Industry Overview - The U.S. health insurance industry, known as Health Maintenance Organization (HMO), is expected to benefit from an expanding suite of commercial plans that offer higher margins and reduced regulatory risk [1] - Companies in this sector primarily manage subscribers' basic and supplemental health services, assuming risks and assigning premiums to health and medical insurance policies [2] Trends Impacting the Industry - Rising medical costs are a significant concern, driven by deferred care, increased utilization, chronic conditions, and expensive specialty drugs, which have pressured profit margins and led to earnings guidance cuts from major insurers [3][4] - Regulatory challenges are increasing, with proposals to cut federal Medicaid funding and reduce ACA subsidies, prompting insurers to focus on boosting their commercial plans portfolio [4] - A nationwide shortage of healthcare professionals, particularly nurses, is impacting hospitals' operational efficiency and the quality of care provided, which can affect customer retention for HMOs [5] Strategic Initiatives - HMOs are increasingly pursuing mergers and acquisitions (M&A) to enhance capabilities, enter new markets, and strengthen their competitive position, especially with favorable financing conditions expected from interest rate cuts in 2025 [6] Market Performance - The Zacks Medical-HMO industry has underperformed, declining 36.8% over the past year compared to the S&P 500's growth of 17.7% [11] - The industry's current valuation, based on the forward 12-month price-to-earnings (P/E) ratio, stands at 21.5X, which is lower than the S&P 500's 23.36X [15] Company Highlights - Cigna Group is well-positioned for growth, driven by its Evernorth and Cigna Healthcare platforms, with a consensus estimate for 2025 earnings at $29.69 per share, reflecting an 8.6% increase from the previous year [18][19] - Humana Inc. has shown steady growth, supported by rising premiums and an expanding membership base, with a 2025 earnings estimate of $16.99 per share, indicating a 4.8% rise from 2024 [23][24]

Medicare Advantage Strategy - Humana's core business is Medicare Advantage (MA), which remains an attractive sector[22, 35, 36] - The company focuses on delivering a more stable and compelling MA margin through clinical excellence and operating leverage[22] - Humana aims for a 3%+ Individual Medicare Advantage pre-tax margin[31, 55, 56] - Sustained growth in Medicare Advantage depends on superior customer satisfaction and retention[100] CenterWell and Medicaid Growth - Humana will continue to allocate capital to CenterWell and Medicaid, viewing them as strategic growth engines[22, 33] - CenterWell Primary Care is on track to reach approximately $6 billion in revenue with over 440,000-460,000 patients in 2025, with wholly-owned centers demonstrating a 32% CAGR in average contribution margin from 2021 to 2024[141, 145] - Humana expects to improve Medicaid pre-tax margin by 200-300 bps as its Medicaid presence matures[215] Financial Performance and Operating Leverage - Humana expects adjusted operating expenses to grow at less than half the rate of revenue through 2028, inclusive of investments[189] - The company anticipates a 150-180 bps improvement in operating leverage by 2028, with over 50% driven by cost reduction[199, 200] - Humana projects a 6-8% CAGR in Individual Medicare Advantage PMPM Underwriting Margin from 2025E to 2028E[209, 210]