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Humana's (HUM) Q4 Earnings Surpass Estimates, Improve Y/Y

Zacks Equity Research

Humana Inc.’s HUM fourth-quarter 2018 operating earnings per share of $2.65 beat the Zacks Consensus Estimate by 4.7%. The bottom line also improved 28.6% year over year. This upside can primarily be attributed to Medicare Advantage membership growth and significant operating efficiency.

Operational Update

Revenues of $14.2 billion were up nearly 9% in the fourth quarter. Moreover, the top line surpassed the Zacks Consensus Estimate of $13.9 billion by 2.2% year over year.

Adjusted consolidated pre-tax income of $480 million declined 16.7%, primarily due to rise in outpatient spending in the Retail segment. However, this downside was partially offset by the persistence of lower inpatient medical utilization.

Benefit ratio expanded 40 basis points to 83.4%.

Operating cost ratio deteriorated 110 basis points to 15%.

Humana Inc. Price, Consensus and EPS Surprise

Humana Inc. Price, Consensus and EPS Surprise | Humana Inc. Quote

Segmental Results


Revenues from the Retail segment were $12.04 billion, up 10% year over year. This can primarily be attributed to higher revenues from the company’s individual and group Medicare Advantage membership strength and improved per-member premiums for a few segments' products.

Benefit ratio of 84% expanded 20 bps year over year, primarily owing to reinstatement of the non-deductible health insurance industry fee.

The segment's operating cost ratio of 12.9% deteriorated 110 bps year over year. This was mainly due to the reinstatement of the non-deductible health insurance industry fee in the year, rise in incentive compensation costs and strategic investments in the fourth quarter of 2018 as a result of the Tax Reform Law.

Group and Specialty

Revenues from the Group and Specialty segment were $1.91 billion, up 1% from the prior-year quarter, primarily backed by higher stop-loss premiums related to the company's level-funded ASO accounts and rise in per member premiums across the commercial fully-insured business.  

Benefit ratio expanded 150 bps year over year to 84.6%, driven by retroactive contractual rate adjustments, membership mix, impact of the exit of the Workplace Voluntary Benefit (WVB) and Financial Protection Products (FPP) of business in the second quarter.

Operating cost ratio deteriorated 200 bps year over year to 23.9%.

Healthcare Services

Revenues of $6.19 billion increased 3% year over year, primarily owing to Medicare Advantage membership growth, rise in intersegment revenues associated with certain buyouts and favorable external services revenues.

Operating cost ratio deteriorated 80 bps year over year to 96.8%.

Individual Commercial

Humana exited this business effective Jan 1, 2018 and consequently, the result reflects its run-out. The segment incurred $2 million loss in the reported quarter compared with segment losses of $14 million in the year-ago quarter.

Financial Update

As of Dec 31, 2018, the company had cash, cash equivalents and investment securities of $12.4 billion, down 9% from 2017-end level.

Debt-to-total capitalization as of Dec 31, 2018 was 37.4%, up 410 bps from Dec 31, 2017.

Operating cash outflow totaled $333 million in the fourth quarter against cash inflow of $218 million in the year-earlier quarter.

Capital Deployment

The company paid cash dividends worth $69 million in the fourth quarter of 2018.

Last November, it entered into an agreement to affect a $750-million ASR program under its current share repurchase authorization. During the fourth quarter, the company bought back shares worth $600 million.

2019 Guidance

For 2019, Humana expects adjusted EPS in the range of $17-$17.50.

Zacks Rank

Humana carries a Zacks Rank #2 (Buy). You can seethe complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Upcoming Releases From Medical Sector

Some other stocks worth considering from the medical sector are as follows:

Molina Healthcare, Inc MOH is set to report fourth-quarter 2018 earnings performance on Feb 11. The stock has an Earnings ESP of +2.89% and a Zacks Rank #1.

Endologix, Inc. ELGX is slated to announce fourth-quarter earnings numbers on Feb 25. It has a Zacks Rank #3 (Hold) and an Earnings ESP of +21.43%.

Tenet Healthcare Corporation THC has an Earnings ESP of +5.63%. This company has a Zacks Rank of 3 and is scheduled to release fourth-quarter financial figures on Feb 25.

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