Health insurers including Humana ( HUM - Get Report), UnitedHealth Group ( UNH - Get Report) and WellCare Health Plans ( WCG - Get Report) reported combined third-quarter earnings of $2.6 billion, setting up what will probably be the weakest year since 2003. Net income fell 31% from $4.8 billion in the third quarter of 2007, according to the National Association of Insurance Commissioners' health financial statement. Thirty percent of health insurers recorded net losses. If business stayed the same during the last three months of 2008, it's likely that net income dropped to less than $11.6 billion for the year, compared with $17.1 billion in 2007. In 2003, health-insurance companies booked profits of $10.3 billion. Profit margins are suffering from reduced investment income and downward pressure on underwriting. Health insurers have two main sources of income: underwriting, the difference between premiums and the amount paid out in claims; and investment income. Insurers invest enormous sums of money, illustrated by American International Group ( AIG - Get Report), once the largest U.S. insurer but now on the brink of bankruptcy. There have been failures of small health insurers this year, though not on the scale of those in the banking industry. President Barack Obama plans to reform health care, and controversial plans for Medicare Advantage payments will increase profit pressure on health insurers. Health insurers generated $318 billion in cash from premiums in the first nine months of 2008. Because of the short-term nature of policyholder contracts, companies typically can't make long-term investments and rely on the liquidity of bond markets. Health-insurance companies recorded $6.5 billion in investment income during 2007, equal to 40% of profits. Based on trends, total investment income for 2008 may be about $3.4 billion, a decline of 48%. In the third quarter, investment income tumbled 46% to $527 million from the same period a year earlier.
A total of 3.3% of insurers recorded investment losses through September, with losses for those insurers doubling to $99 million in the third quarter. Still, 70% of insurers that posted investment losses had positive net income, including subsidiaries of Coventry Health Care ( CVH) and Wellpoint ( WLP). Investment losses weren't the cause of insurers losing money in the first nine months of 2008. However, that substantial income helps keep premiums down and companies more competitive. Health-insurance companies make most of their profits on underwriting income. Insurers made $9.7 billion from underwriting in 2007, a slim 2.4% margin. Underwriting income in the third quarter rose 10.8% to $2.7 billion, but was down 5.7% in the first nine months of 2008. In previous quarters, medical expenses had been rising faster than premiums. Because of the drop in medical expenses, underwriting income may exceed $10 billion for the year, an increase of 3% over 2007. Thirty-six percent of insurers recorded underwriting losses in the first nine months of the year, up 18%, or $200 million, to $1.3 billion. Three-quarters of companies that lost money on underwriting also recorded an overall net loss. Thirty-six insurers had underwriting losses that exceeded $10 million, including subsidiaries of Centene ( CNC - Get Report), Humana, Molina Healthcare ( MOH), UnitedHealth Group and WellCare Health Plans. Note: The insurers represent only those filing the health annual statement blank with the National Association of Insurance Commissioners, or NAIC. Some life and health companies or property and casualty companies selling health insurance coverage may complete a different filing if they don't meet the NAIC requirements for mandatory health blank completion. TheStreet.com Ratings issues financial strength ratings for 4,000 life, health, annuity and property/casualty insurers are available at no charge on the Insurers & HMOs Screener. In addition, the financial strength ratings on each of the nation's 8,600 banks and savings and loans are available on the Banks & Thrifts Screener.