Strong Membership Growth Boosts Humana
Profits were pressured in the quarter, but we are reiterating our fair value estimate and no-moat rating for the managed-care organization.
The combination of Humana's exit from the public exchange market and solid underwriting held the firm’s medical loss ratio steady compared with the year-ago period. However, the adjusted operating cost ratio (centralized costs as a percentage of operating revenue) increased by 170 basis points and weighed on profits. Positively, premium and total operating revenue increased for the quarter and were accompanied by a significant increase in membership. We believe the firm continues to benefit from higher-deductible plans, which kept utilization at a lower rate. We find this development highly positive and believe it reflects good underwriting and sales execution. However, the increase in centralized costs is a negative, and we would like to see this trend reverse over the coming quarters. Given the long-term uncertainty that will dominate the health insurance space over the next several years and the firm’s concentration in the lower-profit Medicare Part C market, controlling nonmedical expenses will be essential for Humana in producing long-term economic profits.
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