CHICAGO--(BUSINESS WIRE)--The rating and sector outlooks for U.S. health insurers in 2017 are negative, according to Fitch Ratings' 2017 U.S. health insurance outlook report. Fitch expects more health insurer rating downgrades than upgrades over the next 12-24 months.
"Leverage concerns tied to large mergers and concerns about the profitability of business sourced from health insurance exchanges are the key factors underlying Fitch's negative outlooks," said Mark Rouck, Senior Director, Fitch Ratings.
Fitch believes that the repeal and replacement of the Affordable Care Act (ACA) which became a possibility following November elections which saw Donald Trump win the presidency and Republicans retain control of Congress, would be a longer-term credit positive for the sector. Nevertheless, significant near-term uncertainty around the form of the potential repeal and replacement exists.
Repealing the ACA would likely enhance insurers' underwriting flexibility, reduce sector wide fees, and promote more varied product design (e.g. low-cost catastrophic coverage) and pricing capabilities that reduce adverse selection risk that resulted from provisions of the ACA. While these changes would affect the entire sector, they are most likely to benefit the financial results of insurers currently offering ACA exchange products. These insurers are more likely to be nonprofit insurers.
President-elect Trump's plan for replacing the ACA appears to have several key components, namely promoting competition, providing tax incentives for consumers, establishing high-risk pools and changing the way the federal government provides Medicaid funding to the states. The individual credit and rating implications of these components vary. "There are likely to be individual winners and losers in such an environment depending on insurers' specific capabilities and circumstances," said Rouck.
If the Department of Justice (DOJ) successfully challenges Aetna Inc.'s (AET) acquisition of Humana Inc. (HUM) and Anthem Inc.'s (ANTM) acquisition of Cigna Corp. (CI) in rulings expected to be delivered in early 2017, resulting in the acquirers foregoing acquisition-related financing, Fitch would likely remove negative watches on the companies' ratings. Given the size and significance of the companies involved, this may be sufficient to contribute to a change in the sector's rating outlook to stable.
Fitch's base case projected 2017 earnings call for modest increases in EBITDA and net income with flat EBITDA-based margins and a decline return on capital. Employer group membership EBITDA-based margins are expected to be in the high single digits, and Medicare Advantage and Medicaid membership margins are expected to be in the low to mid-single digits. Individual market margins are more uncertain with modest loss to break-even expectations.
The full report, '2017 Outlook: U.S. Health Insurance' is available at www.fitchratings.com or by clicking on the link.
Additional information is available at 'www.fitchratings.com'.
Related Research
2017 Outlook: U.S. Health Insurance (Election Results Add to Uncertainty)
https://www.fitchratings.com/site/re/890957
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.