Humana (HUM)

One trick pony: Despite the recent gestures towards diversification, Humana is in the business of contracting with the government. That's all well and good so long as Medicare Advantage and Medicare Part D persist, but if the government decides to provide benefits directly--rather than pay for private insurance--then Humana could be in an extremely weak position. And right now it looks like the government is headed in that direction, as all leading Democratic presidential candidates have proposed national health insurance plans.

Despite growth, no profits: Humana had a banner year in 2006, but despite this, its profit margins declined. To an extent, taking on new customers requires lowering prices. But the rise in the MCR is worrisome, because it signals that the new Medicare Part D customers may never be very profitable. By margin and by MLR, Humana has underperformed relative to its peers. It's just not clear why they would make a better investment than, for example, Aetna.

Despite growth, no profits: Humana had a banner year in 2006, but despite this, its profit margins declined. To an extent, taking on new customers requires lowering prices. But the rise in the MCR is worrisome, because it signals that the new Medicare Part D customers may never be very profitable. By margin and by MLR, Humana has underperformed relative to its peers. It's just not clear why they would make a better investment than, for example, Aetna.

Problems in the credit market: The subprime meltdown will have a negative impact on Humana's bottom line, as it makes bonds harder to buy because of concerns about ratings reliability. Moreover if the Fed cut interest rates, then net investment income will decline.