UPDATE 4-Humana profit drops, sees modest Medicare growth

* Q3 EPS $1.49, ex items vs $1.47 estimate

* $0.40/shr in losses from distressed securities

* Sees 2009 EPS of $5.90-$6.10, vs estimate $5.87

* Medicare '09 member growth trails analyst expectations

* Shares fall 9.8 percent
(Recasts, adds analyst comments, updates shares)

By Lewis Krauskopf

NEW YORK, Oct 27 (Reuters) - Health insurer Humana Inc
(HUM.N) forecast relatively tepid growth for its Medicare plans
for seniors next year that signaled a potential slowdown for
its main business, sending shares down nearly 10 percent.

The large U.S. provider of Medicare plans, whose results
have been hurt this year by high costs for its drug benefit
plans, posted third-quarter results on Monday that beat
expectations and forecast a rebound in 2009 profit that
exceeded analyst estimates.

Although the 2009 earnings growth looked "very favorable,"
Humana's Medicare enrollment projection fell below market
expectations, Stifel Nicolaus analyst Thomas Carroll said.

"It was somewhat taken for granted that strong Medicare
enrollment growth would just be there, and clearly the company
is not guiding in that direction," Carroll said.

Humana executives told analysts on a conference call that
the competitive environment for Medicare was challenging for
2009, but that it was intent on maintaining a 5 percent
operating pretax profit margin for its Medicare business.

Humana has grown explosively in recent years as it benefited
from an expansion of the role for companies under Medicare, the
popular federal government health program.

BMO Capital Markets analyst David Shove said government
reimbursement rates to the plans have not kept pace with rising
costs, "so to sustain the generous benefits which have
contributed to the growth is impossible. The benefits have to
get cut, and that's going to slow growth."

Shove said Humana's stock drop represented investors
slapping a lower valuation on the company because of diminished
Medicare growth expectations. Compounding matters, investors
are also worried that the next administration will cut payments
to health insurers and make the program less profitable.

Humana's third-quarter net income fell to $183 million, or
$1.09 per share, from $302.4 million, or $1.78, a year ago.

Results included 40 cents a share in losses from investments
and sales of distressed securities.

Excluding those losses, earnings were $1.49 per share, 2
cents ahead of the average estimate of analysts, according to
Reuters Estimates.

Health-insurer stocks, already down this year due to a
series of profit warnings, have been pressured in recent weeks
during the credit crisis as investors worry about potential
sizable write-downs and the companies' balance sheets.

Humana in March severely cut its 2008 profit forecast,
blaming high costs in Medicare drug benefit plans. It
maintained the problems were correctable and that its growth
trajectory would bounce back in 2009.

Louisville, Kentucky-based Humana forecast 2009 earnings
per share of $5.90 to $6.10, implying growth of more than 50
percent, according to Goldman Sachs analyst Matthew Borsch. The
average Reuters estimate was $5.87 a share.

It expects membership in its full-service Medicare
Advantage plans to grow by 25,000 to 75,000 by the end of 2009,
compared with expected growth of 300,000 members this year.

Stifel's Carroll had expected Medicare Advantage growth of
200,000 members for next year.

Morningstar analyst Matthew Coffina said it appears that
Humana is sacrificing enrollment gains to maintain profit
margins, which should be seen positively as a way to shore up
its bottom line.

The company's benefit expense ratio, a key measure of
medical costs as a percentage of premium revenue, worsened to
83.1 percent in the quarter from 81.3 percent a year ago,
reflecting its Medicare drug-plan woes. But the result came in
better than the 83.7 percent expected by Goldman's Borsch.

"Operating metrics look very solid," Borsch said in a
research note of the third-quarter results.

Revenues rose 13 percent to $7.15 billion.

Humana cut its fourth-quarter outlook to $1.00 to $1.10 per
share, hurt by 10 cents per share in lower investment income.

Shares of Humana fell $3.54, or 9.8 percent, to $32.73 in
afternoon trade on the New York Stock Exchange.
(Reporting by Lewis Krauskopf; additional reporting by Shradhha
Sharma in Bangalore; editing by Derek Caney, Dave Zimmerman,
Matthew Lewis)