Health Insurers Take Sickly Turn

OKLAHOMA CITY -- Following an especially stormy March -- which hit WellPoint (WLP Quote) and Humana (HUM Quote) shares like an F-5 tornado -- the managed care sector no longer resembles a "safe haven" at all.

Over the past few weeks, several health insurers have issued warnings about looming profit shortfalls. WellPoint blamed rising medical costs. Humana cited forecasting mistakes. Coventry (CVH Quote) mentioned the flu.

Other players tried to look strong, with Cigna (CI Quote) and Aetna (AET Quote) coming across as somewhat immune.

Nevertheless, many investors have already fled the space. Others have weathered serious damage that could take months -- if not years -- to repair. All have been left to wonder just how long this storm will last.

News You Need: Wellpoint, Humana

To be sure, some analysts still forecast sunny days ahead. But others, such as Goldman Sachs analyst Matthew Borsch, see more dark clouds on the horizon.

"We disagree with managements and the apparent Street consensus that the reductions to guidance amount to a freak occurrence of simultaneous unrelated events," Borsch wrote earlier this month. "Instead, the common thread is the industry underwriting cycle -- which is, far and away, the most important driver of industry fundamentals ... What we have characterized as a 'cyclical slowdown' over the past two years, since the end of the 2000-2005 up-cycle, looks to be headed towards an outright downturn."

By now, Borsch has gathered plenty of evidence to support his cautious stance. He has gone a step further than most by regularly studying the performance of health insurance companies that never report to Wall Street at all.

Despite rampant consolidation, which has created publicly traded giants like WellPoint and UnitedHealth (UNH Quote), nonprofit Blue Cross providers still control much of the health insurance market. In recent years, Borsch notes, these companies have made so much money that they have been able to cut their premiums without depleting their rich surplus accounts.

Importantly, he says, those companies have managed to steal market share from their for-profit competitors -- and put pressure on their prices -- as a result.

Now, however, they seem to be paying a price. For the first time in nearly a decade, Borsch recently wrote, the nonprofit Blues have started to lose money. Eventually, Borsch fears, that pain could spread.

"We had hoped further declines in operating profit at the Blues might translate to less pricing pressure on the public companies this year," Borsch wrote last week. "While that is still possible, the recent raft of earnings warnings from public companies suggests to us instead that the underwriting cycle has entered a worsening stage, setting the stage for a period of impaired earnings growth for most of the public companies until the downturn washes out excess competitive pressures -- historically, a two- to three-year process" for the group.

For the most part, Borsch is urging industry investors to remain on the sidelines in the meantime. His firm seeks to do business with the companies it covers.