Market Overview

Humana Reports Second Quarter 2018 Financial Results; Raises Full Year 2018 Adjusted EPS Guidance

Share:
  • 2Q18 earnings per diluted common share (EPS) of $1.39 on a GAAP
    basis, $3.96 on an Adjusted basis
  • New full year 2018 GAAP EPS guidance of approximately $11.52;
    Adjusted EPS guidance raised $0.25 from the previous guidance midpoint
    to approximately $14.15
  • Continued favorable inpatient utilization in Medicare Advantage
    resulting in improved full year 2018 Retail segment benefit ratio
    guidance
  • Further advanced the company's integrated care delivery strategy
    with the closing of the Kindred at Home and Curo Health Services
    transactions
  • Substantial progress with governmental approvals related to the
    sale of the company's closed block of non-strategic commercial
    long-term care insurance policies resulting in a charge of $2.59 EPS

Humana Inc. (NYSE:HUM) today reported consolidated pretax income and
diluted earnings per common share (EPS) for the quarter ended June 30,
2018 (2Q18) versus the quarter ended June 30, 2017 (2Q17) and for the
six months ended June 30, 2018 (1H 2018) versus the six months ended
June 30, 2017 (1H 2017) as follows:

 

Consolidated pretax income

       

In millions

  2Q18 (a)   2Q17 (b)   1H 2018 (c)   1H 2017 (d)
Generally Accepted Accounting Principles (GAAP)   $19   $1,042   $726   $2,731
Loss on sale of KMG America Corporation (KMG), a wholly-owned
subsidiary
  790   -   790   -
Amortization associated with identifiable intangibles   21   18   51   36
Operating income associated with the Individual Commercial segment   (18)   (118)   (71)   (181)
Net gain associated with the terminated merger agreement (for 1H
2017, primarily the break-up fee)
  -   -   -   (947)
Guaranty fund assessment expense to support the policyholder
obligations of Penn Treaty (an unaffiliated long-term care insurance
company)
  -   -   -   54
Adjusted (non-GAAP)   $812   $942   $1,496   $1,693
 
 
Diluted earnings per common share (EPS)   2Q18 (a)   2Q17 (b)   1H 2018 (c)   1H 2017 (d)
GAAP   $1.39   $4.46   $4.93   $11.98
Loss on sale of KMG, a wholly-owned subsidiary   2.59   -   2.59   -
Amortization associated with identifiable intangibles   0.12   0.08   0.28   0.16
Operating income associated with the Individual Commercial segment   (0.10)   (0.51)   (0.39)   (0.77)
Adjustments to provisional estimates for the income tax effects
related to the tax reform law enacted on December 22, 2017 (Tax
Reform Law)
  (0.04)   -   (0.09)   -
Net gain associated with the terminated merger agreement (for 1H
2017, primarily the break-up fee)
  -   -   -   (4.31)
Beneficial effect of lower effective tax rate in light of pricing
and benefit design assumptions associated with the 2017 temporary
suspension of the non-deductible health insurance industry fee;
excludes Individual Commercial segment impact
  -   (0.54)   -   (1.06)
Guaranty fund assessment expense to support the policyholder
obligations of Penn Treaty (an unaffiliated long-term care insurance
company)
  -   -   -   0.23
Adjusted (non-GAAP)   $3.96   $3.49   $7.32   $6.23
       

The company has included financial measures throughout this
earnings release that are not in accordance with GAAP. Management
believes that these measures, when presented in conjunction with the
comparable GAAP measures, are useful to both management and its
investors in analyzing the company's ongoing business and operating
performance. Consequently, management uses these non-GAAP financial
measures as indicators of the company's business performance, as well as
for operational planning and decision making purposes. Non-GAAP
financial measures should be considered in addition to, but not as a
substitute for, or superior to, financial measures prepared in
accordance with GAAP. All financial measures in this press release are
in accordance with GAAP unless otherwise indicated.

