For Immediate Release
Chicago, IL – September 26, 2012 – Today, Zacks Equity Research discusses the U.S. Insurance, including WellPoint Inc. (WLP), UnitedHealth Group, Inc. (UNH), Fidelity National Financial, Inc. (FNF), Homeowners Choice, Inc. (HCII) and ProAssurance Corporation (PRA).
A synopsis of today’s Industry Outlook is presented below. The full article can be read at
The U.S. healthcare system is significantly dependent on private health insurance, which is the primary source of coverage for most Americans. More than half of the U.S. citizens are covered under private health insurers such as WellPoint Inc. (WLP) and UnitedHealth Group, Inc. (UNH).
Unfortunately, these insurance companies utilize a pre-existing condition exemption clause to control costs and maximize profit. The historic healthcare reform legislation, which was passed by Congress in 2010, aims to prevent private insurance companies from using the pre-existing condition clause and at the same time bring in 32 million more people under coverage by 2019.
However, the legislation has had many detractors who contested several of its stated benefits and considered it another entitlement program that the country can ill afford. Finally, in June 2012, the U.S. Supreme Court ruled in favor of the healthcare reform, rejuvenating the industry by removing major uncertainties.
With respect to the individual mandate, which drew the most attention as it requires all uninsured Americans to purchase a minimum level of health insurance coverage, the Supreme Court ruled that individuals failing to buy health insurance will have to pay a tax fine, but forcing them to buy insurance will be illegal. Employers will also be fined if they fail to provide insurance coverage to their workers.
While the legislative overhaul brings more regulatory scrutiny for private insurance companies, the net negative effect is far softer than was initially feared. Also, the removal of this uncertainty is a net positive in its own right.
Though the reform will provide more cross-selling opportunities for health insurers, their overall profitability will be marred in the long run as the negative impact of Medicare Advantage payment cuts, industry taxes and restrictions on underwriting practices will more than offset the benefits of adding the extra 32 million people into the system.
Growth in nonfarm payroll employment is expected to enhance health insurers’ customer base to some extent as these individuals will be insured through their jobs. However, according to the U.S. Bureau of Labor Statistics, in August 2012, nonfarm payroll employment inched up just 96,000 and the rate of unemployment marginally edged down to 8.1%.
That said, growth in industry revenue is expected to decline until 2015 as insurers will be forced to adjust the benefits to comply with the healthcare legislation. Among others, providing coverage to everyone regardless of whether they had an expensive pre-existing condition would put their top lines at stake.
Property & Casualty Insurers
Steep losses in the investment portfolios have been continuously reducing the capital adequacy of most property-casualty insurers since the latest recession. The seizure of credit markets and rising concerns over defaults have pushed down bond prices sharply since then, causing significant realized and unrealized capital losses on these insurers’ portfolios.
As property-casualty insurers hold about two-thirds of the invested assets in the form of bonds, their capacity is highly sensitive to changes in credit market conditions. Low interest rates and government bond yields are expected to compress profits in the quarters ahead. However, an expected improvement in casualty rates will partially offset the negatives.
While the ongoing recovery in the credit and equity markets is leading to a reduction in unrealized investment losses, the premium rates continue to decline, though at a slower pace. This declining trend in premium rates is expected to persist through the first half of 2013, adversely affecting insurer profitability. The key positive trend visible as of now is a slight improvement in some insurance pricing after persistent deterioration for the last three years.
On the other hand, high catastrophe losses, stiff competition and lower reinvestment yields are expected to depress profits for property-casualty insurers.
However, the property-casualty industry endured the latest financial crisis better than the other financial service sectors. Once the economic recovery gains momentum, insurance volume will grow rapidly.
The recent quarters have been witnessing an increasing rebound in claims-paying capacity (as measured by policyholders’ surpluses), which reflects the industry’s resilience over the prior years. Strong capital adequacy and conservative investment strategies will keep these insurers on solid financial footing in the upcoming quarters.
Losses from the investment portfolios of reinsurance companies have gotten worse during the last few quarters. The deterioration resulted from the supply-demand imbalance in reinsurance coverage due to intense competition that kept pricing soft over the last few years.
Also, catastrophic events like hurricanes Ike and Gustav were the major culprits that put underwriting profits under pressure. However, in the recent months, reinsurance prices have increased substantially. Also, reinsurers now have the capacity to meet the demand for coverage despite catastrophe losses.
With signs of recovery in the capital markets (though still weak by any standard), concerns related to reinsurers' ability to access capital markets on reasonable terms have sufficiently eased.
However, lesser new business and rising expense ratios are the major concerns for reinsurers at this point. An increased level of price competition may also hurt top lines in the upcoming quarters.
Moreover, reinsurance market capital levels are expected to be down for reinsurers with huge exposure to the European sovereign debt crisis.
Insurance companies are suffering from the ongoing economic uncertainty and challenges related to natural disasters. However, this tough period brings opportunities for many large industry participants to grow by attracting new customers and taking market share away from weak rivals. The industry has been undertaking several structural changes that will make underwriting and pricing schemes even more attractive to consumers.
We remain positive on Fidelity National Financial, Inc. (FNF), Homeowners Choice, Inc. (HCII) and ProAssurance Corporation (PRA) with a Zacks #1 Rank (short-term Strong Buy).
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