LOUISVILLE, Ky. (AP) — Humana Inc. reported a 3.5 percent drop in fourth-quarter net income on Monday as the health insurer absorbed higher claims payments driven by the flu outbreak, which offset continued growth in its lucrative Medicare Advantage membership.

The performance still surpassed Wall Street expectations, though costs mounted into early this year from the worst flu season that the company said it had experienced in at least a decade.

Humana's stock was up $3.77 per share, or 5 percent, to $79.12 in morning trading.

In December, Humana was hit by an additional $25 million in flu-related medical costs, amounting to 10 cents per share, Chief Financial Officer Jim Bloem told industry analysts during a conference call.

"These incremental flu costs primarily were driven by a sharp increase in hospital admissions associated with respiratory diagnoses," he said. "We saw these admission levels peak just before the middle of January, with steady abatement occurring since then."

The company estimates accumulating about $75 million in costs from those flu-related hospital admissions in late 2012 and early 2013, with some two-thirds of the amount occurring in this year's first quarter, Bloem said.

Looking ahead, the company said acquisitions and other investments made in the past year will position Humana for strong growth in coming years. It reaffirmed its 2013 earnings projection of between $7.60 and $7.80 per share.

Humana's fourth-quarter earnings were dragged by a higher percentage of premium dollars from its members that went to pay for medical claims in its key retail segment. As a result, quarterly pretax income in that segment fell $70 million from a year ago.

Humana, based in Louisville, Ky., reported net income of $192 million, or $1.19 per share, in the fourth quarter that ended last Dec. 31. That's down from $199 million, or $1.20 per share, in the year-ago period. Analysts polled by FactSet expected earnings of $1.07 per share.

Revenue rose to nearly $9.6 billion from nearly $9.1 billion. Analysts expected $9.7 billion.

For the full year, Humana posted net income of $1.2 billion, or $7.47 per share, compared with $1.4 billion, or $8.46 per share, a year ago. Revenue rose 6.2 percent to $39.1 billion.

Humana's quarterly performance appeared "relatively solid with few surprises," Leerink Swann analyst Jason Gurda said in a research note. He said the company's first quarter is "shaping up to be stronger than originally expected."

Last year, Humana acquired Metropolitan Health Networks Inc. in a deal aimed at strengthening its Medicare Advantage business, a government-subsidized comprehensive health insurance for seniors.

Metropolitan Health coordinates medical care for Medicare Advantage and Medicaid recipients.

In another late-year deal, Humana acquired Certify Data Systems, which through its health information exchange technology connects health care providers so they can share patient health information.

Humana also hired more clinical care nurses and stepped up efforts to closely monitor the health status of its new Medicare members.

"We expect that these investments will benefit us significantly over the long term, both in competitive positioning and profitability," Bloem said.

Humana's membership in its individual Medicare Advantage business reached 1.93 million at the end of 2012, up 18 percent from a year ago. That growth continued in January, when the membership surpassed 2 million, up about 83,400 from the end of 2012. Humana CEO Bruce D. Broussard predicted net membership growth of 100,000 to 120,000 in 2013.

Those plans offer privately run, government-subsidized health insurance for seniors with extras like vision or dental coverage in addition to basic Medicare coverage.

Membership in Humana's individual stand-alone Medicare prescription drug plans rose 18 percent to nearly 3 million members at year's end. Humana promotes its Medicare prescription drug offerings and other plans at Wal-Mart stores. Humana expects enrollment net growth of 135,000 to 175,000 members in those prescription plans this year, Broussard said.

Humana reported fourth-quarter pretax income of $256 million in its retail division, compared with $326 million a year earlier. The drop was due to the higher claims payments. For the full year, pretax earnings fell by $425 million from the prior year.

Humana's employer group segment had a pretax loss of $25 million in the fourth quarter, an improvement from a pretax loss of $51 million a year ago. Its health and well-being services segment posted pretax income of $75 million in the fourth quarter, down $10 million from a year ago, mainly because of transaction costs associated with a couple of acquisitions.