Humana 3Q profit jumps on government programs

Associated Press
November 2, 2009

LOUISVILLE, KY (AP) -- Health insurer Humana Inc. rode its strong government business in posting a 65 percent jump in third-quarter profit Monday, as bulging membership and premiums from Medicare Advantage overcame a lackluster commercial segment hampered by the weak economy.

Louisville-based Humana said its quarterly revenue rose 8 percent as enrollment in its Medicare Advantage offerings grew 11 percent from a year ago.

But the company saw enrollment in its plans sold to employers fall by 7.6 percent from a year ago, contributing to a pretax loss in its commercial segment during the three months.

Still, the commercial performance was "better than we modeled," Goldman Sachs analyst Matthew Borsch wrote to investors. And Humana predicts pretax income of about $120 million from the commercial segment in 2009.

Slumping enrollment in employer-sponsored health coverage plans has been a problem for several insurers as companies slash jobs and reduce the number of covered workers.

Shares of Humana fell 57 cents, or 1.5 percent, to close at $37.01 Monday.

The three largest publicly traded health insurers - UnitedHealth Group Inc., WellPoint Inc. and Aetna Inc. - all reported better-than-expected third-quarter results last month. But they also were bogged down by flu-related cost spikes. WellPoint and UnitedHealth also were hurt by declines in employer-sponsored insurance enrollment, something that is expected to continue into next year.

Cigna Corp., the last of the large health insurers, will report its third-quarter results Thursday.

Humana President and CEO Michael B. McCallister cited rising unemployment, market competition and swine flu as putting strains on his company's commercial business.

"The positive momentum in the government segment is offsetting the less-favorable results in the commercial segment," McCallister said in a conference call with industry analysts.

The company said it spent about $5 million on swine flu-related costs in the third quarter, roughly in line with the quarter before. Humana Chief Financial Officer Jim Bloem said the company now anticipates a heavier swine flu season in the fourth quarter than previously thought.

Looking ahead, McCallister predicted more net membership gains in Humana's Medicare Advantage offerings in 2010 - in the range of about 180,000 to 240,000. He also predicted the company's commercial business will stabilize, with projected pretax earnings of $125 million to $175 million next year.

Humana also said its third-quarter consolidated benefit ratio improved from a year ago. The medical care ratio is the percentage of premiums paid to cover medical claims.

The company said it earned $301.6 million, or $1.78 per share, in the three months ended Sept. 30, up from profit of $183 million, or $1.09 per share, a year prior. Revenue jumped 8 percent to $7.72 billion.

Analysts polled by Thomson Reuters expected profit of $1.77 per share on $7.82 billion in revenue.

Humana said it still expects full-year profit of about $6.15 per share on revenue of about $31 billion, while analysts forecast $6.14 per share in profit on $31.24 billion in revenue.

The company's Medicare Advantage membership surpassed 1.5 million as of Sept. 30, up 11 percent from a year ago and 5 percent higher than enrollment at the end of 2008. Medicare Advantage plans are government-sponsored, privately run programs for seniors that offer comprehensive health coverage.

Medicare Advantage premiums of $4.14 billion in the third quarter gained 18 percent from a year ago.

Overall, Humana posted pretax income of $474.5 million in its government segment, up sharply from $271.7 million in the year-ago quarter.

Membership in Humana's stand-alone Medicare prescription drug plans totaled 1.96 million as of Sept. 30, down from nearly 3.1 million a year ago. Humana previously realigned its premiums and benefits for those prescription plans to correspond with past claims experience.

Last year, higher-than-expected expenses in its Medicare drug plans sapped earnings. Humana said Monday that the membership decline in the stand-alone drug plans was due mainly to some low-income seniors joining rival plans with lower or no member premiums and some seniors choosing Medicare Advantage plans.

Humana said premiums in those Medicare drug plans totaled $578.1 million in the quarter, down 26 percent from a year ago.

Meanwhile, Humana posted a pretax loss of $5.2 million in its commercial segment, compared with pretax income of $11.2 million a year ago.

Commercial segment medical membership slipped to 3.4 million as of Sept. 30, down 4 percent from a year ago.

Premiums and service fees for the commercial segment fell 1 percent to $1.87 billion in the quarter.

For the first nine months of the year, Humana reported net income of $789 million, or $4.67 per share, up 67 percent from nearly $473.1 million, or $2.79 per share, in the year-ago period.

Humana projected a full-year profit in the range of $5.05 to $5.25 per share in 2010, excluding any potential impact from a possible overhaul of the nation's health care system.

Borsch wrote that that Humana faces "a very, very tough outlook beyond 2010" if proposed Medicare Advantage cuts become law as part of the possible health care overhaul being considered by Congress.

Another uncertainty for Humana is the fate of its business providing military managed health care in the Southern U.S. The Defense Department announced it was switching the contract to UnitedHealth Group Inc. Humana appealed and is awaiting word from the department.

AP Business Writers Damian Troise in New York and Tom Murphy in Indianapolis contributed to this story.

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