As the health insurance reform debate has taken center stage in 2009, health insurers’ net income has continued to decline and profit margins are at their lowest level in years.

According to a new analysis released Dec. 21 by Highline Data, the health insurance industry reported a decline of 12.4% in net income, to $8.2 billion, as of Sept. 30 compared to the same period in 2008.

More than a third of health companies (335) reported underwriting losses in the third quarter, with larger market players considerably outperforming their smaller competitors. 35% ($2.8 billion) of total industry net income in the first nine months of the year was earned by the top 1% of companies ranked by 2008 total assets.

Underwriting costs, which primarily include health benefit payments, increased by 6.9% year-over-year and totaled $332 billion as of Sept. 30. Underwriting costs showed a five-year CAGR of 9.5%, outpacing total revenue, which showed a five-year CAGR of 9.2%.

Overall, the industry saw gains in total assets, member months and capital and surplus, which was an improvement over 2008 results, all of which reported declines. Return on average equity continued to decline, however, reaching a six-year low of 11.2%.

“While the public perception is that health companies are recording record profits, the reality they face is clearly a reduction in profit margins [Net Underwriting Margin], which reached a four-year low of 2.4%,” Laurie Dallaire, vice president and director of Highline Data, says. “Even before the anticipated impact of pending health reform legislation, the industry will continue to see depressed margins as companies strive to control premiums and benefits costs.”

Highline Data’s analysis says the industry is under enormous strain to keep underwriting costs down, even as medical costs continue to climb. In the face of these contradictory pressures, health companies have so far managed in 2009 to keep the growth rate of underwriting costs below rates seen earlier in the decade.

The 2009 figures discussed are year-to-date. All of the data in the analysis is available in Highline Data’s premier online analytical resource, Insurance Analyst PRO. The data is derived from the annual and quarterly statutory financial statements filed with the National Association of Insurance Commissioners (NAIC) by individual companies. The California companies’ data is obtained from public filings submitted to the California Department of Managed Health Care.