Best’s Special Report: Health Mergers and Acquisitions Focus: Vertical Integration, Revenue Diversification and Expansion
OLDWICK, N.J.--(BUSINESS WIRE)--Apr 2, 2019--The financial results for eight U.S. publicly traded health insurers improved overall in 2018, a year that included two notable acquisitions that could set for more vertical integration transactions.
The analysis in the Best’s Special Report, “Health Mergers and Acquisitions Focus: Vertical Integration, Revenue Diversification and Expansion,” states that the pressure for vertical integration should intensify in the near term, but on a potentially smaller scale. The number of traditional horizontal mergers and acquisitions (M&A) declined in 2018, but included several sizeable deals. However, larger deals will become more difficult, particularly as companies’ health insurance and non-insurance operations both become bigger.
Overall, revenue among this group of health insurers increased 10.9%, resulting from a 9.9% rise in premium revenue, a 12.7% increase in fees and commissions and a 26.2% increase in net investment income. UnitedHealth Group had the largest year-over-year growth in revenue, at $25 billion, or roughly 12.5%, driven primarily by the increase in the number of individuals served through risk-based products, pricing trends and growth across its Optum business due to an expansion in care delivery, pharmacy care services, managed services, and advisory services. Molina Healthcare was the only company whose revenue declined from 2017, with a drop of $993 million, or 5%, driven mainly by a decrease in marketplace membership and lower premiums in Medicaid. However, the nearly 60% decrease in marketplace membership, which was partially offset by premium rate increases of nearly 60%, was part of a strategic initiative to improve both profitability and the medical care ratio.
In 2017, the industry experienced a tax benefit of roughly $3.4 billion dollars as a result of the Tax Cuts and Jobs Act. In 2018, however, taxes increased by nearly $590 million. The firms with the highest tax increases were Anthem ($1.2 billion), Molina ($392 million) and UnitedHealth Group ($362 million), while Humana reported a decrease of $1.18 billion. Tax increases for these firms can be attributed to an increase in operating income, but also to planning around tax reform. The previously deferred federal health insurance tax also presented an additional challenge to insurers in 2018. Total debt rose to $111.6 billion in 2018, up nearly 72.6%, from $64.7 billion in 2017.
Overall, the majority of carriers have taken advantage of low borrowing costs over the last five years to complete a series of acquisitions and maintain higher than historical financial leverage levels. Should the appetite for M&A and vertical integration continue, additional increases in financial leverage over the medium term may be likely.
To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=28418.
AM Best is a global rating agency and information provider with a unique focus on the insurance industry. Visit www.ambest.com for more information.
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KEYWORD: UNITED STATES EUROPE NORTH AMERICA NEW JERSEY
INDUSTRY KEYWORD: PROFESSIONAL SERVICES INSURANCE
SOURCE: AM Best
Copyright Business Wire 2019.
PUB: 04/02/2019 12:37 PM/DISC: 04/02/2019 12:37 PM