Zacks Industry Outlook Highlights: CIGNA, WellPoint, Humana, Health Net and UnitedHealth Group

Nov 15, 2013, 09:30 ET from Zacks Investment Research, Inc.

CHICAGO, Nov. 15, 2013 /PRNewswire/ -- Today, Zacks Equity Research discusses the U.S. Health Insurance, including CIGNA Corp. (NYSE: CI-Free Report), WellPoint Inc. (NYSE: WLP-Free Report), Humana Inc. (NYSE: HUM-Free Report), Health Net, Inc. (NYSE: HNT-Free Report) and UnitedHealth Group Inc. (NYSE: UNH-Free Report)


Industry: Health Insurance


The health insurance industry has confronted many external challenges in the recent past such as federal, state legislative and regulatory reforms; a challenge to meet the demand of more price-and service-conscious consumers, a fiercely competitive market, shift of customer mix and uncertain economic conditions in the U.S. and abroad, just to name a few.

Notwithstanding the headwinds, the industry is "thriving under stress." Big players – including CIGNA Corp. (NYSE: CI-Free Report), WellPoint Inc. (NYSE: WLP-Free Report), Humana Inc. (NYSE: HUM-Free Report), Health Net, Inc. (NYSE: HNT-Free Report) – reported third quarter earnings ahead of the Zacks Consensus Estimate, while UnitedHealth Group Inc. (NYSE: UNH-Free Report) reported in line.

Following third quarter results, most of the carriers raised their 2013 earnings estimates, reflecting a favorable operating environment. We, however, expect narrower margins in 2014 compared to 2013, as favorable claim development and continued lower-than-expected utilization helped the industry witness strong margins in the prior year. Margins are anticipated to decline in 2014 and beyond as medical costs will likely return to more normal levels and pricing may not increase to that extent.

About the Industry The health and medical insurance industry is an integral part of the U.S. economy. According to the Centers for Medicare and Medicaid Services, U.S. health expenditures account for approximately 18% of the country's annual gross domestic product. According to the World Health Organization, health care expenditure per person in the United States is the highest in the world.

Despite huge sums of money being spent on health care, millions of Americans lacked health insurance coverage or were underinsured. This was largely attributed to a dysfunctional health care system in place for the past several years. To rein in the wastage and make health care more accessible, effective and affordable, President Barack Obama introduced the Health Care Reform in an attempt to overhaul the nation's ailing health care system.

Industry Ranking – Positive

Within the Zacks Industry classification, Health Insurance is grouped under the Finance sector (one of the 16 Zacks sectors).

We rank all the 260 plus industries in the 16 Zacks sectors based on the earnings outlook for the constituent companies in each industry. The ranking is available on the Zacks Industry Rank page.

As a point of reference, the outlook for industries with Zacks Industry Rank #88 and lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.'

The health insurance industry features in the top 1/3rd with a Zacks Industry Rank #6. This indicates that the overall outlook is 'Positive.'

Please note that the Zacks Rank for stocks, which is at the core of our Industry Outlook, has an impressive track record, verified by outside auditors, to foretell stock prices, particularly over the short term (1 to 3 months). The rank, along with Earnings ESP or expected surprise prediction helps in predicting the probability of earnings surprises.

Earnings Trends

Currently, we are approaching the end of the third quarter 2013 earnings season with results from nearly 88% of the S&P 500 companies already available.

Among the finance companies that have already reported, the 'earnings beat ratio' (percentage of companies with positive surprises) was 58.2% while the 'revenue beat ratio' was 50.6%. Total earnings for this sector were up 9.9% year over year, moderating from the 32.4% growth in the second quarter. Total revenue moved north 0.6% versus 7.9% growth in the prior quarter.

Looking at the consensus earnings expectations for the rest of the year, we are encouraged by the estimated 32.3% growth for the sector in the fourth quarter and full-year 2013 growth of around 13.7%.

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