Sector Wrap: 2Q earnings boost health insurers

Both companies reported smaller profits due to higher medical costs. In addition, large lawsuit settlements pressured UnitedHealth's results. But because many health insurers have lowered their profit forecasts over the last four months, Wall Street was wary of worse news.

Citi Investment Research analyst Charles Boorady said UnitedHealth's results show that health insurers may be near the end of a cycle in which medical costs and lower prices have led to thinner profit margins.

"UnitedHealth is sending a more convincing signal that it will begin to raise prices at a rate sufficient to offset rising medical cost trends, a move we think will result in stable loss ratios in 2009 vs. 2008," he said.

Medical loss ratios measure the portion of premium revenue that is spent on medical care. Higher medical loss ratios lead to tighter profit margins.

UnitedHealth's medical loss ratio rose to 83.2 percent from 80.3 percent, while WellPoint's medical loss ratio increased to 83.3 percent from 81.8 percent.

"The second-quarter result should be a relief relative to lingering concerns that WellPoint might show significant earnings weakness and/or steep deterioration in the medical cost ratio," said Goldman Sachs analyst Matthew Borsch.

Shares of WellPoint rose $4.42, or 9.1 percent, to $53.17 in afternoon trading, building on a 6.8 percent gain Tuesday.

UnitedHealth stock added $1.55, or 5.9 percent, after picking up 9.7 percent in Tuesday trading.

Coventry Health Care Inc. is scheduled to report its quarterly results Friday morning, and its stock advanced $2.96, or 9.3 percent, to $34.87. Several other insurers are scheduled to post their results in late July or early August.