GAAP and Adjusted pretax income and EPS results reflect the solid
execution of the company's strategy, including, among other items,
strong Medicare Advantage membership growth, lower inpatient medical
utilization in the Retail segment driving a better than expected benefit
ratio, and significant operating cost efficiencies in the first half of
2018 driven by productivity initiatives implemented in 2017. The company
also benefited from a lower tax rate year-over-year as a result of the
Tax Reform Law, allowing it to invest pretax dollars in its employees,
the communities of its members, technology and its integrated care
delivery model to drive more affordable healthcare and better clinical
outcomes. In addition, year-over-year comparisons are impacted by the
return of the health insurer fee in 2018; enhanced 2018 Medicare
Advantage member benefits resulting from the investment of the better
than expected 2017 individual Medicare Advantage pretax earnings; lower
Prior Period Development, as expected; and a more severe flu season than
last year which affects the first half comparisons. EPS results were
further impacted by a lower number of shares in 2018, primarily
reflecting share repurchases in 2017. Please refer to the consolidated
and segment highlights sections that follow for additional discussion of
the factors impacting year-over-year results.

"Our strong 2018 financial results are testimony to the underlying
improvement in our operating metrics, like Net Promoter Score, digital
self-service utilization and call transfer reduction, and to the growing
effectiveness of our national and local clinical programs," said Bruce
D. Broussard, Humana's President and Chief Executive Officer. "Also, we
took another large step this quarter in helping our members, especially
those living with chronic conditions, by beginning the integration of
important clinical services through our investments in Kindred at Home
and Curo, and through our partnership with Walgreens. Over time, these
moves, along with the continuous improvement of our operating system,
will go a long way in simplifying the healthcare experience of our
members and provider partners, while also improving the health status of
our members."

Long-Term Care Divestiture Update

The company has made substantial progress towards receiving the
approvals necessary to complete the sale of its wholly-owned subsidiary,
KMG America Corporation (KMG), which includes the company's closed block
of non-strategic commercial long-term care insurance policies, to
Continental General Insurance Company (CGIC) (LTC Transaction).
Accordingly, during 2Q18, the company recognized a pretax loss on the
expected sale of $790 million, including transaction costs, and recorded
an associated deferred tax benefit of $430 million for a net EPS impact
of $2.59 per diluted common share. The company also classified KMG as
held-for-sale and aggregated its assets and liabilities separately on
the balance sheet at June 30, 2018.

In addition, in connection with the expected KMG divestiture, during
2Q18 the company entered into a series of reinsurance agreements
(Reinsurance Transaction) to fully cede its workplace voluntary benefit
(WVB) and Financial Protection Products (FPP) to ManhattanLife Assurance
Company of America (ManhattanLife). These products were previously
reported as supplemental benefit offerings in the company's Group and
Specialty segment and are expected to result in a reduction in the
company's Specialty membership of approximately 450,000 members,
approximately 430,000 of which were ceded during 2Q18. In addition, in
connection with the Reinsurance Transaction, the company expects to
transfer a total of approximately $245 million of subsidiary cash along
with the related reserves to ManhattanLife, $230 million of which was
transferred during 2Q18. This transfer of cash had no impact on cash and
short-term investments held at the parent company, but is classified as
an operating cash outflow that was not previously contemplated in the
company's operating cash flow guidance.

The sale of KMG is expected to close during the third quarter of 2018.
Upon closing of both Transactions, the company will have no remaining
exposure to the commercial long-term care insurance or the non-core WVB
and FPP businesses.

2018 Earnings Guidance

Humana today raised its Adjusted EPS guidance for the year ending
December 31, 2018 (FY18). The company now expects GAAP EPS of
approximately $11.52 from the previous range of $13.54 to $13.94, while
FY18 Adjusted EPS guidance was increased to approximately $14.15 from
its previous range of $13.70 to $14.10.

"We are very pleased with the continued strong operational execution of
our strategy which positions the company well for the back half of the
year," said Brian A. Kane, Chief Financial Officer. "This execution,
coupled with the strategic moves we have made, will sustain this
performance for 2019 and beyond."

A reconciliation of GAAP to Adjusted EPS for the company's FY18
projections as well as comparable numbers for the year ended December
31, 2017 (FY17) is shown below for comparison.

