Business | Markets
HMO stocks' recent rally may not last
Health insurer stocks climbed back from rock-bottom lows in December, but issues that plagued the group last year threaten to undercut any sustained rally in 2009.
- Reuters
- Published: 23:35 January 4, 2009
New York: Health insurer stocks climbed back from rock-bottom lows in December, but issues that plagued the group last year threaten to undercut any sustained rally in 2009.
The stocks' performance will depend on investor confidence in the companies' pricing trends and balance sheets, analysts and money managers said. Investors also need more clarity on US healthcare reform efforts to determine how the insurers will weather any changes.
The S&P Managed Health Care index of the six largest US health insurers rose 25 per cent in December, compared to a 0.8 per cent climb for the broader S&P 500 index.
The late rise helped recoup losses from a brutal year for health maintenance organisation (HMO) stocks. The managed care index still fell 55 per cent for all of 2008, while the broader S&P dropped 38.5 per cent.
HMO stocks had sunk to their 2008 lows at the end of November, as concerns over the insurers' balance sheets compounded a raft of company profit warnings issued earlier in the year.
"What they experienced last month is akin to what you saw in the regional banks going back a couple of months when everybody just wanted to avoid financials," said Paul Alan Davis, co-portfolio manager of the Schwab Healthcare Fund. "People were selling them almost in panic."
"What investors do is they go look at what had been beaten up the most and bid the price of those up a bit," Davis said. "I'm not saying that it's going to last for a long period of time."
Tim Nelson, a healthcare analyst with First American Funds, said data that show slowing medical costs, along with a realisation that near-term results "will probably be pretty decent", also fuelled investor optimism.
Nelson said the companies appeared to shore up their pricing after they fell behind medical costs earlier in the year. The question is whether they will be able to remain steady with their pricing and profit margins, he said.
"That ability to raise prices may not hold for the rest of the businesses booked in late fall and into the spring for the second half of the year," Nelson said.
Worries over the insurers' balancesheets also may be abating. Because of statutory requirements, insurers maintain more extensive reserves and investments than most other types of companies, and their positions have come under greater scrutiny due to the market volatility.
Cigna Corp and Aetna Inc - whose finances are perhaps the most concerning to investors - made soothing comments about their finances in the past few weeks that buoyed the group, said David Heupel, a portfolio manager with Thrivent Investment Management.
"That's the greatest fear - that you wake up and one of these companies has a massive hit on the balance sheet and their coverage ratios are such that they have to go raise capital," Heupel said.
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