Humana reports sharply lower 3Q earnings

Humana Inc. said Monday its third-quarter profit tumbled nearly 40 percent, dragged down by a bitter dose of investment losses and an expected decline in premiums from its Medicare prescription drug plans.

The health insurer also lowered its earnings projections for the fourth quarter and full year, but forecast sharply higher earnings next year as its top executive said the company's business operations remain "firmly on track."

Investors were less than pleased, however, sending shares tumbling $5.47, or 15.1 percent, to close at $30.80. Since the beginning of the year, shares have fallen from a high of $88.10 to bottom earlier this month at a 52-week low of $29.01.

In the three months ended Sept. 30, Humana earned $183 million, or $1.09 per share, down from $302.4 million, or $1.78 per share, in the year-ago period. Third-quarter results included a loss of $108.3 million, or 40 cents per share, related to a downturn in the company's investment and securities lending porfolios and the sale of distressed financial institution securities.

The loss was just a fraction of Humana's more than $6 billion investment portfolio. Excluding that loss, Humana said its earnings came in at $1.49 per share - toward the upper end of its prior guidance of $1.45 to $1.50 per share.

Quarterly revenue rose 13 percent to $7.15 billion from $6.32 billion a year ago.

Adjusted profit beat the $1.47 per share estimate of analysts surveyed by Thomson Reuters, but revenue came in below the average forecast of $7.34 billion.

Despite the investment losses, Humana President and Chief Executive Michael B. McCallister said the company was "fairly well immunized" against global financial fears because its portfolio is diverse and conservatively managed.

He said a "relatively small portion of our investments were in financial institutions that are now in distress." Those losses did not affect operations and the company's financial position remains strong, he said.

Humana Chief Financial Officer Jim Bloem said the Louisville-based company has ample capital and liquidity to meet its obligations. Still, the company is conserving capital and liquidity in "these uncertain times" by lowering capital expenditures for the year and refraining from share repurchases in the third and fourth quarters, he said.

Goldman Sachs analyst Matthew Borsch said Humana "took a hit in its investment portfolio but the balance sheet and liquidity more than passed the critical stress test," which he said should "address lingering concerns" some investors might have.

For the year's first nine months, Humana posted net income of $473 million, down 20 percent from nearly $590.5 million in the year-ago period. Revenue for the nine months totaled nearly $21.5 billion, up 13 percent from a year earlier.

Third-quarter pretax earnings in Humana's government segment totaled $271.7 million, down from $416.3 million a year ago as a result of investment losses and previously announced lower operating results in its Medicare prescription drug plans.

Membership in Humana's Medicare Advantage plans, which offer comprehensive health coverage, grew to 1.37 million as of Sept. 30, an increase of 230,000 members from a year ago. Medicare Advantage premiums increased 24 percent to $3.5 billion for the just-ended quarter.

For 2009, McCallister said the company is confident of reaching its targeted 5 percent pretax operating margin for its overall Medicare business despite tough competition. But the company is predicting a midpoint range of 50,000 new net Medicare Advantage members next year, which is lower than recent years due to the competition, he said.

Membership in the company's stand-alone Medicare prescription drug plans totaled nearly 3.1 million at the end of the quarter, down from nearly 3.5 million a year ago. Premiums from those prescription plans fell 12 percent to $782.9 million in the quarter.

McCallister predicted membership in those drug plans will drop by 650,000 to 750,000 next year, due to 2009 prices driven by the company's members' pharmacy claims cost experience.

Meanwhile, pretax earnings for Humana's commercial segment plunged 82 percent to $11.2 million in the quarter, compared with $62.2 million a year ago. Humana said the decline was mainly due to $56.4 million in investment losses during the just-ended quarter, which more than offset improved operating results.

Commercial segment medical membership grew 8 percent to reach 3.55 million as of Sept. 30.

Humana cut its outlook to $1 to $1.10 per share for the fourth quarter and $3.80 to $3.90 per share for the full year on revenue of about $29 billion. The midpoints of the company's previous guidance range had been $1.17 a share for the fourth quarter and $4.35 for the year.

Analysts have forecast quarterly profit of $1.20 per share and full-year earnings of $4.37 per share on revenue of $28.89 billion.

But looking ahead, Humana projected sharply higher earnings in 2009 in the range of $5.90 to $6.10 on revenue of $30 billion to $32 billion. Wall Street analysts are looking for earnings per share of $5.85 and revenue of $31.63 billion, on average.

"I think we're set up nicely for next year," McCallister said.