 
Diluted earnings per common share   FY18 Guidance (e)  

FY17 (f)

GAAP   ~ $11.52   $16.81
Loss on Sale of KMG, a wholly-owned subsidiary   2.60   -
Amortization of identifiable intangibles   0.51   0.32
Operating income associated with the Individual Commercial segment   (0.39)   (0.84)
Impact of Tax Reform Law, primarily re-measurement of deferred tax
assets at lower corporate tax rates
  (0.09)   0.92
Net (gain) expenses associated with the terminated merger agreement
(for FY17, primarily the break-up fee)
  -   (4.31)
Beneficial effect of lower effective tax rate in light of pricing
and benefit design assumptions associated with the 2017 temporary
suspension of the non-deductible health insurance industry fee;
excludes Individual Commercial segment impact
  -   (2.15)
Guaranty fund assessment expense to support the policyholder
obligations of Penn Treaty (an unaffiliated long-term care insurance
company)
  -   0.24
Charges associated with voluntary and involuntary workforce
reduction programs
  -   0.64
Costs associated with early retirement of debt in the fourth quarter
of 2017
  -   0.08
Adjusted (non-GAAP) – FY18 projected   ~ $14.15   $11.71
   

Detailed Press Release

Humana's full earnings press release including the statistical pages has
been posted to the company's Investor Relations site and may be accessed
at https://humana.gcs-web.com/
or via a current report on Form 8-K filed by the company with the
Securities and Exchange Commission this morning (available at www.sec.gov
or on the company's website).

Conference Call

Humana will host a conference call at 9:00 a.m. eastern time today to
discuss its financial results for the quarter and the company's
expectations for future earnings.

All parties interested in the audio only portion of the company's 2Q18
earnings conference call are invited to dial 888-625-7430. No password
is required. The audio-only webcast of the 2Q18 earnings call may be
accessed via Humana's Investor Relations page at humana.com.
The company suggests participants for both the conference call and those
listening via the web dial in or sign on at least 15 minutes in advance
of the call.

For those unable to participate in the live event, the archive will be
available in the Historical Webcasts and Presentations section of the
Investor Relations page at humana.com,
approximately two hours following the live webcast. Telephone replays
will also be available approximately two hours following the live event
until midnight eastern time on October 1, 2018 and can be accessed by
dialing 855-859-2056 and providing the conference ID #5593277.

Footnotes

(a) 2Q18 Adjusted results exclude the following:

  • Loss of approximately $790 million pretax, or $2.59 per diluted common
    share, associated with the company's pending sale of its wholly-owned
    subsidiary, KMG America Corporation (KMG). GAAP measures affected in
    this release include consolidated pretax and EPS.
  • Amortization expense for identifiable intangibles of approximately $21
    million pretax income, or $0.12 per diluted common share; GAAP
    measures affected in this release include consolidated pretax, EPS,
    and segment pretax results (for each segment's amount of such
    amortization).
  • Operating income of $18 million pretax, or $0.10 per diluted common
    share, for the company's Individual Commercial segment given the
    company's exit on January 1, 2018, as previously disclosed. GAAP
    measures affected in this release include consolidated pretax income,
    EPS, consolidated revenues, consolidated benefit ratio and
    consolidated operating cost ratio.
  • Adjustment of $0.04 per diluted common share related to provisional
    estimates for the income tax effects related to the Tax Reform Law.
    The only GAAP measure affected in this release is EPS.

(b) 2Q17 Adjusted results exclude
the following:

  • Amortization expense for identifiable intangibles of approximately $18
    million, or $0.08 per diluted common share; GAAP measures affected in
    this release include consolidated pretax income, EPS, and segment
    pretax results (for each segment's amount of such amortization).
  • Operating income of $118 million pretax, or $0.51 per diluted common
    share, for the company's Individual Commercial segment given the
    company's exit on January 1, 2018, as previously disclosed. GAAP
    measures affected in this release include consolidated pretax income,
    EPS, consolidated revenues, consolidated benefit ratio and
    consolidated operating cost ratio.
  • The one-year beneficial effect of a lower effective tax rate of
    approximately $0.54 per diluted common share in light of pricing and
    benefit design assumptions associated with the 2017 temporary
    suspension of the non-deductible health insurance industry fee;
    excludes Individual Commercial segment impact. The only GAAP measure
    affected in this release is EPS.

