Humana earnings diluted despite jump in revenue due to cost of healthcare exchanges entry, state contracts and new specialty drugs

LOUISVILLE, Ky.–(BUSINESS WIRE)–July 30, 2014– Humana Inc. (NYSE: HUM) today reported diluted earnings per common share (EPS) for the quarter ended June 30, 2014 (2Q14) of $2.19, compared to diluted earnings per common share (EPS) of $2.63 for the quarter ended June 30, 2013 (2Q13).

As expected, EPS for 2Q14 was lower than that for 2Q13 due primarily to investments in healthcare exchanges and state-based contracts and higher specialty drug costs associated with a new treatment of Hepatitis C, partially offset by membership growth and a lower diluted share count.

Additionally, results from 2Q13 included pretax expenses of $31 million ($0.12 per diluted common share) in connection with the company’s exit from its Puerto RicoMedicaid business effective September 30, 2013.

For the six months ended June 30, 2014 (1H14) the company reported EPS of$4.54 compared to $5.58 in the six months ended June 30, 2013 (1H13). The lower year-over-year earnings year to date reflected the items discussed above as well as $0.41 per share benefit in 1H13 from the settlement of contract claims with the Department of Defense (DoD) related to previously-disclosed litigation and the absence of the impact of sequestration for the company’sMedicare business.

The company reaffirmed its estimate for EPS for the year ending December 31, 2014 (FY14) to be in the range of $7.25 to $7.75.

“Our second-quarter and year-to-date results show the effectiveness of our integrated care delivery model in driving robust membership growth in ourMedicare, health care exchange and state-based Medicaid businesses,” saidBruce D. Broussard, President and Chief Executive Officer of Humana. “We believe our strategy leads to higher quality care and better outcomes for our members, and combined with the power of our base businesses and favorable demographics, it comprises a strong foundation upon which Humana’s future growth will be built.”

Consolidated revenues

Consolidated revenues Consolidated revenues for 2Q14 were $12.22 billion, an increase of 18.4 percent from $10.32 billion in 2Q13, with total premiums and services revenue up 18.6 percent compared to the prior year’s quarter. The year‐over‐year increase in premiums and services revenue was primarily driven by higher medical membership in the Retail segment and higher group Medicare Advantage membership in the Employer Group segment.

1H14 consolidated revenues rose $3.13 billion, or 15.0 percent, to $23.93 billion from $20.81 billion in 1H13 with total premiums and services revenues of $23.75 billion up 15.2 percent, increasing $3.13 billion from $20.62 billion in the prior‐year period. Higher Retail and Employer Group segment premiums and services revenues also drove the year‐over‐year change in 1H14.

Consolidated benefits expense

The 2Q14 consolidated benefit ratio (benefits expense as a percent of premiums) of 83.1 percent declined by 30 basis points from 83.4 percent for the prior year’s quarter as the year over year benefit from the company’s previously announced exit from its Puerto Rico Medicaid business on September 30, 2013 more than offset higher ratios year over year in both the Retail and Employer Group segments. The company experienced favorable prior‐year medical claims reserve development of $49 million in 2Q14 compared to $100 million in 2Q13.

The 1H14 consolidated benefit ratio of 82.7 percent decreased by 50 basis points from 83.2 percent in 1H13. The first‐half decrease primarily reflects the same factors impacting the second quarter yearover‐ year comparison. The company experienced favorable prior‐year medical claims reserve development of $346 million in 1H14 compared to $366 million in 1H13.

Consolidated operating expenses

The consolidated operating cost ratio (operating costs as a percent of total revenues less investment income) of 15.1 percent for 2Q14 increased from 14.3 percent in 2Q13, primarily reflecting higher ratios in the Retail and Employer Group segments. The 1H14 consolidated operating cost ratio of 15.2 percent increased from 14.1 percent in 1H13. The first‐half increase reflects the same factors impacting the second quarter year‐over‐year comparison.

Balance sheet

At June 30, 2014, the company had cash, cash equivalents, and investment securities of $11.05 billion, down $657 million from $11.71 billion at March 31, 2014, primarily reflecting the funding of the company’s working capital needs due to higher contract deposit financing associated with Part D reinsurance subsidies and higher receivables associated with premium stabilization programs, commonly referred to as the 3Rs(b).

Parent company cash and short‐term investments of $736 million at June 30, 2014 increased $337 million from $399 million at March 31, 2014, primarily due to dividends to the parent company from the operating subsidiaries, partially offset by share repurchases, capital expenditures, and payment of a cash dividend to shareholders during 2Q14. Cash and short‐term investments at the parent at June 30, 2014 excluded approximately $219 million in dividends from subsidiaries not received until July 2014.

Days in claims payable of 49.4 at June 30, 2014 increased slightly from 48.0 days at March 31, 2014 due to an increase in claims inventories. At June 30, 2014, net receivables of $240 million related to the 3Rs(b), were included primarily in other long‐term assets. Approximately 64 percent of these net receivables related to reinsurance recoverables. Debt‐to‐total capitalization at June 30, 2014 was 20.6 percent, down 50 basis points from 21.1 percent at March 31, 2014, primarily reflecting higher capitalization associated with 2Q14 earnings.