Report: Midyear Outlook Stable for U.S. Health Insurers

June 1, 2004

Standard & Poor’s Ratings Services published an article stating that the remainder of 2004 will likely see continued earnings strength for U.S. health insurers, but numerous competitive, political, regulatory, purchaser, and provider pressures will restrain the industry’s ability to sustain such earnings in 2005 and beyond. The outlook on the sector remains stable.

“All indications show that 2004 will be another good year for U.S. health insurance companies,” said Standard & Poor’s credit analyst Shellie Stoddard. “But the sustained double-digit rise in medical costs dictating double-digit rate increases is becoming less affordable for employers and employees. This trend leads to challenges for health insurers as their revenue growth erodes and they pursue overly aggressive marketing strategies.”

The report also states that despite the stable outlook, rating upgrades
in the sector are likely to slightly outpace downgrades throughout the
year, as they have for the first quarter.

Many health plans have benefited from the favorable pricing environment, supported in part by employers passing costs on to employees, a moderating cost trend in 2003, and a less restrictive political and regulatory environment, according to the report. These plans have turned themselves around operationally and achieved rating enhancements as a result of earnings stability and strong capitalization.

Continued scrutiny of companies with surplus growth and provider pressure regarding reimbursement levels add to concern about insurers’ future earnings and capitalization. Regulators continue to voice concern over insurers’ surplus revenue.

The report, titled “U.S. Health Insurance Midyear Outlook 2004: Long-Term Pressures Balance Solid Earnings,” is available on RatingsDirect, Standard & Poor’s Web-based credit research and analysis system. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (212) 438-9823 or sending an e-mail to research_request@standardandpoors.com.

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