Moody's Investors Service said the credit outlook for U.S. health insurers over the next 12-to-18 months has shifted to negative from stable.

Reasons the negative view of the sector, which with group health plans provides a large amount of revenue for property-casualty agents and brokers, include operational, economic and political challenges that will lower margins and hamper growth.

The report author, Moody's Vice President Stephen Zaharuk, said, "Over the near term we believe that the credit profile of health care insurers will come under negative pressure as the result of the current political and economic climates, which in turn have placed a strain on both management and operational capabilities."

He pointed out in the report that the mounting cost of health care continues to test the willingness of employers to provide health insurance to their employees, especially with a downturn in the economy.

"This scenario," said Mr. Zaharuk, "results in intense pricing pressure in order to maintain market share. In addition, new commercial and Medicare Advantage products have added more operational complexity and financial risk for the insurers."

"Although more conservatively invested than other sectors, the health care insurance sector will feel the impact of credit impairments and lower investment returns should economic conditions continue to deteriorate," he explained.

"Additionally, the vulnerability of an employer-based system for health care coverage is exposed in a recessionary environment. Layoffs and coverage elimination by employers have an immediate negative impact on the sector's revenues and earnings," the analyst noted.

Lastly, he said, "the current uncertainty surrounding political solutions with respect to health care at both the state and federal levels hinders insurers' ability to develop focused strategic plans."

Mr. Zaharuk added, "More urgently, reimbursement cuts to insurers for Medicare Advantage programs and pressure on state budgets for Medicaid spending are threatening the growth and profitability of these segments."

But, not all companies will face the same degree of ratings pressure.

Mr. Zaharuk said the rating impact on any particular insurer will be determined by several external and internal factors:

o A company's size and product diversity.

o Financial profile, including profitability, capital adequacy and financial flexibility.

o Quality and adaptability of management.

o Severity of the current economic downturn.

o The degree and swiftness of health care reform.

The report is titled "US Healthcare Insurers: Industry Pressures Prompt Negative Outlook."

Special Reports /

Moody's Says Outlook Now Negative For Health Sector

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