Wall Street Is Optimistic About Health Insurance Industry, Expects More M&A in 2021

by Peter Johnson

Equities analysts are bullish on the health insurance industry in 2021, despite the challenges caused by the COVID-19 pandemic. Wall Street also expects more mergers and acquisitions will take place in 2021 than the previous year.

"Prior to 2020, the industry had already posted several years of record earnings, leading to higher absolute and risk-adjusted capitalization levels, trends that full-year results are likely to further support," wrote AM Best analyst Doniella Pliss in the firm's 2021 outlook for health insurers. "In addition, amid a severe level of economic uncertainty, the industry accumulated substantial cash balances, leading to stronger liquidity metrics. These factors make the industry well prepared to withstand the anticipated challenges and further uncertainties of 2021."

"Many of our rated issuers have grown their scale significantly over recent years, taken market share and added capabilities. The evolution of business profiles is credit positive," wrote Moody's Investors Service analyst Marc Pinto.

"We expect insurers to continue to acquire non-regulated health service businesses to deepen vertical integration, but large transformative deals are unlikely," Pinto explained. "Smaller, tuck-in insurance acquisitions to improve geographic diversification or under-scaled businesses are more likely. We expect leverage to improve in the absence of outsized M&A."

Analysts also projected a more stable political and regulatory environment with the departure of the Trump administration, and they observed that a split Congress is unlikely to pass major health care reform legislation. Further, they expect that the Supreme Court will not strike down the Affordable Care Act in its pending decision on California v. Texas.

However, analysts emphasized that the pandemic is far from over, and no one can say for certain what level of care utilization to expect. When utilization dropped in the second quarter of 2020, carriers' earnings spiked dramatically. A similar, if smaller, phenomenon could take place early in 2021.

"We expect the COVID pandemic to linger into 2021 with more sluggish utilization in [the first half of the year]," wrote Citi analyst Ralph Giacobbe in his 2021 health care outlook. However, he predicted that the second half of the year was "more likely to show accelerating utilization/spending as individuals gain comfort as we get broader administration of the vaccine."

From Health Plan Weekly