(c) 1H 2018 Adjusted results exclude the following:

  • Loss of approximately $790 million pretax, or $2.59 per diluted common
    share, associated with the company's pending sale of its wholly-owned
    subsidiary, KMG America Corporation (KMG). GAAP measures affected in
    this release include consolidated pretax and EPS.
  • Amortization expense for identifiable intangibles of approximately $51
    million pretax, or $0.28 per diluted common share; GAAP measures
    affected in this release include consolidated pretax income, EPS, and
    segment pretax results (for each segment's amount of such
    amortization).
  • Operating income of approximately $71 million pretax, or $0.39 per
    diluted common share, for the company's Individual Commercial segment
    given the company's exit on January 1, 2018, as previously disclosed.
    GAAP measures affected in this release include consolidated pretax
    income, EPS, consolidated revenues, consolidated benefit ratio and
    consolidated operating cost ratio.
  • Adjustment of $0.09 per diluted common share related to provisional
    estimates for the income tax effects related to the Tax Reform Law.
    The only GAAP measure affected in this release is EPS.

(d) 1H 2017 Adjusted results exclude the following:

  • Amortization expense for identifiable intangibles of approximately $36
    million pretax, or $0.16 per diluted common share; GAAP measures
    affected in this release include consolidated pretax income, EPS, and
    segment pretax results (for each segment's amount of such
    amortization).
  • Operating income of approximately $181 million pretax, or $0.77 per
    diluted common share, for the company's Individual Commercial segment
    given the company's exit on January 1, 2018, as previously disclosed.
    GAAP measures affected in this release include consolidated pretax
    income, EPS, consolidated revenues, consolidated benefit ratio and
    consolidated operating cost ratio.
  • Net gain from the termination of the merger agreement of approximately
    $947 million pretax, or $4.31 per diluted common share; includes the
    net break-up fee and transaction costs net of the tax benefit
    associated with certain expenses which were previously non-deductible;
    GAAP measures affected in this release include consolidated pretax
    income and EPS.
  • The one-year beneficial effect of a lower effective tax rate of
    approximately $1.06 per diluted common share in light of pricing and
    benefit design assumptions associated with the 2017 temporary
    suspension of the non-deductible health insurance industry fee;
    excludes Individual Commercial segment impact. GAAP measures affected
    in this release include consolidated EPS.
  • Guaranty fund assessment expense of approximately $54 million pretax,
    or $0.23 per diluted common share, to support the policyholder
    obligations of Penn Treaty (an unaffiliated long-term care insurance
    company); GAAP measures affected in this release include consolidated
    pretax income, EPS, and consolidated operating costs ratio. Under
    state guaranty assessment laws, the company may be assessed (up to
    prescribed limits) for certain obligations to the policyholders and
    claimants of insolvent insurance companies that write the same line or
    lines of business as the company. On March 1, 2017, a court ordered
    the liquidation of Penn Treaty which triggered assessments from the
    state guaranty associations.

(e) FY18 Adjusted EPS projections exclude the
following:

  • Loss of approximately $790 million pretax, or $2.60 per diluted common
    share associated with the company's sale of its wholly-owned
    subsidiary, KMG America Corporation (KMG).
  • Amortization expense for identifiable intangibles of approximately $92
    million pretax, or $0.51 per diluted common share.
  • Operating earnings of approximately $70 million pretax, or $0.39 per
    diluted common share, for the company's Individual Commercial segment
    given the company's exit on January 1, 2018, as previously disclosed.
  • Adjustment of $0.09 per diluted common share related to provisional
    estimates for the income tax effects related to the Tax Reform Law.

