Humana Inc.’s (HUM) second-quarter operating earnings came in at $671.4 million or $2.50 per share, surpassing the Zacks Consensus Estimate of $2.07 per share. The figure also compares favorably with earnings of $566.4 million or $2.11 in the year-ago quarter.
The operating earnings exclude the positive impact of 21 cents per share in the second quarter of 2011 and 44 cents per share in the prior-year quarter as a result of favorable development of prior-period medical claims reserves. The prior-period earnings also exclude the negative impact of 55 cents per share related to the write-down of certain deferred acquisition costs.
The better-than-expected showing was attributable to higher year-over-year earnings in the Humana’s Retail and Health and Well-Being Services business segments, which was partially offset by lower earnings in the company’s Employer Group business segment.
On a reported basis, Humana earned $726.5 million or $2.71 per share pre-tax in the reported quarter as opposed to $535.9 million or $2.00 per share in the prior-year quarter.
Consolidated revenues for the reported quarter climbed 8.0% year over year to $9.28 billion but failed to beat the Zacks Consensus Estimate of $9.32 billion. Revenues from premium and administrative services fees also increased 8.0% year-over-year.
Meanwhile, total medical membership increased 6.6% year over year to 11,002,800 at the end of June 30, 2011, while the total specialty membership at the end of the reported quarter hiked by 1.4% to 7,350,100.
Humana reported benefit expenses of $7.27 billion, an increase of 5.8% year over year, while the operating costs also climbed by 9.0% year over year to $1.19 billion. Depreciation and amortization expenses surged 5.3% year over year to $67.8 million.
Consolidated benefit ratio, which reflects the percentage of benefit expenses in premium revenues, fell by 60 basis points to 82.8% from 83.4% in the prior-year quarter. The consolidated operating cost ratio, which reflects the percentage of operating costs in total revenues less investment income, climbed to 13.0% from 11.1% in the prior-year 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 surged to $465.1 million from $433.8 million in the prior-year quarter, on the back of increased average membership.
Reported premiums and services revenue increased 12% to $5.40 billion in the reported quarter. The increase was primarily the result of higher average Individual Medicare Advantage membership year over year of 1,602,500.
The benefit ratio was 82.1% as compared to 82.3% in the prior-year quarter. The operating cost ratio increased 60 basis points to 9.1% 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 $91.4 million from $30.4 million in the prior-quarter, while reported premiums and services revenue decreased 4% to $2.30 billion, primarily on the back of lower average commercial group medical membership year over year.
The benefit ratio was 82.0%, decreasing from 84.5% in the prior-year quarter, whereas the reported operating cost ratio was 16.8%, up from 17.2% in the year-ago 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 reported pretax income increased to $87.8 million from $50.9 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.
Reported revenue also increased to $2.73 billion from $2.23 billion in the year-ago quarter. This increase was primarily due to growth in the company’s pharmacy solutions business together with the acquisition of the Concentra business.
However, reported operating cost ratio declined 130 basis points to 96.1% in the reported quarter.
Financial Update
Cash flows provided by operations were $161.2 million in the reported quarter, as against $325.3 million in the year-ago period, due to higher net income being offset by increase in working capital.
Humana exited the quarter with cash and cash equivalents of $10.77 billion and long-term debt of $1.66 billion at the end of June 30, 2011.
During 2Q11, Humana repurchased 2,549,200 of its outstanding shares at an average price per share of $78.51.
In April 2011, Humana’s Board 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, amounting to $41.5 million, was paid on July 28, 2011.
As of June 30, 2011, Humana’s total assets were $17.59 billion and total shareholders’ equity was $7.59 billion.
Outlook for 2011
Humana hiked its earnings forecast to a range of $7.50 to $7.60 per share from $6.70 to $6.90 per share, while revenue outlook was increased to $36.5 billion to $37.0 billion.
The increase reflects lower projected benefit expense ratios in the company’s Retail and Employer Group Segments and higher projected earnings for the Medicare business, along with higher projections for marketing reinvestments and expenses.
Peer Take
Unitedhealth Group Inc.(UNH), a rival of Humana generated second quarter operating earnings of $1.16 per share, beating the Zacks Consensus Estimate of 93 cents. Another peer, CIGNA Corporation (CI ), is expected to declare its second quarter 2011 results before the market opens on August 4, 2011.
Humana carries a Zacks #2 Rank, implying a short-term Buy rating.
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