Humana (HUM) Boosts Q2, FY16 Outlook; Comments on Aetna Transaction

Humana Inc. (NYSE: HUM) announced that the company has raised its financial guidance for the year ending December 31, 2016 (FY16) and updated its estimate for the quarter ended June 30, 2016 (2Q16). The higher guidance is primarily the result of better-than-anticipated performance year to date for the company’s individual Medicare Advantage and Healthcare Services businesses partially offset by continued challenges in the company’s individual commercial medical (Individual) business. The company’s revised earnings guidance for FY16 is as follows:

*** NOTE: The Street sees FY16 EPS of $8.87 and revenue of $54.3 billion.

The company ’s updated guidance for FY16 Adjusted EPS of at least $9.25 compares to its previous guidance for FY16 Adjusted EPS of at least $8.85 (excluding $0.21 per diluted common share of transaction and integration costs through the first quarter of 2016 and $0.32 per diluted common share of annual amortization expense for identifiable intangibles).

In conjunction with its revised financial guidance for FY16, the company has also adjusted its guidance for 2Q16 EPS as follows:

*** The Street sees Q2 EPS of $2.19.

The company ’s updated guidance for 2Q16 Adjusted EPS of approximately $2.28 compares to its previous guidance for 2Q16 Adjusted EPS of at least $2.15 (excluding $0.09 per diluted common share of amortization expense for identifiable intangibles). Transaction and integration costs for 2Q16 had not been determined at the time management previously gave guidance for the quarter.

Better-than-expected operating performance other than Individual business

The company is experiencing better-than-expected performance across several of its businesses resulting in an increase in its FY16 earnings guidance for these businesses. This increase is primarily being driven by better-than-expected performance in the company’s individual Medicare Advantage and Healthcare Services businesses with higher projected FY16 pretax earnings also now projected for certain of the company’s other businesses(b).

Higher projected individual Medicare Advantage pretax results of approximately $185 million, or $0.76 per diluted common share(a), are primarily due to operating initiatives resulting in favorable prior period medical claims development and lower current-year utilization than was anticipated in pricing. This is allowing the company to begin to return to its targeted margin levels more quickly than previously anticipated.

The increase in projected Healthcare Services pretax earnings for FY16 of approximately $62 million, or $0.29 per diluted common share, is primarily due to higher-than-projected earnings associated with the pharmacy business resulting from higher mail order penetration together with an increase in projected margins on that business primarily from favorable rebates and generic purchasing discounts.

Individual business remains very challenging

As previously disclosed, the company established a premium deficiency reserve (PDR)(d) in the fourth quarter of 2015 associated with certain of its individual policies for 2016. Based on the evaluation of claims data received through June 2016, the company expects to increase its FY16 PDR in 2Q16 by approximately $208 million pretax, or $0.86 per diluted common share. Additionally, based on updated information received from the Centers for Medicare and Medicaid Services on June 30, 2016 and prior period claims development, the company anticipates net pretax expenses year to date through 2Q16 of approximately $52 million, or $0.22 per diluted common share, to reflect changes to its accruals for the premium stabilization programs and prior period claims development. These two items together comprise the change in FY16 estimate for the Individual business of $1.08 per diluted common share indicated in the table above.

During 2Q16, the company submitted proposed rate filings to various Departments of Insurance (DOIs) for its 2017 Individual offerings. These filings proposed a number of significant rate increases and service area changes to retain a viable product for individual consumers and address persistent risk selection challenges.

The company has also notified relevant DOIs of its intent to discontinue certain on-exchange Individual products across a number of geographies for 2017 and exit substantially all Affordable Care Act (ACA) compliant off-exchange Individual markets. As a result, the company’s 2017 geographic presence for its Individual offerings is expected to cover no more than 156 counties across 11 states, down from 1,351 counties across 19 states in 2016. Humana expects 2017 premiums associated with ACA-compliant offerings in the range of $750 million to $1 billion versus approximately $3.4 billion projected for FY16. The rate review and approval processes with the related states are ongoing.

The company will continue to evaluate the performance of this business for 2016 as it further develops and the corresponding impact on the PDR, if any, over the coming quarters.

Adoption of new accounting standard

In March 2016, the Financial Accounting Standards Board issued a new pronouncement regarding the accounting for the tax effect of stock-based compensation. As permitted by this accounting standard, the company has chosen to adopt this change effective as of January 1, 2016, retrospectively impacting the company’s financial results for the first quarter of 2016. Consequently, financial guidance for FY16 has been adjusted to reflect a lower projected tax rate, raising the company’s EPS guidance by approximately $0.12 per diluted common share.

2Q16 Earnings Release

The company expects to issue its detailed 2Q16 earnings before the open of trading on Wednesday, August 3, 2016. Due to the pending transaction with Aetna, the company is not planning to host a conference call in conjunction with its 2Q16 earnings release and does not expect to do so for future quarters.

Aetna Transaction

As previously announced, Humana entered into a definitive merger agreement with Aetna on July 2, 2015 under which, at the closing, Aetna will acquire each outstanding common share of Humana for $125 in cash and 0.8375 of an Aetna common share. At separate special stockholder meetings both held on October 19, 2015, Humana stockholders approved the adoption of the Aetna merger agreement and Aetna shareholders approved the issuance of the Aetna common stock in the transaction.

The transaction is subject to customary closing conditions, including the expiration of the Hart-Scott-Rodino anti-trust waiting period and approvals of certain state Departments of Insurance and other regulators. On July 21, 2016, the U.S. Department of Justice (DOJ) filed a civil antitrust lawsuit seeking to block the transaction. Together with Aetna, the company intends to vigorously defend the transaction in response to the lawsuit.

Aetna and Humana previously agreed to extend the time period to obtain regulatory approvals to no later than December 31, 2016, as permitted under the merger agreement. Judicial review could extend past December 31, 2016, and therefore, given the uncertainty associated with the timing and outcome of litigation, the company cannot predict the timing of when the transaction may close.

Footnotes

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