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'.
2017 Outlook: U.S. Health Insurance (Election Results Add to Uncertainty)
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