01—Abstract
Summary
Summary of the 10-K filed February 19, 2014. Cited figures are marked; the original filing is the authoritative source.
Humana Inc. (NYSE: HUM), headquartered in Louisville, Kentucky, reported full-year 2013 results in its 10-K filed February 19, 2014.
Total revenues were $41.3 billiona, up from $39.1 billion in 2012, and net income was $1.23 billion, or $7.73 per diluted share, compared with $1.22 billion, or $7.47 per diluted share, in 2012. Results were weighed down by $243 million of benefits expense (about $0.99 per diluted share) for reserve strengthening on the non-strategic closed block of long-term care policies, while favorable prior-year medical claims reserve development of $474 million helped the benefit ratio. The consolidated benefit ratio was 83.9% and the operating cost ratio was 15.5%.
Approximately 75%b of premiums and services revenue came from federal government contracts, including about 15% from Medicare Advantage contracts with CMS in Florida. The filing signals a sharp change in 2014 earnings dynamics. The non-deductible health insurance industry fee under the Health Care Reform Law is expected to raise the effective tax rate to approximately 45% to 47%, and the company expects operating cash flow to decline from 2013 as it builds a receivable tied to the risk adjustment, risk corridor and reinsurance provisions.
Management also expects Medicare Advantage rate reductions of 6%c to 7% for 2015, based on its estimate. Membership grew, with approximately 12.0 million medical members and 7.8 million specialty members at year end, and January 2014 individual Medicare Advantage membership rose about 12% from December 31, 2013. Balance sheet and capital position remained strong.
Stockholders' equity was $9.3 billiond, cash and investments totaled $10.9 billion, and long-term debt was $2.6 billion. The company repurchased 5.8 million shares for $502 million in 2013 and paid $168 million in dividends. Its quarterly dividend was raised to $0.27 per share, and about $580 million remained under its share repurchase authorization as of February 1, 2014.
02—Key points
Key Highlights
- Total revenues rose to $41.3 billion in 2013 from $39.1 billion in 2012, and diluted EPS was $7.73 versus $7.47.
- Net income included $243 million ($0.99 per diluted share) of reserve strengthening for the closed block of long-term care insurance policies.
- Favorable prior-year medical claims reserve development totaled $474 million in 2013, compared with $257 million in 2012.
- About 75% of 2013 premiums and services revenue came from federal government contracts, and about 15% came from CMS Medicare Advantage contracts in Florida.
- Management expects the 2014 health insurance industry fee of $525 million to $575 million to push the effective tax rate to about 45% to 47% and operating cash flow to decline from 2013.
- Management estimates 2015 Medicare Advantage rate reductions of 6% to 7%.
- Stockholders' equity was $9.3 billion, and the company repurchased $502 million of stock and paid $168 million in dividends during 2013.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 19, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $41.31B$39.13B | +5.6% |
| SG&A Expenses | $6.36B$5.83B | +9.0% |
| Operating Income | $2.06B$2.02B | +2.2% |
| Interest Expense | $140.00M$105.00M | +33.3% |
| Net Income | $1.23B$1.22B | +0.7% |
| EPS (Basic) | $7.81$7.56 | +3.3% |
| EPS (Diluted) | $7.73$7.47 | +3.5% |
| Shares Outstanding (Basic) | 157.50M161.48M | −2.5% |
| Shares Outstanding (Diluted) | 159.15M163.46M | −2.6% |
05—Questions
Frequently Asked Questions
What drove the change in Humana's 2013 earnings?
Net income was $1.23 billion, or $7.73 per diluted share, compared with $1.22 billion, or $7.47, in 2012. The filing attributes the increase mainly to improved operating performance across most major business lines, including Medicare Advantage membership growth in the Retail and Employer Group segments. These gains were partly offset by $243 million of reserve strengthening for the long-term care closed block, which cost $0.99 per diluted share.
How will the health insurance industry fee affect 2014?
The fee is not deductible for tax purposes. Humana expects to pay the federal government between $525 million and $575 million in 2014, and it expects the fee to significantly increase its effective income tax rate to approximately 45% to 47%. The company says it expects to offset the impact on results through pretax income improvement, but it cannot assure that it will be able to do so.
How concentrated is Humana's revenue in government programs?
Approximately 75% of total premiums and services revenue in 2013 came from contracts with the federal government. Medicare products accounted for about 74%, and the Florida CMS Medicare Advantage contracts accounted for about 15%. The filing says the loss of these contracts or adverse changes in government programs may have a material adverse effect on results.
What is the outlook for Medicare Advantage rates and membership?
Humana estimates 2015 Medicare Advantage rate reductions of 6% to 7%, based on CMS fee-for-service cost trend estimates and other factors, and it expects to seek alternatives to limit disruption to beneficiaries. Membership grew, and January 2014 individual Medicare Advantage membership rose by about 250,000 members, or 12%, from December 31, 2013.
How strong is Humana's financial position and capital return?
At December 31, 2013, stockholders' equity was $9.3 billion, cash and investments totaled $10.9 billion, and long-term debt was $2.6 billion. The company repurchased 5.8 million shares for $502 million and paid $168 million in dividends during 2013. Its credit agreement had a $995 million remaining borrowing capacity, and about $580 million remained under the current repurchase authorization as of February 1, 2014.
06—Continue