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WellPoint Warning Takes Shine Off Insurer Stocks

WellPoint may have just shot down any investor hopes that U.S. health insurers could be a safe place to put their money in a troubled economy.
Shares of WellPoint tumbled as much as 28 percent on Tuesday after the largest U.S. health insurer by membership slashed its 2008 profit forecast, citing high medical costs, weak enrollment and a worsening economy.

Wellpoint
Wellpoint

The stock dropped as low as $47.70, the lowest price since November 2004. That move wiped away nearly $10 billion in market value in WellPoint alone.

Shares of rival insurers also fell sharply: Humana declined 18 percent, UnitedHealth Group skidded 10 percent, Cigna dropped 10 percent and Coventry Health Care sank 19 percent. Aetna shed 10 percent despite the fact that the company reaffirmed its outlook on Tuesday.

After the markets closed on Monday, WellPoint projected 2008 earnings per share growth of 4 percent to 8 percent, down from its prior expectation of 15 percent.

Analysts at Goldman Sachs, Bear Stearns, Raymond James and Stifel Nicolaus were among those to downgrade their ratings on WellPoint stock following the profit warning.

Seven weeks ago, WellPoint's chief financial officer had told Reuters in an interview the health insurance industry has historically performed well in down economic times and had been
a pretty good defensive play. Other executives and analysts also touted the industry's defensive properties.

But analysts said on Tuesday that WellPoint's problems would leave health-insurer stocks in the doldrums.

"We do not view current weakness in the group as a buying opportunity," J.P. Morgan analyst William Georges said in a research note.

In fact, Georges said WellPoint's view of higher medical costs is "likely systemic."

"We expect other managed-care plans to report similar issues," Georges said. "Indeed, with fundamentals now at risk, we see prolonged negative sentiment and believe the stocks are
unlikely to perform for much of the year heading into the November elections."

Goldman Sachs analyst Matthew Borsch cut his view of managed-care stocks to "neutral" from "attractive," saying WellPoint's problems "reflect industry-wide pricing pressures that are now combined with upward pressure on underlying medical-cost trends, substantially increasing the risk that the current cyclical slowdown in managed care becomes an outright downturn," Borsch said in a research note.

Even before WellPoint's announcement, health insurer stocks had been rocky in 2008. The S&P Managed Healthcare index, which includes the six biggest health insurers, had been off 22 percent this year, underperforming a 13 percent decline in the broader S&P 500 index.

Some analysts took solace in WellPoint CFO Wayne DeVeydt's comments on a conference call on Monday that he didn't see cost issues as an industry-wide trend.

"I think there's some things that we need to do better," DeVeydt said, according to a transcript of the call.

Citigroup analyst Charles Boorady recommended sticking with managed-care stocks, citing stable demand for health insurance.

But Bear Stearns analyst John Rex cut his rating on the sector to "market weight" from "overweight."

"WellPoint opened up what we consider to be the ultimate managed-care-earnings fear: rising medical costs," Rex said in a research note.

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