S&P predicts steady ratings, possible 'downside tilt,' for insurers

Stock exchange floor

Standard & Poor’s maintains a steady ratings outlook for the health insurance sector, though there could be a "tilt to the downside" at midyear, according to a new report from the ratings agency.

Analysts forecast improving rates and expect growing payroll numbers will benefit health insurers through 2017. However, S&P notes a relatively high percentage of credits with non-stable outlooks across the industry, causing a potential downward shift in credit ratings.

Health reform, shifting demographics and employment trends will cause health insurers to get more of their business from government-sponsored products, according to the S&P report. Barriers such as significance of scale, technological capacity, capital and operational rigor, also make it more difficult for smaller insurers to enter the market, the analysts note, adding that the presence of strict compliance and regulatory measures favors larger health insurers.

Improving labor market outcomes suggest enrollees should increase through employer-based insurance plans. Further, these outcomes suggest more people will be able to afford plans purchased on through public exchanges, the report says.

Currently, more than 50 percent of insurers S&P rates are ‘A’ or better. UnitedHealth, Kaiser Permanente, Anthem and Cigna comprised the only firms in the portfolio with ‘AA’ ratings. Firms with negative credit outlooks increased from 2015 to 2016 from approximately 25 percent to just over 30 percent. This led analysts to pronounce some “downward tilt” for the industry, despite stable forecasts for most of the portfolio.

Insurers that are concentrated on higher-growth, niche products represent potential acquisition targets for larger, more diversified insurers, the report adds. The Anthem-Cigna and Aetna-Humana mergers could lead to credit downgrades for those companies, according to a previous S&P report, as both would-be acquirers take on the acquired firm’s debt in addition to debt issued during capital raise. Moody’s Investor Service downgraded Aetna’s debt rating after a $13 billion bond sale in March.

“Longer term, we believe the transition to value-based reimbursement from fee-for-service reimbursement (supported by payment/delivery system initiatives) is the single most significant manifestation of healthcare reform, after the ACA coverage expansion,” S&P analyst Joseph N. Marinucci says in the report.

- access the report