Humana Earnings Slide; Shares Drop

The insurer cuts its forecast for the current fiscal year but says 2009 will be better.
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Humana

(HUM) - Get Report

said Monday that its third-quarter earnings declined from the same period a year earlier, partly because of losses in the company's investment and securities lending portfolios, and the insurer cut its forecast for the current fiscal year.

The company earned $1.09 a share in the quarter, compared with $1.78 a share for the same period a year earlier. The latest quarter included 40 cents a share in losses, primarily associated with impairments in Humana's portfolios and sales of securities issued by distressed financial institutions.

Excluding those losses, Humana would have earned $1.49 a share, at the upper end of the company's prior guidance of $1.45 to $1.50. Third-quarter revenue was $7.2 billion, up 13% year on year.

For the full year, Humana is now looking for earnings of $3.80 to $3.90 a share, well below its earlier guidance that it would have a profit of more than $4. Analysts, on average, are calling for $4.37.

However, for 2009 the company projected earnings of $5.90 to $6.10 a share, above expectations for $5.85. Still, shares of Humana sank 15% on the session.

During the quarter, Humana took $108 million in losses on investments and securities, resulting in a net loss of $16.8 million on investing activities. With an additional investment loss of $4.2 million projected for the fourth quarter, investment income will be down around $160 million for the year, and for management, looking forward is perhaps the best strategy.

Government pretax income was down 45% to $271.7 million compared with the prior year, despite the 20% increase in Medicare Advantage members. Commercial pretax income fell 82% to $11.2 million.

Humana is projecting a roughly $2 billion revenue increase for 2009 to between $30 billion and $32 billion, mainly owing to higher Medicare Advantage membership. The company does need to control expenses, which have risen 3.6% overall.

Liquidity is not expected to be a problem, and Humana reports that it has an unused $1 billion revolving credit line that will be the source of a $250 million drawdown during the fourth quarter to complete the purchase of PHP.

Total investments are now $6.5 billion, down from $6.7 billion at the end of last year. Humana carries bonds in

Freddie Mac

(FRE)

and

Fannie Mae

(FNM)

totaling $1 billion, and a significantly reduced portfolio of subprime mortgage-backed securities.

Municipal bonds not covered by insurance have declined in value to $657 million from $1.1 billion. The securities lending portfolio is now worth $488 million, down from $1.3 billion.

Both the investment portfolio and the securities lending program took a hit in the third quarter, but assuming that the losses expected in the fourth quarter are the end of the problems, Humana will be well positioned to take advantage of any upturn in the market, with the cash flows generated from the revenue.

What remains to be seen is what will happen with the performance of the government programs for the fourth quarter, but Humana believes that 2009 is looking positive and that earnings will be up significantly.

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Gavin Magor joined TheStreet.com Ratings in 2008, and is the senior analyst responsible for assigning financial strength ratings to health insurers and supporting other health care-related consumer products, including Medicare supplement insurance, long-term care insurance and elder care information. He conducts industry analysis in these areas. He has more than 20 years' international experience in credit risk management, commercial lending and analysis, working in the U.K., Sweden, Mexico, Brazil and the U.S. He holds a master's degree in business administration from The Open University in the U.K.