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Industry Outlook

The health insurance industry is largely immune to recent market worries like Brexit, a slowdown in China, indecisiveness of the Fed over interest rates and weak overall global growth that are hampering other sectors. The overriding issues for the health insurance industry pertain to the regulatory, financial and competitive challenges brought about by the Health Care Reform Act, more popularly known as Obamacare.

The massive overhaul following the reform which came into effect in March 2010 has changed the face of the industry, so much so that once-successful strategies and business practices of the players are no longer sustainable.

Having faced limited government interference in their operations prior to 2010, health insurers were totally autonomous in dealing with questions of coverage, pre-existing conditions and handling of claims. But all of that has changed following Obamacare.

The legislation has put major restrictions on insurers. Some of the clauses of the law relating to the provision of insurance coverage to people with pre-existing diseases, a bar on rejecting claims, restrictions on undue increases in premium, etc. have changed the environment of this business. These players are now faced with increased competition, regulatory compliance costs, changing patient mix, pricing pressures, rising consumerism, higher taxes and fees, rising medical costs and general marketplace uncertainty.

Amid the sea-change that the industry is undergoing, players are busy remodeling their businesses with innovative, consumer-centric products and services. They are also aggressively hunting for new avenues of growth both at home and abroad.

How Q1 2016 Transpired for the Industry

Most of the health insurers came up with impressive results and surpassed earnings expectations in the first quarter of 2016. The list of those that surpassed estimates  include most of the industry leaders like UnitedHealth Group Inc. (UNH - Free Report) , Aetna Inc. (AET - Free Report) , Cigna Corp. (CI - Free Report) , Humana Inc. (HUM - Free Report) , Anthem Inc. (ANTM - Free Report) and WellCare Health Plans, Inc. (WCG - Free Report) . Moreover, when judged on revenue and membership growth, these players tell positive a story.

Total revenue as well as enrollment of most of the top players increased year over year in the first quarter. This brings home the fact that the industry players trended strongly in the first quarter after a solid ending to 2015, which was the second year of full implementation of most of the major provisions of the Affordable Care Act (ACA). Along with strong operating numbers, most of the players guided strong earnings for 2016, which again pointed at opportunities latent in the industry despite many hurdles on its growth path. 

What to Look Forward for the Rest of 2016?

The major catalysts that might shake up the industry in the coming months are the Presidential elections, Public Exchange Business, and the merger and acquisition environment.

The industry has caught the attention of presidential candidates vowing to make major changes to the legislation that gave the industry a complete makeover. Insurers who strived hard to adapt to the numerous changes brought about by the reform may have to readjust their business if the new president brings in his/her desired changes.

Also, most big players in the industry have been vocal about the troubles faced by their individual exchange business on the public exchanges. The setting up of the public exchanges was one of the main features of the act, aimed at providing subsidized insurance. UnitedHealth, Aetna, Humana and others have reported a loss in their exchange business.

These players will watch the viability of this business in 2016 and will decide on their course of action. In case the business remains unprofitable and the players decide to fold it, the central theme of the health care reform act to bring insurance to the millions of uninsured Americans will be defeated.

Another major event to watch in the industry will be its merger and acquisition environment. The industry is due to witness two major mega-mergers – Anthem with Cigna and Humana with Aetna. Apart from these two, another acquisition recently completed was that of Centene Corp. (CNC - Free Report) taking over Health Net. These mergers will reduce the number of players, thereby saturating the already concentrated industry, eventually leading to a reshuffling of the ranks of the players that exist.

Industry Ranking: Overall Positive

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

We rank all the 257 industries in the 16 Zacks sectors based on the earnings outlook of the constituent companies in each industry. The ranking is available on the Zacks Industry Rank page.

The way to align the ranking and outlook from the complete list of Zacks Industry Rank for the 257 companies is by considering the outlook for the top one-third of the list (Zacks Industry Rank of #86 and lower) as positive, the middle one-third (Zacks Industry Rank between #86 and #172) as neutral and the bottom one-third (Zacks Industry Rank #173 and higher) as negative.

The health insurance industry features in the top 1/3rd range with a Zacks Industry Rank #7. This indicates that the overall outlook is ‘Positive.'

Please note that the Zacks Rank for stocks, which is 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, helps in predicting the probability of earnings surprises.

Earnings Trends

Finally, with Q1 earnings season behind us, it is apparent that overall growth remained stressed. The broader Finance sector, of which the health insurance is a part, experienced a 7.0% decline in earnings from the same period last year on 2.7% higher revenues, with 59.1% beating EPS estimates and 53.4% coming ahead of top-line estimates.

For the second quarter of 2016, earnings for the finance sector is expected to decline 5% year over year and while revenues are expected to go down by 0.3%.

For more information about earnings for this sector and others, please read our 'EarningsTrends' report.

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