LOUISVILLE, Ky.--(BUSINESS WIRE)--Humana Inc. (NYSE: HUM) today announced the mutual termination of its merger agreement with Aetna Inc. (Aetna), following a ruling from the United States District Court for the District of Columbia granting a United States Department of Justice request to enjoin the merger. Under the terms of the merger agreement, Humana is entitled to a breakup fee of $1 billion, or approximately $630 million, net of tax.
“The healthcare industry is in a dynamic state, and the public is looking to companies like Humana to improve the cost of care and the consumer experience,” said Bruce D. Broussard, Humana’s President and Chief Executive Officer. “As an independent company, we will continue to innovate and sharpen our focus on the local healthcare experience of all our members, especially seniors living with chronic conditions. Our strategy not only improves the value we bring to members, doctors and other healthcare professionals, but it also helps reduce costs and enhances the growth platform for both our health plans and our Healthcare Services businesses, thus positioning us well for long-term, sustainable growth.”
Broussard added, “We are very proud of the tremendous effort and commitment of our associates during this extended period of uncertainty and their continuing focus and dedication to helping our members achieve their best health.”
As an independent company, Humana will continue to build upon its integrated care delivery strategy by intensifying its focus on people living with chronic conditions – particularly those aging into or already in Medicare Advantage or dual eligible plans. This population is fast-growing, with greater than 85 percent of seniors having at least one chronic condition and 65 percent having multiple chronic conditions (a). To further advance this strategy, the company will maintain its employer group customer focus, continuing to establish relationships with Medicare age-ins, while leveraging its clinical and operating platforms and furthering partnerships with doctors and other healthcare professionals. This brings value-added capabilities to the company’s employer group customers, particularly small to mid-size employers.
As the company’s business model demonstrates, when Humana integrates care with doctors and other healthcare professionals and serves members outside of traditional institutions, its members’ health improves, care is more cost-effective, and consumers are more engaged. These are key drivers to enabling more affordable healthcare for consumers and facilitating higher Star quality ratings, while also improving financial performance.
Humana is enhancing its integrated care delivery strategy in several key areas to further enable a rich, locally delivered healthcare experience for members, by doing the following:
“By extending and expanding the local capabilities of our Healthcare Services businesses and supporting doctors and other healthcare professionals with innovative and unsurpassed population-health tools, we believe we can remove barriers for our members. This will help them achieve their best health by enabling a more simplified healthcare experience – one that combines the lifestyles of our members and the clinical aspects so critical to improving lifelong health and well-being,” said Broussard. “We believe this will, in turn, continue to drive growth across the enterprise and favorable returns for our stockholders.”
The company will continue its practice of evaluating its portfolio of businesses to ensure focus on those lines of business where its integrated care delivery strategy can add value for health plan members, healthcare professionals and its government program and employer group customers.
Regarding the company’s individual commercial medical coverage (Individual Commercial), substantially all of which is offered on-exchange through the federal Marketplaces, Humana has worked over the past several years to address market and programmatic challenges in order to keep coverage options available wherever it could offer a viable product. This has included pursuing business changes, such as modifying networks, restructuring product offerings, reducing the company’s geographic footprint and increasing premiums.
All of these actions were taken with the expectation that the company’s Individual Commercial business would stabilize to the point where the company could continue to participate in the program. However, based on its initial analysis of data associated with the company’s healthcare exchange membership following the 2017 open enrollment period, Humana is seeing further signs of an unbalanced risk pool. Therefore, the company has decided that it cannot continue to offer this coverage for 2018. Through the remainder of 2017, Humana remains committed to serving its current members across 11 states where it offers Individual Commercial products. And, as it has done in the past, Humana will work closely with its state partners as it navigates this process.
Capital Deployment Plans
The company today also announced strategic changes to its capital deployment plans to increase its return of capital to stockholders and to create capacity for strategic investments.
Investor Day 2017
Humana also announced its intention to host an Investor Day in New York, NY on April 25, 2017, where it will provide more detail on the company’s strategic actions and its financial prospects. Specific details for that event will be announced at a later date.
