Sector Snap: Health Insurers Downgraded

NEW YORK (AP) — A BMO Capital Markets analyst cut his rating on health insurers on Wednesday, saying most of the stocks will stay close to their current prices due to high unemployment, which will reduce profit growth.

Dave Shove downgraded the sector to "Market Perform" from "Outperform." He said job losses and high COBRA enrollment ("typically an unprofitable offering," according to Shove) will continue to hurt enrollment and premiums until 2011, and medical costs may go up, partly due to swine flu. His new rating means Shove expects the sector do about as well as the S&P 500.

"While these dynamics are not new, we now expect them to dominate share valuations for a prolonged period," Shove said. While health insurer stocks have traded higher of late, with investors growing more optimistic as it appeared more likely that a federal health care reform bill would not include a public insurance option.

He added that Medicare and Medicaid reimbursement rates are lower than usual, and investment income, which was once a significant source of profits for health insurers, will probably be neutral in 2010.