UPDATE: Humana 3Q EPS Up 13% On Light Usage, More Members

Humana Inc.'s (HUM) third-quarter earnings rose 13%, topping expectations, as the managed-care company's rising Medicare membership fueled stronger revenue and a continued slowdown in patients using health-care services kept a lid on costs.

The Louisville, Ky., company once again boosted its full-year earnings outlook. Humana also set a 2012 per-share earnings target Monday that analysts said was an encouraging starting point, even though it implies a decline from this year and is below analysts' consensus view.

In a replay from last week, when Aetna Inc. (AET) took a similar road with its first 2012 guidance projection, analysts are assuming Humana is setting a low bar with plenty of room for increases. The company's 2011 guidance projection has risen sharply since it was first issued last November.

"We are very encouraged by this initial view and expect the company to adopt a 'beat-and-raise' posture throughout 2012," Sanford Bernstein analyst Ana Gupte said.

Humana shares rose 7.2% to $86.14 in recent trading and are up about 57% on the year.

The company reported a profit of $444.8 million, or $2.67 a share, up from $393.2 million, or $2.32 a share, a year earlier. Excluding prior-period favorable medical-claims developments--which reflect overestimates on money needed for patients' claims--per-share earnings rose to $2.54 from $2.01.

In August, Humana said it expected earnings of $1.95 to $2.05, while analysts surveyed by Thomson Reuters had forecast earnings of $2.02 a share.

Humana's medical-cost ratio--the percentage of premium revenue used to pay medical bills--fell to 80.7% from 81.6% a year earlier and 82.2% in the second quarter. Health insurers have benefited as economic turbulence slows traffic in doctors' offices and operating rooms, because it means they have fewer bills to cover.

Meantime, revenue in the recent quarter increased 11% to $9.3 billion. Analysts recently forecast $9.25 billion.

Humana--one of the biggest providers of privately run Medicare Advantage health plans for seniors in the U.S.--has boosted sales through its growing member ranks. The company said membership in its individual Medicare Advantage plans has risen 10% from a year ago to 1.6 million at the end of September, mainly because of a successful enrollment season and Americans reaching Medicare age.

Enrollment in the company's individual, stand-alone prescription-drug plans has jumped 47% to 2.5 million over the last year, meantime, with help from a collaboration with Wal-Mart Stores Inc. (WMT). That plan has drawn more than one million Medicare beneficiaries.

Insurers have been focused on growing their businesses for Medicare-based plans to tap the aging pool of baby boomers, and as high unemployment levels make growing the mature market for employer-based insurance a tougher prospect. Last week, Cigna Corp. (CI) agreed to buy Medicare insurer HealthSpring Inc. (HS) for $3.8 million to boost its presence in the senior market.

Humana, meantime, has recently disclosed two deals to buy Medicare Advantage HMOs that, in total, add roughly 80,000 members in the western U.S.

Chairman and Chief Executive Michael McCallister highlighted Humana's Medicare growth strategy as a major point of focus. He also indicated the market will continue consolidating, fueled by the economic benefits of larger scale.

"Longer term, the smaller players, I think, will find a home somewhere else and we hope to be a part of that as it occurs," McCallister said during a conference call with analysts.

For the current year, Humana raised its per-share earnings forecast to a range of $8.35 to $8.40 a share from its earlier estimate of $7.50 to $7.60. The guidance has been raised multiple times from a target of $5.35 to $5.55 a share set nearly a year ago.

This track record caused analysts to view the initial 2012 guidance--for $7.40 to $7.60 a share--as a low and easily beatable target, even though analysts have targeted a higher target of $7.79 a share, on average. Some said Humana could hit $9 a share next year.

Humana's guidance in recent years "has been well below what the company actually reports so we wouldn't read very much into the below-consensus guidance range," Leerink Swann analyst Jason Gurda said.

Humana projected revenue for the coming year of $38.25 billion to $38.75 billion, bracketing analyst expectations. Humana anticipates it will add 145,000 to 155,000 Medicare Advantage members in its retail business targeting individuals next year while adding another 55,000 to 75,000 Medicare Advantage members in its employer-focused business.

Humana also expects to boost membership in stand-alone Medicare prescription-drug plans by 500,000 to 600,000 in the coming year.

-By Jon Kamp, Dow Jones Newswires; 617-654-6728; jon.kamp@dowjones.com

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