S&P: U.S. Health Insurance Sector Outlook Revised to Positive from Stable

June 8, 2005

Standard & Poor’s Ratings Services has revised its outlook on the health insurance sector to positive from stable, according to an article published Wednesday.

The article, which is titled “Rosy Midyear Outlook For U.S. Health Insurance In 2005,” cited strengthened competitive positions and improved earnings quality as well as historically high operating margins that Standard & Poor’s views as sustainable as the reasons for the outlook revision.

“Cost and efficiency improvements have yielded more predictable earnings,” explained Shellie Stoddard, director in Insurance Ratings at Standard & Poor’s. Improvements in pricing, medical costs, claims processing, and technological innovation have all helped.

Moderation in the cyclical nature of the industry’s earnings has played an important part in creating a stable environment. Geographic diversity and specialty operations have also added balance. While highs and lows in earnings may still occur, they will not be as pronounced, and earnings volatility will be smoothest for more diversified plans.

“We expect upgrades to materially exceed downgrades by the end of the year,” observed Joseph Marinucci, director in Insurance Ratings at Standard & Poor’s. Outlooks have also been improving, with movement from negative to stable and stable to positive.

The government sector of health care is important because it currently represents the only significant growth market for health insurers. When Medicare legislation in 2003 increased funding and expanded options for the program, it signaled the potential for new sources of membership and revenue. Medicaid also offers prospects for commercial insurers. But Standard & Poor’s analysts expressed concern that the federal and state governments might limit growth in funding over the longer term.

The pace of consolidation in the health insurance industry has slowed, but pressure from the major insurers continues to drive small and medium-sized companies to seek affiliation or mergers with larger players. Consumerism represents a growing trend as employers shift more health costs to employees and emphasize greater patient responsibility for decisions.

This outlook will be discussed with industry and market participants at Standard & Poor’s Health Insurance Conference taking place in New York on June 15. For more information, call (212) 438-2800 or go to www.events.standardandpoors.com/healthcare.

The report is available to subscribers of RatingsDirect, Standard & Poor’s Web-based credit research and analysis system, at www.ratingsdirect.com.

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