CHICAGO, April 20, 2012 /PRNewswire/ -- Today, Zacks Equity Research discusses the Health Insurance Industry, including Aetna (NYSE: AET), Cigna (NYSE: CI), WellPoint (NYSE: WLP), Humana (NYSE: HUM) and UnitedHealth (NYSE: UNH).
Over the next few years, growth opportunity for the players in the health insurance sector will be driven by:
Higher health expenditures and increased reliance on managed care. According to the government, national health spending is expected to touch $4.6 trillion by the end of this decade from $2.6 trillion currently, representing a CAGR of nearly 7%. This clearly points to the fact that the health care industry will most certainly outstrip broader economic growth. Moreover, over the same time frame, managed care penetration is expected to grow to about 1/2 of the total national health care spending, up from approximately 1/3rd at present, driven by increased reliance on insurers in managing government's fee-for-service Medicare and Medicaid products.
2010 Census figures show that seniors constitute a larger share of the American population than ever before. The trend will only gain steam in the years ahead. Consequently, the aging population is expected to drive industry demand as they would aim to reduce their health-related costs.
We expect most of the companies within our coverage to benefit from the trend.
Aetna (NYSE: AET ) has been beating our estimates for the past several quarters, on the back of declining utilization, strong performance across all the product lines, disciplined pricing and medical cost trends. The company is also making strong progress in its Medicare business. The lifting of sanctions from the Center of Medicare and Medicaid Services and the acquisition of Genworth's Medicare Supplement business will upgrade its Medicare platform.
The company is also aggressively looking to generate incremental fee revenues by managing the infrastructure necessary for care organizations. It is growing its international business for diversification benefits. Moreover, its deployment of $1.2 billion for acquisitions will position it well to deal with the consequences of the Health Care Reform. A solid balance sheet, well-controlled debt and adequate liquidity will provide overall strength.
Our next pick would be Cigna (NYSE: CI). Though the company was heavily biased towards commercial business, it made timely acquisitions to ramp up the government business, placing itself amongst the top five providers of Medicare products. Its unique and growing international presence is also a positive differentiator. A strong balance sheet and adequate liquidity will further lead to continued share buybacks, thereby contributing to the bottom line.
WellPoint (NYSE: WLP) comes next in line. With over 34 million members, the company is a dominant player with a vast provider network. WellPoint has strengthened its portfolio through the acquisition of CareMore Health Group in order to expand its presence in the U.S. government program for the elderly.
The company has been witnessing substantial earnings growth over the past few quarters, spurred by membership gains, improvements in operating cost structure, strategic acquisitions and capital transactions. The company is also well poised to benefit from economies of scale and favorable demographic trends.
Being the second-largest provider of Medicare Advantage plans, Humana (NYSE: HUM) also offers potential for solid growth going forward. The company has been surpassing earnings estimates for the past several quarters and management raised its fiscal year 2012 guidance, citing better-than-expected operating trends.
UnitedHealth (NYSE: UNH ) has also been beating the Zacks Consensus Estimate for the past several quarters and has recently raised its fiscal year 2012 guidance. It has strengthened its position in the Medicare Advantage (MA) market with the acquisition of XLHealth.
We believe the company's diversified business model in the managed care industry, with a leading market share in the Commercial, Medicare and Medicaid markets, a solid balance sheet, a highly conservative investment portfolio and expansion into higher margin Health Services segments (Optum) will provide investors with a high risk -- return investment opportunity over time.
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