The COVID-19 pandemic has wreaked havoc on different business sectors. The health insurance industry was not left unscathed by its adverse impact. Nonetheless, looking back at 2021, we see that the companies in this industry have been bouncing back, thanks to rising enrolment, product modifications, improved services and cost management, better claims handling, technological upgrades, and many more strategic initiatives. In fact, government aids and better pricing helped health insurers to rise above the losses incurred on several occasions.
Now let’s see how the industry is performing.
Stocks of the health insurance industry, more popularly called
Health Maintenance Organization (HMO), have been recovering at an impressive rate. Bullish investor sentiments regarding this industry are evident. In the past six months, the HMO industry has jumped 18.3% compared with an 8.8% increase of the S&P 500 Index and a 9.4% decline of the overall medical sector. Image Source: Zacks Investment Research
The industry is not only expected to retain the momentum but also turn up the heat in 2022. Support from the government is expected to play a crucial role going forward.
Continued Government Support
The government’s backing of the Affordable Care Act is one of the major positives for the health insurers and acts as the bedrock for the industry. It is bringing more Americans under the health insurance coverage, in turn buoying health insurers’ top line. The Special Open Enrollment window has given Americans another chance to buy insurance coverage online on health exchanges, leading to membership growth. Looking ahead, moves like lowering the Medicare eligibility age to 60 from 65 through the Improving Medicare Coverage Act can expand Medicare to more than 23 million people. This will likely result in more business wins for health insurers, indicating a long-term boon for the industry.
Importantly, Medicare and Medicaid — the government-sponsored programs for the retiring population and underprivileged — have been in great demand for a while now among a huge population of baby boomers nearing retirement age. Both these schemes saw growing participation of health insurance companies as states reach out to them to effectively manage the expenses of these plans.
Other Major Growth Drivers
The pandemic fueled the adoption of telehealth facilities in 2020 and 2021. Remote healthcare has become a safe and efficient way for medical assistance in the current scenario. The year 2022 is expected to see further improvement of technologies and new innovations, which will support the greater adoption of telehealth services. Hence, we expect to see more investment in telehealth infrastructure. This is expected to bring about a positive impact on health insurers. In fact, several companies are enhancing their virtual healthcare services and offerings to aid their members.
Technological improvements are expected to accelerate the usage of chatbots and AI-based voice, assistants, augmented reality, virtual reality and mixed reality, mobile-based apps, robots, and cloud computing, among others. This should optimize healthcare delivery and workflow, minimize unnecessary costs, enhance operational efficiency as well as boost customer experience. Insurers who can bridge the physical-virtual chasm will be the frontrunners in the industry.
The pandemic forced the companies to reduce expenses through cost-cutting measures and optimizing their portfolios. This not only positively impacted the bottom line but also led to better usage of available capital. We expected the trend to continue in 2022 as well, which will increase the profit levels and generate more cash from operations.
4 Stocks on the Watchlist
The overall bullish scenario is expected to result in consistent growth of the industry, which should drive the prospects of the companies with strong business fundamentals. Considering their operational strength, we have selected four health insurance stocks with the help of the
Zacks Stock Screener that have gained more than 20% year to date and are well poised to keep the momentum alive in 2022. These stocks currently carry a Zacks Rank #3 (Hold). Their estimates have seen northward revisions for 2022.
You can see
. the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here UnitedHealth Group Incorporated ( UNH Quick Quote UNH - Free Report) : Its shares have jumped 37.9% in the year-to-date period. A strong market position and an attractive core business that continues to be driven by new deals, renewed agreements, and expansion of service offerings should help it retain the momentum. Its expansion of the health services segment and the international business provides significant diversification benefits and shields it from stringent regulations in the United States.
UnitedHealth’s health service business, branded as Optum, is becoming increasingly valuable. It is also crucial to the company’s diversification strategy. The primary growth drivers for Optum are pharmacy care services, care delivery, technology, government services and international. UNH expects 2022 revenues in the $317-$320 billion range, indicating an increase from the 2021 estimated figure of $287 billion. This will be the first time for the company to cross the $300-billion revenue mark in a year. Its moves of combining the insurance unit with the provision of medical care business bode well. Also, for 2022, UnitedHealth expects operating cash flows within $23-$24 billion.
Lower operating costs are expected to boost its bottom line in 2022. It boasts a strong earnings surprise history. UnitedHealth beat earnings estimates in all the last four quarters, with the average being 8.7%.
Anthem, Inc. ( ANTM Quick Quote ANTM - Free Report) : Its shares have risen 36.9% year to date. Anthem’s top-line improvement remains impressive, witnessing a four-year CAGR of 9% (2015-2020). We expect the favorable top-line trend to continue, given its strong business growth, membership hike and significant new contracts in the government business. Several contract wins and organic growth are expected to keep driving Anthem’s membership, in turn boosting the top line.
Strategic buyouts and collaborations along with the company’s expanded product portfolio should drive long-term growth. This June, ANTM completed the purchase of Puerto Rico-based subsidiaries including MMM Holdings from InnovaCare Health. Also, this November, Anthem agreed to acquire Integra Managed Care to expand the Medicaid business. Anthem was awarded a contract to serve the retirees in New York in partnership with Emblem Health. All these initiatives bode well for the company.
Anthem’s bottom line for 2022 is expected to grow 10.1% year over year. It beat earnings estimates thrice in the last four quarters and missed once, with an average surprise of 4.7%.
Centene Corporation ( CNC Quick Quote CNC - Free Report) : It has surged 37.3% in the year-to-date period. Headquartered in St. Louis, MO, Centene's leading position in the industry is largely supported by its prudent operating performance, strong inorganic growth and solid fundamentals. Medical membership of the company has been rising over the last several quarters due to contract wins and expansion across different regions. We expect this trend to continue on the back of certain contract wins.
Centene anticipates the broadening of its Medicare Advantage offerings in 2022. The leading health insurance company is expected to provide a wide array of Medicare Advantage plans in 1,575 counties across 36 states during the 2022 Medicare Annual Enrollment Period. Centene expects total revenues for 2022 in the range of $135.9-$137.9 billion. Adjusted earnings per share are expected within $5.30-$5.50. The adjusted SG&A expense ratio for 2021 is expected within 8.2-8.6% and decline to 7.8-8.3% in 2022.
Further, Centene expects to record adjusted earnings of $7.50-$7.75 per share for 2024, thanks to business expansion and optimization. CNC expects the health benefits ratio for 2022 within 87.6-88.2%. Capital expenditure for 2022 is expected to be $1 billion. A solid guidance instills investors’ confidence in the stock. It beat earnings estimates once in the last four quarters and missed thrice.
Molina Healthcare, Inc. ( MOH Quick Quote MOH - Free Report) : The stock has gained 40.6% to date this year. It has been gaining from the restructuring and profitability improvement plan. The plan included streamlining of the organizational structure to improve efficiency, speed and quality of decision making. Prudent cost-management efforts and sound scalability of the business are expected to result in a decline in the adjusted G&A ratio.
Molina Healthcare’s membership is growing fast, thanks to well-performing Medicare, Medicaid and Marketplace businesses. We expect the same to rise on the back of contract wins and strategic initiatives. Various buyouts, such as that of YourCare, are leading to membership growth for the company.
Headquartered in Long Beach, CA, Molina Healthcare’s bottom line is expected to grow 27.3% year over year. The company has witnessed four upward estimate revisions in the past 60 days against no movement in the opposite direction. In the last four reported quarters, MOH beat earnings estimates twice and missed on the other two occasions, with the average surprise being 4%.