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Humana Earnings Jump, but Sees Lower 2010 Profit

Published: Monday, 2 Nov 2009 | 9:08 AM ET

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By: Reuters

Health insurer Humana Monday projected lower profit next year as it sees profit margin pressure on its Medicare business for the elderly and weaker enrollment in its commercial plans serving employers.
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Humana, [HUM Loading... () ] which also posted a 65 percent jump in third-quarter profit, forecast a significant rise in Medicare Advantage enrollment, adding as many as 240,000 to its rolls.

The company is one of the largest providers of Medicare plans for seniors. Health insurers face lower reimbursement from the government next year in Medicare.

Humana's 2010 forecast largely came in line with Wall Street expectations, when excluding for asset write-downs related to the end of a military contract, said Stifel Nicolaus analyst Thomas Carroll.

"They put it at a level in line with current expectations," Carroll said. "They talk about decent enrollment and revenue growth but also feeling some margin pain."

Third-quarter net income was $301.5 million, or $1.78 per share, compared with $183 million, or $1.09 per share, a year earlier, when the company was hit by investment losses.

Analysts on average expected $1.77 per share, according to Thomson Reuters I/B/E/S. Revenue rose 8 percent to $7.72 billion. Analysts expected $7.82 billion.

Humana is the first large health insurer to provide detailed 2010 forecasts, although it follows larger rival UnitedHealth Group in expecting lower earnings per share next year.

WellPoint [WLP Loading... () ] and Aetna [AET Loading... () ] deferred giving a 2010 forecast until gaining more clarity on factors such as the state of the economy, the severity of the flu season and the outcome of health reform legislation.

Health insurer shares are trading at rock-bottom valuations over the potential hit to future profits from reform legislation. Quarterly pretax income in Humana's government segment that includes its Medicare business soared 75 percent to $474.5 million.

Membership in its Medicare Advantage plans stood at 1.51 million on Sept. 30, up 11 percent from a year ago. Humana posted a pretax loss of $5.2 million for its commercial segment including health plans serving employers, as Americans losing their jobs also lost health coverage.

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Higher costs from the H1N1 flu also hurt results. The company forecast 2009 earnings of about $6.15 per share, in line with its prior projected range of $6.10 to $6.20 per share. Analysts expect $6.14.

For 2010, Humana expects earnings in the range of $5.05 to $5.25 per share. Analysts were looking for $5.36.

Humana's forecast included asset write-downs and charges tied to its exit of the military Tricare contract -- which amounts to about 25 cents per share, Stifel's Carroll said.

Excluding the charge, Carroll said Humana's forecast equated to a range of $5.30 to $5.50 per share.

The company expects to add as many as 240,000 Medicare Advantage members next year, but see lower profit margins in the business. It forecast enrollment for its commercial plans falling by as much as 145,000 members next year.

"Humana expects to grow both its Medicare Advantage individual and group business in 2010, which should help the company prove that Medicare is a sustainable business even after reductions in reimbursement," Wells Fargo analyst Matt Perry said in a research note.

Through Friday, Humana shares had risen about 1 percent this year, underperforming a 5 percent rise for the S&P Managed Health Care index.