Humana (HUM) Prelim. Q1 EPS Tops Views; Raises FY EPS Guidance

As previously disclosed, Humana Inc. (NYSE: HUM) will be hosting an Investor Meeting in New York City on Tuesday, April 25, 2017, at 9:30 a.m. eastern time. The Investor Meeting will include a number of presentations by company leaders focusing on Humana’s strategic direction, operational and financial progress as well as expectations for future performance. Logistics associated with the company’s Investor Meeting are detailed below.

The agenda for the event follows:

1. Strategic Overview – Bruce Broussard, President and Chief Executive Officer
2. Retail Overview – Alan Wheatley, President, Retail
3. Provider – Roy Beveridge, MD, Chief Medical Officer; Joe Jasser, MD, President, Care Delivery
4. Evolving Clinical Model – William Fleming, PharmD, President, Healthcare Services; Chris Kay, Chief Innovation Officer
5. Simplified Experience – Jody Bilney, Chief Consumer Officer; Brian LeClaire, PhD, Chief Information Officer
6. Group – Beth Bierbower, President, Group and Specialty
7. Financial Update – Brian Kane, Chief Financial Officer

Financial Results and Guidance

Humana today pre-announced certain components of its results for the quarter ended March 31, 2017 (1Q17) as detailed below. GAAP and Adjusted results for the quarter ended March 31, 2016 (1Q16) are also shown for comparison. Adjusted prior-year results have been recast to exclude the individual commercial medical (Individual Commercial) business given the company’s decision to no longer offer these products beginning in 2018, as previously disclosed.

(Street sees Q1 EPS of $2.46 and FY EPS of $10.94)

The company has included financial measures throughout this press 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.

The company’s GAAP and Adjusted EPS results for 1Q17 were better than management’s previous expectations, primarily due to outperformance in the Retail segment, largely attributable to prior period development in the company's individual Medicare Advantage business. All of the company's businesses performed well and early indicators are positive relative to management's initial expectations around medical utilization.

The company also today increased its GAAP and Adjusted EPS guidance for the year ending December 31, 2017 (FY17). FY17 GAAP EPS guidance was increased to at least $16.91 from its previous range of $16.65 to $16.85, while Adjusted EPS was increased to at least $11.10 from the previous range of $10.80 to $11.00. The FY17 guidance increases for both GAAP and Adjusted EPS were primarily driven by the same factors impacting the 1Q17 better-than-expected results. Detailed 1Q17 results and components of the company’s FY17 financial guidance updated today will be provided in the company’s full 1Q17 earnings release on May 3, 2017.

A reconciliation of GAAP to Adjusted EPS for the company’s FY17 projections as well as comparable numbers for the year ended December 31, 2016 (FY16) is shown below:

Medicare Payment Rates

On April 3, 2017, the Centers for Medicare and Medicaid Services (CMS) issued its announcement of 2018 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 0.45 percent (h) rate increase for Humana versus CMS’ estimate for the sector of 0.85 percent (h) on a comparable basis. The primary difference between the projections is the impact of fee-for-service county rebasing by CMS.

Investor Meeting Logistics

Humana encourages the investing public and media to listen to its Investor Meeting via the Internet since attendance at the event is by invitation only. The Investor Meeting webcast and virtual presentation (audio with slides) may be accessed via Humana’s Investor Relations page at humana.com. The company suggests web participants sign on approximately 15 minutes in advance of the event. The company also suggests web participants visit the site in advance to run a system test and to download any free software needed.

For those unable to participate in the live event, the replay will be available in the Historical Webcasts and Presentations section of the Investor Relations page at humana.com approximately 2 hours following the live webcast.

Footnotes

(a) 1Q17 Adjusted EPS excludes the following:

• Net gain from the termination of the merger agreement of approximately $947 million pretax, or $4.26 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.
• Amortization expense for identifiable intangibles of approximately $18 million pretax, or $0.08 per diluted common share.
• The one-year beneficial effect of a lower effective tax rate of approximately $0.52 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 business impact.
• 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).
• Operating earnings of approximately $63 million pretax, or $0.27 per diluted common share, for the company’s Individual Commercial business given the company’s planned exit on January 1, 2018, as previously disclosed.

(b) 1Q16 Adjusted EPS (Recast) excludes the following:

• Transaction and integration costs of $34 million pretax, or $0.21 per diluted common share, associated with the then-pending merger agreement.
• Amortization expense for identifiable intangibles of approximately $21 million, or $0.09 per diluted common share.
• Operating losses of $12 million pretax, or $0.09 per diluted common share, for the company’s Individual Commercial business given the company’s planned exit on January 1, 2018, as previously disclosed.

(c) Consolidated revenues have been adjusted to exclude revenues associated with the company’s Individual Commercial business given the company’s planned exit on January 1, 2018, as previously disclosed.

(d) FY17 Adjusted EPS projections exclude the following:

• Net gain from the termination of the merger agreement of approximately $947 million pretax, or $4.36 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.
• Amortization expense for identifiable intangibles of approximately $71 million pretax, or $0.31 per diluted common share.
• 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 business 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).
• Operating losses of approximately $35 million pretax, or $0.15 per diluted common share, for the company’s Individual Commercial business given the company’s planned exit on January 1, 2018, as previously disclosed.

(e) FY16 Adjusted EPS (Recast) excludes the following:

• Transaction and integration costs of $104 million pretax, or $0.64 per diluted common share, associated with the then-pending merger agreement.
• Amortization expense for identifiable intangibles of approximately $77 million pretax, or $0.32 per diluted common share.
• Pretax expenses of $505 million, or $2.11 per diluted common share, of reserve strengthening related to the company’s non-strategic closed block of long-term care insurance business. See related footnote (g).
• Operating losses of $869 million pretax, or $3.78 per diluted common share, for the company’s Individual Commercial business given the company’s planned exit on January 1, 2018, as previously disclosed. Includes the write-off of receivables associated with the risk corridor premium stabilization program. See related footnote (f).

(f) On November 10, 2016, the U.S. Court of Federal Claims ruled in favor of the government in one of a series of cases filed by insurers against the Department of Health and Humana Services (HHS) to collect risk corridor payments, rejecting all of the insurer’s statutory, contract and Constitutional claims for payment. Prior to this decision, the company had maintained the receivable in reliance upon the interpretation previously promulgated by HHS that the risk corridor receivables were obligations of the U.S. government. Given this court decision, however, the company’s conclusion with respect to the ultimate collectability of the receivable shifted, and accounting rules required that the receivable be written off. Land of Lincoln Mutual Health Insurance Company v. United States; United States Court of Federal Claims No. 16-744C.

(g) As noted above, in addition to previously-disclosed adjustments, EPS for FY16 included a strengthening of reserves for the company’s non-strategic closed block of long-term care business. In connection with its acquisition of KMG America in 2007, the company acquired a non-strategic closed block of long-term care insurance policies. These policies were sold between 1995 and 2005, of which approximately 30,800 remained in force as of December 31, 2016. During the fourth quarter of 2016, the company recorded a reserve strengthening for this closed block of policies as it determined the present value of future premiums, together with its existing reserves were not adequate to provide for future policy benefits. This adjustment was primarily driven by emerging experience indicating longer claims duration, a prolonged lower interest rate environment and an increase in policyholder life expectancies.

(h) Excludes the impact of Star quality bonus ratings, the impact of encounter data weighting in risk score calculations and estimates of changes in revenue associated with increased accuracy of risk coding.

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