Buffett Doubles Down on Embattled Insurers

(MoneyWatch)  Lots of people are down on the prospects for many big U.S. health plans, which have been battered by declining enrollment, bad claims management, poor investment performance, and continued run-ins with state insurance regulators. But uber-investor Warren Buffett sees a silver lining somewhere in all that bad news.

On Thursday, Buffett's investment firm Berkshire Hathaway revealed in an SEC filing that it boosted its holdings of two of the worst-off insurers, WellPoint and UnitedHealth Group, in the first quarter. The expansion of Berkshire's stake in the two companies wasn't huge -- 6.7 percent in each case -- but it came during a quarter in which the market value of its WellPoint holding plummeted by almost half while UnitedHealth fell by roughly 40 percent. Such is the esteem in which Buffett's judgment is held that both stocks rallied on Friday.

Neither Buffett nor Berkshire appear to have commented on their decision, although Bloomberg recycled a Buffett quote from earlier this month:

"If a stock goes down 50 percent it doesn't bother me in the least,'' Buffett told reporters earlier this month after Berkshire's annual shareholder meeting in Omaha. "If we're going to be buying things, we want to buy them on sale.''

Which is probably about as good a description as you're going to find of WellPoint and UnitedHealth these days.

On one level, of course, Buffett's probably making a smart move. Markets do overshoot, and the odds are good that both insurers will eventually manage to bolster earnings through a combination of premium hikes and offering less-generous health plans as they've both promised. But what makes a good investment in the short-to-mid term doesn't necessarily count as a vote toward the long-term survival of either company, despite Berkshire's vaunted reputation for holding stocks over the long haul.

In other words, as long as the insurance industry remains wedded to its current business practices, its future is likely to grow steadily darker as its customer base -- i.e., individuals and employers who can actually afford the policies it's selling -- steadily shrinks. And if the Sage of Omaha really sees a bright future for companies who are frantically trying to grab larger slices of a shrinking pie, then he's looking at a different industry than I am.

UPDATE: Over at FierceHealthFinance (now that's a mouthful of a title), editor Anne Zieger is even more skeptical that insurers can dig themselves out of their current financial mess using their old bag of tricks.

Hat tip: WSJ Health Blog
Photo: Wikimedia Commons