While major stock indices absorbed their biggest single-day losses of the year Wednesday as investors came to grips with the post-election reality of the fiscal cliff – amplified by fresh EuroZone worries – most of the large, publicly-traded insurance stocks absorbed losses far in excess of those of the broader markets.
With any uncertainty over the fate of health reform removed after the reelection of President Barack Obama, and the broader markets down about 2 percent, insurance stocks took a beating. Humana’s shares were down 7.5 percent, losing $5.75 per share to $70.41; WellPoint, despite reporting third quarter results that beat analyst estimates, dropped 4.8 percent, or $2.96 per share to $58.24; Aetna lost 3.6 percent, $1.61 per share, to close at $42.95; and UnitedHealth Group's share were down 3.5 percent, losing $1.99 per share to $54.40.
Among the big five insurers, Cigna was least affected by the post-election sell off, losing only 21 cents per share or about 0.4 percent of its value. Analysts noted that Cigna has the least exposure among the big insurers since its business is more broadly diversified and also includes a significant international business.
Among the concerns of analysts and investors are fees included in the Affordable Care Act that are expected to cost insurers nearly $8 billion in 2014 and could grow to roughly $18 billion annually within four years. Also of concern is the law’s reduction in the amount it will pay private insurers to offer Medicare Advantage plans.
Humana is likely the insurer that would come under the most financial pressure as a result of the reduced Medicare Advantage (MA) payments. Wednesday, its stock was downgraded by Goldman Sacks to a sell rating, Zacks.com to “underperform”, and by Bank of America to “hold”.
According to Bank of America “the operating environment will be more difficult for MA plans under HC Reform and the reimbursement outlook in 2014 and 2015 create significant headwinds during a time period where cost trend is not likely to be as modest as it has been over the past few years, reducing the company's margin for error.”
Goldman Sachs concurred on this assessment of Humana’s future prospects, noting that “the company derives a majority of its earnings, by our estimate, from the MA products that face significant headwinds and uncertainties as funding and other changes from health reform roll through.”
For WellPoint, which saw the second steepest decline in trading yesterday, the issues it faces are different. The insurer carries a significant book of its business in the commercial, small group and individual markets, all of which are expected to face challenges with the introduction of health insurance exchanges in 2014. The company has seen a steady decline in its medical membership over the past year, reporting it had nearly 900,000 fewer members at the end of the 2012 third quarter than it did a year ago.
While Jason Gurda, an analyst at Leerink Swan noted WellPoint was “likely oversold” Wednesday on news of President Barack Obama’s reelection, there are still significant concerns regarding WellPoint’s future financial performance.
“The company has been clear that it expects some small group and individual margin compression in 2014,” Gurda wrote in a research note Wednesday. This alone could limit the benefits the company expects to see from its planned acquisition of Amerigroup, which it expects to close early next year. “As a result, we believe EPS growth at (WellPoint) could continue to lag its peers for the next couple of years,” the note concluded.
Bank of America, too, is bullish on WellPoint’s prospects and also downgraded the stock yesterday from a buy rating to underperform. “While the impacts of (health reform’s) provisions have been scrutinized for the past few years, the range of potential outcomes is quite wide with a downside scenario more likely than an upside scenario,” it concluded in its downgrade.
With markets down another 0.5 percent in late morning trading Thursday, both Humana and WellPoint were extending their losses. Humana shares were down $1.56 per share, a drop of 2.2 percent, and WellPoint shares were down more than 2.5 percent, or $1.48 per share.