WellPoint ( WLP) saw its third-quarter results dragged down by some sour investments in the financial industry.

The giant health insurer, which posted its earnings Wednesday, suffered a 5.5% decline in earnings to $821 million as it paid the price for holding big stakes in several companies hurt by the recent meltdown - including bankrupt Lehman Brothers. All told, it wound up with more than $300 million worth of "other-than-temporary" impairment charges.

Excluding special items, WellPoint managed to top Wall Street expectations for the quarter by 10 cents with earnings per share of $1.60.

For the most part, the giant health insurer delivered a solid performance. The company saw revenue grow 2.2% to $15.3 billion, approaching Wall Street's $15.5 billion target, as it expanded its customer base. It ended the quarter with more than 35.3 million members, although that number is expected to drop a bit by the end of the year.

WellPoint also kept its costs under control. Although the company posted an expected uptick in its "benefit expense ratio" on a year-over-year basis, it managed to improve that crucial metric in recent months. During the third quarter, that ratio fell to 82.5% -- down 80 basis points from the previous period -- although it is expected to come in a full percentage point higher for the year as a whole.

To some, WellPoint's full-year forecast may have looked a bit weak. The company expects to post 2008 profits of $5.43 a share to $5.48 a share. It will have to approach the top of that range, however, in order to hit Wall Street's current targets.

WellPoint's stock took a hit in the meantime, falling 5.7% to $39.54 in trading Wednesday. All told, the stock has lost more than half of its value since the beginning of the year.

Meanwhile, Coventry ( CVH) saw its shares plummet 47% to $15.24 on Wednesday morning, a day after it delivered a dreadful third-quarter report. The stock now hovers at its lowest level in at least five years.

Some of the biggest players in the managed care group - including Aetna ( AET), Cigna ( CI) and UnitedHealth ( UNH) - lost some ground on Wednesday as well.

Coventry delivered plenty of bad news. It missed Wall Street profit targets by a large measure, slashed its full-year outlook, postponed its 2009 guidance and cancelled its investor day.

Then it tried to put on a brave face. "Our results for 2008 are unacceptable and a great disappointment to me and the entire company," Coventry CEO Dale Wolf admitted on Tuesday afternoon. "However, we have identified and understand the issues that have affected our results.

"We have implemented a corrective action plan, which we expect will increasingly be reflected in the company's results throughout 2009 and fully realized in 2010. Most importantly, I continue to have confidence in our future prospects."

Coventry has given investors little reason for hope so far. Due to escalating medical costs - which cut almost 70 cents from its EPS results - the company saw its earnings fall by nearly half to $85.5 million in the latest quarter. While analysts had expected the company to post earnings of $1.06 a share, the company mustered profits of just 58 cents a share instead.

Coventry issued a dismal fourth-quarter outlook as well. With costs expected to remain high, particularly for its Medicare Advantage program, the company now expects to post fourth-quarter profits of just 60 cents a share to 62 cents a share. Until now, Wall Street was looking for the company to double the high end of that range.

As a result, analysts are now slashing their forecasts and looking elsewhere in the sector for possible signs of hope.

"Our 2008-2010 estimates were already Street-low and below guidance but not nearly low enough to reflect this unexpected further deterioration," Goldman Sachs analyst Matthew Borsch wrote on Wednesday. "Near-term, however, the good news for the sector are signs that industry pricing discipline appears to have improved into 2009 while valuations remain at historic lows.

"We don't think the down-cycle is over yet - but, at this point, we think margin downside will be limited" next year.

Borsch has neutral ratings on Coventry and WellPoint. His firm has investment banking ties to both companies.

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