PREVIEW-US health insurers seek rebound after brutal 1st half

By Lewis Krauskopf

NEW YORK, July 20 (Reuters) - U.S. health insurers will need to show some signs of stability when they report second-quarter earnings, beginning on Tuesday, if they are to lure back investors to their beaten-down stocks.

Overall, the managed health-care group is expected to post a 4.2 percent drop in second-quarter earnings compared with a year ago, according to Lehman Brothers.

Of the larger insurers, Lehman expects only Aetna Inc (AET.N: Quote, Profile, Research) to post double-digit earnings-per-share growth (12 percent), while it projects WellPoint Inc (WLP.N: Quote, Profile, Research) to post flat earnings and UnitedHealth Group Inc (UNH.N: Quote, Profile, Research) to report a 27 percent drop.

Since March, five of the seven largest health insurers by market value have slashed their full-year earnings expectations -- some more than once. The warnings sparked investor fears about the sector and led to massive sell-offs.

Pressure on the group has come from Washington as well. The U.S. Congress last week overrode a veto by President George W. Bush and passed legislation that will cut payments to health insurers involved with Medicare, the federal health program for seniors that has been a profitable business for insurers.

The Morgan Stanley Healthcare Payor index has fallen some 43 percent this year, sharply underperforming a 14 percent decline for the broader S&P 500 index .SPX. Health insurers are the five worst performers this year in the 52-company S&P Health Care Sector index .

"It seems like a lot of bad news, low expectations, political risk -- whatever you want to call it -- is priced in at this point," said Maria Mendelsberg, a principal at Cambiar Investors.

"If there's just some sign of stabilization or the guidance looks OK, I would think you'd get some sort of rally in the group just because the valuations are so depressed," she said.