Humana Inc., the second-biggest provider of U.S.-funded health insurance, reported a 39 percent decline in quarterly profit on investments in financial companies and rising costs in its drug plans for the elderly.

Third-quarter net income fell to $183 million, or $1.09 a share, from $302.4 million, or $1.78 a share, a year earlier, the Louisville, Kentucky-based company said today in a statement.

Earnings were reduced by $108.3 million, or 40 cents a share, by losses and writedowns of investments in Lehman Brothers Holdings Inc., American International Group Inc., Fannie Mae and Freddie Mac. The adjustment was modest and won't cripple Humana's $6.5 billion investment portfolio or require the company to raise capital, said Carl McDonald, an analyst with Oppenheimer & Co. in New York, in a note today to clients.

``Eighty-six percent of Humana's investments don't have much risk,'' McDonald wrote in an Oct. 10 note to clients. ``Even if disaster strikes the rest of the company's investment portfolio, it still won't have a catastrophic impact on the rest of the company's business.'' The insurer can absorb as much as $1.3 billion in writedowns without danger, he said.

Humana fell $1.16 cents, or 3.2 percent, to $35.11 in New York Stock exchange composite trading at 9:36 a.m. The insurer's shares were down 52 percent this year through last week.

The company reported an investment loss of $16.8 million for the third quarter, compared with an $82.4 million gain a year earlier. Humana didn't identify about 30 percent of its impaired investments.

Lehman, AIG, Fannie, Freddie

Last month the company said in a corporate filing that it held $62 million in securities in Lehman Brothers, now in bankruptcy proceedings, and $4.9 million in bonds from distressed insurer AIG. Humana today reported investment losses of 27 cents a share from Lehman and AIG, 1 cent from U.S.- chartered mortgage institutions Fannie Mae and Freddie Mac, and 12 cents from 22 unspecified issuers.

Third-quarter earnings per share, excluding the investment writedowns, beat by 2 cents the average $1.47 estimate of 15 analysts surveyed by Bloomberg. Revenue climbed 13 percent to $7.15 billion. Humana forecast 2009 profit of $5.90 to $6.10 a share, more than analysts projected.

The company reduced its profit goal for the fourth quarter by 10 cents a share to a range of $1 to $1.10, and it trimmed its 2008 forecast to $3.80 to $3.90 a share from the $4.30 to $4.40 announced Aug. 4. The reduction reflects the bad investments and lower returns on good holdings, Humana said.

Medical Costs

Humana spent 84.1 percent of premium revenue from the government on medical care in the third quarter, up from 81.4 percent a year earlier, because drug costs in Medicare plans for the elderly were higher than anticipated.

The company first reduced 2008 profit expectations by 25 percent in March because of the drug claims. Last month, Humana imposed a 64 percent average price increase for its largest drug plan to avert a repeat next year. That may reduce drug-plan membership by 750,000 in 2009, to about 2.3 million, said Humana Chief Operating Officer Jim Murray on a conference call with analysts.

``Humana in its Medicare products next year is going less for expansion of market share and new members and more for entrenching themselves,'' said Rick Byrne, an analyst with HealthLeaders-InterStudy of Nashville, Tennessee, in a phone interview before the earnings release.

Humana is second to UnitedHealth Group Inc., the largest U.S. health insurer, in government-subsidized plans. Humana covers 1.37 million enrollees in Medicare health plans; Medicaid programs for the poor; and Tricare coverage for military personnel, families and retirees.

Medicare Advantage

To a greater extent than any insurer except the smaller Healthspring Inc. of Nashville, Humana relies on Medicare's Advantage benefit plans. The company draws two-thirds of its income from the program.

The company expects Advantage enrollment in 2009 to grow by about 50,000 as it begins charging premiums to enrollees and reducing benefits while competitors are offering no-premium policies and richer benefits, said Humana Chief Executive Officer Michael McCallister, on the conference call.

UnitedHealth, WellPoint

Health-insurer shares fell beginning in March after companies, led by UnitedHealth of Minnetonka, Minnesota, and WellPoint Inc. of Indianapolis, reduced earnings goals because of unexpected medical costs. The six-member S&P 500 Managed Health Care Index dropped 57 percent this year through last week. 

In third-quarter earnings reported in the past 11 days, UnitedHealth's net income declined 28 percent from a year earlier and WellPoint's fell 5.4 percent. Coventry Health Care Inc., of Bethesda, Maryland, lost more than half its value in trading on Oct. 22 after reporting its profit plummeted 49 percent. Aetna Inc., of Hartford, Connecticut, and Philadelphia- based Cigna Corp. are scheduled to release their earnings this week.

Return to In the News

Bloomberg.com