Sector Wrap: Health insurers are mixed

UnitedHealth said intense competition was hurting its premium yields, leading to lower profit margins. The company also cited higher-than-expected Medicare costs and a decreased amount of commercial business. But most insurers have lowered their forecasts this year, and analysts said UnitedHealth's new outlook doesn't contain any signs that things will get worse in the sector.

In a client note, Wachovia analyst Matthew Perry said no new issues have cropped up, and the causes of UnitedHealth's April cuts have not gotten any worse. Medical costs haven't increased further, he said; the problem is that insurance premiums have come down.

Perry added that UnitedHealth's forecasts have come down less than some of its rivals, many of whom have cut their outlooks over the past four months.

"The good news for the group is that the company maintains its view that medical cost trend is not accelerating," said Carl McDonald of Oppenheimer & Co.

UnitedHealth shares rose more than 5 percent in morning trading, although the stock later declined 51 cents, or 2 percent, to $25.12 and set a four-year low of $25.04. The news was good for other stocks the sector, but the analysts said UnitedHealth is still struggling with issues of its own.

"United's primary challenge appears to be that it is losing higher margin Commercial risk-based business to competitors, and has been more willing than previously anticipated to concede on pricing to retain key accounts at lower margins," said Deutsche Bank analyst Scott Fidel.

Goldman Sachs analyst Matthew Borsch said profit margins in the industry will continue to fall through 2010 because of competition between companies. He said margins are the biggest issue facing the managed-care industry.

Also on Wednesday, UnitedHealth said it will cut at least 4,000 jobs and said it will settle a stock-options backdating lawsuit for $895 million.

Health insurers got a lift from UnitedHealth's news, but several declined in afternoon trading as the broader markets moved lower.