NEW YORK – 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 to post double-digit earnings-per-share growth (12 percent), while it projects WellPoint Inc to post flat earnings and UnitedHealth Group Inc 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. Congress last week overrode a veto by President 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. 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.

Indeed, as a group, the six largest health insurers on average trade at a lowly 7.4 times next year's earnings forecasts. Lehman's Josh Raskin last week described the group's forward earnings valuation as the lowest in its history.

So far, companies have blamed their earnings disappointments on a variety of issues: missteps in pricing their health plans for employers, offering overly generous benefits under Medicare, and enrollment declines stemming from heated competition and the weakening U.S. economy.

UnitedHealth, the largest U.S. health insurer by market value, kicks off the reporting season on Tuesday.

However, UnitedHealth earlier this month deflated some of the suspense from its report, when it said it expected to post second-quarter earnings far below analyst expectations and slashed its full-year profit forecast. The company blamed tough competition in its commercial health benefits business.

So investors may be more attuned to Wednesday's report from WellPoint, the largest U.S. health insurer by membership.

“All eyes will probably be on WellPoint,” Morningstar analyst Matthew Coffina said.

WellPoint was the first company to sharply reduce its 2008 profit expectations in March. Since rival Coventry Health Care cut its outlook last month, WellPoint has yet to comment on its forecast.

“We're optimistic on WellPoint going into the second quarter,” Coffina said. “But certainly the industry downturn has affected them so far, and it's certainly possible that they could guide down again.”

Coventry reports Friday, followed by Aetna and Cigna Corp next week, with Humana Inc coming later.

While some of the problems earlier in the year might have been related to temporary issues, such as high medical costs from the flu, continued problems might be an indication of more sustained troubles, Coffina said.

But he added that investors might be looking for a bottom with these stocks. “I think there's probably a few value investors that are starting to lick their lips,” Coffina said.

Not everyone says now is necessarily the time to jump in.

Stifel Nicolaus analyst Thomas Carroll said in a research report that although a longer-term buying chance is at hand, investors probably do not need to own the stocks now.

“Between now and (the first quarter of 2009), discussion of immediate operational and macro policy issues should be vetted,” Carroll said in his report. “This, in our opinion, will keep valuations depressed relative to prior levels.

“Longer term value investors should be rewarded with patience,” Carroll said. “But the next few quarters may continue to pressure the managed-care stocks.”

(Editing by Maureen Bavdek)