01—Abstract
Summary
Summary of the 10-K filed February 18, 2016. Cited figures are marked; the original filing is the authoritative source.
Humana Inc., headquartered in Louisville, Kentucky, reported 2015 net income of $1.28 billiona, or $8.44 per diluted common share, compared with $1.15 billion, or $7.36 per diluted share, in 2014.
Results include a $270 millionb pre-tax gain from the June 1, 2015 sale of Concentra Inc. for approximately $1,055 million in cash, and a $176 million premium deficiency reserve for individual commercial medical products compliant with the Health Care Reform Law for the 2016 coverage year. Total revenues were $54.29 billion, up from $48.50 billion, and premiums revenue rose to $52.41 billion. The benefit ratio increased to 84.5% from 83.0%, while the operating cost ratio declined to 13.6% from 15.9%.
Approximately 73% of 2015 premiums and services revenue came from federal government contracts, and Medicare products accounted for approximately 72%. Humana entered a Merger Agreement with Aetna Inc. on July 2, 2015, under which each Humana share converts into 0.8375 of an Aetna share plus $125c in cash, a transaction estimated at approximately $37 billion including assumed Humana debt. Stockholders approved the merger on October 19, 2015, and the merger is expected to close in the second half of 2016.
Under the agreement, Humana suspended its share repurchase program and capped its quarterly dividend at $0.29d per share. Cash flow from operations fell to $868 million from $1.62 billion, reflecting working capital timing and growth in receivables under the 3Rs risk-sharing programs of the Health Care Reform Law. At year-end 2015 Humana reported 14.2 million medical members, including 2,753,400 individual Medicare Advantage members, and stockholders' equity of $10.35 billion.
Total debt was $3.82 billion in long-term debt plus $299 million of short-term borrowings. The company cited an investment-grade credit rating of BBB+ from S&P and Baa3 from Moody's.
02—Key points
Key Highlights
- Net income of $1.28 billion ($8.44 diluted EPS) in 2015 versus $1.15 billion ($7.36) in 2014, helped by a $270 million pre-tax gain on the sale of Concentra.
- Pending Aetna merger: each Humana share converts into 0.8375 Aetna shares plus $125 in cash, a transaction estimated at approximately $37 billion; expected to close in the second half of 2016.
- Retail segment pretax income fell 30.5% to $930 million, driven by a benefit ratio of 86.7% and a $176 million premium deficiency reserve for individual commercial medical products.
- Group segment pretax income rose 70.9% to $258 million, and Healthcare Services pretax income rose 32.9% to $981 million.
- Operating cash flow dropped to $868 million from $1.62 billion, reflecting timing of working capital and 3Rs receivable growth.
- Share repurchases were suspended under the Merger Agreement, and the quarterly dividend is capped at $0.29 per share before closing.
- Approximately 73% of 2015 premiums and services revenue came from federal government contracts, with about 14% from Florida individual Medicare Advantage contracts with CMS.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 18, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $54.29B$48.50B | +11.9% |
| SG&A Expenses | $7.29B$7.64B | −4.5% |
| Operating Income | $2.35B$2.36B | −0.6% |
| Interest Expense | $186.00M$192.00M | −3.1% |
| Net Income | $1.28B$1.15B | +11.2% |
| EPS (Basic) | $8.54$7.44 | +14.8% |
| EPS (Diluted) | $8.44$7.36 | +14.7% |
| Shares Outstanding (Basic) | 149.46M154.19M | −3.1% |
| Shares Outstanding (Diluted) | 151.14M155.87M | −3.0% |
05—Questions
Frequently Asked Questions
What is the status of the Aetna merger and what will shareholders receive?
Humana stockholders approved the Merger Agreement on October 19, 2015. Each Humana share will convert into 0.8375 of an Aetna common share and $125 in cash, without interest. The merger remains subject to closing conditions, including regulatory approvals, and is currently expected to close in the second half of 2016.
Why did Retail segment earnings decline in 2015?
Retail segment pretax income decreased $409 million, or 30.5%, to $930 million. The primary drivers were a higher benefit ratio of 86.7%, including a $176 million premium deficiency reserve for certain individual commercial medical products for the 2016 coverage year, and higher than expected medical costs in Medicare Advantage and individual commercial medical.
How significant is government program exposure to Humana's revenue?
The filing states that about 73% of 2015 premiums and services revenue was derived from contracts with the federal government, and that Medicare products generated approximately 72%. Approximately 14% came from individual Medicare Advantage contracts with CMS in Florida, and the filing notes the loss of these or other CMS contracts could have a material adverse effect.
What drove the decline in operating cash flow and what capital actions did Humana take?
Operating cash flow was $868 million in 2015 versus $1.6 billion in 2014. The company attributed the decline to the effect of significant commercial and group Medicare Advantage membership growth in 2014 and to working capital timing, including growth in receivables under the 3Rs. Humana repurchased 1.85 million shares for $329 million and paid $172 million in dividends during 2015.
What risks does the health insurance industry fee and the Health Care Reform Law pose to Humana's results?
The annual health insurance industry fee is not tax deductible. Humana paid $867 million for 2015 and expects a higher amount in 2016 given its market share. This significantly increased the effective tax rate, which was 47.5% in 2015 and is expected to be 49% to 51% in 2016 excluding Merger transaction costs. The filing also notes that a one-time suspension of the fee in 2017 is expected to significantly reduce the 2017 effective tax rate.
06—Continue