Humana’s 2nd-quarter net income jumps 21 percent on premiums, full-year guidance boosted

Humana 2Q net income rises 21 percent on premiums

LOUISVILLE, Ky. — Humana Inc. reported a 21 percent upswing in second-quarter profit Monday as the health insurer’s latest strong performance in its vast government segment, led by its growing Medicare Advantage business, was backed by a big improvement in its commercial sector.

Based on solid first-half results, the Louisville-based company raised its net income-per-share expectations for the full year to a range of $5.65 to $5.75, compared to a prior range of $5.55 to $5.65.

Analysts expect $5.71 per share, on average.

“We continue to experience strong operating performance in both our business segments, and believe we are positioned to ensure that momentum carries on in the long term,” Humana President and Chief Executive Michael B. McCallister said in a conference call with industry analysts.

Shares of Humana rose $1.71, or 3.6 percent, to close at $48.73.

Humana became the latest health insurer to post strong second-quarter profit, following recent reports from such competitors as UnitedHealth Group Inc. and Aetna Inc. that also beat Wall Street expectations.

Humana said its lucrative Medicare Advantage business posted double-digit enrollment growth in the quarter. Medicare Advantage plans are government-sponsored, privately run programs for seniors that offer comprehensive health coverage.

Meanwhile, the company’s second-quarter consolidated benefit ratio — the percentage of premiums paid to cover medical claims — also improved from a year ago.

The company earned $340.1 million, or $2 per share, up from $281.8 million, or $1.67 per share, a year ago. Revenue rose 9.5 percent to $8.65 billion from $7.9 billion.

Analysts polled by Thomson Reuters expected $1.67 per share in net income on $8.61 billion in revenue.

The company’s second-quarter results reflect a higher-than-expected favorable development in medical claims reserves — stemming from prior years and this year’s first quarter — that amounted to $117 million, or 44 cents per share.

“Much of this favorable development was due to a lower level of health care services utilization, which has continued through the second quarter,” Humana Chief Financial Officer Jim Bloem told industry analysts.

Humana also recorded a significant write-down of deferred acquisition costs associated with its individual medical product business. The costs included some broker commissions along with underwriting and other policy issuance costs, Bloem said. The write-down amounted to $147.5 million, or 55 cents per share, in the second quarter.

Humana posted quarterly pretax income of $451.2 million in its government segment, up from $404.7 million a year ago. The company attributed the higher results to the rise in Medicare Advantage membership and lower administrative costs.

Its Medicare Advantage membership grew 17 percent to 1.76 million as of June 30. That contributed to an 18 percent boost to $4.89 billion in Medicare Advantage premiums and administrative service fees. McCallister was upbeat about Humana’s prospects for continued growth in the Medicare Advantage segment.

Membership in Humana’s stand-alone Medicare prescription drug plans totaled 1.79 million people as of June 30, compared to just under 2 million a year ago. Humana said the enrollment decline reflected its “competitive positioning” as it realigned the program’s premium and benefit designs to correspond with past pharmacy claims. But premium revenue rose 10 percent to $700.2 million and the company increased premiums per member per month by about 18 percent.

Pretax earnings in the government segment reached $696.9 million in the first half of the year, an increase of $126.1 million from 2009.

Meanwhile, Humana’s commercial segment reported quarterly pretax earnings of $115.2 million, up sharply from $35.3 million a year ago. The company pinned the big upswing on pricing discipline, or setting premiums based on the underlying medical costs, as well as fewer medical claims and a continued focus on reducing administrative costs.

“We’re pleased with the turnaround and overall improvement in our commercial business this year, especially after a very challenging 2009,” Bloem said.

Like many other health insurers, Humana’s commercial business has struggled amid declines in employer-sponsored insurance enrollment blamed on the sluggish economy.

Commercial segment medical membership stood at 3.28 million as of June 30, down 162,800 from a year ago. Premiums and administrative services fees for the segment fell by 2 percent to $1.84 billion.

Military services membership totaled just over 3 million, up about 1 percent from a year ago, but revenue fell slightly to $907.9 million.