(f) FY17 Adjusted results exclude the following:

  • Amortization expense for identifiable intangibles of approximately $75
    million pretax, or $0.32 per diluted common share.
  • Operating income of approximately $193 million pretax, or $0.84 per
    diluted common share, for the company's Individual Commercial segment
    given the company's exit on January 1, 2018, as previously disclosed.
  • Net gain from the termination of the merger agreement of approximately
    $936 million pretax, or $4.31 per diluted common share; includes the
    net break-up fee and transaction costs net of the tax benefit
    associated with certain expenses which were previously non-deductible.
  • The one-year beneficial effect of a lower effective tax rate of
    approximately $2.15 per diluted common share in light of pricing and
    benefit design assumptions associated with the 2017 temporary
    suspension of the non-deductible health insurance industry fee;
    excludes Individual Commercial segment impact.
  • Guaranty fund assessment expense of approximately $54 million pretax,
    or $0.24 per diluted common share, to support the policyholder
    obligations of Penn Treaty (an unaffiliated long-term care insurance
    company). Under state guaranty assessment laws, the company may be
    assessed (up to prescribed limits) for certain obligations to the
    policyholders and claimants of insolvent insurance companies that
    write the same line or lines of business as the company. On March 1,
    2017, a court ordered the liquidation of Penn Treaty which triggered
    assessments from the state guaranty associations.
  • Expense of approximately $148 million pretax, or $0.64 per diluted
    common share, associated with voluntary and involuntary workforce
    reduction programs.
  • Expense of approximately $17 million pretax, or $0.08 per diluted
    common share, associated with early retirement of debt in the fourth
    quarter of 2017.
  • The impact of approximately $0.92 per diluted common share associated
    with the re-measurement of deferred tax assets at lower corporate tax
    rates under the Tax Reform Law.

Cautionary Statement

This news release includes forward-looking statements regarding Humana
within the meaning of the Private Securities Litigation Reform Act of
1995. When used in investor presentations, press releases, Securities
and Exchange Commission (SEC) filings, and in oral statements made by or
with the approval of one of Humana's executive officers, the words or
phrases like "expects," "believes," "anticipates," "intends," "likely
will result," "estimates," "projects" or variations of such words and
similar expressions are intended to identify such forward-looking
statements.

These forward-looking statements are not guarantees of future
performance and are subject to risks, uncertainties, and assumptions,
including, among other things, information set forth in the "Risk
Factors" section of the company's SEC filings, a summary of which
includes but is not limited to the following:

