The coronavirus outbreak has been taking a toll on health insurers. But Democratic presidential candidate Bernie Sanders’ suspending of his campaign yesterday provided a boost to health insurers as his policies, including Medicare-For-All, weren’t boding well for this key segment. And as health insurers recover ground, it won’t be a bad proposition to invest in some of the fundamentally-sound players now.
Coronavirus a Big Blow
Shares of health insurance companies have been falling at a faster clip than the broader market over the past five weeks, which incidentally is the worst period for the stock market since the financial crisis of 2008.
The pandemic has weighed on economic growth worldwide and impacted the overall outlook of the healthcare sector. This is because in order to curb the spread of the virus, the government has initiated lockdown measures, which has resulted in massive layoffs. And as unemployment levels rose, health insurance companies saw a drop in premium volumes, which in due course squeezed profit margins.
Meanwhile, the Fed has trimmed its benchmark interest rate to 0% to provide support to the economy amid the pandemic. By trimming its short-term interest rates, the Fed aims to pump cash into the financial system. But a low interest rate environment is affecting insurers’ profitability.
This is because the relationship between interest rates and insurance companies is linear and straightforward, meaning higher the rate, greater the growth. Insurers derive their investment income from premiums, which are received from policyholders in corporate and government bonds. Yields and coupons on these bonds rise in response to a rise in Fed fund rates and bank interest rates. This enables insurers to invest their premiums at higher yields and earn more investment income, expanding their profit margins.
Health Insurers Gain Ground on Sanders’ Dropout
Things are, however, looking up for health insurers now. After all, Sanders recently announced his withdrawal from the Democratic primary, paving a clearer path to the White House for former Vice President Joe Biden. A survey by The Morning Consult found that 80% of Sanders’ supporters would like to vote for Biden in the fall, with some even thinking of voting for President Trump.
Sanders’ policies haven’t been positive for health insurance stocks. He has favored Medicare-For-All and intended to abolish private insurance, which had cast a shadow on health insurance companies for months. Sanders had said that “even before this horrific pandemic we are now experiencing, more and more Americans understood we must move to a Medicare-For-All single-payer platform.”
In fact, now the Presidential race narrows to Joe Biden and President Trump. Both of them incidentally argued that proposals such as Medicare-For-All are too costly, which is undoubtedly a win-win scenario for health insurers.
Biden, in particular, wants to expand Obamacare and wants individuals to buy health insurance similar to Medicare. And for health insurers, this plan looks far more attractive. No doubt, big health insurers did well under Obamacare and will continue to flourish under Biden’s healthcare plan as well.
Health Insurance Stocks: 5 Big Gainers With More Upside Left
Industry giants, in the meantime, including Molina Healthcare, Inc
. (MOH - Free Report
) , Cigna Corporation
(CI - Free Report
) , UnitedHealth Group Incorporated
(UNH - Free Report
) , Anthem, Inc
. (ANTM - Free Report
) and Humana Inc
. (HUM - Free Report
) saw their shares gain 12.5%, 5.1%, 8%, 10.3% and 5.4%, respectively, on Apr 8 following Sanders’ dropping out of the presidential race.
Molina Healthcare, currently, has a Zacks Rank #2 (Buy). Molina Healthcare’s ability to engage in inorganic growth initiatives and capital deployment reflect an improved financial position. The Zacks Consensus Estimate for its current-year earnings has moved up 0.9% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 28.9% and 3%, respectively. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Cigna currently has a Zacks Rank #2. Acquisition of Express Scripts, strong international operations, solid balance sheet and growing medical membership should drive Cigna. The Zacks Consensus Estimate for its next-quarter earnings has risen 3.3% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 8.6% and 8.3%, respectively.
UnitedHealth currently has a Zacks Rank #3 (Hold). Its continued strong growth at Optum as well as UnitedHealthcare segments is driving revenues. The Zacks Consensus Estimate for its current-year earnings has climbed 0.4% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 28.1% and 9.5%, respectively.
Anthem currently has a Zacks Rank #3. Strategic buyouts and collaborations and an improving top line along with the company’s expanded product portfolio should drive Anthem’s long-term growth. The Zacks Consensus Estimate for its current-year earnings has advanced 0.6% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 41.2% and 16%, respectively.
Humana currently has a Zacks Rank #3. It is well-poised for growth on the back of its strong Medicare business, inorganic growth strategy and operating initiatives. The Zacks Consensus Estimate for its current-year earnings has risen 1.2% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 18.4% and 5.5%, respectively.
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