Market Overview

Humana Reports First Quarter 2019 Financial Results; Raises Full Year 2019 Financial Guidance

Share:
  • 1Q19 earnings per diluted common share (EPS) of $4.16 on a GAAP basis,
    $4.48 on an Adjusted basis
  • 2019 EPS guidance raised to approximately $16.63 to $16.88 on a GAAP
    basis, $17.25 to $17.50 on an Adjusted basis, meaningfully exceeding
    long-term growth targets
  • Strong start to 2019 driven by better than expected utilization in the
    individual Medicare Advantage business
  • Increased full year expected individual Medicare Advantage membership
    growth to 415,000 to 440,000 members, representing approximately 14
    percent growth in 2019

Humana Inc. (NYSE:HUM) today reported consolidated pretax income and
diluted earnings per common share (EPS) for the quarter ended March 31,
2019 (1Q19) versus the quarter ended March 31, 2018 (1Q18) as follows:

               

Consolidated pretax income

In millions

      1Q19 (a)     1Q18 (b)
Generally Accepted Accounting Principles (GAAP)       $ 746     $ 707  
Amortization associated with identifiable intangibles         18       30  

Put/call valuation adjustments associated with 40% minority
interest in Kindred at Home

        39       -  
Segment earnings associated with the Individual Commercial Segment         -       (53 )
Adjusted (non-GAAP)       $ 803     $ 684  
               
Diluted earnings per common share (EPS)       1Q19 (a)     1Q18 (b)
GAAP       $ 4.16     $ 3.53  
Amortization associated with identifiable intangibles         0.10       0.17  
Put/call valuation adjustments associated with 40% minority interest
in Kindred at Home
        0.22       -  
Segment earnings associated with the Individual Commercial segment         -       (0.29 )
Adjustments to provisional estimates for the income tax effects
related to the tax reform law enacted on December 22, 2017 (Tax
Reform Law)
        -       (0.05 )
Adjusted (non-GAAP)       $ 4.48     $ 3.36  
         

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 (Adjusted) financial measures as
indicators of the company's business performance, as well as for
operational planning and decision making purposes. Non-GAAP (Adjusted)
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. Please refer to the
footnotes for a detailed description of each item adjusted out of GAAP
financial measures to arrive at a non-GAAP (Adjusted) financial measure.

"In a year of strong Medicare Advantage membership growth for the
industry, driven in no small part by the health insurance industry fee
suspension and the resulting increased benefits offered to seniors
nationwide, we are pleased to be able to deliver industry leading
individual Medicare Advantage membership growth of 415,000 to 440,000
members together with above target earnings growth for 2019." said Bruce
D. Broussard, Humana's President and Chief Executive Officer. "Each day,
more and more seniors are choosing Medicare Advantage, a program that
today has over 22 million members, demonstrating the compelling value of
a program that delivers affordable, quality care for seniors and
improved clinical outcomes as payers and providers work together to
understand each member's whole health and help them navigate the complex
healthcare system."

Summary of 1Q19 Results

GAAP and Adjusted pretax income and EPS results for 1Q19 exceeded
management expectations, primarily driven by lower than anticipated
utilization in the individual Medicare Advantage business.

The company's year-over-year consolidated GAAP and Adjusted pretax
results in 1Q19 were favorably impacted by the solid performance of the
company's Medicare Advantage business and significant operating cost
efficiencies driven by productivity initiatives previously implemented.
As expected, the company's higher-than-anticipated individual Medicare
Advantage membership growth during the recently completed Annual
Election Period (AEP) had a muted impact on the consolidated earnings in
1Q19. While new Medicare Advantage members increase revenues, on
average, they have a breakeven impact on pretax earnings in the first
year as they were not previously engaged in clinical programs or
appropriately documented under the Centers for Medicare and Medicaid
Services (CMS) risk-adjustment model.

The year-over-year changes in GAAP and Adjusted EPS for 1Q19 reflected
the same factors impacting GAAP and Adjusted consolidated pretax income
comparisons as well as the beneficial impact of the temporary suspension
of the health insurance industry fee (HIF) in 2019. In addition,
year-over-year comparisons of both GAAP and Adjusted EPS are favorably
impacted by a lower number of shares used to compute EPS, primarily
reflecting share repurchases.

