4 Health Insurers Set To Beat Q3 Earnings

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.

One way to narrow down the list of choices this earnings season is by looking at stocks that have the combination of a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) – and a positive Earnings ESP. Notably, Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising estimates in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

Below are four health insurance stocks that we believe are best positioned to stand out this earnings season.

Anthem Inc. (ANTM - Analyst Report) has an Earnings ESP of +2.58% and carries a Zacks Rank #3. The company is slated to report third-quarter earnings on Oct 28. Anthem has been strengthening its portfolio through acquisitions. The company recently proposed to acquire Cigna, which if approved by the latter would boost its earnings and generate significant cost synergies.

Successful acquisitions, rollouts of health insurance exchanges, national accounts in the commercial segment and Medicaid expansion in the government segment have helped in enhancing the company’s membership base. Apart from acquisitions, this health maintenance organization forms alliances with various companies for its health insurance business expansion.

Molina Healthcare, Inc. (MOH - Analyst Report) has an Earnings ESP of +8.57% and carries a Zacks Rank #2. The company is expected to report third-quarter earnings on Oct 29. Molina Healthcare operates two of the fastest growing programs in the managed care industry, namely dual eligibles and Medicaid. As individuals in these programs shift to managed care, demand for the company’s services should increase. Acquisitions play an important role in Molina Healthcare’s growth. Further, strong cash flows pave the way for efficient capital deployment.

Aetna (AET - Analyst Report) has an Earnings ESP of +0.56% and carries a Zacks Rank #2. The company is expected to report third-quarter earnings on Oct 29. Aetna, which is due to acquire Humana, has strengthened its product suite through acquisitions. It is now positioned for faster growth from businesses such as Medicare, Medicaid, health care information technology, and international. In addition continued improvement is expected in earnings from pricing actions on the commercial business and from the development of narrow network products.

Cigna (CI - Analyst Report) has an Earnings ESP of +0.92% and carries a Zacks Rank #3. The company is expected to report third-quarter earnings on Nov 6. The company is well poised for long-term growth from increasing Medicare revenue, an expanding international business and incremental revenues from cross selling specialty and Group Disability/Life products to Anthem.