Oct. 27 (Bloomberg) -- 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, the Louisville, Kentucky-based company said today in a statement. Humana fell 15 percent in New York trading, the most in more than 7 months, and the results drove down the shares of other health insurers.

Earnings were reduced by $108.3 million, or 40 cents a share, because of losses and writedowns of investments in Lehman Brothers Holdings Inc., American International Group Inc., Fannie Mae and Freddie Mac, companies hit by the credit crisis. Humana said it still has a $6.5 billion portfolio with ``ample capital and liquidity'' to meet regulatory requirements.

``It illustrates that managed-care companies are being impacted by this, but not in a really disastrous way,'' said Thomas Carroll, an analyst at Stifel Nicolaus & Co. in Baltimore, in a telephone interview today. ``We were estimating a 55-cent charge and it came in at 40. Liquidity doesn't seem to be a concern.''

Humana fell $5.47 to $30.80 in New York Stock exchange composite trading at 4:01 p.m., the most since March 11. The shares are down 59 percent this year. The six-member Standard & Poor's Managed Health Care Index declined 9.4 percent. Cigna Corp., scheduled to report earnings this week, fell 13 percent to $20.73.

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.

Earnings in the third quarter fell from $302.4 million, or $1.78 a share, a year earlier. Profit 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.

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 failed investments and lower returns on good holdings, Humana said.

Still, Humana forecast today a 2009 profit of $5.90 to $6.10 a share, more than analysts projected.

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 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. Competitors are offering no-premium plans with richer benefits, he said.

The 50,000 projected increase compares with 230,000 new Advantage enrollees in the last 12 months. Each Medicare Advantage member generates about $10,000 a year for insurers.

Message to Investors

``Doing this now perhaps fosters longer-term stability,'' Carroll said. ``But investors should see that this company that's the perennial expert at Medicare is sending a message that this business is perhaps not going to be as robust longer- term as we thought.''

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.

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. Aetna Inc., of Hartford, Connecticut, and Philadelphia-based Cigna are scheduled to release their earnings this week.

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

Last Updated: October 27, 2008 16:42 EDT