Health insurance stocks are an overlooked investment sector. CEO and equity research analyst interviews reveal some interesting potential investment upside in this segment of the market.
Meyer Shields is Managing Director at Keefe, Bruyette & Woods, Inc., a subsidiary of Stifel Financial Corp. He covers insurance brokers and small- and mid-cap property and casualty insurers. Earlier, he worked at Legg Mason, J.P. Morgan Securities, Inc., and Zurich North America. He ranked fifth among stock pickers in the insurance/nonlife industry in The Wall Street Journal “Best on the Street” analysts survey for 2009.
He has a B.S. degree in actuarial science from the University of Toronto and is a Fellow of the Casualty Actuarial Society. In his interview in the Wall Street Transcript, Mr. Shields states:
“2021 was a fascinating year that started off with really strong earnings because in the first quarter of the year, there was still less driving than normal, and therefore car insurance companies were making an awful lot of money.
And then very quickly, in the aftermath of COVID-related supply chain disruptions, the rate of claim cost inflation, what we call loss trend, for personal auto really accelerated and most companies were actually doing worse or significantly worse than they expected earlier on.
So, over the course of the end of 2021, let’s say the second half of the year, that segment of the insurance industry did fairly poorly because there were consistent indications of rising claim costs, and not much in the way of rate increases.
And the insurance brokers also did pretty well. The economic rebound that we saw last year combined with the tendency of insurance companies to raise rates — and this is predominantly a commercial subsegment-focused industry, that’s what most of the brokers sell — that translated into very solid top-line growth. So that was the 2021 story.
2022 has been sort of tough. I mean, most of the market is down. That seems to be broadly true for insurance companies. There are some exceptions. But the space has been under some pressure and the weak performance that we’ve seen, particularly in growth stocks, has also manifested itself in insurance names that are considered to be growthy.
So it’s been a much tougher start to this year than the end of last year.”
Mario Schlosser is the CEO and co-founder of Oscar Health Inc. a newly public health insurance stock.
Oscar Health develops seamless technology and provides personalized support to help more than 1M members navigate their health care. It has been recognized as one of Fast Company’s most innovative companies in health, one of CNBC’s top 50 disruptors, and one of TIME’s most influential in health care.
Previously, Mr. Schlosser co-founded the largest social gaming company in Latin America, where he led the company’s analytics and game design practices.
Prior to that, he was a Senior Investment Associate at Bridgewater Associates and worked as a consultant for McKinsey & Company in Europe, the U.S. and Brazil. Mr. Schlosser also spent time as a visiting scholar at Stanford University, where he wrote and co-authored 10 computer science publications, including one of the most cited computer science papers published in the past decade, in which he developed the EigenTrust Algorithm to securely compute trust in randomized networks.
In May 2019, Mr. Schlosser and his co-authors, Sepandar D. Kamvar (Mosaic Building Group Inc.) and Héctor Garcia-Molina (Celo), received the prestigious Seoul Test of Time Award from the International World Wide Web Conference Committee (IW3C2) for this work.
Mr. Schlosser holds a degree in computer science with highest distinction from the University of Hannover in Germany and an MBA from Harvard Business School.
Mario Schlosser is currently applying his intellect to the problems of health care insurance coverage in the United States.
“We are the first consumer-driven, tech-driven insurance company startup in the U.S. We started the company in 2012 with an eye towards developing a different kind of insurance company.
From that time period, we now are at 1.1 million members and north of $6 billion in revenues this year. Not only have we developed a health insurer that has among the highest member engagements and member satisfaction anywhere in health insurance, but we’ve also built our technology stack in such a way that we are enabling other risk-bearing entities in the U.S. health care system to build on top of our technology.
So we lease out our technology and our services to others in these two business lines — on the one hand, offering insurance to individuals, and on the other hand, offering technology to other players in U.S. health care.”
This fairly recent IPO stock has a path to profitability:
“We spent a couple of hours at an investor day about two months ago or so taking people through what needs to happen and what we need to do in order for that to be the case.
First, insurance company profitability in 2023 and then, following up in 2025 by overall company profitability. I have really every confidence that with the levers we control there, we are pulling exactly the right sequence and with the right power.
And that the overall market conditions will also be such that everything we need to see around us is falling in place.
So yes, I have confidence.
We’ve now been doing this for 10 years and I think we have also had a somewhat unique history of challenges to navigate. We are one of the few companies in the ACA and the individual markets from the very beginning — and there have been many situations where the ACA almost got defunded, where it changed very, very radically in terms of the market and so on for a new insurance market.
That’s not uncommon at all.
The Medicare Advantage market also went sideways for many, many years in the early 2000s, late 1990s, before it then recovered and became this kind of unstoppable juggernaut for health insurers.
We think we’re very early in a market that will look like that.”
Ann Hynes is a senior health care services analyst and managing director at Mizuho Securities Co, Ltd. and has alot of advice regarding health insurance stocks.
Previously, she was a senior member of Leerink’s health care research team, and worked at Caris & Company, FTN Equity Capital Markets, and Cowen and Company. She received an MBA from Boston College and a bachelor’s degree from Fairfield University.
Ms. Hynes does not see inflationary pressures impacting health insurance stocks profitability:
“I think of all my subsectors, the health insurance industry is the least impacted.
There are some labor pressures that the companies see. But it is more on the customer service side. They do not employ a lot of physicians, where we are seeing a lot of the pressure point.
From an inflationary perspective, I think what would impact them over the next couple of years would be from providers, like hospitals or outpatient centers or surgery centers, who are really struggling with increased labor costs.
To put it in perspective, historically, for a hospital, labor costs per full-time employee might increase 2% to 2.5%, and currently, it is increasing about 5% to 6% on the base business.
That is a big headwind for hospitals.
They will have to go to commercial insurance companies to try to get paid for that. And typically, that does not happen mid-contract cycle. These contracts are typically anywhere from one to three years and roughly one-third of their book renews each year.
As the contract renews, managed care will need to reimburse health care providers for higher base wage rates. They will have to negotiate and likely have to pay hospitals for the labor increases.
But that will just end up in higher premiums to the consumer.
It is not a net negative from a margin perspective for a managed care company. It is really just going to hit the U.S. consumer.
Because our health care premiums will eventually increase because of the labor market increases on the health care side of the equation.”
Health insurance stock sector CEO and equity research analyst interviews reveal some interesting potential investment upside in this segment of the market. Read the complete interviews to get the complete advice from these highly professional executives, only in the Wall Street Transcript.