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Humana (HUM) Beats Earnings Estimates, Lags Revenues in Q2

Humana Inc.’s HUM second-quarter 2017 operating earnings per share of $3.49 beat the Zacks Consensus Estimate by approximately 13%. The bottom line improved 6% year over year, primarily driven by the company’s individual Medicare Advantage and Individual Commercial businesses,partially offset by lower pretax earnings in the Group and Specialty and Healthcare Services segments.

Operational Update

Adjusted consolidated revenues of $13.3 billion grew 2% on higher Retail segment revenues from the company’s Medicare business, excluding the impact of revenues from its Individual Commercial business. However, revenues missed the Zacks Consensus Estimate of $13.6 billion.

Humana’s adjusted consolidated benefit ratio of 83.4% deteriorated 90 basis points (bps) from the prior-year quarter, primarily due to the impact of the temporary suspension of the health insurance industry fee in 2017.

Adjusted consolidated operating cost ratio of 10.7% improved 130 bps from the year-ago quarter, also due to the temporary suspension of the health insurance industry fee for 2017.

Quarterly Segment Results

Retail Segment

Revenues from the Retail segment were $11.30 billion, up 3% year over year, primarily owing to higher revenues from the company’s Medicare Advantage business.

Benefit ratio of 85.8% deteriorated 50 bps year over year, primarily due to the impact of the temporary suspension of the health insurance industry fee in 2017. The segment’s operating cost ratio of 8.5% improved 130 bps year over year because of the same reason.

Adjusted pretax income of $613 million jumped 18% year over year, primarily due to lower benefit and operating cost ratios.

Group and Specialty Segment

Revenues from the Group and Specialty segment were $1.83 billion, down 2% from the prior-year quarter, primarily due a decline in average group fully-insured and ASO commercial medical membership.

Benefit ratio deteriorated 100 bps year over year to 78.4%, due to the impact of the temporary suspension of the health insurance industry fee in 2017. Operating cost ratio improved 110 bps year over year to 21.6%, due to the same reason.

Adjusted pretax income of $102 million decreased 19% year over year due to the timing of revenues under the company’s TRICARE contract primarily relating to medical cost trend incentives and amounts for additional services requested under the contract.

Healthcare Services

Revenues of $5.98 decreased 5% 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.

Operating cost ratio remained flat year over year at 95%.

Adjusted pretax income for the segment was $281 million, down 3% year over year due to ongoing pressures in the company’s provider services business. This reflects lower Medicare rates year over year in specific geographies, as well as the impact of the optimization process associated with the company’s chronic care management programs.

Individual Commercial Segment

Individual Commercial membership was 0.2 million as of Jun 30, 2017, down 77% year over year, primarily due to a decline in number of countries where the company offers on-exchange coverage as well as the discontinuance of off-exchange products.

Benefit ratio of 34.8% rose 106 bps from second-quarter 2016. The year-over-year improvement primarily resulted from the effect of the $208 million increase in the PDR in the prior-year quarter, planned exits in 2017 in certain markets that carried a higher benefit ratio, and per-member premium increase.

The segment’s operating cost ratio deteriorated 140 bps from the year-ago quarter to 16.2%, primarily due the loss of scale efficiency from market exits in 2017

The company witnessed a pretax income of $118 million, which compared favorably with a pretax loss of $225 million in the prior year quarter. This was owing to the exit from certain markets in 2017 and per-member premium increases.

Humana Inc. Price, Consensus and EPS Surprise

Financial Update

As of Jun 30, 2017, the company had cash, cash equivalents, and investment securities of $18.92 billion, down 1% sequentially.

As of Jun 30, 2017, cash and short-term investments held by the parent company was $2.82 billion, up 65% from Mar 31, 2017.

Debt-to-total capitalization as of Jun 30, 2017 was 31.3%, down 260 bps from Mar 31, 2017.

Cash flows used in operations totaled $83 million compared with $296 million in the prior-year quarter. The improvement was primarily driven by higher earnings year over year and the timing of working capital changes, partially offset by the portion of taxes paid in the quarter related to the merger termination fee.

Share Repurchase and Dividend Update

In Feb 2017, Humana’s board of directors approved a $2.25 billion share repurchase authorization, which will expire on Dec 31, 2017.

The company subsequently entered into an agreement with a third-party financial institution to bring into effect a $1.50 billion ASR program under the authorization.

Given the outstanding ASR, the company did not execute any share repurchases in the second quarter.

The company paid cash dividends to its stockholders of $57 million in the second quarter.

Guidance Raised

Humana increased its 2017 adjusted EPS guidance to $11.50 from the previous guidance of at least $11.10. The increase was primarily driven by the strong results in the Retail segment, largely attributable to the company’s individual Medicare Advantage business.

Zacks Rank and Performance of Other Insurers

Humana presently carries a Zacks Rank #4 (Sell). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among the other firms in the medical sector that have reported second-quarter earnings so far, the bottom lines of Centene Corp. CNC, Anthem Inc ANTM and UnitedHealth Group Inc. UNH beat their respective Zacks Consensus Estimate.

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