OLDWICK, N.J.--(BUSINESS WIRE)--Long-term debt obligations among a group of 12 publicly traded health insurers have more than tripled over the past decade and collectively totaled $75.4 billion through the third quarter of 2016, according to a new analysis from A.M. Best.
The latest Best’s Special Report also states that in five of the past 10 years, aggregate long-term debt obligations among this group increased by more than 20%. The increasing debt obligations for the publicly traded health insurers nearly doubled the aggregate debt-to-capital ratio from 24.4% at year-end 2006 to 42.0% as of the third quarter of 2016.
Some companies have been taking advantage of the prolonged low interest rate environment by issuing debt with lower associated coupons and using the proceeds to extinguish older debt with higher coupons. Furthermore, health insurers have extended the weighted average years of their debt obligations while simultaneously reducing the weighted fixed coupon they have to pay on that debt. This provides further protection for interest payments and any potential deterioration in operating earnings.
While the aggregate debt-to-capital ratio for publicly traded health companies remains at 10-year highs, the companies, especially those with lower-than-average debt-to-capital ratios, show continuous willingness to borrow as the rates remain low and companies consider potential merger and acquisition moves. It is expected that the carriers with currently higher debt levels will work toward gradual deleveraging; however, the average debt-to-capital ratio is likely to remain significantly above historic levels in the near to medium term.
A.M. Best believes that the number of large-scale acquisitions among the publicly traded health insurers will temper in the near-to-medium term given the increased financial leverage and integration efforts of recently closed transactions, as well as the blocked large-scale transactions of Aetna/Humana and Anthem/Cigna Corp. However, smaller-scale acquisitions by the larger carriers are likely to continue and are expected to include both insurance companies and other operations that support the health insurance business.
To access a copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=259405.
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