2017 Financial Guidance
Humana provided its Generally Accepted Accounting Principles (GAAP) and Adjusted EPS guidance for FY17 as detailed below. GAAP and Adjusted results for the year ended December 31, 2016 (FY16) are shown below for comparison. Adjusted FY16 results have been recast to exclude the Individual Commercial business given the company’s decision to no longer offer these products beginning in 2018, as discussed above.
|Diluted earnings per common share||
|GAAP||$16.65 to $16.85||$4.07|
|Net (gain) expenses associated with the now-terminated transaction with Aetna (for FY17, primarily the break-up fee)||(~4.32)||0.64|
|Amortization of identifiable intangibles||~0.31||0.32|
|Beneficial effect of lower effective tax rate in light of pricing and benefit design assumptions associated with the 2017 temporary suspension of the non-deductible health insurance industry fee; excludes Individual Commercial business impact||(~2.14)||-|
|Write-off of risk corridor receivables (d)||-||2.43|
|Reserve strengthening for the company’s non-strategic closed block of long-term care insurance business (e)||-||2.11|
|Estimated guaranty fund assessment expense to support the policyholder obligations of Penn Treaty (an unaffiliated long-term care insurance company)||~0.13||-|
|FY16 Adjusted (non-GAAP) – as reported||-||$9.57|
|Operating losses associated with the Individual Commercial business given the company’s planned exit on January 1, 2018; FY16 excludes losses associated with the write-off of risk corridor receivables||~0.17||1.37|
|Adjusted (non-GAAP) – FY17 projected; FY16 as recast||$10.80 - $11.00||$10.94|
The company has included financial measures throughout this earnings release that are not in accordance with GAAP. Management believes that these measures, when presented in conjunction with the comparable GAAP measures, are useful to both management and its investors in analyzing the company’s ongoing business and operating performance. Consequently, management uses these non-GAAP financial measures as indicators of the company’s business performance, as well as for operational planning and decision making purposes. Non-GAAP financial measures should be considered in addition to, but not as a substitute for, or superior to, financial measures prepared in accordance with GAAP. All financial measures in this press release are in accordance with GAAP unless otherwise indicated.
“Our results for 2016 demonstrated Humana’s ability to maintain operational discipline and advance our strategy during periods of uncertainty and change,” said Brian A. Kane, Senior Vice President and Chief Financial Officer for Humana. “As we head into 2017, this experience increases our confidence that we will continue to drive increased consistency and sustainability of earnings, as well as top and bottom line growth.”
Factors expected to impact the company’s projected FY17 earnings growth include:
|Midpoints of FY17 estimated ranges used for simplicity||
|FY16 Adjusted – as reported||$2,821||$9.57|
|Operating losses associated with the Individual Commercial business given the company’s planned exit on January 1, 2018; excludes FY16 losses associated with the write-off of risk corridor receivables||291||1.37|
|FY16 Adjusted – as recast||$3,112||$10.94|
|Excess prior period development not expected to recur in FY17, primarily Medicare Advantage (f)||(~180)||(~0.74)|
|Projected changes versus the prior year include:|
Retail Segment primarily reflecting:
|Group Segment primarily reflecting (1) consistent pricing discipline and (2) continued focus on cost structure optimization||~30|
Healthcare Services Segment primarily reflecting the
offsetting impacts of:
|Other changes (primarily investment income and interest expense)||(~85)|
|Total projected changes||~115||~0.38|
|Lower projected weighted average share count primarily due to anticipated share repurchases||~0.32|
|Projected FY17 Adjusted||~$3.05 billion||~$10.90|
|In accordance with GAAP unless otherwise noted||
As of February 14, 2017
Diluted earnings per common share (EPS)
GAAP $16.65 to $16.85
Non-GAAP $10.80 to $11.00
Consolidated $53.5 billion to $54.5 billion
Retail segment $45.75 billion to $46.25 billion
Group segment $7.00 billion to $7.50 billion
Healthcare Services segment $25.50 billion to $26.00 billion
|Change in year-end medical membership from prior year end||
: 86.0% to 86.5%
Group segment: 80.5% to 81.5%
|Consolidated operating cost ratio||11.25% to 11.75%||
|Segment pretax results||
$1.75 billion to $1.80 billion
Group segment: $265 million to $285 million
Healthcare Services segment: $1.00 billion to $1.10 billion
|Effective tax rate||
GAAP 36% to 37%
Non-GAAP 47% to 48%
|Weighted average share count for diluted EPS||146 million to 147 million||
|Cash flows from operations||$2.8 billion to $3.2 billion||
|Capital expenditures||$550 million to $600 million|
Conference Call and Webcast
Humana will host a conference call and webcast to discuss the announcements in this press release at 4:45 p.m. eastern time today.
