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Humana Falls on News of Fourth-Quarter Charge

The company plans to take a charge after overestimating the value of an acquisition it now must sell.


(HUM) - Get Humana Inc. Report

said Monday that it would take a charge of $400 million to $500 million in the fourth quarter after overestimating the value of a recent acquisition that it now has to sell.

Shares of the Louisville, Ky. health care company stabilized down 3/8, or 5%, to 7 13/16 in afternoon trading after tumbling as low as 7 3/8 after the announcement. (Humana closed Monday down 5/8, or 8%, to 7 9/16)

The projected charge is roughly equivalent to 25% of the company's market capitalization at the high end.

Humana plans to sell

PCA Property & Casualty Insurance

, a workers' compensation business, to

FolksAmerica Holding Company

, a New York-based subsidiary of

White Mountains Insurance Group

(WTM) - Get White Mountains Insurance Group Ltd. Report

, of Bermuda, for $125 million in cash.

The sale price represents a loss to Humana of around $65 million before taxes. That amount is included in the charge the company plans to take, which also includes an overestimation of good will

White Mountains shares were down 2 3/4, or 2 %, to 117 3/4, after the deal was announced. (White Mountains closed down 3, or 2%, to 117 1/2.)

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Humana picked up PCA Property & Casualty as part of

Physician Corporation of America

in 1997.

Humana also said it would sell its Medicare supplemental business to

United Teachers Associates Insurance Company

, a closely held company based in Austin, Tex. The Medicare unit serves 42,000 members in 17 states.

"The decision to sell the workers' compensation and Medicare supplemental businesses allows us to focus more effectively on our core health insurance business," said James E. Murray, Humana vice president and chief financial officer, in a statement.

Joel Ray, analyst for

First Union Securities

, said that although the reorganization is not unexpected, the damage to the company's balance sheets is significant.

"Everyone is focusing, focusing, focusing," Ray said. "We've seen the whole industry for the most part scaling back over the last year."

Unfortunately for Humana shareholders, the company is behind the trend, according to Ray, who rates the stock a buy. First Union has not performed underwriting for Humana.

"They thought that they were choosing an attractive way to go and it's turning out the distractions to management are too much to handle," said Anne Anderson, health care analyst for

Atlantis Research

. Anderson doesn't keep a formal rating on the stock, but said she would rate it a sell if she did. (Her firm hasn't done underwriting for Humana.)

While Humana is just now beginning to recognize its miscalculations, health care competitors like

Wellpoint Health Networks



Coventry Health Care


have already made significant divestitures, Ray noted.

In fact, both of those companies have become mildly acquisitive again. Wellpoint, which says it is aiming its growth at certain geographic areas, bought

Rush Prudential Health Plans of Chicago

last month.

And Coventry, through its St. Louis Medicaid subsidiary,

HealthCare USA

, last month bought

Prudential Health Care

, which served 11,800 Medicaid members in St. Louis.

Units that serve Medicare and Medicaid patients have been particularly thorny for health care companies recently. They seemed like attractive acquisitions just a few years ago, simply because Medicaid and Medicare patients go to the doctor often, creating a volume business.

Now, health care organizations like Humana are selling off those businesses.

"As states became more tight-fisted, Medicare became more tight-fisted, you're seeing more organizations say, 'Wait a minute,'" Ray said. With lower reimbursement rates, more volume doesn't help.

Anderson said she thinks health maintenance organizations like Humana are in more danger from lawsuits than from fruitless acquisitions or falling Medicaid and Medicare reimbursements.

"It's not a great time for HMOs," she said. "I think investors are just tired of hearing bad news in this sector."