Humana's healthy signs

The Baltimore Sun

What does the future hold for my shares of Humana Inc.?

- K.C., via Internet

Recent success of the large health insurer is tied to its strong commitment to Medicare and its ability to capitalize on changes in that system.

Membership in its Medicare Advantage prescription-drug plans exceeded 1 million in 2006, an 80 percent increase for the year. An additional 100,000 members joined during January.

Shares of Humana (HUM) are up 8 percent this year after gains of 2 percent last year and 83 percent in 2005.

The positive news from its Medicare strategy is that it led to a doubling of profits, to $155 million, in the fourth quarter. Revenues, profits and medical membership set records for the full year, and the company raised earnings projections for 2007.

"We transformed ourselves from a regional firm to a national competitor," said chief executive Michael B. McCallister as earnings were announced.

The not-so-good news is that its ever-growing dependence on government makes it more vulnerable to the quixotic nature of politics. Adverse changes in Medicare reimbursement rates or lost government contracts would have a significant effect on its bottom line.

In addition, although Humana has made gains at the expense of rivals, it must compete against larger firms UnitedHealth Group Inc., Aetna Inc. and WellPoint Inc., which have more resources. It may also take Humana some time to shift more participants into its Medicare Advantage programs and out of the less-profitable Medicare Part D plan.

Consensus analyst rating on the shares of Humana is a "hold," according to Thomson Financial. That consists of three "strong buys," two "buys," 11 "holds" and two "under performs."

One beneficiary of recent good results is McCallister, a longtime Humana employee who assumed his current position in 2000 and led the firm through restructuring. His salary was increased to $975,000 this year from $900,000 in 2006, according to a Securities and Exchange Commission filing. The firm also set target annual incentive awards for its executive officers, including McCallister, at 100 percent to 150 percent of their base salaries for this year.

Humana earnings are expected to increase 46 percent this year, versus 13 percent expected for the health care-plan industry.

Next year's forecast of a 16 percent growth rate matches the industrywide expectation. The projected five-year annualized growth rate is 16 percent versus 15 percent for its peers.

What do you think of Needham Growth Fund, which was recommended to me?

- R.R., via the Internet

Featuring low portfolio turnover in the pursuit of reasonably priced growth, the small and distinctive fund has performed equally well in bear and bull markets.

But co-manager Vincent Gallagher recently left the fund, so Jim Kloppenburg is now its sole manager. Both joined it in April 2003.

"We don't see this as a management change that would either worry us or make us thrilled," said Todd Trubey, an analyst with Morningstar Inc. in Chicago.

"We respect what this fund does, but we don't recommend it because its 1.91 percent annual expense ratio is just too expensive."

The $262 million Needham Growth Fund (NEEGX) is up 7 percent over the past 12 months, ranking in the top third of all mid-cap growth funds.

Its three-year annualized return of 11 percent is above the midpoint of its peers.

It has a much larger technology stake than many comparable growth funds.

Kloppenburg, aided by Needham's team of more than 40 analysts, can use techniques usually employed by hedge funds, such as short sales and options.

It does short stocks, but the shares represent only about 5 percent of the portfolio and it has enough cash to cover the short positions.

"The strength and value of Needham Growth Fund lie in the strong research staff," said Trubey, who noted that that its fund family's shareholder letters are consistently thorough. "That costs money, but it doesn't mean I would select it over cheaper funds that are also competitive."

Among Needham Growth Fund assets, technology hardware represents 41 percent, health care 17 percent, business services 10 percent, and software and energy each 9 percent.

Largest holdings are Motorola Inc., Talisman Energy Inc., Johnson & Johnson, Chesapeake Energy Corp., Brooks Automation Inc., Seagate Technology, GlobalSantaFe Corp., Tyco International Ltd., Comcast Corp. and Atmel Corp.

This "no-load" (no sales charge) fund requires a $5,000 minimum initial investment.

I'll be retiring in the next few years and applying for Social Security benefits. For planning purposes, I would like to know how much I'll be receiving. How do I figure that out?

- V.C., via the Internet

Your benefits are based on your lifetime earnings, adjusted for inflation. The Social Security Administration takes your 35 highest-earning years and calculates your average monthly earnings, using zeroes for any years in which you didn't work.

"It changes every year, but in 2007 we are taking the monthly average and multiplying the first $680 by 90 percent and the remaining amount up to $4,100 by 32 percent," explained Dorothy Clark, SSA representative in Baltimore. "If there is anything in excess of that, we multiply that amount by 15 percent."

Adding the three amounts together will determine your monthly Social Security amount at full retirement age, Clark said. For anyone born from 1943 to 1954, full retirement age is 66.

For those born in 1955 or later, the age goes up in two-month increments each year. For anyone born in 1960 or later, full retirement age is 67.

Go to the SSA's Web site ( to calculate an estimate of benefits you'll receive. For more information call 800-772-1213.

Andrew Leckey writes for Tribune Media Services.

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