3 Health Insurance Stocks Poised to Surge

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For the past year, the Affordable Care Act (ACA), popularly known as Obamacare, has been a roller-coaster ride for insurers, providers, consumers and even federal and state governments. Although health insurance companies haven’t made much money this year, many are looking ahead to 2015, when rate increases and expansion into other state marketplaces will beef up the bottom line.

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The bad news: With myriad systems glitches and an unknown risk pool, health insurance companies have struggled to develop, price and offer new Obamacare-compliant plans, incurring significant costs to sell that new coverage in state or federal government exchanges.

Beyond the cost of regulatory compliance, health insurance companies had to design and price healthcare plans before they knew who would be buying them. Obamacare only works if there are enough young, healthy enrollees to offset older and sicker individuals — but no one knew what that subscriber mix would be. As it turned out, the enrollment of older patients with chronic (and expensive-to-treat) conditions has increased health insurers’ cost of providing care.

The good news: With a year of Obamacare under their collective belt, health insurance companies have a better handle on how to price policies based on the mix of its risk pool. The average exchange-purchased premium across all states will rise 8.2%, according to a new study by PriceWaterhouseCoopers, but that reflects a wide divergence from state to state. Insurers participating in the Arizona exchange will cut existing rates by 23%, while plans in Arkansas will raise premiums by 50%.

Health insurance stocks have posted strong gains so far in 2014 — the Health Care SPDR (XLV) is up 11% — but the entire sector has faced some headwinds with the rollout of Obamacare. Health insurance companies have experienced significant up-front costs as they geared up to compete in the new exchanges. Those costs should start to decline over the next two-to-three quarters.

However, some new headwinds, like citizenship verification for individuals who purchased a plan through an exchange, could open up Pandora’s Box for the sector. Still, opportunities exist for these three health insurance stocks to surge in 2015:

UnitedHealth (UNH)

As the nation’s largest health insurance company, UnitedHealth (UNH) is staking a claim in in the ACA-mandated marketplaces. UNH’s most recent earnings slipped on higher costs and taxes, but the company is looking toward doubling its participation in health exchanges to as many as 24 next year, up from a dozen in 2014.

Although enrollees that signed up last year were disproportionately skewed toward older individuals with chronic and/or expensive conditions, those who signed up in the March enrollment period tended to be younger individuals. That’s a very important metric as UNH works to boost its profitability.

UNH stock has gained 8% year-to-date and has a current dividend yield of 1.8%. Although UNH’s price-to-earnings-growth (PEG) ratio of 1.28 seems a little high, this health insurance stock has a forward P/E of 13.4 — about average among health insurance stocks.

WellPoint (WLP)

Among health insurers, WellPoint (WLP) has the biggest exposure to Obamacare right now: More than three-quarters of a million subscribers have enrolled in WLP’s exchange-offered plans, which currently are being offered in 14 states.

WLP, the second-largest health insurer in the U.S., is looking to expand not only its participation in the exchanges, but broader direct marketing to consumers. That’s a big reason why WLP is changing its name back to Anthem, its primary brand.

WLP stock is up nearly 20% year-to-date and it sports a current dividend yield of 1.6%. The stock also is trading at around 12 times forward earnings. Perhaps more importantly, UNH has been able to grow earnings per share over the past six quarters while doing a solid job of managing debt.

Aetna (AET)

When it comes to benefiting from Obamacare, Aetna (AET) has rolled out qualified health plan coverage in 16 state exchanges and the District of Columbia. Georgia’s exchange will be added next year. As of mid-May, the nation’s third-largest health insurance company had 720,000 individuals sign up for Obamacare coverage.

There is one wild card, however: CEO Mark Bertolini recently said that nearly two-thirds of its public exchange membership had effective dates of April or May. That means the health insurance company doesn’t yet have the data to determine medical costs for the population.

Aetna stock pays a current dividend yield of 1.1%, and the stock is up 13% YTD. AET’s forward P/E is less than 11, which is attractive, but its PEG ratio of 1.18 suggests the stock may be slightly overvalued now.

Bottom Line

Major insurers now have put most major ACA development costs behind them, so they have a better handle on their risk pool and plan to raise rates in 2015. Several health insurance companies say that they will expand their participation in the exchanges next year, in some cases doubling the plans and state exchanges they participate in. That kind of outlook is a clear sign that health insurance companies see the value of Obamacare to their earnings growth.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/08/health-insurance-stocks-obamacare/.

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