Insurers' earnings growth is outpacing the market. Expect that to continue

Earnings growth for insurers has outpaced the broader market, and that's a trend that's likely to continue, according to a new report from Moody's Investors Service.

Moody's analysts tracked eight large health plans: UnitedHealth Group, Anthem, Cigna, Aetna, Humana, Centene Corporation, Health Care Service Corporation and Highmark. In 2010, the aggregate earnings before interest, taxes, depreciation and amortization (EBITDA) across all eight was $24.7 billion.

By 2020, that figure rose to $64.9 billion, an increase of 10.1% on average each year. By comparison, the average annual growth rate for S&P 500 companies' operating earnings was 3.9%, and U.S. gross domestic product growth was 3.5% in that window.

That growth has been driven by several factors, which do vary somewhat between the companies, Moody's said.

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"Acquisitions are part of the story … but the industry also has important organic growth elements," the analysts wrote.

For one, an aging population has made Medicare Advantage (MA) a hot market and a key growth target for most insurers, according to the report. Most large national plans have their eye on double-digital annual growth in MA, executives have said on previous earnings calls.

MA membership has grown by about 8.5% per year, according to the report, and sits at about 25 million enrollees. This represents 40% of the broader Medicare population, up from 32% in 2016, Moody's said.

Another key factor driving this earnings growth has been acquisitions, which have not simply expanded the size of national insurers but also the scope, as vertical deals have become increasingly valuable.

Centene was the largest grower in the Moody's report, boosting its EBITDA by an average of 37% per year. The insurer, which largely focuses on government plans, has done so through strategic acquisitions that grow its reach beyond its previous concentration in Medicaid. It's now a key figure in the individual market and MA, according to the report.

Cigna landed in second place with 17.5% annual EBITDA growth rate, which is largely backed by its acquisition of pharmacy benefit management giant Express Scripts in 2018. Similarly, third-place UnitedHealth's 10.8% annual EBITDA growth rate reflects the significant growth, and continued potential, of its Optum subsidiary.

Companies that lagged behind on growth in the report, such as HCSC and Highmark, have invested less in vertical integration by comparison, the analysts said. That's also set to change, though; Highmark, for example, has recently entered into high-profile partnerships with Alphabet's Google Cloud and Verily to launch the Living Health platform.

Moody's said that although these trends have been largely credit positive and are likely to continue in the foreseeable future, they haven't yet led to significant credit upgrades for these companies.

"Even though the sector’s increased scale, revenue generation and diversification of revenue over the past decade could eventually outweigh the increases in leverage and goodwill, we also consider in our ratings the ongoing nature of the industry’s evolution, with periodic spikes in leverage, and integration risk," the analysts said.

"Furthermore, as many changes are still recent, it will also take some time for the credit effects of different health insurers’ strategies to play out. Finally, political risk in this sector remains high and is an ongoing rating consideration," they said.