In the third quarter, the health insurance sector heard increased chatter about the mega deals that were announced in the second quarter. These deals also were scrutinized by senators as well as candidates running for the 2016 presidential elections.

The growth outlook for the industry is being dictated by inorganic expansion as players seek to enhance market share through mergers and acquisitions, in the rapidly changing market landscape.

The year 2015 has been strong for health insurers who continue to benefit from growth led by the Affordable Care Act (ACA)-driven Medicaid expansion as well as public exchanges, a benign flu season and a lower-than-expected medical utilization rate.  

Insurers have witnessed an overall rise in enrollment largely made possible by the influx of millions of uninsured patients, courtesy of the health care reform. The expansion of Medicaid also turned out to be a boon for the health insurance industry. The exchanges, established in Oct 2013, have brought big business for insurers, which enrolled customers in flocks in 2014. The trend continues this year as well.

Healthy top-line growth was also seen in segments such as Medicare Advantage and Medicaid. In Medicare Advantage, baby boomers reaching 65 should offer a secular growth tailwind, while seniors continue to prefer the private Medicare Advantage product over the government-run Fee-for-Service offering.

One very important aspect affecting the bottom line of the health insurers is medical utilization which refers to the demand for health care services in the U.S. It was feared that an improving economy would prompt millions of insured Americans to access medical care to a higher extent, causing a sharp rise in the medical utilization ratio and consequently leading to higher claims payment which goes on to erode the bottom line. However, the utilization rate to date for 2015 has turned out lower than expected so far, thereby shielding the margins of health insurers.

Insurers’ earnings are also expected to see accretion from their international operations. Some players – Aetna Inc. (AET – Analyst Report), Cigna Corp. (CI – Analyst Report) and UnitedHealth Group Inc. (UNH) – have extended their business beyond the national boundaries in the wake of stringent regulations in the home turf. However, a strong U.S. dollar will be a drag on the earnings of the players.
Moreover, strong balance sheets with low leverage and attractive organic cash flow generation, along with excess capital in the form of statutory reserves and parent cash continue to make this an attractive sector.

Overall, the health insurance scenario looks favorable for its players. Thus, it may be a good idea to look at some companies in the health insurance sector that have the potential to post an earnings beat in their upcoming releases. These stocks are well positioned in the present market, and could see considerable upside riding on the aforementioned trends. A positive earnings surprise should help these stocks gain investor confidence and show favorable price movement.

How to Pick?

Given the large number of industry participants, pinpointing stocks that have the potential to beat estimates appears a daunting task. But our proprietary methodology makes it fairly simple.

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