HUM — A closer look at insurance costs

Humana's third quarter produced two different earnings headlines: a profit under accounting rules and an adjusted loss.

On November 6, $HUM reported GAAP earnings of $1.33 per share and an adjusted loss of $0.70 per share. The adjustments include valuation changes and other items, so the figures answer different questions. Neither should be treated as a complete substitute for reading the reconciliation.

The insurer's benefit ratio was 93.7% in its insurance segment. That means benefits expense was about $93.70 for every $100 of premium revenue, before other operating costs. It was better than management's previous expectation of slightly above 94%, but left a narrow margin to cover the rest of the business.

Humana raised its full-year adjusted earnings forecast to at least $9.50 per share from at least $9.00. Management still expects a year-over-year decline in that adjusted measure, partly reflecting a Medicare Advantage star-ratings headwind after mitigation. Quality ratings can affect bonus payments to plans.

For the next test, compare the insurance benefit ratio, membership and adjusted earnings with the reconciliation to GAAP results. That can show whether improved claims costs and pricing are translating into more durable earnings.