Health insurers weather storms heading into 2010

INDIANAPOLIS - Rising unemployment, swine flu and the threat of health care reform all ganged up on managed care companies in the third quarter and could hurt their performance heading into 2010. But most of the large publicly traded health insurers reported better-than-expected profit growth for the latest period, and analysts still see strong core businesses beneath the challenges facing the industry.

"I would say they're holding their own in a very, very bad situation," BMO Capital Markets analyst Dave Shove said.

On Thursday, Philadelphia-based Cigna Corp. reported a third-quarter profit that soared 92 percent, as improving equity markets helped turn around the performance of a discontinued business the insurer maintains but no longer markets.

Cigna joined Minnetonka, Minn.-based UnitedHealth Group Inc., Hartford, Conn.-based Aetna Inc. and Louisville, Ky.-based Humana Inc. in recording earnings growth that stretched into the double digits compared with the third quarter of 2008, when the economy was mired in a deep slump.

Cigna also reported a drop in commercial health insurance enrollment, another trend it shares with its competitors. All the major health insurers aside from Aetna reported declines in enrollment driven by employers cutting jobs and reducing the number of people covered by private health insurance plans.

Even Aetna said it expects to lose as many as 650,000 members this year due to group health insurance cuts.

"It's rather frustrating, but it's a fact of life," Aetna Chief Financial Officer Joe Zubretsky said last week. "You have an account that's enjoying your services, it's priced well, it's meeting all of its objectives. But if they shed 5-to-7 percent of their payroll, that's lost members and lost revenue and profit."

Those job cuts deliver a double-whammy by increasing the number of people who continue their employer-sponsored insurance coverage under the federal law known as COBRA.

Earlier this year, the government started offering temporary subsidies that pay 65 percent of the cost of COBRA coverage, which is normally too expensive for most people to afford when they lose a job.

UnitedHealth and Indianapolis-based WellPoint Inc. both said they've seen an increase in their COBRA enrollment, normally a money-draining customer base. WellPoint, for instance, said it spends between $1.50 and $2 on COBRA claims for every dollar it collects in premiums.

WellPoint officials also said they expect a spike in claims from their COBRA enrollment in the fourth quarter because subsidies will start to run out and customers will rush to use their health insurance while they still have it.

Swine flu cases helped boost flu-related costs for several insurers. UnitedHealth said it spent $60 million on swine flu-related costs in the third quarter, up from $50 million the quarter before. Company executives also said flu spending could be a "significant factor" in the fourth quarter.

Both UnitedHealth and WellPoint told analysts they do not expect growth in operating earnings next year. That measures profit without one-time items like investment gains. Several companies also expect enrollment declines to continue into 2010.

But analysts note that these are temporary challenges. Flu costs usually sink by springtime. COBRA subsidies eventually will end, and the enrollment losses also are expected to slow next year.

In the meantime, insurers have cut costs and adjusted to lower enrollment levels. They still run a business that grows even when enrollment falls because revenue rises with health care costs, Shove noted.

"It is a very, very high cash flow, low capital business," he said.

The biggest health insurers all have more than enough reserves to cover claims and are financially strong, said FTN Equity Capital Markets analyst Peter Costa.

"All of the publicly traded companies have far more reserves than are required by the government," he said.

They also may not be hurt as badly by a federal health care overhaul as many analysts first worried. Congress is debating ways to cover the uninsured and reduce costs, and health insurance stocks have been sensitive to this debate for months.

Shares sank at the start of the year when the reform debate picked up steam, but they have recovered for the most part as the threat of a strong public option that would compete with insurers faded.

A possible tax on insurers based on their market share remains a concern. But overall, analysts say the sector remains on sound footing heading into the next few quarters.

"I think they're getting a really bad shake in the current environment," Costa said. "But the core businesses are there."

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