Please refer to the consolidated and segment highlight sections that
follow for additional discussion of the factors impacting the
year-over-year results. In addition, below is a summary of key
consolidated and segment statistics comparing 1Q19 to 1Q18.

 

Humana Inc. Summary of Quarter Results
(dollars in
millions, except per share amounts)

      1Q19 (a)     1Q18 (b)
Consolidated results:              
Revenues – GAAP       $ 16,107       $ 14,279  
Revenues – Adjusted       $ 16,107       $ 14,284  
Pretax income – GAAP       $ 746       $ 707  
Pretax income – Adjusted       $ 803       $ 684  
EPS – GAAP       $ 4.16       $ 3.53  
EPS – Adjusted       $ 4.48       $ 3.36  
Benefits expense ratio – GAAP         86.2 %       84.5 %
Benefits expense ratio – Adjusted         86.2 %       84.9 %
Operating cost ratio – GAAP         10.4 %       12.4 %
Operating cash flows– GAAP       $ 896       $ 3,686  
Operating cash flows– Adjusted       $ 896       $ 351  
Parent company cash and short term investments       $ 721       $ 567  
Debt-to-total capitalization         36.0 %       33.9 %
Retail segment results:              
Revenues – GAAP       $ 14,013       $ 12,107  
Benefits expense ratio – GAAP         88.3 %       87.4 %
Operating cost ratio – GAAP         8.2 %       10.1 %
Segment earnings – GAAP       $ 465       $ 267  
Segment earnings – Adjusted       $ 469       $ 273  
Group and Specialty segment results:              
Revenues – GAAP       $ 1,887       $ 1,970  
Benefits expense ratio – GAAP         76.4 %       73.2 %
Operating cost ratio – GAAP         21.9 %       23.6 %
Segment earnings – GAAP       $ 165       $ 211  
Segment earnings – Adjusted       $ 166       $ 212  
Healthcare Services segment results:              
Revenues – GAAP       $ 6,098       $ 5,663  
Operating cost ratio – GAAP         96.6 %       96.2 %
Segment earnings – GAAP       $ 175       $ 173  

Adjusted earnings before interest, taxes, depreciation and
amortization (Adjusted EBITDA)
(c)

      $ 238       $ 222  
         

2019 Earnings Guidance

Humana has raised its GAAP and Adjusted EPS guidance for the year ended
December 31, 2019 (FY19). The company now expects FY19 GAAP EPS guidance
to be in a range of approximately $16.63 to $16.88, while Adjusted EPS
is expected to be in a range of approximately $17.25 to $17.50.

A reconciliation of GAAP to Adjusted EPS for the company's FY19
projections as well as comparable numbers for the year ended December
31, 2018 (FY 2018) is shown below for comparison.

               
Diluted earnings per common share       FY 2019 Guidance (d)    

FY 2018 (e)

GAAP       ~$16.63 to $16.88     $ 12.16  
Amortization of identifiable intangibles       0.40       0.49  
Put/call valuation adjustments associated with 40% minority interest
in Kindred at Home
      0.22       0.18  
Loss on sale of KMG America Corporation (KMG), a wholly-owned
subsidiary
      -       2.41  
Segment earnings associated with the Individual Commercial segment       -       (0.41 )
Adjustments to provisional estimates for the income tax effects
related to the Tax Reform Law
      -       (0.28 )
Adjusted (non-GAAP) – FY 2019 projected       ~$17.25 to $17.50     $ 14.55  
         

"Early indicators in 2019 are positive, with utilization trending better
than our initial expectations for the Retail segment," said Brian A.
Kane, Chief Financial Officer. "This strong performance has allowed us
to raise our full year Adjusted EPS guidance to a range of $17.25 to
$17.50, reflecting expected Adjusted EPS growth of 19 to 20 percent,
while delivering compelling individual Medicare Advantage membership
growth significantly in excess of the industry."

