S&P changes US health insurance outlook to negative

NEW YORK, Nov 3 (Reuters) - Standard & Poor's on Monday said it expects the number of downgrades of companies in the U.S. health insurance sector to pick up, reflecting weaker operating results and a worsening economy.

S&P changed its outlook on the sector to negative, from stable, indicating companies in the sector are more likely to be downgraded over the next one to two years.

"Aggressive pricing, unforeseen medical trend development, and slowing top-line growth that have driven performance shortfalls beyond our downside expectations," S&P said in a statement.

"Overall, we believe the sector is feeling the strain of a slumping U.S. economy and more intense competitive pressure, which we expect to persist meaningfully into 2009," the rating agency added.

Shares of health insurance companies were hurt last week after Aetna Inc (AET.N) said third quarter net income dropped to $277.3 million from $496.7 million a year earlier, and Cigna Corp (CI.N) said net income dropped to $171 million from $365 million for the same period.

"In the past few months, health-insurer-related rating activity has quickly taken a negative turn as pressure on earnings and cash-flow levels raised concerns about goodwill valuation (for some companies) and quality of capital in general," S&P added.

In spite of the negative outlook, S&P said it expects downgrades to be limited to only a subset of companies with negative outlooks, the negative sector outlook also indicates that upgrades will also be less common. (Reporting by Karen Brettell; Editing by James Dalgleish)