Health insurer earnings are suffering from swine flu and coming reforms

The onset of H1N1 flu season and the coming health-care reforms are putting health insurers -- and their latest quarterly reports -- in the spotlight. With the exception of Aetna (AET), most insurers' shares have dropped as investors worry about potential fallout of reform and from rising swine flue costs and insurance for people who've lost their jobs. Laid-off workers who become insured under COBRA plans generally cost companies more than employees in regular group plans.

Insurer shares have dropped 15 percent since the $829 billion bill sponsored by Max Baucus was introduced in mid-September. That plan would extend coverage to about 29 million uninsured Americans through a mix of taxpayer subsidies, expansion of Medicaid benefits for the poor and restrictions on insurers.

In fact, according to Goldman Sachs, Medicare cuts would halve earnings growth over the next decade for UnitedHealth Group (UNH) and wipe them out completely for Humana (HUM), if the health-care bill approved by a Senate panel last week becomes law. WellPoint (WLP), too, would see slower growth, while Cigna (CI) would be least affected among the five largest insurers, given its low numbers in Medicare and commercial policies. With all that in mind, here's a wrapup of some major health insurers' earnings reports:

On Oct. 26, Amerigroup Corp. (AGP) announced preliminary third-quarter results, cutting its third-quarter earnings outlook and withdrawing its full-year outlook due to medical costs associated with a severe H1N1 season. The virus is particularly virulent among children, pregnant women and other high-risk groups -- a category representing about 87 percent of Amerigroup's 1.7 million members.

Despite its previous warning, AGP shares fell over 3 percent on Friday when the company reported actual results, posting a net profit fall of 41 percent to $22.5 million, or 43 cents a share. That was below estimates of 47 cents per share. Revenues rose 19 percent to $1.3 billion, but the lower profit reflected elevated medical costs associated with what appears to be a bad season for the flu.

For Coventry Health Care Inc. (CVH), it seems, swine flu isn't an issue -- at least not yet. While it posted lower third-quarter net income on Friday, hurt by a charge tied to a sale, the results topped analysts' forecasts. Profit margins improved at its commercial health plans serving employers. Coventry also raised its full-year forecast.

In Coventry's case, while investors worry about the announced departure of its chief financial officer, it seems that the restructuring steps it has taken have eased some fears as investors see a turnaround progress. Even for Coventry, though, medical costs rose.

Aetna Inc. also said it saw high costs from the H1N1 flu and COBRA insurance claims. It reported Thursday that its third-quarter profit rose 18 percent on better returns from its investments, topping Wall Street's expectations. Revenue rose 14 percent to $8.72 billion, also above expectations.

Still, like other insurers, Aetna shares are trading at low valuations over concerns that health-care reform could significantly cut into its business. But in its 2009 forecast, Aetna indicated it had a firm grip on medical-cost problems that plagued it earlier this year.

WellPoint Inc.'s third-quarter profit, while 11 percent lower on asset writedowns, far exceeded Wall Street views due to lower-than-anticipated medical costs. Layoffs helped push enrollments down, but WellPoint maintained its full-year earnings guidance despite several headwinds.

WellPoint anticipates a weak economy, an active flu season and high levels of COBRA membership in the fourth quarter and next year. As a result, it increased its outlook for the growth in medical costs.

Last week, UnitedHealth Group Inc.reported a better-than-expected 13 percent increase in third-quarter earnings as cost controls helped offset commercial-enrollment losses. Despite that, UnitedHealth experienced higher medical costs due to, it said, the H1N1 flu virus and an increasing proportion of members receiving care under programs for those who lost their jobs.

The health insurer cautioned that 2010 should be "a somewhat more difficult year," resulting in lower earnings. The status of the U.S. health-overhaul legislation and other market factors will influence UnitedHealth's timing and level of share repurchases in the fourth quarter and in 2010, its CEO said.

In the coming week, Cigna and Humana are scheduled to report results. If they follow the trend of peer companies that have already reported, they're bound to be hurt by the same rising costs that have plagued all health insurers. And if Goldman's analyst is right, industry share prices may remain suppressed for some time.

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