Humana Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2021. Unaudited results; comparisons are with the corresponding 2020 periods. Humana operates Retail, Group and Specialty, and Healthcare Services segments, with Medicare products representing approximately 83% of premiums and services revenue in the first half of 2021.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $20.645 billion | $19.083 billion | $41.313 billion | $38.018 billion |
| Operating income | $1.236 billion | $2.435 billion | $2.459 billion | $3.509 billion |
| Net income | $588 million | $1.828 billion | $1.416 billion | $2.301 billion |
| Diluted EPS | $4.55 | $13.75 | $10.94 | $17.31 |
| Benefit ratio | 85.8% | 76.4% | 85.9% | 80.7% |
| Operating cost ratio | 10.3% | 12.4% | 10.0% | 11.8% |
Revenue increased 8.2% in Q2 and 8.7% in the first half, primarily reflecting individual Medicare Advantage and state-based membership growth. Net income declined 67.8% in Q2 and 38.5% in the first half. Higher benefit ratios were a major pressure on earnings; lower operating cost ratios and lower effective tax rates partly offset the impact. The effective tax rate was 23.7% in Q2 and 22.7% for the first half, versus 30.0% and 31.0% in 2020.
Cash flow and liquidity: Operating cash flow was negative $477 million for the first half, compared with positive $3.541 billion in 2020. Investing activities used $2.203 billion and financing activities provided $1.385 billion; cash declined $1.295 billion to $3.378 billion. Management attributed the operating cash flow decline mainly to working-capital effects, including claims inventory and provider payments, and lower earnings. At June 30, current assets were $25.790 billion and current liabilities were $15.051 billion.
Debt: Short-term debt, all commercial paper, was $1.109 billion; long-term debt was $6.063 billion. Humana reported $4.0 billion of unused capacity under its revolving credit agreements and no borrowings under those facilities or its $500 million delayed-draw term loan. Credit-agreement debt to capitalization was 33%, below the 60% covenant limit. Cash, cash equivalents and short-term investments at the parent company totaled $1.3 billion.
Segments and material changes
- Retail: Revenue was $18.480 billion in Q2, up 9.2%; segment earnings fell to $836 million from $1.989 billion. Individual Medicare Advantage membership grew 12.0% year over year, while group Medicare Advantage and stand-alone PDP membership declined. Retail’s Q2 benefit ratio rose to 87.0% from 78.3%.
- Group and Specialty: Q2 revenue was $1.704 billion, down 6.6%; segment earnings fell to $40 million from $287 million. Fully insured commercial group membership declined 14.0%. The segment benefit ratio increased to 82.6% from 67.0%.
- Healthcare Services: Q2 segment earnings were $311 million, down 1.9%; first-half earnings rose 2.3% to $580 million. Growth in pharmacy and provider services contributed to revenue growth.
- Comparisons were affected by the unusually low non-COVID care utilization in 2020, net of COVID treatment and testing costs and provider relief. Humana said these factors favorably affected 2020 results relative to 2021. First-half 2021 also included $619 million of favorable prior-period medical claims reserve development, versus $205 million in the prior-year period.
Outlook, unusual items and risks
- Humana agreed to acquire the remaining 60% of Kindred at Home for an enterprise value of $8.1 billion, including its existing 40% interest valued at $2.4 billion. Closing was expected in Q3 2021, subject to regulatory approvals. The expected cash transaction amount, net of its existing stake, was approximately $5.7 billion; funding was expected from parent cash, debt financing and assumption of existing KAH debt. Management expected to record an approximately $1 billion mark-to-market gain on its existing stake at closing.
- Q2 results included a $377 million expense from termination of the KAH put and call options, within a $419 million Q2 put/call valuation adjustment; a $63 million gain on publicly traded equity securities; and $22 million of KAH transaction and integration costs. Humana disclosed that these three items together reduced Q2 diluted EPS by $2.25 and first-half diluted EPS by $3.44. Results also reflect volatility in investment values and the prior-year put/call adjustments.
- Humana stated that available cash, investments, operating cash flows and borrowing sources were adequate for operating needs and other requirements for at least the next 12 months. No numerical earnings guidance is provided in the supplied filing text.
- Key exposures include COVID-related changes in care utilization and costs; Medicare Advantage risk adjustment and the phase-in from RAPS to EDS diagnosis data; CMS audits and potential changes to RADV audit methodology; government program and reimbursement changes; and regulatory limits on subsidiary dividends. The filing describes ongoing DOJ information requests concerning Medicare risk-adjustment practices, a False Claims Act qui tam matter, and other regulatory and legal proceedings. Humana said potential outcomes could be substantial but could not estimate possible losses beyond amounts accrued.
- Interest-rate risk remains relevant: Humana estimated that a 1 percentage-point increase in rates would reduce investment securities’ fair value by approximately $619 million. It reported no material credit allowances on debt securities during the first half.
Important facts for investors to verify
- Whether Q2 and first-half medical cost trends and benefit ratios persist as COVID-related utilization normalizes, and how much earnings depend on favorable reserve development.
- Completion, financing, integration costs and expected returns of the Kindred at Home acquisition, including the timing and amount of the anticipated mark-to-market gain.
- Medicare risk-adjustment results, CMS audit developments and any effects from the EDS transition or RADV methodology.
- Whether working-capital movements reverse and operating cash flow recovers, given negative first-half operating cash flow and planned acquisition funding.
- Membership and profitability trends in individual Medicare Advantage, group Medicare Advantage, stand-alone PDP and commercial group products.