WellPoint warning may long haunt HMO stocks

NEW YORK (Reuters) - WellPoint Inc (WLP.N) may have just shot down any investor hopes that U.S. health insurers could be a safe place to put their money in a troubled economy.

Shares of WellPoint plummeted as much as 29 percent on Tuesday after the largest U.S. health insurer by membership slashed its 2008 profit forecast, citing high medical costs, weak enrollment and a worsening economy.

The stock dropped as low as $46.76, the lowest price since November 2004. That move wiped away about $10.4 billion in market value in WellPoint alone.

The lower outlook also crushed shares of rival insurers. The Morgan Stanley Healthcare Payor index .HMO, which includes 11 health insurers, fell the most in a day, 17 percent, since its creation in 1994.

Shares of Humana (HUM.N), which is highly leveraged to Medicare plans for the elderly, tumbled 31 percent to their lowest price since May 2006. WellPoint pointed to cost trends in its Medicare Advantage plans as running particularly high.

UnitedHealth Group (UNH.N) shares were down about 14 percent, Cigna (CI.N) dropped 12 percent and Coventry Health Care (CVH.N) sank almost 15 percent. Aetna (AET.N) fell 11 percent despite reaffirming its outlook on Tuesday.

After the markets closed on Monday, WellPoint projected 2008 earnings per share growth of 4 percent to 8 percent, down from its prior expectation of 15 percent.

Analysts at Goldman Sachs, Bear Stearns, Raymond James, FTN Midwest and Stifel Nicolaus were among those to downgrade their ratings on WellPoint stock following the profit warning.

DEFENSIVE PLAY?

Seven weeks ago, WellPoint's chief financial officer had told Reuters in an interview the health insurance industry has historically performed well in down economic times and had been a pretty good defensive play. Other executives and analysts also touted the industry's defensive properties.

But analysts said on Tuesday that WellPoint's problems would leave health-insurer stocks in the doldrums.

"We do not view current weakness in the group as a buying opportunity," JP Morgan analyst William Georges said in a research note.

In fact, Georges said WellPoint's view of higher medical costs is "likely systemic."

"We expect other managed-care plans to report similar issues," Georges said. "Indeed, with fundamentals now at risk, we see prolonged negative sentiment and believe the stocks are unlikely to perform for much of the year heading into the November elections."

Goldman Sachs analyst Matthew Borsch cut his view of managed-care stocks to "neutral" from "attractive," saying this was more than a company specific issue.

WellPoint's problems "reflect industry-wide pricing pressures that are now combined with upward pressure on underlying medical cost trends, substantially increasing the risk that the current cyclical slowdown in managed care becomes an outright downturn," Borsch said in a research note.

Even before WellPoint's announcement, health insurer stocks had been rocky in 2008. The S&P Managed Healthcare index .GSPHMO, which includes the six biggest health insurers, had been off 22 percent this year, underperforming a 13 percent decline in the broader S&P 500 index.

Some analysts took solace in WellPoint CFO Wayne DeVeydt's comments on a conference call on Monday that he didn't see cost issues as an industry-wide trend.

"I think there's some things that we need to do better," DeVeydt said, according to a transcript of the call.

Citigroup analyst Charles Boorady recommended sticking with managed care stocks, citing stable demand for health insurance.

But Bear Stearns analyst John Rex cut his rating on the sector to "market weight" from "overweight."

"WellPoint opened up what we consider to be the ultimate managed care earnings fear: rising medical costs," Rex said in a research note.

(Editing by Brian Moss and Maureen Bavdek)