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Humana (HUM) Beats Q3 Earnings Estimates, Revenues Miss

Humana Inc.’s HUM third-quarter 2017 operating earnings per share of $3.39 beat the Zacks Consensus Estimate by approximately 3.7%. The bottom line improved 6.6% year over year driven by lower share count.

However, adjusted consolidated pretax income of $915 million declined 2% due to charges associated with voluntary and involuntary workforce reduction program and lower pretax earnings in the company’s Healthcare services segment. However, this was partially offset by improvement in the company’s Group & Specialty and Retail segments.

Operational Update

Adjusted consolidated revenues of $13.1 billion grew 2% on higher Retail segment revenues from the company’s Medicare business. Revenues, however, missed the Zacks Consensus Estimate by 2%.

Humana’s adjusted consolidated benefit ratio of 82.4% 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 11.8% improved 70 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 $11.05 billion, up 2% year over year, primarily owing to higher revenues from the company’s Medicare Advantage business resulting from increased membership.

Benefit ratio of 84.3% deteriorated 70 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 9.8% improved 80 bps year over year because of the same reason.

Adjusted pretax income of $616 million remained flat year over year.

Group and Specialty Segment

Revenues from the Group and Specialty segment were $1.85 billion, up 1% from the prior-year quarter, primarily due to increased group fully insured per-member premiums.

Benefit ratio improved 140 bps year over year to 79.6%, due to favorable utilization of the segment’s fully insured commercial medical business and higher prior period development compared to the year-ago quarter. Operating cost ratio improved 220 bps year over year to 21.6%, due to the temporary suspension of the health insurance industry fee in 2017 as well as operating cost efficiencies.

Adjusted pretax income of $93 million, increased 158% year over year driven by the company’s higher pretax earnings related to fully insured commercial medical products.

Healthcare Services

Revenues of $6 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.

Operating cost ratio deteriorated 70 bps year over year to 95.6%.

Adjusted pretax income for the segment was $251 million, down 19% year over year due to optimization process associated with the company’s chronic care management program and higher operating cost ratio.

Individual Commercial Segment

Individual Commercial membership was 142,800 as of Sep 30, 2017, down 80% 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 65.6% deteriorated 1680 bps from third-quarter 2016. The year-over-year improvement primarily resulted from the planned exit from certain markets with higher benefit ratio.

The segment’s operating cost ratio deteriorated 560 bps from the year-ago quarter to 21.9%, primarily due the loss of scale efficiency from market exits in 2017.

The company witnessed a pretax income of $26 million, which compared favorably with a pretax income of only $2 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 Sep 30, 2017, the company had cash, cash equivalents, and investment securities of $21.20 billion, up 12% sequentially.

As of Sep 30, 2017, cash and short-term investments held by the parent company was $2.32 billion, up 18% from Jun 30, 2017.

Debt-to-total capitalization as of Sep 30, 2017 was 30.5%, down 80 bps from Jun 30, 2017.

Cash flows used in operations totaled $3.83 billion for the first nine months of 2017, compared with $1.68 billion in the prior-year period. The improvement was positively impacted by the receipt of merger termination fee, higher earnings and the timing of working capital items.

Share Repurchase Update

In February 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 on Feb 16, 2017 to bring into effect a $1.50 billion ASR program under the authorization. Under the terms of the agreement that was completed in the third quarter, the company bought back nearly 6.7 million shares at an average per share price of $224.81.

Moreover, the company bought back shares worth $240 million under its existing share repurchases authorization in the third quarter of 2017.

Over the first nine months of 2017, the company repurchased shares worth $1.74 billion.

As of Nov 3, 2017, Humana has $239 million of share repurchase authorization remaining.

Dividend Update

The company paid cash dividends to its stockholders of $58 million in the third quarter. During the first nine months of 2017, total amount of dividends paid to the shareholders was $162 million.

In Nov 17, the company declared a cash dividend of 40 cents per share, to be paid on Jan 26, 2018 to the shareholders of record on Dec 29, 2017.

Guidance Raised

Humana increased its 2017 adjusted EPS guidance to $11.60 from the previous guidance of at least $11.50.

Total revenues are expected to lie between $53.60 billion and $54.00 billion, as against the previous guidance of $53.5 billion and $54.5 billion

Cash flow from operations is expected to range within $3.3 billion to $3.6 billion as against the previously projected range of $3-$3.4 billion.

Zacks Rank and Performance of Other Insurers

Humana presently carries a Zacks Rank #3 (Hold). 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 third-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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