Health insurer Humana Inc. reported a 28 percent drop in fourth-quarter profit Monday, driven by higher claim expenses from its stand-alone Medicare prescription drug plans, lower investment income and a loss in its commercial business.
The company again predicted a big turnaround in the next year, forecasting earnings per share in the range of $5.90 to $6.10 for 2009, compared with $3.83 for the year just ended.
Top company executives also gave assurances that the drag on Humana's 2008 earnings from its Medicare prescription drug plans, dogged by premiums the company set too low, were now in the past.
Humana's businesses are "well positioned to succeed" despite continued economic volatility, Humana President and Chief Executive Michael B. McCallister said in a conference call with industry analysts..
Humana's stock surged $2.20, or 5.8 percent, to close at $40.13 Monday.
Louisville-based Humana said it earned nearly $174.1 million, or $1.03 per share, for the three months ended Dec. 31, compared with earnings of $243.2 million, or $1.43 per share, in the year-ago period.
The results were within Humana's own forecast range for earnings in the quarter but came in below an average forecast of $1.07 per share by analysts polled by Thomson Reuters.
Revenue rose 18 percent to nearly $7.5 billion from $6.3 billion a year ago.
Total premium and administrative fees were up 19 percent from the previous year, due largely to an increase in average Medicare Advantage membership, the company said.
For the full year, the company's net income was $647.2 million, down 22 percent from $833.7 million the previous year. Revenue was up 14.5 percent to $28.9 billion for the just-ended year.
Humana's pretax income in its vast government segment dropped 12 percent to $267.3 million in the just-ended quarter, compared with $304.6 million a year ago. The decline was driven by previously announced lower operating results from its Medicare prescription drug plans and lower net investment income. Full-year pretax earnings in the government segment totaled $785.2 million, off 24 percent from a year ago.
Humana said its Medicare Advantage membership grew to 1.4 million as of Dec. 31, up 26 percent, or 292,900 members, from the end of 2007. Medicare Advantage premiums of $3.6 billion in the just-ended quarter were up 29 percent compared with $2.8 billion a year ago. Medicare Advantage plans offer comprehensive health coverage.
Membership in Humana's stand-alone prescription drug plans totaled nearly 3.1 million at the end of 2008, compared with 3.4 million a year earlier. The company said membership has dropped by 924,000 since the end of 2008 to total 2.1 million in January, largely because the company raised premiums. Higher-than-expected claims in 2008 were a big drag on Humana's earnings throughout the year.
Last year, Humana said higher-than-expected claims in those prescription plans stemmed from bad assumptions on pricing and costs in its bids to the government.
Humana Chief Operating Officer Jim Murray reassured industry analysts Monday that the company is confident in forecasting this year's costs.
Asked during the conference call if the company is doing anything differently to track those costs, Murray replied: "We're doing them much more vigorously and identifying new opportunities to evaluate data that makes us feel much more comfortable than we did at this point last year."
In a note to investors, Goldman Sachs analyst Matthew Borsch said Humana's quarterly performance "looks mostly solid." Borsch predicted that investors would react favorably to the drop in Medicare prescription plan membership "as evidence that Humana has moved aggressively to reprice this product."
Meanwhile, Humana's commercial segment fell to a pretax loss of $6.3 million in the quarter, compared with a profit of $54.4 million a year ago. The company said the decline was driven partly by the growth in its high-deductible health plan membership, a seasonal factor in which the company bears a greater share of the medical costs late in the year once members have reached their deductibles.
Another big factor in the decline was a 37 percent drop in net investment income, Humana said.
Commercial segment medical membership grew by 169,200, or 5 percent, to reach 3.6 million at the end of 2008.
