PREVIEW-US health insurers seek rebound after brutal 1st half

By Lewis Krauskopf

NEW YORK, July 20 (Reuters) - U.S. health insurers will need to show some signs of stability when they report second-quarter earnings, beginning on Tuesday, if they are to lure back investors to their beaten-down stocks.

Overall, the managed health-care group is expected to post a 4.2 percent drop in second-quarter earnings compared with a year ago, according to Lehman Brothers.

Of the larger insurers, Lehman expects only Aetna Inc (AET.N: Quote, Profile, Research, Stock Buzz) to post double-digit earnings-per-share growth (12 percent), while it projects WellPoint Inc (WLP.N: Quote, Profile, Research, Stock Buzz) to post flat earnings and UnitedHealth Group Inc (UNH.N: Quote, Profile, Research, Stock Buzz) to report a 27 percent drop.

Since March, five of the seven largest health insurers by market value have slashed their full-year earnings expectations -- some more than once. The warnings sparked investor fears about the sector and led to massive sell-offs.

Pressure on the group has come from Washington as well. The U.S. Congress last week overrode a veto by President George W. Bush and passed legislation that will cut payments to health insurers involved with Medicare, the federal health program for seniors that has been a profitable business for insurers.

The Morgan Stanley Healthcare Payor index has fallen some 43 percent this year, sharply underperforming a 14 percent decline for the broader S&P 500 index .SPX. Health insurers are the five worst performers this year in the 52-company S&P Health Care Sector index .GSPA.

"It seems like a lot of bad news, low expectations, political risk -- whatever you want to call it -- is priced in at this point," said Maria Mendelsberg, a principal at Cambiar Investors.

"If there's just some sign of stabilization or the guidance looks OK, I would think you'd get some sort of rally in the group just because the valuations are so depressed," she said.

Indeed, as a group, the six largest health insurers on average trade at a lowly 7.4 times next year's earnings forecasts. Lehman's Josh Raskin last week described the group's forward earnings valuation as the lowest in its history.

So far, companies have blamed their earnings disappointments on a variety of issues: missteps in pricing their health plans for employers, offering overly generous benefits under Medicare, and enrollment declines stemming from heated competition and the weakening U.S. economy.

UnitedHealth, the largest U.S. health insurer by market value, kicks off the reporting season on Tuesday.

However, UnitedHealth earlier this month deflated some of the suspense from its report, when it said it expected to post second-quarter earnings far below analyst expectations and slashed its full-year profit forecast. The company blamed tough competition in its commercial health benefits business.

So investors may be more attuned to Wednesday's report from WellPoint, the largest U.S. health insurer by membership.

"All eyes will probably be on WellPoint," Morningstar analyst Matthew Coffina said.

WellPoint was the first company to sharply reduce its 2008 profit expectations in March. Since rival Coventry Health Care (CVH.N: Quote, Profile, Research, Stock Buzz) cut its outlook last month, WellPoint has yet to comment on its forecast.  Continued...