Zacks Industry Outlook Highlights: WellPoint, UnitedHealth, Alleghany, EMC Insurance and Everest Re Group

CHICAGO, Sept. 18, 2013 /PRNewswire/ -- Today, Zacks Equity Research discusses the U.S. Oil & Gas, including WellPoint Inc. (NYSE:WLP-Free Report), UnitedHealth Group, Inc. (NYSE:UNH-Free Report), Alleghany Corporation (NYSE:Y-Free Report), EMC Insurance Group Inc. (Nasdaq:EMCI-Free Report) and Everest Re Group Ltd. (NYSE:RE-Free Report).

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Industry: Insurance

Link:  http://www.zacks.com/commentary/29030/Insurance-Industry-Stock-Outlook---Sept-2013

As U.S. health insurers continuously preparing themselves to comply with the mandates of the health care reform, their financials are beefing up. Broad-based moderation in utilization has been primarily boosting the bottom line of health insurers. Also, increased access to capital and better retention opportunities are helping them grow consistently despite tardy economic growth.

Moreover, the carriers have been witnessing better credit quality in the recent quarters, reflecting a moderate industry risk.

In 2010, the historic health care reform legislation -- The Patient Protection and Affordable Care Act (PPACA) -- was passed by the Congress with the intension of making health care facilities more affordable, preventing private health insurers from continuing with the pre-existing condition clause and at the same time reducing the number of uninsured by bringing in 32 million more people under coverage by 2019.

The legislation had many detractors who contested several of its stated benefits and considered it another entitlement program that the country can ill afford. Finally, in Jun 2012, the U.S. Supreme Court ruled in favor of the reform, rejuvenating the industry by removing major uncertainties. Further, Obama's re-election in Nov 2012 essentially ensured the law's future.

Controversies did not stop in 2013, with many states declining from participating in the new health insurance market and expanding Medicaid -- the public health insurance program for low-income families -- to avoid the additional costs involved in it. So far, less than half the states have approved of the Medicaid expansion.   

However, the development so far is expected to significantly reduce the number of uninsured, making the U.S. one of the economically sound countries that guarantees coverage.

While the legislative overhaul brings more regulatory scrutiny for private insurers such as WellPoint Inc. (NYSE:WLP-Free Report) and UnitedHealth Group, Inc. (NYSE:UNH-Free Report), the net negative effect is expected to be far softer than was initially feared.

Although the full implementation of PPACA will be in 2015, the industry is expected to see gradual changes through the reminder of 2013 and dramatic changes in 2014. While bringing more people under coverage will add prospects for growth, the requirement to reduce health care costs will lead to margin compression.

Also, while the reform will provide more cross-selling opportunities for health insurers, their overall profitability will be limited over the long run as the negative impact of Medicare Advantage payment cuts, industry taxes and restrictions on underwriting practices will more than offset the benefits of bringing more people under the umbrella.

Consequently, substantial growth in industry revenue is not expected until 2015 as insurers will be forced to adjust the benefits to comply with the health care legislation. Among others, providing coverage to everyone regardless of an expensive pre-existing condition would put their top lines at stake.

(Want to know more about the future prospects of health insurers? Read our Health Insurance Stock Outlook).

Property & Casualty Insurers

Along with continually improving pricing power, better preparation to withstand catastrophe-related losses should help insurers perform better in the upcoming quarters despite the pressure on investment income.

As property-casualty insurers hold about two-thirds of the invested assets in the form of bonds, their capacity is highly sensitive to changes in credit market conditions. Moreover, with credit markets remaining weak and bond prices still hovering at low levels due to persisting concerns over defaults, insurers may incur significant realized and unrealized capital losses on their portfolios in the upcoming quarters. Moreover, catastrophe losses continue to keep the balance sheets of a number of carriers under pressure.

However, the ongoing recovery in the credit and equity markets is leading to a reduction in unrealized investment losses. Also, the recent rise in long-term bond yields is expected to somewhat increase the property-casualty insurers' investment income. Moreover, once the economic recovery gains momentum, insurance volume will grow rapidly. With improved employment in the private sector and recovery in the housing markets, a number of carriers have already started seeing growth in insurance sales.

The recent quarters have been increasingly witnessing a rebound in claims-paying capacity (as measured by policyholders' surpluses), which reflects the industry's resilience over the prior years. Conservative investment strategies and capital restructuring efforts will continue to help property-casualty insurers improve their financial footing in the upcoming quarters.

Currently, Alleghany Corporation (NYSE: Y - Free Report), EMC Insurance Group Inc. (Nasdaq: EMCI - Free Report) and Everest Re Group Ltd. (NYSE: RE - Free Report) -- all with a Zacks Rank #1 -- are worth a look in the property-casualty space.

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