2020 Rate Notice

On April 1, 2019, CMS published its 2020 Medicare Advantage Capitation
Rates and Medicare Advantage and Part D Payment Policies and Final Call
Letter (the Final Rate Notice). The company expects the Final Rate
Notice to result in a 2.20 percent(f) rate increase for
Humana's individual Medicare Advantage business versus CMS' estimate for
the sector of 2.53 percent, excluding the impact of Employer Group
Waiver Plan (EGWP) funding changes, on a comparable basis. The
difference between the Humana projection and the CMS projection results
from small differences in various components of the rate.

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 company's 1Q19 earnings conference call
are invited to dial 888-625-7430. No password is required. The
audio-only webcast of the 1Q19 earnings call may also 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 from approximately 2:00 p.m. eastern time on May
1, 2019 until 11:00 p.m. eastern time on June 26, 2019 and can be
accessed by dialing 855-859-2056 and providing the conference ID
#3292269.

Footnotes

(a) 1Q19 Adjusted
results exclude the following:

  • Amortization expense for identifiable intangibles of approximately $18
    million pretax, or $0.10 per diluted common share; GAAP measures
    affected in this release include consolidated pretax, EPS, and segment
    earnings (for respective amortization expense for the Retail and Group
    and Specialty segments).
  • Put/call valuation adjustments of approximately $39 million, or $0.22
    per diluted common share, associated with Humana's 40% minority
    interest in Kindred at Home. GAAP measures affected in this release
    include consolidated pretax and EPS.

(b) 1Q18 Adjusted results exclude the following:

  • Amortization expense for identifiable intangibles of approximately $30
    million pretax, or $0.17 per diluted common share; GAAP measures
    affected in this release include consolidated pretax, EPS, and segment
    earnings (for respective amortization expense for the Retail and Group
    and Specialty segments).
  • Segment earnings of $53 million, or $0.29 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 $0.05 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.

(c) The Healthcare Services segment Adjusted EBITDA includes GAAP
segment earnings with adjustments to add back depreciation and
amortization expense, interest expense, and income taxes. The Adjusted
EBITDA includes results from the all lines of business within the
segment and the impact of Humana's 40% minority interest in Kindred at
Home.

(d) FY 2019 Adjusted EPS projections exclude the
following:

  • Amortization expense for identifiable intangibles of approximately
    $0.40 per diluted common share.
  • Put/call valuation adjustments of approximately $0.22 per diluted
    common share, associated with Humana's 40% minority interest in
    Kindred at Home. FY 2019 GAAP EPS guidance excludes the impact of
    future value changes of the Kindred at Home put/call option, which
    cannot be estimated.

(e) FY 2018 Adjusted results exclude the following:

  • Amortization expense for identifiable intangibles of approximately $90
    million pretax, or $0.49 per diluted common share.
  • Put/call valuation adjustments of approximately $33 million, or $0.18
    per diluted common share, associated with Humana's 40% minority
    interest in Kindred at Home.
  • Loss of approximately $786 million pretax, or $2.41 per diluted common
    share, associated with the company's sale of its wholly-owned
    subsidiary, KMG.
  • Segment earnings of approximately $74 million, or $0.41 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 $0.28 per diluted common share related to provisional
    estimates for the income tax effects related to the Tax Reform Law.

(f) Excludes estimates of changes in revenues associated with increased
accuracy of risk coding.

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.
  • 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 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.
    Changes to the risk-adjustment model utilized by CMS to adjust
    premiums paid to Medicare Advantage, or MA, plans according to the
    health status of covered members, including proposed changes to the
    methodology used by CMS for risk adjustment data validation audits
    that fail to address adequately the statutory requirement of actuarial
    equivalence, if implemented, could have a material adverse effect on
    our operating results, financial position and cash flows.
  • 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 or judicial
    changes, including activities to invalidate, 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 or
    judicial 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.
  • Humana's failure to manage acquisitions, divestitures and other
    significant transactions successfully may have a material adverse
    effect on the company's results of operations, financial position, 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, 2018; and
  • Form 8‐Ks filed during 2019.

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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