Humana Inc. (HUM) reported its first-quarter operating earnings of $1.55 per share, surpassing the Zacks Consensus Estimate of $1.45 per share. This also compares favorably with earnings of $1.15 in the year-ago quarter.
The operating earnings exclude the positive impact of 31 cents per share in the first quarter of 2011 and 37 cents per share in the prior year quarter, as a result of favorable development of prior-period medical claims reserves.
The better-than-expected showing was attributable to higher year-over-year earnings in the Humana’s Employer Group and Health and Well-Being Services business segments, partially offset by lower earnings in the company’s Retail business segment.
On a reported basis, Humana earned $1.86 per share in the first quarter of 2011 as opposed to $1.52 per share in the prior-year quarter.
Behind the Headlines
Consolidated revenues for the reported quarter climbed 10.0% year-over-year to $9.19 billion, beating the Zacks Consensus Estimate of $9.05 billion.
Revenues from premium and administrative services fees also increased 10.0% year-over-year on the back of an 11% growth in average membership in the company’s Medicare Advantage plans coupled with the acquisition of Concentra in December 2010. This was partially offset by lower average commercial group medical membership in the quarter.
Total medical membership increased 4.3% year-over-year to 10,921,900 at the end of March 31, 2011, while the total specialty membership at the end of March 31 hiked by 0.6% to 7,227,300.
Humana reported benefit expenses of $7.34 billion, an increase of 7.7% y/y, while the operating costs also climbed by 18.4% y/y to $1.26 billion. Depreciation and amortization expenses surged 12.3% y/y to $66.1 million in the reported quarter.
Consolidated benefit ratio, which reflects the percentage of benefit expenses in premium revenues, jumped 300 basis points to 83.8% from the prior-year quarter of 83.5%. The consolidated operating cost ratio, which reflects the percentage of operating costs in total revenues less investment income, climbed to 13.8% in the first quarter from 12.8% in the prior-year quarter.
Consolidated pretax income surged 19.2% year over year to $496.8 million in the quarter.
Segment Results
On April 26, Humana realigned its business units using the main segments of retail, employer group, health and well-being services, and other businesses to better reflect its business model.
Retail Segment: The retail segment includes Medicare Advantage and prescription drug plans, and individual health insurance business lines.
The segment’s pretax income declined to $217.0 million in the reported quarter as against $264.8 million in the prior-year quarter, on the back of lower favorable prior-period medical claims reserve development in the quarter than in the prior year’s quarter and the impact of health insurance reform on the HumanaOne business.
Premiums and services revenue increased 12% to $5.31 billion in the reported quarter. The increase was primarily the result of higher average Medicare Advantage membership year over year of 1,594,800.
The benefit ratio was 85.8% in the reported quarter, as compared to 83.9% in the prior-year quarter. The operating cost ratio decreased 40 basis points to 10.0% in the reported quarter.
Employer Group: The employer group includes employer group coverage and group Medicare Advantage and prescription drug plans.
The segment’s pretax income increased to $138.8 million in the reported quarter from $73.5 million of the prior-quarter, primarily due to higher favorable prior-period development of medical claims reserves in the reported quarter.
Premiums and services revenue decreased 4% to $2.32 billion in the reported quarter, primarily on the back of lower average commercial group medical membership year over year.
The benefit ratio was 78.7% in the reported quarter, a decrease of 350 basis points from the prior-year quarter. The operating cost ratio was 18.3% in the reported quarter, up from 17.8% in the prior-year 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 pretax income increased to $96.4 million in the reported quarter from $48.2 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.
Services revenue increased from $2.20 billion to $2.77 billion in the reported quarter. This increase was primarily due to growth in the company’s pharmacy solutions business together with the acquisition of the Concentra business.
The operating cost ratio declined 180 basis points to 95.8% in the reported quarter.
Humana’s military and Medicaid business units will now report under Other Business, along with a closed block of long-term-care insurance business and a limited-income newly eligible transition (LI-NET) pharmacy program that Humana administers for Medicare.
Evaluation of Capital and Balance Sheet
Cash flows provided by operations were $795.5 million in the first quarter, as against $754.7 million in the year-ago period, due to higher net income year over year.
Humana exited the quarter with cash and cash equivalents of $10.75 billion and long-term debt of $1.67 billion at the end of March 31, 2011.
In December 2009, Humana’s Board renewed its share authorization for the use of up to $250 million for the repurchase of Humana common shares. During 1Q11, Humana repurchased 825,000 of its outstanding shares at an average price per share of $63.73.
On April 2011, Humana’s Board also replaced its previous share repurchase authorization with a new authorization for share repurchases of up to $1 billion by June 30, 2013.
On the same day, Humana’s Board also initiated a quarterly cash dividend to stockholders, declaring a cash dividend of 25 cents per share for stockholders of record as of June 30, 2011. The dividend will be paid on July 28, 2011. Humana is expected to spend about $42.5 million per quarter on its new dividend.
As of March 31, 2011, Humana’s total assets were $17.2 billion and total shareholders’ equity was $7.23 billion.
Outlook for Fiscal 2011
Humana has reiterated its guidance provided on April 26, 2011, and has hiked its fiscal 2011 earnings forecast to a range of $6.70 to $6.90 per share from $5.95 to $6.15 per share. The new forecast represents a growth of about 4%-7% from 2010 earnings of $6.47 per share, against its previous expectation of a decline in 2011.
The increase also reflects favorable prior-period claims development in the first quarter of 2011, lower projected benefit expense ratios in the company’s Retail and Employer Group Segments and higher projected earnings for the company’s Health and Well-Being Services Segment.
According to Humana, the primary reason for raising the share repurchase authorization, cash dividend and the EPS outlook is the new rule of the health care reform that essentially requires Humana to pay out a minimum percentage of premiums on medical claims or issue rebates to consumers.
With the dividend announcement, Humana became the fourth largest health insurer to announce a larger dividend payment in the past year. WellPoint Inc. (WLP) also paid a quarterly cash dividend of 25 cents per share in the first quarter of 2011, reported on April 27.
The quantitative Zacks #3 Rank (short term Hold rating) on the stock indicates no directional pressure on the shares over the near term.
HUMANA INC NEW (HUM): Free Stock Analysis Report
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