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Molina Healthcare shares fall sharply amid company restructuring

Molina Healthcare Inc. shares fell sharply the same week the company reported a net loss and announced it would undergo a restructuring plan.

For the week ended Aug. 3, the SNL Insurance Index increased 1.37% to 979.04, while the S&P 500 was unchanged at 2,472.16.

Molina reported a second-quarter adjusted net loss of $225 million, or $4.01 per share, compared with adjusted net income of $38 million, or 67 cents per share, in the year-ago quarter, prompting it to revoke its guidance for the rest of the year and begin an expense overhaul to control its losses.

The company also said it would withdraw from Utah and Wisconsin's Affordable Care Act exchanges in 2018 and reduce the scope of its 2018 participation in the Washington state marketplace. It also plans to increase its premiums 55% nationwide.

The company cited uncertainty regarding cost-sharing reduction payments from the government to keep costs low for low-income or intensive-care patients. But at the same time, Molina unit Molina Healthcare of Ohio Inc. announced it would enter counties in Ohio other insurers have fled.

Molina recorded an adjusted net loss of $225 million, or $4.01 per share, in the second quarter of 2017, compared to adjusted net income of $38 million, or 67 cents per share, a year earlier.

Part of that loss was $43 million in restructuring and separation costs related to termination benefits paid to the company's former CEO and CFO. In May, the company ousted brothers Joseph and John Molina, expressing a need for new leadership as a result of the company's disappointing financial performance.

Interim CEO, President, CFO and chief accounting officer Joseph White said during a conference call to discuss the quarter's earnings that when the company entered the Affordable Care Act exchanges, it saw rapid growth. But growing so quickly left room for a future decline, he said.

"In retrospect, a better approach would have been to undertake a full review of the organization in anticipation of the potential growth resulting from the Affordable Care Act," White said, according to a transcript. "Instead of increasing investment in existing processes, we should have conducted a full redesign of our business that we are doing now."

Following first-quarter results, rumors circulated about a potential sale of the company. After the second quarter, at least one analyst returned to the idea, with J.P. Morgan equity analyst Gary Taylor writing in a research note that his firm believes the weaker the company's operating results, the more shareholders will "agitate" for a takeout.

Molina shares fell 10.79% to $62.32 for the week. But other managed care shares jumped the same week they reported favorable earnings for the second quarter.

Humana Inc. shares surged the same week it announced that it has "overcome" the health insurance tax that it previously projected would hamper long-term growth.

In the company's second-quarter earnings call, CFO Brian Kane said the company did not deduct the fee in its tax filings and take advantage of the savings by putting them into benefits, effectively offsetting future impacts to the company's margins should the tax come back. The fee is currently in abeyance per a one-year suspension signed during the Obama administration in late 2015.

Humana's stock rose 6.76% to $248.84 per share, from $233.08 per share a week ago, on higher-than-average volume.

Good earnings for the company have led to favorable market trends, RBC Capital Markets equity analyst Frank Morgan said in an interview.

Beyond Humana, Morgan said, the four other largest health insurers are also seeing good earnings results, even with the uncertainty swirling in Washington, D.C.

"In the backdrop of a market that is weighing down healthcare to varying degrees ... the shining star in healthcare is managed care," Morgan said. "Companies have beat their numbers, they're rising their guidance and in a market like this, that's why you're seeing good performance relative to everything else."

In the property and casualty insurance space, Kemper Corp.'s shares shot up 20%, the largest jump in insurance shares tracked by S&P Global Market Intelligence. It closed at $47.10 per share.

Its shares rose the same week the company reported a jump in its second-quarter consolidated net operating income of $21.0 million, or 41 cents per share, from $4.6 million, or 9 cents per share, in the year-ago quarter.

Raymond James equity analyst Gregory Peters wrote in a research note that the company's nonstandard auto business has "started to turn" following its management's pricing, re-underwriting and claims initiatives.

If the company closes in on a 10% return on equity, it could represent annualized operating EPS of up to $4 or more, "which represents considerable upside potential relative to near-term expectations," he wrote.