healthcare Inc. ( MOH ), WellPoint Inc. ( WLP ) and Aetna Inc. ( AET ) also outperformed their respective Zacks Consensus Estimate in the first quarter.



AETNA INC-NEW (AET): Free Stock Analysis Report

HUMANA INC NEW (HUM): Free Stock Analysis Report

MOLINA HLTHCR (MOH): Free Stock Analysis Report

WELLPOINT INC (WLP): 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 , Earnings , Stocks

Referenced Stocks: EPS , AET , HUM , MOH , WLP

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