Humana beats on earnings, guides higher. But profit-takers are out after recent all-time highs

Published Wed, Jul 27 202211:45 AM EDT

Club holding Humana (HUM) reported a better-than-expected second quarter before the opening bell Wednesday. Revenue increased 15% year-over-year to $23.66 billion, topping estimates on FactSet of $23.41 billion, and adjusted earnings-per-share increased 26% year-over-year to $8.67, exceeding estimates of $7.62. The earnings beat comes despite Humana's benefits expense ratio — also known as medical loss ratio, or MLR — coming in slightly above expectations at 85.8% versus the 85.3% consensus estimates. That, however, means a miss as lower is better here. Bottom line All in, a solid quarter with little to nitpick. The stock was actually down about 3.5% due to what we believe is a combination of profit-taking — given its recent run to all-time highs — and perhaps disappointment that management did not pass the entirety of the beat through to forward guidance. We believe Human's decision to use some of the second quarter's upside to increase investments in marketing and distribution to support Humana's improved 2023 Medicare Advantage (MA) product offering and support long-term growth to be the right call by management. Moreover, management remains on track to realize $1 billion in value creation with more upside in 2023 than previously expected. We'll go more on-depth on that later. Segment results for Q2 Humana's Retail Segment includes Medicare benefits — marketed to individuals directly or via group Medicare accounts, Medicare Supplement and state-based contract accounts. Retail revenue increased 13% year over year to $20.95 billion, driven by individual Medicare Advantage, membership growth in state-based contracts, and higher per member individual Medicare Advantage premiums. The benefits expense ratio in the quarter was 87%, in line with the year ago period. It reflected anticipated lower favorable prior period development that was partially offset by higher per member individual Medicare Advantage premiums and lower admissions per thousand associated with the individual Medicare Advantage business in the current year. Excluding the impact of favorable PPD, kind of like a core rate, retail's benefit ratio decreased, meaning improved, 60 basis points year over year to 87.2% from 87.8% a year ago. Humana's Group and Specialty Segment mostly consists of employer group fully insured commercial medical products and specialty insurance benefits marketed to individuals and groups. Group and Specialty revenue decreased 8% year over year to $1.58 billion, primarily due to the anticipated decline in fully insured commercial medical and administrative services only (ASO) commercial memberships, partially offset by higher per member premiums. The benefits expense ratio in the quarter saw significant improvement, falling to 76.3% from 82.6% last year. The improvement can be attributed to a higher mix of specialty products, which has a lower benefits ratio, as well as pricing and benefit design efforts to address Covid and improve profitability. Ma