Private Medicare plans provider Humana Inc. (HUM) on Monday posted a sharp growth in third-quarter profit on strong performance at its Government businesses, boosted by Medicare Advantage program. Further, the health insurer reaffirmed its 2009 earnings forecast, and initiated financial guidance for fiscal 2010.
Q3 Analysis
The Louisville, Kentucky-based company's third-quarter net income was $301.5 million, a jump of 64.8% from $183.0 million reported in the corresponding period last year. On a per share basis, earnings climbed 63.3% to $1.78 from $1.09 in the prior-year quarter.
On average, 21 analysts polled by Thomson Reuters expected the company to post earnings of $1.77 per share. Analysts' estimates typically exclude special items.
The company noted that the year-ago results reflected $0.40 per share in realized losses primarily associated with other-than-temporary impairments in investments and sales of distressed financial institution securities. Third quarter of 2008 results also included high stand-alone Prescription Drug Plan or PDP claim expenses.
Quarterly revenues advanced 8.0% to $7.72 billion from the previous year's revenue of $7.15 billion, but fell short of twelve Wall Street analysts' consensus revenue estimate of $7.82 billion for the quarter.
Michael McCallister, president and chief executive officer of Humana, said, "Our results this quarter reflect continued solid performance in our Government businesses, offsetting continuing challenges in our Commercial Segment."
Premiums rose 6.5% to $7.44 billion from $6.99 billion a year ago, while administrative services fees grew 16.9% to $133.7 million from $114.4 million in the previous year. The increase in premiums and administrative services fees primarily reflects an increase in both average Medicare Advantage membership and per-member premiums for these products.
The latest quarter's consolidated benefit ratio declined to 82.1% from 83.1% in the same quarter of last year, largely due to a decline of 220 basis points in the Government Segment, partially offset by a 250 basis point increase in the Commercial Segment benefit ratio.
Segment Results
The company's Government segment reported pretax income of $474.5 million, compared to $271.7 million in the prior-year quarter, primarily driven by lower PDP claim expenses, an 11% rise in average Medicare Advantage membership, the implementation of member premiums for most of the company's Medicare Advantage products, and higher investment income. Medicare Advantage membership grew to 1.51 million at September 30, 2009, up 11%, from last year.
The Commercial Segment incurred a pretax loss of $5.2 million in the most recent quarter, compared to pretax income of $11.2 million a year ago, primarily led by higher benefit expenses as a percent of premiums and lower average medical membership, partially offset by higher investment income.
Commercial Segment medical membership declined to 3.42 million at September 30, 2009, a decrease of 4% from 3.55 million prior year, reflecting the impact of the economic recession and increased unemployment across various of the company's fully-insured group medical lines of business as well as the loss of two large ASO accounts totaling approximately 95,400 members on January 1, 2009.
Year-To-Date Highlights
For the nine-month period, the company reported net income of $789.0 million or $4.67 per share, compared to $473.1 million or $2.79 per share in the year-ago period.
Total revenues for the nine months ended September 30, 2009 totaled $23.3 billion, up 21.5 billion reported a year earlier.
Future In Focus
Looking ahead, the company projects fiscal 2009 earnings to be about $6.15 per share, with revenues of about $31 billion. Previously, the company expected 2009 earnings per share in the range of $6.10 - $6.20, that excludes any potential accounting charges and other costs associated with the military contract loss. The 2009 projection compares to earnings per share of $3.83 for fiscal 2008. Analysts are looking for earnings of $6.14 per share for the full year 2009.
McCallister stated, "We continue to anticipate consolidated results in line with our previous expectations and thus are reaffirming our 2009 EPS guidance."
For fiscal 2010, Humana expects earnings to range between $5.05 and $5.25 per share. The 2010 estimate includes military services earnings between breakeven and $0.10 per share and excludes any potential impact from pending health legislation or regulatory reform. Revenues for the year 2010 is forecasted to be in the range of $32 billion - $34 billion. Wall Street analysts have a consensus revenue estimate of $5.37 per share on revenues of $29.63 billion for fiscal 2010.
Further, the company anticipates substantial net-new Medicare Advantage member growth, attributable to both large-group and individual customers.
McCallister added, "In addition, as we've said in the past, we target an overall Medicare pretax operating margin of approximately 5 percent, which next year will include a significant increase in group membership, a traditionally lower margin business, a moderating margin for our stand-alone PDPs, and an individual Medicare margin that approximates the overall target."
The company also expects to stabilize its Commercial operating results with administrative cost reductions and continuation of pricing actions.
Peer Review
Among Humana's rivals, Aetna Inc. (AET) reported third-quarter net income of $326.2 million or $0.73 per share, up from $277.3 million or $0.58 per share in the previous year, aided primarily by improved valuations in its investment portfolio. Quarterly revenue, excluding net realized capital gains, totaled $8.70 billion, an increase of 9%, compared to $7.98 billion in the prior-year quarter. For fiscal 2009, the company currently projects operating earnings to be $2.75 per share, compared to the previously communicated outlook range of $2.75 - $2.90 per share.
Another peer, UnitedHealth Group, Inc. (UNH) posted higher profit for the third quarter that totaled $1.04 billion or $0.89 per share, compared to $920 million or $0.75 per share in the prior-year quarter, driven by strong overall third quarter performance in services businesses and effective cost controls. Total revenues grew 8% to $21.7 billion from $20.16 billion in the previous year. For fiscal 2009, the company continues to expect earnings of about $3.15 per share and cash flows from operations of about $5 billion.
Yet another competitor, CIGNA Corp. (CI) is scheduled to announces its third-quarter results before the market opens on November 5, as analysts are looking for earnings of $1.03 per share on revenues of $4.60 billion. In the year-earlier period, the company earned $0.62 per share on revenue of $4.85 billion.
While releasing second-quarter figures, Cigna boosted its fiscal 2009, currently expecting adjusted income from operations in the range of $1.04 billion - $1.10 billion, or $3.80 - $4.00 per share, versus its prior forecast range of $1.02 billion - $1.08 billion, or about $3.70 - $3.90 per share. Also, the company currently projects 2009 adjusted income from operations for the Health Care segment to be in the range of $700 million - $760 million. For the year, medical membership is expected to decline by about 5% - 5.5%.
Stock Quotes
Humana shares, which have been trading between $18.57 and $46.01 in the past 52 weeks, closed Friday's trading session at $37.58.
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