News and Commentary

Underwriting earnings slow, but investment gains soar

First quarter underwriting gains (profit that remains after paying claims and expenses) for the health insurance industry declined 2.6 percent to $2.7 billion in the first quarter of 2007, according to a report released by Ratings (formerly Weiss Ratings). The total is down $100 million from the first quarter of 2006. Investment gains (the after-tax gain when securities are sold) were up nearly 42 percent compared with the same period last year. These gains buoyed net profits, which rose 13.9 percent to $4.1 billion in the first quarter of 2007, up from $3.6 billion last year. A recent Kaiser Family Foundation report indicated, however, that premiums increased an average of 6.1 percent this year, increases that so far haven't been enough to offset increased medical costs.

Companies with the largest decreases in underwriting results along with the largest increases in investment gains include Highmark, Regence Blue Cross Blue Shield Oregon, and Health Care Service Corp., which does business under the Blue Cross Blue Shield name in Oklahoma, Illinois, Texas, and New Mexico.

Analysts see some problems over the next two years. First, with members having more open access to providers, medical costs have been rising annually. Insurers are struggling to keep premiums high enough to cover the costs. Raising premiums might work to offset the rising medical costs, but it will be unpopular with members. Second, commercial Medicare is doing well. While insurers make out great, it is unclear how long this will last. And third, the reliance on investment gains to soften bottom-line numbers could be turn out to be problematic.

"More and more of insurers' bottom lines are coming from investment gains," says Melissa Gannon, vice president for insurance and bank ratings at Ratings. "The industry is clearly beginning to struggle with profitability in its core business of underwriting health insurance as claims expense rises faster than premium income."

Well-positioned to navigate the political crosswinds of health care reform

Largest A+ rated health insurance companies.
Company Members (millions)
Health Care Service* 4.6
Excellus Health Plan** 1.9
Horizon Healthcare Services 1.6
Blue Cross Blue Shield of Tennessee 1.1
Blue Cross Blue Shield of Arizona 1.1
Source: Ratings by Ratings.
*Does business as Blue Cross Blue Shield of Oklahoma, Illinois, Texas, and New Mexico.
**Does business as Blue Cross Blue Shield of Central New York.


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