Humana Inc. — Q2 2022 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2022. Financial statements are unaudited. Humana operates Retail, Group and Specialty, and Healthcare Services businesses, with Medicare Advantage a central focus.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $23.662B | $20.645B | $47.632B | $41.313B |
| Operating income | $1.215B | $1.236B | $2.504B | $2.459B |
| Net income attributable to Humana | $696M | $588M | $1.626B | $1.416B |
| Diluted EPS | $5.48 | $4.55 | $12.77 | $10.94 |
| Benefit ratio | 85.8% | 85.8% | 86.1% | 85.9% |
| Operating cost ratio | 13.4% | 10.3% | 12.7% | 10.0% |
- Revenue growth reflected Medicare Advantage and state-based contract growth, higher individual Medicare Advantage premiums, and Kindred at Home (KAH) consolidation. Services revenue rose 175% in Q2 and 173% for the half-year, primarily from KAH.
- Reported operating income was nearly flat in Q2 and up 2% for the first half. Net income rose 19% and 15%, respectively; comparisons also reflect non-operating fair-value changes and tax effects.
- Benefits expense increased 11% in Q2 and 12% for the half-year. The Q2 benefit ratio was unchanged; the half-year ratio increased 20 basis points, partly reflecting lower favorable prior-period claims development. Favorable development was $37M in Q2 2022 versus $164M in Q2 2021, and $397M for the first half versus $719M.
- Operating costs increased 50% in Q2 and 47% for the first half. Humana attributed the higher consolidated cost ratio largely to KAH, whose operations have a higher operating cost ratio, and to $203M of value-creation initiative charges.
- Healthcare Services segment earnings were $437M in Q2, up 41%, and $883M for the half-year, up 52%. Retail segment earnings were $929M in Q2, up 11%, and $1.713B for the half-year, up 5%. Group and Specialty earnings were $101M and $233M, respectively.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $1.261B, versus cash used of $477M in 2021. Investing used $1.670B and financing provided $2.235B. Cash and cash equivalents were $5.153B on the balance sheet; the cash-flow statement reports $5.220B including $67M classified as held for sale.
- At June 30, total debt was approximately $12.831B: $1.541B short-term and $11.290B long-term, compared with $12.494B at year-end 2021. The company issued $750M of senior notes in March. Debt-to-capitalization was 45.3% under applicable credit agreements, below the 60% covenant limit.
- Humana reported $2.4B of remaining capacity under its five-year revolver and $1.5B under its 364-day revolver, with no revolver borrowings. Management said available cash, investments, operating cash flow and financing capacity should fund requirements for at least the next 12 months.
- Investment securities totaled $13.417B at fair value. The portfolio had $1.367B of gross unrealized debt-security losses, primarily attributed to higher interest rates; approximately 96% of debt securities were investment grade. A 1% rise in rates was estimated to reduce securities’ fair value by about $604M.
Material changes and unusual items
- Individual Medicare Advantage membership grew 4.9% year over year to 4.56M; state-based Medicaid and other membership grew 20% to 1.05M. Commercial fully insured, ASO and specialty membership declined.
- Humana agreed to sell a 60% interest in KAH’s Hospice and Personal Care divisions to CD&R at a $3.4B enterprise valuation, expecting approximately $2.8B cash proceeds. Closing was expected in Q3 2022, subject to regulatory approvals. The operations were classified as held for sale; the gain was to be recognized at closing. A $167M deferred tax liability was recorded.
- The $203M Q2 value-creation charge included $140M of asset and software impairment and abandonment and $21M of future severance payments. Humana anticipated additional charges during the remainder of 2022.
- Management’s reconciliation table identified diluted-EPS impacts from specified items totaling $3.08 for Q2 and $3.71 for the first half, including the value-creation charges, the KAH-sale tax provision, put/call valuation changes, transaction and integration costs, and publicly traded equity-security fair-value changes. These are disclosed adjustment impacts, not a substitute for reported EPS.
- Investment income fell 73% in Q2 and 80% for the first half, primarily because of changes in fair value of publicly traded equity securities. The effective tax rate rose to 38.1% in Q2 and 30.5% for the half-year, mainly due to the KAH-related deferred tax liability.
Outlook, risks and contingencies
- Management cited lower-than-anticipated overall healthcare utilization in the first half of 2022, as the decline in COVID-related utilization after the Omicron wave outpaced the recovery in non-COVID utilization. It cautioned that utilization patterns and seasonality may continue to be disrupted.
- All material CMS Medicare contracts had been renewed for 2023; product offerings remained subject to CMS approval. Medicare products represented approximately 81% of premiums and services revenue for the first half.
- CMS and HHS-OIG risk-adjustment audits, potential changes to RADV extrapolation methodology, and internal coding reviews could lead to material repayment obligations or other adverse effects. Humana said recorded audit estimates were not material, but the ultimate effects of regulatory changes and reviews were uncertain.
- The filing describes ongoing government inquiries and litigation, including a False Claims Act qui tam case concerning a Part D plan; the court denied summary judgment motions in March 2022. Humana said it was vigorously defending the allegations and could not estimate possible losses beyond accrued amounts.
- Other risks include government-program changes, regulatory limits on profitability or cash transfers from insurance subsidiaries, credit-rating downgrades, interest-rate-driven investment losses, and the TRICARE East contract’s scheduled expiration on December 31, 2022.
Most important facts for investors to verify
- Whether the KAH Hospice and Personal Care transaction closed on expected terms, its final proceeds and recognized gain, and the resulting impact on debt and earnings.
- Whether medical utilization, claims development and Medicare risk-adjustment revenue develop as management expected, and how CMS audit or rulemaking outcomes affect results.
- How much of the higher operating cost ratio and reported earnings change reflects KAH consolidation and one-time charges versus underlying trends in the health-plan businesses.
- Whether investment-security unrealized losses recover or lead to realized losses or credit allowances, particularly as interest rates change.
- Developments in the disclosed legal matters, regulatory reviews, and TRICARE contract renewal or replacement.