Tickers in this Article: UNH, AET, WLP, CI, HUM
One major health insurer has already released its earnings and several more will follow suit in the coming days. The results themselves have been overshadowed by the prospects of a health care reform bill emerging from Congress. Regardless of what happens on Capitol Hill, these companies will face steep challenges in the quarters that lie ahead.

IN PICTURES: Eight Ways To Survive A Market Downturn

Deteriorating Enrollment

One of the biggest obstacles staring most of the mega insurers in the face has been a rising unemployment rate which has had a negative impact on enrollment figures. When UnitedHealth Group (NYSE:UNH) reported its Q2 earnings on Tuesday, the company noted that its commercial health business saw enrollment drop by 6% to 25 million, from its year-ago quarter.

Despite this pressure, the company was still able to finish with a 170.4% increase in EPS on a 6.9% rise in revenue. These metrics benefited from strength in UnitedHealth's public and senior health business segments and enabled the company to slightly up the lower end of its full year earnings guidance range.

Industry Results
The next two major insurers to report earnings will be Aetna (NYSE:AET) and WellPoint (NYSE:WLP). Shareholders can expect much of the same headwinds for Aetna and WellPoint when the companies announce their Q2 results on Wednesday. Analysts are looking for Aetna to check in with a 17% drop in EPS and a 9.3% increase in revenue. Both EPS and revenue at WellPoint are expected to remain relatively flat when compared to the company's year-ago quarter. (Find out if management is doing its job of creating profit for investors, see Assess Shareholder Wealth With EPS.)

In Q1, Aetna actually added to its membership figures, but noted that increased Consolidated Omnibus Budget Reconciliation Act (COBRA) membership and a higher intensity of facility services pushed medical costs higher than expected. WellPoint reported a 2.3% decrease in its medical enrollment figures in Q1 as it pointed to a downward trend in its local group business segment and the decision to pull out of a couple of state sponsored plans as being contributing factors to the decline.

Managing Expectations
When Cigna
(NYSE:CI) announced its Q1 results in April, the company saw its medical enrollment fall by 3%. The company is now set to report its Q2 results on Thursday July 30. According to Yahoo! Finance, 17 Analysts will be looking for Cigna to report EPS of 96.7 cents, down from $1.08 in the year-ago quarter. Revenue is expected to fall by 1.3%.

Humana (NYSE:HUM) reports its Q2 earnings on Monday, August 3. When the company released its Q1 results in April, it did acknowledge the pressure that the economy was putting on its commercial business. However, Humana derives the majority of its revenue from the insurer's government business segment which deals in Medicare, Medicaid and military lines of business. (One program is for the poor; the other is for the elderly. Learn which is which in What's The Difference Between Medicare And Medicaid?)

In Humana's Q1, Medicare Advantage premiums rose 28% compared to Q1 2008, due to an increase in membership and the introduction of member premiums. Humana's client portfolio makeup should afford the company the ability to ride out an otherwise difficult market.

The Bottom Line
With the downward pressure that these companies are facing from rising unemployment and the uncertainty that has arisen from a potential healthcare reform bill in the works, the health insurance sector has become a bit more risky to invest in than years past. The defensive characteristics that these stocks have traditionally been known for are being put to the test. For investors looking to dive into this space, wade with caution.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center