  • If Humana does not design and price its products properly and
    competitively, if the premiums Humana receives are insufficient to
    cover the cost of healthcare services delivered to its members, if the
    company is unable to implement clinical initiatives to provide a
    better healthcare experience for its members, lower costs and
    appropriately document the risk profile of its members, or if its
    estimates of benefits expense are inadequate, Humana's profitability
    could be materially adversely affected. Humana estimates the costs of
    its benefit expense payments, and designs and prices its products
    accordingly, using actuarial methods and assumptions based upon, among
    other relevant factors, claim payment patterns, medical cost
    inflation, and historical developments such as claim inventory levels
    and claim receipt patterns. The company continually reviews estimates
    of future payments relating to benefit expenses for services incurred
    in the current and prior periods and makes necessary adjustments to
    its reserves, including premium deficiency reserves, where
    appropriate. These estimates, however, involve extensive judgment, and
    have considerable inherent variability because they are extremely
    sensitive to changes in claim payment patterns and medical cost
    trends, so any reserves the company may establish, including premium
    deficiency reserves, may be insufficient.
  • If Humana fails to effectively implement its operational and strategic
    initiatives, particularly its Medicare initiatives and state-based
    contract strategy, the company's business may be materially adversely
    affected, which is of particular importance given the concentration of
    the company's revenues in these products. In addition, there can be no
    assurances that the company will be successful in maintaining or
    improving its Star ratings in future years.
  • The divestiture of Humana's subsidiary, KMG America Corporation, is
    subject to various closing conditions, including various regulatory
    approvals and customary closing conditions, as well as other
    uncertainties, and there can be no assurances as to whether and when
    it may be completed.
  • If Humana fails to properly maintain the integrity of its data, to
    strategically implement new information systems, to protect Humana's
    proprietary rights to its systems, or to defend against cyber-security
    attacks, the company's business may be materially adversely affected.
  • Humana is involved in various legal actions, or disputes that could
    lead to legal actions (such as, among other things, provider contract
    disputes relating to rate adjustments resulting from the Balanced
    Budget and Emergency Deficit Control Act of 1985, as amended, commonly
    referred to as "sequestration"; other provider contract disputes; and
    qui tam litigation brought by individuals on behalf of the
    government), governmental and internal investigations, and routine
    internal review of business processes any of which, if resolved
    unfavorably to the company, could result in substantial monetary
    damages or changes in its business practices. Increased litigation and
    negative publicity could also increase the company's cost of doing
    business.
  • As a government contractor, Humana is exposed to risks that may
    materially adversely affect its business or its willingness or ability
    to participate in government healthcare programs including, among
    other things, loss of material government contracts, governmental
    audits and investigations, potential inadequacy of government
    determined payment rates, potential restrictions on profitability,
    including by comparison of profitability of the company's Medicare
    Advantage business to non-Medicare Advantage business, or other
    changes in the governmental programs in which Humana participates.
  • The Healthcare Reform Law, including The Patient Protection and
    Affordable Care Act and The Healthcare and Education Reconciliation
    Act of 2010, could have a material adverse effect on Humana's results
    of operations, including restricting revenue, enrollment and premium
    growth in certain products and market segments, restricting the
    company's ability to expand into new markets, increasing the company's
    medical and operating costs by, among other things, requiring a
    minimum benefit ratio on insured products, lowering the company's
    Medicare payment rates and increasing the company's expenses
    associated with a non-deductible health insurance industry fee and
    other assessments; the company's financial position, including the
    company's ability to maintain the value of its goodwill; and the
    company's cash flows. Additionally, potential legislative changes,
    including activities to repeal or replace, in whole or in part, the
    Health Care Reform Law, creates uncertainty for Humana's business, and
    when, or in what form, such legislative changes may occur cannot be
    predicted with certainty.
  • Humana's business activities are subject to substantial government
    regulation. New laws or regulations, or changes in existing laws or
    regulations or their manner of application could increase the
    company's cost of doing business and may adversely affect the
    company's business, profitability and cash flows.
  • If Humana fails to develop and maintain satisfactory relationships
    with the providers of care to its members, the company's business may
    be adversely affected.
  • Humana's pharmacy business is highly competitive and subjects it to
    regulations in addition to those the company faces with its core
    health benefits businesses.
  • Changes in the prescription drug industry pricing benchmarks may
    adversely affect Humana's financial performance.
  • If Humana does not continue to earn and retain purchase discounts and
    volume rebates from pharmaceutical manufacturers at current levels,
    Humana's gross margins may decline.
  • Humana's ability to obtain funds from certain of its licensed
    subsidiaries is restricted by state insurance regulations.
  • Downgrades in Humana's debt ratings, should they occur, may adversely
    affect its business, results of operations, and financial condition.
  • The securities and credit markets may experience volatility and
    disruption, which may adversely affect Humana's business.

In making forward-looking statements, Humana is not undertaking to
address or update them in future filings or communications regarding its
business or results. In light of these risks, uncertainties, and
assumptions, the forward-looking events discussed herein may or may not
occur. There also may be other risks that the company is unable to
predict at this time. Any of these risks and uncertainties may cause
actual results to differ materially from the results discussed in the
forward-looking statements.

Humana advises investors to read the following documents as filed by the
company with the SEC for further discussion both of the risks it faces
and its historical performance:

  • Form 10‐K for the year ended December 31, 2017;
  • Form 10-Q for the quarter ended March 31, 2018; and
  • Form 8‐Ks filed during 2018.

About Humana

Humana Inc. (NYSE:HUM) is committed to helping our millions of medical
and specialty members achieve their best health. Our successful history
in care delivery and health plan administration is helping us create a
new kind of integrated care with the power to improve health and
well-being and lower costs. Our efforts are leading to a better quality
of life for people with Medicare, families, individuals, military
service personnel, and communities at large.

To accomplish that, we support physicians and other health care
professionals as they work to deliver the right care in the right place
for their patients, our members. Our range of clinical capabilities,
resources and tools – such as in-home care, behavioral health, pharmacy
services, data analytics and wellness solutions – combine to produce a
simplified experience that makes health care easier to navigate and more
effective.

More information regarding Humana is available to investors via the
Investor Relations page of the company's website at humana.com,
including copies of:

  • Annual reports to stockholders
  • Securities and Exchange Commission filings
  • Most recent investor conference presentations
  • Quarterly earnings news releases and conference calls
  • Calendar of events
  • Corporate Governance information

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