Health Insurer Risk is Rising, But Investment Potential Remains Strong

Weiss issues safety ratings for thousands of insurance companies, but today I want to zero in on the safety of the often-discussed health insurance sector. We analyze their financial statements every quarter in order to monitor and pinpoint the best and the worst in the industry.

Each health insurer we review receives one of the following safety ratings: “A” – Excellent, “B” -Good, “C”- Fair, “D” – Weak, or “E” – Very Weak. “You can click here and scroll down to the bottom of the page to see complete rating definitions for insurance companies.

Based on the latest round of ratings, 256 companies or 39.8% of the health insurers we rate made the Weiss Strongest Health Insurers list. At first, this doesn’t sound too bad at all: Nearly 40% of insurers whose major focus is the health business received an “A” or a “B” safety rating from Weiss.

But once you dig in a bit deeper, you see that the three-year ratings trend paints a darker picture. It shows that health insurers’ overall financial safety is not where it used to be. More specifically, the number of companies at the top of our ratings scale is shrinking, while the number of companies at the bottom end is growing.

The strongest health insurers dropped 24% from 337 companies in Q3 2013 to 256 in Q3 2016. The number of “Cs” went up by 43.2% from 155 to 222 health insurers over the same period. And “D” and “E” ratings skyrocketed 69.4% from 98 to 166 companies over the last three years.

So far, we’ve identified a negative health insurance industry trend. Now let’s take a look at the current list of the top 10 strongest and weakest health insurers and, where possible, identify their parent company and its investment rating.

The top 10 largest and highest rated list had two insurance companies with publicly traded parent companies.

As you can see in the table below, Humana Ins Inc (WI) and Blue Cross of California, are rated “B+” and “A+”, respectively. But only one of the parent companies, Anthem, Inc. (ANTM, Rated “B-”), is in the BUY investment category.

Of the top 10 largest and weakest health insurers, five have publicly traded parent companies. Four out of those five were in the BUY range. Molina Healthcare, Inc. (MOH, Rated “C”) was the only HOLD company in the group.

From the data above, you can see that investment and safety ratings don’t always correspond. Some insurance companies could be on one side of the safety ratings spectrum, while the parent companies could be on quite the opposite side of the investment ratings scale.

Why is that? Changes in the health insurance industry have sought to strengthen insurers and require certain standards to be followed to provide value to enrollees. An example of a standard is maintaining a minimum medical loss ratio requirement under the Affordable Care Act. It’s intended to make insurers spend the majority of premiums on health care related items. However, the parent companies of those insurers can have a high or low investment rating, regardless of their subsidiaries’ safety.

Shareholders also have a different perspective than someone looking for the safest place to seek health care coverage. Investors want a lean company that is efficient and growing, and paying as generous a dividend as possible. But building the safest insurers requires retention of capital, building reserves and re-investing continually in the business. Contradictory aims like that will always create some tension for insurers in the shorter-term, and lead to ratings anomalies. But for the most part, balance is achieved and no one side is dominant for long.

Meanwhile, if you’re searching for safe health insurers, be sure to check out our Weiss Ratings health insurance web page. Look around, find your insurer, and add it to the Watchlist, so we can notify you every time a rating change takes place.

Until next time,

Gavin Magor

Insurance Insights Edition, By Gavin Magor, Senior Financial Analyst Gavin has more than 30 years of international experience in credit-risk management, commercial lending and insurance, banking and stock analysis and holds an MBA. Gavin oversees the Weiss ratings process, developing the methodology for Weiss’ Sovereign Debt and Global Bank Ratings. Gavin has appeared on both radio and television, including ABC and NBC as an expert in insurance, bank and stock ratings and has been quoted by CNBC, The New York Times, Los Angeles Times, and Reuters as well as several regional newspapers and trade media.