Humana (HUM) Q1 2026 Earnings Call Transcript

Image source: The Motley Fool.

Date

Apr. 29, 2026 at 8 a.m. ET

Call participants

- President and Chief Executive Officer — James Rechtin

- Chief Financial Officer — Celeste Mellet

- President, Insurance Segment — George Renaudin

- President, CenterWell — Dr. Sanjay Shetty

Need a quote from a Motley Fool analyst? Email [email protected]

Full Conference Call Transcript

Jim Rechtin, Humana's President and Chief Executive Officer; and Chief Financial Officer, Celeste Mellet. Following these remarks, we will host a question-and-answer session where Jim and Celeste will be joined by George Renaudin, Humana's President of Insurance segment; and Dr. Sanjay Shetty, President of Center well. Before we begin our discussion, I need to advise call participants of our cautionary statement. Certain of the matters discussed in this conference call are forward-looking and involve a number of risks and uncertainties. Actual results could differ materially.

Investors are advised to read the detailed risk factors discussed in our latest Form 10-K, our other filings with the Securities and Exchange Commission and our fourth quarter 2025 earnings press release as they relate to forward-looking statements, along with other risks discussed in our SEC filings. We undertake no obligation to publicly address or update any forward-looking statements and future filings or communications regarding our business or results. Today's press release, our historical financial news release and our filings with the SEC are also available on our Investor Relations site. Call participants should note that today's discussion includes financial measures that are not in accordance with generally accepted accounting principles, or GAAP.

Management's explanation for the use of these non-GAAP measures and reconciliation of GAAP to non-GAAP financial measures are included in today's press release. Any references to earnings per share or EPS made during this conference call refer to diluted earnings per common share. Finally, this call is being recorded for replay purposes. That replay will be available on the Investor Relations page of Humana's website, humana.com, later today. With that, I will turn the call over to Jim.

James Rechtin: Thank you, Lisa, and good morning, everyone. Thank you for joining us today. We have a few headlines. Let me start with we are pleased with our first quarter, and that is because we are where we expect it to be. And I'm just going to repeat that for emphasis. We are pleased with our first quarter because we are where we expect it to be. And right now, second headline, we are turning our attention to bids and we are approaching bids with a focus on returning to a sustainable margin of at least 3% in 2028 and making progress against that in 2027. We know that we need to make some progress against that in 2027.

Those are the commitments we laid out in June of last year at Investor Day, and we stand by those commitments. The primary headline here is that we believe that we are on track to meet our commitments from Investor Day, and we're doing the things to follow through on that. So as usual, I will frame my comments today around the 4 drivers of our business. First is product and experience, which drive customer retention and growth; second is clinical excellence, which delivers clinical outcomes in medical margin; third, highly efficient operations; and fourth, capital allocation and growth in both CenterWell and [ Medicaid ].

So I'll start with product and experience where there are 3 things that I want you to take away. First of all, our member growth trajectory is on track. Now we will, and we have and we will continue to manage distribution and growth dynamically if things change, but our growth trajectory is on track. Second, I want to emphasize that membership, both new and returning, is performing as expected 3 months into the year. Now as we turn our attention to bids for the 2027 plan year, we want express appreciation for CMS' engagement on the improved rate notice.

This helps promote more stability in the industry as a whole, and it has a positive impact on the health of our seniors. Nevertheless, medical cost trend continues to outpace program funding. And so our third takeaway, which is something we have noted previously, is that we will adjust benefits to remain on track to deliver our 2028 commitment of returning to a sustainable margin of at least 3%. And again, we expect to make the necessary progress towards that goal in 2027. We are very aware that we need to make some progress in '27. So turning to clinical excellence. Our outlook on BY '28 Stars has not changed.

