01—Abstract
Summary
Summary of the 10-K filed February 16, 2018. Cited figures are marked; the original filing is the authoritative source.
Humana Inc., headquartered in Louisville, Kentucky, is a health and well-being company with approximately 14 million medical members and 7 million specialty members at December 31, 2017.
During 2017, 79% of total premiums and services revenue came from contracts with the federal government, including 15% from individual Medicare Advantage contracts with CMS in Florida. Reported 2017 results were strongly boosted by a $936 milliona net gain tied to the terminated Aetna Merger Agreement, which was mainly a $1 billion breakup fee. Net income rose to $2.45 billion, or $16.81 per diluted share, compared with $614 million, or $4.07 per diluted share, in 2016.
Income before income taxes was $4.02 billionb, versus $1.55 billion in 2016. The filing also cites a 2017 suspension of the health insurer fee and the Tax Reform Law, which raised the 2017 tax provision by about $133 million and is expected to lower the 2018 effective tax rate to approximately 32.5% to 33.5%. Underlying operations were mixed.
Retail segment pretax income rose $288 millionc, or 17.0%, to $1.98 billion, driven by Medicare Advantage. Healthcare Services pretax income fell $129 million, or 11.8%, to $967 million, and the Individual Commercial segment swung to $193 million of pretax income from a $869 million loss, after the company exited that business effective January 1, 2018. Operating cash flow was $4.05 billion, up from $1.94 billion, largely reflecting the receipt of the merger termination fee.
Humana repurchased 12.99 million shares for $3.05 billiond in 2017, and a new authorization for up to $3.0 billion of repurchases was approved on December 14, 2017. Pending transactions include the sale of KMG America, expected to produce a net loss of about $365 million, and the acquisition of a 40% minority interest in Kindred at Home for about $800 million, expected to close in summer 2018. The filing highlights concentration risk and regulatory exposure.
Medicare products represented about 78% of total premiums and services revenue, and the company is subject to CMS risk-adjustment audits (RADV), qui tam litigation, and a pending $611 million claim against the federal government over risk corridor payments. Management also noted that 2018 Medicare Advantage membership growth is expected to be 180,000 to 200,000 members, while Medicare stand-alone PDP membership is expected to decline by 280,000 to 320,000.
02—Key points
Key Highlights
- Net income of $2.45 billion, or $16.81 per diluted share, in 2017, versus $614 million, or $4.07 per diluted share, in 2016; includes a $936 million net gain from the terminated Aetna Merger Agreement.
- Pretax income of $4.02 billion in 2017 versus $1.55 billion in 2016; Retail segment pretax income rose 17.0% to $1.98 billion.
- Healthcare Services segment pretax income declined 11.8% to $967 million, reflecting chronic care management optimization and lower provider services earnings.
- Operating cash flow of $4.05 billion in 2017, up from $1.94 billion, primarily due to receipt of the merger termination fee.
- Medicare products accounted for approximately 78% of total premiums and services revenue, and government contracts for 79%, creating significant concentration risk.
- Exited the Individual Commercial medical business effective January 1, 2018; Individual Commercial swung to $193 million pretax income in 2017 from an $869 million pretax loss in 2016.
- Share repurchases of $3.05 billion in 2017 (12.99 million shares); a $3.0 billion repurchase authorization was approved December 14, 2017.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 16, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $53.77B$54.38B | −1.1% |
| SG&A Expenses | $6.57B$7.17B | −8.4% |
| Operating Income | $4.26B$1.74B | +144.8% |
| Interest Expense | $242.00M$189.00M | +28.0% |
| Net Income | $2.45B$614.00M | +298.7% |
| EPS (Basic) | $16.94$4.11 | +312.2% |
| EPS (Diluted) | $16.81$4.07 | +313.0% |
| Shares Outstanding (Basic) | 144.49M149.38M | −3.3% |
| Shares Outstanding (Diluted) | 145.59M150.92M | −3.5% |
05—Questions
Frequently Asked Questions
What drove the large increase in 2017 net income?
The filing attributes the increase mainly to a net gain of $936 million associated with the terminated Aetna Merger Agreement, primarily a $1 billion breakup fee received February 16, 2017. Lower effective tax rate from the suspension of the health insurance industry fee in 2017 and year-over-year improvement in the Retail, Group and Specialty, and Individual Commercial segments also contributed, partly offset by lower Healthcare Services earnings and charges for workforce reduction programs.
How significant is government program exposure?
Very significant. In 2017, 79% of total premiums and services revenue came from federal government contracts, and Medicare products accounted for about 78%. Florida individual Medicare Advantage contracts with CMS alone represented about 15% of total premiums and services revenue, covering approximately 609,600 members.
What are the key pending transactions?
Humana agreed to sell KMG America, which holds a closed block of about 29,800 non-strategic long-term care policies, to Continental General Insurance Company, expected to produce a net loss of approximately $365 million and close by the third quarter of 2018. It also agreed to acquire a 40% minority interest in the Kindred at Home division of Kindred Healthcare for approximately $800 million, expected to close in summer 2018.
What is the outlook for the effective tax rate and membership?
The company expects its effective tax rate for 2018 to be approximately 32.5% to 33.5%, reflecting the federal corporate rate reduction under the Tax Reform Law, partly offset by the resumption of the health insurer fee in 2018. For 2018, it anticipates net growth of 180,000 to 200,000 individual Medicare Advantage members and 65,000 to 70,000 group Medicare Advantage members, and a net decline of 280,000 to 320,000 Medicare stand-alone PDP members.
What legal and regulatory risks are disclosed?
The filing discloses CMS risk-adjustment data validation (RADV) audits, the risk of extrapolated audit settlements, qui tam False Claims Act litigation including a suit over the actuarial equivalence of the Basic PDP plan, and a Department of Justice information request concerning Medicare Part C risk adjustment practices. Humana also filed suit on November 2, 2017 seeking approximately $611 million in risk corridor payments from the federal government, for which no receivable has been recorded. The company states it cannot predict outcomes with certainty and that results could be materially adversely affected.
06—Continue