01—Abstract
Summary
Summary of the 10-K filed February 17, 2017. Cited figures are marked; the original filing is the authoritative source.
Humana Inc. reported net income of $614 milliona, or $4.07 per diluted common share, for 2016, down from $1.3 billion, or $8.44 per diluted share, in 2015.
Results were weighed by a $583 millionb write-off of commercial risk corridor receivables recorded in the fourth quarter, $505 million of reserve strengthening for the closed block of long-term care insurance policies, and $104 million of transaction and integration planning costs tied to the Aetna merger. Total revenues were $54.38 billion and stockholders' equity was $10.69 billion at December 31, 2016. Cash flow from operations rose to $1.94 billion from $868 million.
The central event in the filing is the termination of the Aetna merger. A federal court granted a permanent injunction on January 23, 2017, and on February 14, 2017 Humana and Aetna agreed to mutually terminate the Merger Agreement; Humana is entitled to a $1 billionc breakup fee. The Board also approved a new share repurchase authorization of up to $2.25 billion expiring December 31, 2017, under which Humana expects to complete a $1.5 billion accelerated share repurchase in the first quarter of 2017.
The quarterly dividend was raised to $0.40d per share from $0.29. On the business side, Humana is exiting its individual commercial medical business effective January 1, 2018, citing an unbalanced risk pool after the 2017 open enrollment period. Medicare is the dominant revenue source, with approximately 75% of total premiums and services revenue derived from federal government contracts.
Medicare Advantage Star ratings fell for the 2018 bonus year, with approximately 37% of July 31, 2016 membership in 4-Star plans or higher versus approximately 78% a year earlier, and Humana has filed for reconsideration. The company also expects a one-time suspension of the health insurer fee in 2017 to reduce operating costs and lower its effective tax rate to approximately 36% to 37%.
02—Key points
Key Highlights
- Net income fell to $614 million ($4.07 per diluted share) in 2016 from $1.276 billion ($8.44 per diluted share) in 2015, with the risk corridor write-off and long-term care reserve strengthening as major drags.
- Aetna merger terminated on February 14, 2017 after a January 23, 2017 federal court injunction; Humana is entitled to a $1 billion breakup fee.
- New share repurchase authorization of up to $2.25 billion, with a planned $1.5 billion accelerated share repurchase in Q1 2017; quarterly dividend declared at $0.40 per share.
- Exiting individual commercial medical businesses effective January 1, 2018, after the 2017 open enrollment showed signs of an unbalanced risk pool.
- Approximately 75% of 2016 premiums and services revenue came from federal government contracts; individual Medicare Advantage membership reached 2,837,600 at December 31, 2016.
- Star ratings declined for the 2018 bonus year, with approximately 37% of Medicare Advantage membership in 4-Star plans or higher versus approximately 78% previously; reconsideration has been requested.
- Health insurer fee suspended for 2017 is expected to reduce operating costs, lowering the 2017 effective tax rate to approximately 36% to 37% from 60.5% in 2016.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 17, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $54.38B$54.29B | +0.2% |
| SG&A Expenses | $7.17B$7.29B | −1.7% |
| Operating Income | $1.74B$2.35B | −25.8% |
| Interest Expense | $189.00M$186.00M | +1.6% |
| Net Income | $614.00M$1.28B | −51.9% |
| EPS (Basic) | $4.11$8.54 | −51.9% |
| EPS (Diluted) | $4.07$8.44 | −51.8% |
| Shares Outstanding (Basic) | 149.38M149.46M | −0.1% |
| Shares Outstanding (Diluted) | 150.92M151.14M | −0.1% |
05—Questions
Frequently Asked Questions
What happened to the Aetna merger?
A U.S. District Court granted the Department of Justice a permanent injunction on January 23, 2017, blocking the merger on antitrust grounds. On February 14, 2017, Humana and Aetna agreed to mutually terminate the Merger Agreement because the Board determined an appeal would not be in stockholders' best interest. Humana is entitled to a $1 billion breakup fee, and the filing notes continued liability for certain transaction costs.
Why did earnings decline in 2016?
Net income fell to $614 million from $1.276 billion. The filing attributes the decline mainly to a $583 million premiums reduction from writing off commercial risk corridor receivables, $505 million of benefits expense for reserve strengthening on the long-term care closed block, a $208 million increase in the premium deficiency reserve for individual commercial medical, and $104 million of Merger-related costs. The 2015 results also included a $270 million gain on the sale of Concentra.
What is changing in the individual commercial business?
Humana discontinued substantially all Health Care Reform Law compliant off-exchange individual commercial medical plans effective January 1, 2017, and offers on-exchange plans in 11 states for 2017, down from 15. On February 14, 2017, it announced an exit from these businesses effective January 1, 2018. The filing projects 2017 premiums from Health Care Reform Law compliant offerings of $850 million to $900 million, compared with $3.3 billion in 2016.
How will capital be returned to shareholders?
The Board approved a new share repurchase authorization of up to $2.25 billion, expiring December 31, 2017, and Humana expects to complete a $1.5 billion accelerated share repurchase in the first quarter of 2017. The Board declared a $0.40 per share dividend payable April 28, 2017, up from the $0.29 quarterly rate that was capped under the Merger Agreement. Declaration of future dividends remains at the Board's discretion.
What risks did the filing highlight regarding Medicare Advantage?
Star quality ratings for the 2018 bonus year showed approximately 37% of July 31, 2016 Medicare Advantage membership in 4-Star plans or higher, down from approximately 78% a year earlier. Humana attributes part of the decline to a CMS comprehensive program audit and has requested reconsideration, but says there can be no assurance of success. The filing also notes uncertainty around the phase-in of risk score calculation from RAPS to EDS, which rises to 25% for 2017, and ongoing RADV audits.
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