Oct. 22 (Bloomberg) -- WellPoint Inc., the health insurer for one of every nine Americans, said third-quarter profit fell 5.4 percent, dragged down by bad investments in Fannie Mae, Freddie Mac and Lehman Brothers Holdings Inc.

The company dropped as much as 4.4 percent in New York trading today after reporting investment losses of $562.6 million, or 71 cents a share. Chief Executive Officer Angela Braly said more writedowns may be taken in the fourth quarter, and Indianapolis-based WellPoint reduced the upper range of its forecast for the year.

The damage to WellPoint's $18.6 billion investment portfolio was partially offset by a $460.8 million gain from settlements of government tax disputes. Brian Wright, an analyst with Bank of America in New York, said the insurer can easily withstand investment setbacks, even though it holds more debt from distressed companies than its peers. Aetna Inc., Cigna Corp. and Humana Inc. haven't said whether they will take writedowns for their troubled holdings.

WellPoint ``remains well capitalized with $6.3 billion in surplus capital'' and $3.3 billion more than is required by the Blue Cross Blue Shield Association that grants its franchise, said Wright in a note today to clients. Managed-care plans hold safer investments than other types of insurers, such as American International Group Inc. and MetLife Inc., he said.

UnitedHealth Group Inc., the top U.S. health insurer by revenue, booked a third-quarter write-off of 2 cents a share on its investments last week, or about $40 million. Coventry Health Care Inc., a smaller benefits provider, took a charge yesterday of 15 cents a share, or $36.2 million, for investment losses in the quarter.

WellPoint fell $1.60, or 3.8 percent, to $40.25 in New York Stock Exchange composite trading at 9:36 a.m. after touching $40, the biggest intraday decline in a week. The company dropped 52 percent this year before today.

Revenue Falls 1.8%

The insurer's third-quarter net income dropped to $820.7 million, or $1.60 a share, from $868 million, or $1.45, a year earlier. Revenue fell 1.8 percent to $14.96 billion, pulled down by the investment losses.

Profit of $1.58 per share, excluding the investment losses and the tax gain, beat the $1.48 a share average estimate of 18 analysts surveyed by Bloomberg.

WellPoint's earnings have been hurt this year by declining U.S. employment, shrinking membership in its Medicaid coverage for the poor and higher costs than the company anticipated in Medicare plans for the elderly. Employers have shifted more workers from WellPoint's most profitable plans and put them in benefit programs for which the insurer manages the paperwork without funding medical claims.

Fannie, Freddie, Lehman

The third-quarter losses included $229.5 million for investments in the government-chartered housing agencies Fannie Mae and Freddie Mac, both now in conservatorship, and $88.5 million for holdings in investment bank Lehman Brothers, which filed for bankruptcy. The total investment loss included both equities and debt securities.

The company adjusted its outlook for 2008 to a range of $5.43 to $5.49 from the $5.42 to $5.57 it projected as recently as Sept. 11. The average estimate of analysts was $5.49.

WellPoint's statement today didn't provide a profit forecast for next year, and Braly said on a conference call with investors that the growth rate for earnings per share would be in ``single digits.''

Earnings per share in the third quarter were helped by $171.8 million in share buybacks, bringing the total year-to- date to $3 billion, according to the statement.

Medical Costs

For all plans, WellPoint paid out 82.5 percent of premium revenue to health providers in the quarter, compared with 81.8 percent a year earlier. The company attributed the rise to customer prices that didn't keep pace with actual medical expenses. Analysts and investors view the percentage, referred to as the medical loss ratio, as an indicator of future profit.

The insurer has said benefits in some plans for the elderly cost more than expected. Those plans aren't being offered for next year, WellPoint has said. Enrollment in U.S. Medicare Advantage health plans expanded by more than 25 percent this year to 465,000, as WellPoint tried to compensate for persistent declines in the percentage of Americans covered by employer- sponsored health plans.

WellPoint is the largest U.S. health insurer by enrollment, with Blue Cross plans in 14 states, including California, New York and Georgia, and other coverage nationwide. Medical plan membership in the third quarter increased 1.5 percent from a year earlier to 35.3 million.

Enrollment Declines

The insurer noted that its biggest enrollment declines were in health plans purchased directly from the company rather than through employers. Third-quarter operating profit from WellPoint's commercial business fell 14 percent from a year earlier to $878.8 million.

Even before U.S. job losses jumped by 159,000 last month, WellPoint was losing members from higher-profit health plans for which the company bears the financial risks. There were million members in that category on Sept. 30, a decline of 559,000 from a year earlier, the company said today.

UnitedHealth last week reported a 28 percent decline in third-quarter net income compared with a year earlier, and yesterday Coventry said profit fell 49 percent.

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To contact the reporter on this story: Avram Goldstein in Washington at agoldstein1@bloomberg.net.

Last Updated: October 22, 2008 09:43 EDT