Health Insurers: No Place to Hide


By Nilus Mattive While big financial-services companies such as Marsh & McLennan (MMC) and American International Group (AIG) have garnered the spotlight during New York Attorney General Eliot Spitzer's probe of the insurance industry, another group appears to have come in the crusading attorney general's crosshairs: Managed-care outfits. Stocks in this group were dealt a blow on Oct. 19 amid reports that Spitzer might widen his probe of the insurers to include health-insurance companies.

The focus of Spitzer's investigation is questionable compensation arrangements between insurers and insurance brokers. The probe has already produced some dramatic changes, including the replacement of Marsh's CEO and a significant change in its business model. Standard & Poor's Equity Research Services believes that any action taken by Spitzer's office could lead to hefty fines for the targeted companies, which would likely affect their earnings.

SUBPOENAED AGAIN. Both Aetna (AET

; recent price, $84) and CIGNA (CI

; recent price, $64), health insurers that also sell other insurance products, confirmed that they've received additional subpoenas from the New York Attorney General's office since the ones they disclosed in June. According to Standard & Poor's managed health-care analyst Phil Seligman, the possibility that Spitzer will focus on these companies only adds to the uncertainty already surrounding their stocks given the upcoming Presidential election.

Seligman also points out that managed care has been the third most-profitable industry for three years in a row. As a result, he thinks HMOs may have a harder time convincing their customers to accept the double-digit premium increases of years past. He believes all of these factors will restrain managed-care stocks over the near term.

DOWNGRADED. Because of possible legal action, the uncertain effects of the Presidential election, and potentially weaker profits, Standard & Poor's lowered its rankings on five managed-care stocks on Oct. 19. UnitedHealth (UNH

; recent price, $69) and Pacificare Health Systems (PHS

; $34) were downgraded to 3

STARS (hold) from 4 STARS (accumulate). S&P also cut its target prices on UnitedHealth to $71, from $85, and on Pacificare to $36, from $42.

Meanwhile, Aetna (AET

; $84), Coventry Health Care (CVH

; $40), and Humana (HUM

; $18) were each downgraded to 3 STARS from 5 STARS (buy). Target prices were lowered to $86 from $105 for Aetna, to $41 from $53 for Coventry, and to $19 from $21 for Humana. Cigna's ranking remains 3 STARS. Mattive is senior editor of Standard & Poor's weekly investing newsletter, The Outlook


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