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Fitch: Health Insurers Look Fine

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The U.S. Supreme Court could throw a monkey wrench at health insurers, or insurance company executives could go off the rails, but, otherwise, health insurers should report strong earnings in the coming year.

A team of analysts led by Greg Dickerson has given that assessment in a 2012 outlook commentary released today by Fitch Ratings, Chicago.

Fitch has given the U.S. health insurance and managed care sector a stable rating outlook, and that means the firm expects to affirm the ratings of most of the companies it rates over the next 12 to 24 months, the analysts say.

Fitch rated companies in the sector have an average insurer financial strength grade of A.

The ratings are strong because the health insurance companies have plenty of revenue and net income they can use to pay claims and pay off debt, and they have been doing a good job of increasing their efficiency, the analysts say.

Fitch is assuming that health insurers will make some small and midsize acquisitions in 2012.

Some of those deals might make sense, but, if executives at some health insurers borrow large sums to finance deals, or if publicly traded health insurers spend too much on buying back shares, those companies’ ratings could suffer, the analysts say.

Fitch also assumed when developing the 2012 outlook for health insurers that U.S. unemployment rate will fall slightly, inflation will increase a bit, and investment yields will hold steady. If unemployment soars, employers abandon fully insured plans, or claims costs spike, health insurers could perform worse than expected, the analysts say.

The analysts suggest that the biggest wild card is the possibility that the U.S. Supreme Court could either declare all of the Patient Protection and Affordable Care Act of 2010 (PPACA) to be unconstitutional or simply declare the individual health insurance ownership provision to be unconstitutional, without doing anything about most of the rest of PPACA.

If the court invalidates the individual mandate, and only the individual mandate, and Congress does not ameliorate the effects of the ruling, “there could be negative rating actions,” the analysts say.

Fitch worries that PPACA changes could increase the risk that health insurers will end up covering more people with health problems and fewer healthy people, the analysts say.