We continue to be confident that we're on the right track to return to top quartile Stars results in BY '28. Our performance on the Stars compensation metric as disclosed in our proxy is a good indicator of our progress. However, as you know, we don't know industry thresholds. And so while we feel good about our progress, we cannot guarantee an outcome in October. We will share more about our progress in the Q2 earnings call once the hybrid season is complete. For BY '29 Stars, we are seeing a strong early start. We have early engagement efforts. These are new efforts, early engagement efforts, which are translating into improved member activation and improved outcomes.

To provide just one example, we're identifying certain chronic conditions among new members faster than we have in the past. What this allows us to do is to better target our gap closure efforts. And as a result, at the end of Q1, we are about 5% ahead of last year's GAAP closure pace on a per member basis on certain key HEDIS metrics. Now regarding highly efficient operations, we continue to make progress on our operating model changes. This includes centralizing certain teams, expanding outsourcing and increased automation of processes. All of these things are increasing efficiencies. And then finally, on capital allocation, we recently completed the acquisition of Max Health.

This is a Florida-based primary care organization that will expand CenterWell's reach into new critical markets. We also saw Medicaid membership grow by approximately 50,000 lives, and this is largely driven by the January start of programs in Michigan, Illinois and South Carolina. So in conclusion, we expect to double individual MA margin in 2026 adjusted for Stars. We expect to double individual MA margin. We continue to feel good about the way our member growth is setting us up for this year in subsequent years. We are making good progress on Stars. We will continue to be disciplined in pricing with a focus on unlocking the earnings power of the business by 2028.

As a final note, before I turn it over to Celeste, I want to share an update on the insurance leadership transition that we announced in December. George Renaudin, Insurance segment President, will retire effective June 29, 2026. Until then, he will focus primarily on the annual MA bid process, and he will continue to serve as a strategic adviser through at least the end of 2026. Aaron Martin, who is currently President of Medicare Advantage, will begin leading the day-to-day management of the insurance segment now. He will continue to report to George and he will formally assume the role of Insurance Segment President when George retires.

John Barger, a 30-year industry veteran with more than a decade in Medicare Advantage, will lead MA operations effective immediately and will formally assume the role of President of Medicare Advantage when Aaron transitions. I want to personally thank George for his nearly 3 decades of service to Humana and its instrumental impact on growing the Medicare Advantage business. And with that, I will turn it to Celeste for a few remarks before we get to Q&A.

Celeste Mellet: Thank you, Jim. There are a couple of items I will briefly address before we begin Q&A. First, we are pleased that available information to date suggests that our Medicare Advantage members, both new and existing, are performing in line to better than our guidance, even after adjusting for a more subdued flu season and the winter storms. This data, including what we continue to monitor in April, includes risk scores, hospital admits per thousand, or APTs, pharmacy claims, and initial medical claims, which are continuing to complete for the first quarter.

And we continue to enhance our claims and cost trend monitoring practices, including anomaly detection to identify and react to claims and payment trends faster as well as to improve first-time payment accuracy. This work -- this important work improves visibility into cost trends and further strengthens payment integrity. Turning to capital deployment and the balance sheet. In the first quarter of last year, I posited that there was a real opportunity to increase the efficiency and resiliency of our balance sheet. Over the last 12 months, we have made considerable progress towards this end.

Our efforts include bolstering liquidity and addressing future funding needs with rating agency-friendly instruments, such as the $1 billion junior subordinated notes we completed in March, which is expected to fund 2027 maturities. In addition, we executed on several initiatives to optimize the balance sheet, including deploying subsidiary reinsurance and augmenting legal entity structures successfully mitigating over $3 billion in capital contribution requirements for 2026. We are maintaining dividend levels and limiting share repurchases to amounts necessary to offset dilution from employee stock compensation, and we intend to increase both when our cash flows and funding capacity grow with the execution of the plan laid out at our Investor Day.

