Humana Inc.’s (HUM) fourth-quarter 2013 operating loss came in at 19 cents per share. The results substantially lagged the Zacks Consensus Estimate of 93 cents and also compared unfavorably with the year-ago earnings of $1.19 per share.
The year-over-year decline can be attributed to poor performance by the Retail Segment, Employer Group and other businesses, partially offset by growth in the Healthcare Service segment.
Revenues at Humana for the reported quarter climbed 6.6% year over year to $10.2 billion and were in line with the Zacks Consensus Estimate. Revenues from premium increased 6.5% year over year to $9.6 billion, while services revenues surged 11.2% to $528 million. Higher premiums and service revenues reflect revenue growth in the Retail and Employer Group segments. However, Humana’s investment income declined 4.9% to $97 million in the fourth quarter of 2013.
Quarterly Review
Humana’s consolidated benefit ratio, which reflects the percentage of benefit expenses in premium revenues, increased 210 basis points (bps) year over year to 85.8%, reflecting an increase in pre-tax benefit expenses for the reserves strengthening in the closed block of long-term care insurance policies of the company.
Humana’s consolidated operating cost ratio, which reflects the percentage of operating costs in total revenue less investment income, inched up 140 bps year over year to 18.9%. The increase primarily resulted from a hike in the Retail and Employer Group ratios, which was however partly mitigated by enhanced operating leverage in the Healthcare Services segment.
Quarterly Results by Segment
Retail Segment: The segment’s pre-tax income declined 28.6% year over year to $177 million due to an increase in operating cost ratio.
Reported premiums and services revenues increased 10% to $6.83 billion in the reported quarter. The upside primarily reflects a 7% year-over-year increase in individual Medicare Advantage membership, partially offset by the effect of sequestration.
The benefit ratio was 82.7%, showing slight improvement from 82.8% in the prior-year quarter. Operating cost ratio deteriorated 140 bps to 14.5% in the reported quarter.
Employer Group: The segment incurred pre-tax loss of $79 million comparing unfavorably with a pre-tax loss of $16 million in the year-ago period. This wider loss was attributable to an increase in both the benefit and operating cost ratios in the segment.
The benefit ratio was 87.5%, up 120 bps year over year, whereas the operating cost ratio increased 70 bps to 18.1%.
Meanwhile, reported premiums and services revenues increased 8% to $2.85 billion, primarily on the back of an increase in average group Medicare Advantage membership.
Healthcare Services: Pre-tax income for the segment increased to $137 million from $66 million in the fourth quarter of 2012. The upside was attributable to higher revenues and profits from the acquisition of Metropolitan Health Networks Inc. and the home care services business of Humana. However, these were partly offset by investment spending related to the integration and expansion of provider services.
Revenues at this segment also rose 27% year over year to $4.18 billion, primarily due to improvement in the pharmacy solutions and provider services businesses, along with the Metropolitan acquisition. Operating cost ratio was 95.8% in the reported quarter, down 140 bps year over year, due to the non-recurrence of the acquisition expenses associated with Metropolitan in 2013.
Other Business: The other business segment reported a pre-tax loss of $244 million, wider than a loss of $23 million in the year-ago quarter, due to the reserves strengthening for Humana’s closed block of long-term care insurance policies.
Full Year Highlights
Humana’s full-year 2013 operating earnings came in at $7.73 per share, lagging the Zacks Consensus Estimate of $8.75 per share. However, the results grew 3.5% from the year-ago earnings of $7.47 per share. Full-year 2013 EPS also failed to meet the company guidance of $8.65–$8.75 per share.
Full-year 2013 revenues came in at $41.3 billion, up 6% year over year. Higher average individual and group Medicare membership mainly led to the upside.
Financial Update
Humana’s cash from operations was $1.7 billion in 2013 compared with $1.9 billion in 2012.
As of Dec 31, 2013, cash, cash equivalents, and investment securities of Humana were $10.9 billion, lower than $11.2 billion as of Dec 31, 2012. The decline was attributable to a decrease in net unrealized gains from higher market interest rates in 2013. However, this was partly offset by higher balances related to enhanced revenues in 2013.
The debt-to-capital ratio of Humana as of Dec 31, 2013 was 21.8%, representing a 100 basis points improvement from 22.8% as of Dec 31, 2012.
Share Repurchase Update
During the fourth quarter of 2013, Humana spent $201 million to buy back 1.99 million shares under its $1 billion share repurchase authorization. Currently, the company is left with shares worth $580 million under its authorization.
2014 Outlook
Humana reiterated its EPS guidance for 2014 in the range of $7.25 to $7.75 in expectation of a consistent strong performance by the existing operations of the company. This guidance also includes investment spending and start-up expenses of Humana’s state-based contracts and healthcare exchange operations of 50 – 90 cents. The guidance lies below the Zacks Consensus Estimate of $7.86 for full-year 2014.
Additionally, Humana upped the Medicare Advantage membership guidance to the 370,000–410,000 range from 260,000–305,000. Medicare stand-alone PDP membership is now expected to grow in the range of 450,000–500,000.
Zacks Rank
Humana currently carries a Zacks Rank #4 (Sell).
Result at Another HMO
WellPoint Inc. (WLP) reported fourth-quarter 2013 adjusted income of 87 cents per share, beating the Zacks Consensus Estimate by a penny.
Other Stocks to Consider
Investors interested in the healthcare services industry may also consider stocks like VCA Antech Inc. (WOOF) and LCA-Vision Inc. (LCAV). Both the stocks carry a Zacks Rank #2 (Buy).
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