Humana Inc. has hit a rocky patch with the news of underperforming fourth-quarter 2023 earnings, facing a confluence of higher operating costs, ballooning benefits expenses, and a decrease in medical memberships. This troublesome conundrum forced the company to abandon its previously set target for 2025 earnings per share (EPS). While a hint of silver lining came from premium growth, increased investment income, and the formidable prowess of the CenterWell unit, the financial setback cast a shadow over Humana’s recent performance.

The adjusted earnings per share (EPS) stood at 11 cents, missing the Zacks Consensus Estimate, and marking a stark contrast from the $1.97 per share reported in the year-ago period. On the bright side, Humana recorded a robust 20.8% surge in adjusted revenues, which escalated to $25.7 billion, surpassing the consensus estimate by 1.4%. These contrasting financial dynamics kept investors on their toes, leaving them uncertain about the company’s future trajectory.

Operational Upheaval

Humana’s total premiums reached $25.1 billion, marking an 18.1% improvement compared to the previous year. Services revenues also reflected a positive trend, increasing by 3.6% year over year, amounting to over $1 billion. Moreover, investment income soared by 83.8% year over year, reaching $294 million. However, these glimmers of hope were overshadowed by the benefits expense ratio that worsened by 340 basis points, landing at 90.7%, on account of investments related to benefit design, and increased utilization trends in the Medicare Advantage business. Considering this backdrop, Humana’s reported loss from operations amounted to $348 million in the fourth quarter, significantly lagging behind estimates.

Segmental Standpoints

Insurance

The segment’s adjusted revenues surged by 21.2% to $24.7 billion. However, the adjusted operating loss stood at $361 million, paling in comparison to the operating income of $112 million in the year-ago period. Notably, the total medical membership for this segment dwindled by 1.3% year over year, posing a challenge for Humana.

CenterWell

The segment recorded revenues of $4.7 billion, indicating a 13.7% increase from the previous year. The solid performance was bolstered by growth in the Primary Care business and a solid Home Solutions business, and a commendable increase of 44.5% in adjusted operating income to $445 million.

Financial Update

Looking at Humana’s financial standing as of December 31, 2023, the company’s cash and cash equivalents stood at $4.7 billion, down from the previous year-end figure of $5.1 billion. Additionally, long-term debt amounted to $10.2 billion, with a 20 bps year-over-year improvement in debt to capitalization at 41.8% by the end of the fourth quarter. On a positive note, Humana’s total assets climbed to $47.1 billion from the 2022-end level of $43.1 billion.

Forecast and Moving Forward

Despite the setbacks, Humana remains resolute in projecting an adjusted EPS of around $16 for 2024 — a significant decline from the 2023 figure of $26.09. The company took the bold step of abolishing its previous target of adjusted EPS at $37 for 2025, owing to the escalating medical cost trends. It anticipates a margin recovery initiative to yield a $6-$10 per share growth in adjusted EPS in 2025, holding onto a glimmer of hope amidst current challenges.

The management also foresees individual Medicare Advantage membership growth of around 100,000 and anticipates a rise of approximately 45,000 in Group Medicare Advantage membership. However, it also estimates a decline of around 650,000 members in Medicare stand-alone prescription drug plans.

Summing up its outlook, Humana projects revenues of around $113 billion in 2024, expecting an increase from the 2023 figure of $106.4 billion. These insights shed light on the plethora of challenges and opportunities that lie ahead for Humana as it navigates through uncertainty and strives for sustainable growth.

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Stock Ranking Insights

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Mull over the free stock analysis report for Humana Inc. (HUM).

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