And we are pursuing noncore asset divestitures to help fund strategic acquisitions and expect to share more news with you on this front over the next several months. All in, we are pleased with the results of our balance sheet enhancements and are comfortable with our capital levels, which provide a prudent buffer above regulatory and rating agency requirements. Consistent with this disciplined approach, we continue to evaluate a pipeline of initiatives to further strengthen the balance sheet. Lastly, let me reiterate the key messages that Jim highlighted.

We are pleased with the solid start to 2026 and believe our expanded membership base, relentless focus on returning to top quartile Stars and pricing discipline position us well to deliver stable and compelling MA margin and unlock the earnings potential of the business by 2028 as laid out at our Investor Day last year. We remain committed to taking appropriate action to meet the commitments we have made to you. I will now turn the call back to Lisa to start the Q&A.

Lisa Stoner: Thank you, Glen. Before starting the Q&A, just a quick providers. That's in fairness to those waiting in the queue. We ask that you please limit yourself to 1 question. With that, operator, please introduce the first caller.

Operator: Our first question comes from Ann Hynes with Mizuho.

Ann Hynes: I would just like to dig into DCP and IBNR a bit. in the press release, it looks like IBNR grew about 35% sequentially, and this is versus a 22% membership growth when looking at just total Medicare Advantage. Could you provide some insights into the drivers of this elevated IBNR growth relative to the membership growth? And also relative to your expectations coming online, if it came in line with your expectations? And is this a conservatism on your part? Anything would be great, any more details would be great.

Celeste Mellet: Ann, thanks for your question. So consistent with the prudent assumptions we embedded in our guidance at the beginning of the year, which we are maintaining. We did take a prudent approach to claims reserves for the quarter given how early it is in the year and given the membership growth. So you are right. IBNR was up 35%, well above the growth in membership. We typically point you to looking at membership growth to understand how IBNR ship flows. So we believe we are prudently reserved coming out of the first quarter, just given the year ahead.

I want to reiterate that we feel very good about what we saw in the first quarter and through the end of April in terms of all of the early indicators and completed claims. And what we're seeing in April so far is fairly consistent with what we saw in the first quarter.

Operator: Our next question comes from Andrew Mok with Barclays.

Andrew Mok: I wanted to ask about the Welsh Carson put call options given some near-term exercise windows. First, do you plan to exercise your June call options for the first 2 clinic cohorts? And second, if Welsh Carson were to exercise the full amount of its put options, what would the total cash obligation look like in '27 and '28?

Celeste Mellet: Andrew, it's Celeste. So we need to make a decision on the put call option in the middle of this year. We will obviously be mindful of all of the other things that are going on in our cash position on our balance sheet. I would say that Welsh Carson has been an amazing partner to us, and we're proud of what we've built together and meeting in a leading primary care business for seniors and continue to see structural value in this type of relationship. In terms of if they put to us, next year, so next year would be the beginning of the first quarter, it would be about $1 billion to $1.5 billion in 2027.

And to be clear, they can only put the '25 cohort to us in 2027, but both would be about $1 billion to $1.5 billion. And we have included any outflows related to puts or calls in our funding plan.

Operator: Our next question comes from Justin Lake with Wolfe Research.

Justin Lake: I wanted to talk a little bit more about your '27 bidding strategy. I appreciate your prepared remarks around rates and trend for '27, and how you'll be reducing benefits to bridge the delta between those 2 numbers and protect margins. But I want to ask your thoughts about protecting margins beyond that. Specifically, the reality that the full cost profile of your members probably won't be known for a couple of months, combined with the fact that you're in my confidence that you're going to get your Stars back for '28 will reduce your TBC for 2028?

So I want to ask how investors should think about the potential that the company might get some cushion to bid above and beyond that retrend differential you talked about to reflect this new member uncertainty in the 2028 TDC reality in order to protect 2027 margins?

James Rechtin: Justin, thanks for the question. I'll start, and then George will probably jump in here as well. So let me just be clear about how we're thinking about bids as we go into the year. Obviously, there's only so much detail that we can get into, but we can certainly share kind of philosophically what our principles