The webcast may be accessed via Humana’s Investor Relations page at humana.com. The company suggests those listening over the web sign on approximately 15 minutes in advance of the call. The company suggests web participants visit the site well in advance of the call to run a system test and to download any free software needed.
For those unable to listen in to the live call, the call replay may be accessed the Historical Webcasts and Presentations section of the Investor Relations page at humana.com, approximately two hours following the live webcast. Telephone replays will be available from 8:15 p.m. eastern time on February 14, 2017 until midnight eastern time on April 14, 2017 and can be accessed by dialing 855-859-2056 and providing the conference ID # 72762971.
(a) Chronic condition charts 2014, https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/Chronic-Conditions/Chartbook_Charts.html
(b) FY17 Adjusted EPS projections exclude the following:
(c) FY16 Adjusted EPS (Recast) excludes the following:
(d) On November 10, 2016, the U.S. Court of Federal Claims ruled in favor of the government in one of a series of cases filed by insurers against the Department of Health and Humana Services (HHS) to collect risk corridor payments, rejecting all of the insurer’s statutory, contract and Constitutional claims for payment. The company had maintained the receivable in previous periods in reliance upon the interpretation previously promulgated by HHS that the risk corridor receivables were obligations of the U.S. government. Given this court decision, however, the company’s conclusion with respect to the ultimate collectability of the receivable has shifted, and accounting rules required that the receivable be written off. Land of Lincoln Mutual Health Insurance Company v. United States; United States Court of Federal Claims No. 16-744C.
(e) As noted above, in addition to previously-disclosed adjustments, EPS for FY16 included a strengthening of reserves for the company’s non-strategic closed block of long-term care business. In connection with its acquisition of KMG America in 2007, the company acquired a non-strategic closed block of long-term care insurance policies. These policies were sold between 1995 and 2005, of which approximately 30,800 remained in force as of December 31, 2016. During the fourth quarter of 2016, the company recorded a reserve strengthening for this closed block of policies as it determined the present value of future premiums, together with its existing reserves were not adequate to provide for future policy benefits. This adjustment was primarily driven by emerging experience indicating longer claims duration, a prolonged lower interest rate environment and an increase in policyholder life expectancies.
(f) The company’s reserving practice is to consistently recognize the actuarial best estimate of its ultimate benefits expense. Actuarial standards require the use of assumptions based on moderately adverse experience, which generally results in favorable reserve development related to the prior year. In FY16, the company experienced prior period reserve development that exceeded what it would expect in a typical year primarily due to higher than normal claim recoveries.
This news release includes forward‐looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in investor presentations, press releases, Securities and Exchange Commission (SEC) filings, and in oral statements made by or with the approval of one of Humana’s executive officers, the words or phrases like “expects,” “believes,” “anticipates,” “intends,” “likely will result,” “estimates,” “projects” or variations of such words and similar expressions are intended to identify such forward‐looking statements.
These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and assumptions, including, among other things, information set forth in the “Risk Factors” section of the company’s SEC filings, a summary of which includes but is not limited to the following:
In making forward‐looking statements, Humana is not undertaking to address or update them in future filings or communications regarding its business or results. In light of these risks, uncertainties, and assumptions, the forward‐looking events discussed herein may or may not occur. There also may be other risks that the company is unable to predict at this time. Any of these risks and uncertainties may cause actual results to differ materially from the results discussed in the forward‐looking statements.
Humana advises investors to read the following documents as filed by the company with the SEC for further discussion both of the risks it faces and its historical performance:
Humana Inc., headquartered in Louisville, Ky., is a leading health and well-being company focused on making it easy for people to achieve their best health with clinical excellence through coordinated care. The company’s strategy integrates care delivery, the member experience, and clinical and consumer insights to encourage engagement, behavior change, proactive clinical outreach and wellness for the millions of people we serve across the country.
More information regarding Humana is available to investors via the Investor Relations page of the company’s web site at www.humana.com, including copies of: