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Taking Your Insurer's Pulse

Donna O'Rourke

Every quarter TheStreet.com Ratings looks at the financial strength of over 500 health insurers. The firm's quantitative analytical model assigns a rating, on a scale of A to E, based on each insurer's five-year financial performance, including an analysis of profitability, liquidity, stability and capitalization.

A lower rating doesn't necessarily mean policyholders are likely to be stuck with unpaid claims. But those companies at the bottom of the scale are more likely to be acquired, wind down their business or withdraw from unprofitable business lines. The real issue is continuity of care -- whether you would have to be concerned about a change in benefits and provider network.

A review of third-quarter 2006 financial statements shows that the industry reported an aggregate net income of $11.3 billion, compared with $10.8 billion for the same period the previous year. The 4.57% increase, however, is somewhat distorted, because Anthem Insurance, a subsidiary of Wellpoint Inc. (WLP), did not file a health insurance statement in third quarter of 2005.

If we subtract out the $238.9 million in net income for this one firm, the aggregate increase in net income for the year is only 2.36%. TheStreet.com ratings distribution reflects the continued profitability and strong capitalization of the industry with 65% of the 514 rated health insurers having grades in the B-range or higher.

While group health insurance and public supported plans such as Medicare and Medicaid dominate the bulk of the health insurer membership, the private individual health insurance market is steadily growing. Insurers have increased their focus on this segment in the last few years as employer coverage becomes too expensive, pre-Medicare eligible retirees seek coverage, and the self-employed and previously uninsured look for cheaper alternatives.

The table below lists the health insurers with the largest enrollment in private individual plans in 2005. The Blues dominate this market, and with few exceptions the firms show year-over-year increases in enrollment, including Wellpoint's Rocky Mountain Hospital and Medical with over a 16% year-over-year increase in individual membership from 120,464 to 140,412 and Highmark's Pennsylvania Blue Shield growing 9.4% to 122,688 members.

The latest trend in product design, high-deductible health plans (or HDHPs) that can be combined with a health savings account (HSA), is driving some of this growth. America's Health Insurance Plans reported earlier this month that 1.1 million individuals were covered by such plans as of January 2007, representing a 29 percent increase over last year.

While the various BCBS plans are focused on this product line, other heavy weights include UnitedHealth Group (UNH) via its Golden Rule unit, Aetna (AET), Cigna (CI), and Humana (HUM).

Below is the list of the insurers with the largest number of members enrolled in private individual health insurance plans as of year-end 2005. Included in the list is the financial strength rating assigned by TheStreet.com Ratings team based on data through the third quarter of 2006.