Humana Inc. (HUM) reported third-quarter earnings of $1.78 per share, in line with the Zacks Consensus Estimate. Results were helped by strong earnings from the Government segment, partially offset by weakness in the Commercial segment.

Total revenues were $7.70 billion, up 8.5% from the year-ago quarter, with total premium and administrative service fees rising 7% from the prior-year quarter due to increases in both average membership and per-member premiums for the company’s Medicare Advantage products.

The latest quarter’s consolidated benefit ratio, which reflects the percentage of benefit expenses in premium revenues, decreased to 82.1% from 83.1% in the prior-year quarter.

Humana’s Commercial segment continued to perform badly and posted a pre-tax loss of $5.2 million, hurt by higher benefit expenses as a percentage of premiums and lower average medical membership, which was partially offset by higher investment income. Commercial membership fell 4% to 3.4 million. Commercial segment premiums and administrative fees fell 1% to $1.87 billion.

Earnings from the Government segment rose 74.6% to $474.5 million. The increase was precipitated by lower claim expenses in its Medicare drug plans, an 11% rise in average Medicare Advantage membership and the introduction of member premiums for most of the company’s Medicare Advantage products.

Medicare Advantage membership increased 11% to 1,514,800 members during the quarter. Favorable operating results caused a decline in the debt-to-capitalization ratio to 23.2% from 25.0% in the previous quarter.

Humana provided guidance for 2009 and 2010 as well, the long and short of which are as follows:

    •    For full year 2009, the company expects earnings of approximately $6.15 per share, while it expects between $5.05 and $5.25 in 2010.
 
    •    2009 revenues are expected to come at approximately $31 billion, while revenues for 2010 are expected between $32 to $34 billion.
 
    •    Revenues of $16.4−16.5 billion and $18−$19 billion, respectively, in 2009 and 2010 for Medicare Advantage; approximately $2.4 billion for Medicare’s standalone Prescription Drug Plan (PDPs) for 2009 and between $2.8 and $2.9 billion for 2010.
 
    •    Revenues of approximately $7.5 billion in the Commercial segment in 2009 and between $7.4 and $7.6 billion in 2010.
 
    •    An increase of approximately 65,000 clients from the prior year in Medicare Advantage membership in 2009 while the year-over-year increase is expected to be between 180,000 and 240,000 members for 2010.
 
    •    Medicare stand-alone PDPs are expected to be down 1.15 million in 2009 from the prior year while the figure is expected to be up 150,000 to 200,000 in 2010 from the prior year.
 
    •    Investment income of $290 to $300 million in 2009 and $320 million to $335 million in 2010.
 
    •    Medicare benefit ratio of 82%−83% in 2009 and 84%−85% in 2010
 
    •    Government segment benefit ratio of 83.5−84.0% in 2009 and 85%−86% in 201.

Though the company has reported favorably given the current economic climate, Humana’s stock may be subject to  increased trading volume and volatility.

Currently, we are Neutral on Humana.
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