COVID-19 to hit US health insurers' otherwise robust profit margins and capital buffers

Fitch Ratings has revised the rating outlook for the US health insurance industry to negative from stable due to expectations for an adverse effect on industry fundamentals related to COVID-19, despite most national carriers having robust profit margins and good capital buffers.

Fitch expects a weakening of profitability and debt service metrics driven primarily by heightened claims costs associated with COVID-19 testing and treatments, including hospitalisations.

It said that the negative rating outlook is mainly driven by the extremely wide range of expert estimates with respect the eventual infection rate associated with COVID-19. "This creates significant uncertainty in Fitch's ability to forecast 2020 earnings levels for US health insurers. The higher end of forecast infection rates could eliminate 2020 earnings for the industry as a whole. Fitch views such material uncertainty as inconsistent with a Stable Rating Outlook."

However, it added that once infection rates in the US from COVID-19 become more predictable, Fitch will revisit its outlook.

In addition to the direct effect from heightened claims costs, Fitch expects reported earnings for health insurers to also be pressured by lower premium income due to the adverse employment conditions driven by a significant economic downturn, as well as investment earnings reflecting recent declines in interest rates.

Despite pressure on profitability in 2020, Fitch expects the effect of COVID-19 will not cause excessive stress for most of the health insurers in its ratings coverage, which it said is skewed to the larger national carriers, as profit margins among these companies are otherwise robust and most have good capital buffers.

"The vast majority of health insurers rated by Fitch carry very low exposure to unaffiliated equity investments and below investment grade bonds. This makes these companies less exposed to the very high levels of capital markets volatility caused by COVID-19 concerns and its ultimate impact on the economy," the agency said.

Fitch believes that health insurers most exposed to higher levels of stress would include smaller insurers that have a very high proportion of non-administrative services only business for which premium rates are already contractually locked for the year, and those that have a high exposure to risk in their investment portfolio.