Outlook for US healthcare insurers is stable

The outlook for US healthcare insurers is stable, reflecting the expectation the sector will continue generating solid results owing to disciplined medical management and moderate medical cost trends, Moody's Investors Service has aid in a new report.

Insurers' exits to date and planned from the Affordable Care Act (ACA) individual market have lowered exposure to this challenging business among rated issuers, said the report called ‘Healthcare Insurers – US: Outlook stable on price discipline, stable cost trends despite reform uncertainty’.

However, healthcare reform uncertainty hangs over the industry, and risks could arise should there be legislative changes that may adversely impact Medicaid.

Moody's says macroeconomic conditions support the US health insurance market as modest but stable as organic medical membership growth and predictable medical-cost trends underpin favourable operating results.

"With the economy near full employment, job trends are stable but will not support robust organic medical enrolee expansion in the group commercial segment—the industry's largest business, and representing roughly 55% of medical membership in the US," said Pano Karambelas, a Moody's senior vice president.

Insurers will produce low-to-mid single digit growth membership growth. However, retiring baby boomers will drive a robust increase in the enrollee pipeline for Medicare Advantage, a line not devoid of risk. The modest prospects for organic growth are conducive for M&A activity.

"Rational pricing, particularly in the group commercial segment, disciplined medical management, and stable medical claims inflation will continue to drive earnings stability in 2017," Karambelas said.

While cash flow generation is solid, financial leverage is high for health insurers. The modest growth prospects have fuelled share repurchases, which has pegged financial leverage at the higher end for many of Moody's-rated issuers. As a result, large scale, debt financed M&A transactions would pressure ratings, albeit recent deals have been manageably sized or have used creditor friendly equity financing.