Humana Inc. (HUM) Earnings

Management highlights

- Business and Membership Performance * 2026 year-to-date performance and member growth trajectory are tracking in line with management expectations * Cost trends for 2026 (expected 7-8% all-in, high single-digit) are in line with expectations, with slight favorability concentrated in inpatient care, particularly for members in value-based care agreements * Individual MA pre-tax margin is on track to double in 2026, excluding STARS headwinds - STARS Quality Program Progress * The BY28 STARS measurement period is complete, and 11 of 12 tracked HEDIS and patient safety metrics saw improvement rates that outpaced historical compound annual growth, validating operational changes and investments made over the past 18 months * BY29 STARS member engagement efforts maintain momentum, with key HEDIS metrics 5% ahead of 2025's quality improvement rate on a per-member basis at the end of Q2 2026 * Management now frames top quartile STARS performance as 10% higher STARS revenue per member per month (PMPM) versus the peer group median, rather than focusing solely on the percentage of members in 4+ star plans * A STARS results blackout period will run from August through October 2026, when CMS releases final BY28 STARS data - Operational Efficiency Transformation * Operating model restructuring goals include simplifying/streamlining operations, driving innovation via automation/AI, improving vendor partnerships, and retaining top talent * Completed initiatives to date in 2026 include centralizing utilization management across 11 markets, expanding outsourcing in finance/HR/IT, transforming vendor relationships from tactical to strategic, and integrating legacy Care Plus operations into core platforms * These operating model changes have generated hundreds of millions of dollars in value in the first half of 2026 - Capital Allocation and Strategic Updates * Announced an agreement to divest the minority interest in Gentiva for approximately $900 million, which will largely fund the recent acquisition of MaxHealth * Awarded a statewide Illinois Medicaid managed care contract, set to launch in January 2027; Humana was the only new entrant awarded a contract alongside five incumbents * Established $1.5 billion in contingent capital facilities via pre-capitalized trust securities (PCAPs), an innovative first for the health payer industry, to expand low-cost long-term liquidity access * Announced two new additions to the Board of Directors: Paul Smith (Chief Commercial Officer at Anthropic) and Fred Crawford (former President/COO of Aflac), adding deep technology, insurance, and operational expertise - 2027 MA Bid Strategy * The top priority for 2027 bids is delivering meaningful margin progression to stay on track for the 2028 target of a sustainable 3%+ pre-tax margin, with a secondary priority of retaining as many members as possible * Plan exits will prioritize retaining higher-performing plans (particularly those with greater value-based care penetration) and will impact approximately 600,000 members; management expects to recapture a significant portion of these members, similar to the 40%+ recapture rate seen in 2025

Guidance

- Management reaffirms it remains on track to meet all 2028 Investor Day commitments, including the core goal of delivering a sustainable pre-tax margin of at least 3% - Full-year 2026 operating cost ratio is expected to decrease approximately 150 basis points year-over-year, consistent with prior guidance - Management expects to make meaningful progress toward the 2028 3%+ margin target in 2027, with final 2027 margin results dependent on final membership size and composition - 2027 bid trend assumptions remain aligned with 2026 levels (high single-digit overall), with drug trends expected to tick modestly higher due to the upcoming new drug pipeline; built-in contingency pricing is included to account for uncertainty, consistent with past practice - BY28 STARS outlook remains unchanged: management remains confident it is on track to deliver top quartile STARS results, defined as 10% higher STARS revenue PMPM versus the peer median - A virtual investor update will be held on December 10, 2026, to provide a comprehensive progress update on Investor Day commitments after BY28 STARS results are released; no major strategy changes or target revisions are anticipated

Segment performance

Segment-specific absolute financial results and revenue contribution percentages were not provided in this earnings call transcript. The call focused primarily on overall Medicare Advantage (MA) performance, 2027 MA bid strategy, and enterprise operational progress, with only high-level commentary on Centerwell and Medicaid segments. For the overall business, Q2 2026 consolidated operating cost ratio decreased 120 basis points year-over-year, with a full-year 2026 operating cost reduction of approximately 150 basis points expected. Part D business is performing in line to slightly better than 2026 expectations, with strong focus on margin management for 2027 bids. Centerwell is seeing strong patient growth in 2026 driven by organic growth and acquisitions, with performance aligned to broader business trends.

Risks & headwinds

- Final BY28 STARS results remain uncertain: industry performance thresholds are not yet known, so even with strong operational progress, management cannot guarantee a top quartile outcome when CMS releases final results in October 2026 - 2027 bids are finalized six months in advance of the plan year, leaving exposure to unforeseen shifts in medical or drug cost trends, though management has built contingency buffers into bid pricing - STARS litigation and potential program changes introduce uncertainty; management cannot comment on pending litigation outcomes, and program instability could impact competitive positioning and margins - Plan exits for 2027 will impact approximately 600,000 members, and while management expects to recapture a significant portion of this volume, recapture rates may differ from the 2025 experience - New de novo Centerwell locations are still working through the expected J-curve of early-stage performance, creating near-term margin pressure for this segment - Policy changes such as the sunset of the Part D premium stabilization program create uncertainty, though management planned for this possibility in 2027 bidding

Analyst Q&A

• Q: Management's 2028 target requires around 2% of cumulative margin improvement from 2026 levels. Does management expect to deliver more than half of this improvement in 2027, and what trend assumptions and conservatism are built into 2027 bids? /

  A: Management declined to share specific year-over-year margin progress targets, as final 2027 margins depend on the ultimate size and composition of membership. They confirmed they expect significant margin progress in 2027 that puts them well on path to the 2028 3% target. Bids assume trend levels consistent with 2026, with a modest tick up in drug trends due to the new drug pipeline, and standard contingency buffers built in for uncertainty, as bids are submitted six months in advance of the plan year.

• Q: The 12 HEDIS/ patient safety metrics shared to show STARS progress — how were these selected, how representative are they of overall performance, and how does their improvement rate compare to peer group average improvement? /

  A: These metrics were selected because they have consistent, comparable longitudinal data over the past five years; metrics added/removed from the STARS program, private CMS survey data, or early preview data shared only with Humana were excluded. Management states the sample is representative of overall performance. While internal peer threshold estimates are not shared, the operational progress demonstrated puts Humana in a strong position to hit its target of 10% higher STARS revenue PMPM versus the peer median, even with unforeseen threshold changes, and gives management confidence it can navigate the inherent uncertainty around final results.

• Q: Why is Humana pursuing more aggressive plan exits for 2027 than it did in 2026, and what criteria are used to select which plans to exit? /

  A: Humana follows a multi-year approach to portfolio management, annually evaluating plan-level underwriting margin and capital return targets against dynamic market conditions. For 2027, the company pushed harder on plan exits to reach the needed margin progress for the 2028 target, prioritizing cutting lower-margin, lower-return plans to protect higher-value plans rather than implementing uniform cuts across the portfolio. Most exiting plans had BY27 ratings of 3.5 stars or lower, and Humana expects to recapture over 40% of impacted members, matching the 2025 recapture result.

• Q: What is the strategic rationale for the new $1.5 billion PCAP contingent capital facility, and does it reflect new risk observations related to 2027 bids? /

  A: The PCAP structure allows Humana to expand contingent liquidity access without increasing balance sheet leverage unless the facilities are drawn, and management does not expect to draw on them in the near or medium term. It diversifies liquidity sources at a low cost, eliminates counterparty risk because cash is held in a fixed income trust pool for investors, and provides extended duration, with no connection to changes in 2027 bid risk expectations.