Health insurance companies have been a focus of attention frequently over the past year for several reasons. How do investors, lenders and ratings agencies analyze these complex organizations?
By mid-2025, UnitedHealth eased out its CEO because of an upcoming downturn in performance. Health insurers everywhere are contemplating payouts and claims related to Medicaid and Medicare Advantage programs. CVS decided to withdraw from providing insurance in the marketplace under Obamacare ("ACA") and plans to close hundreds of stores. Shareholders are showing angst by dumping shares, especially vivid from sharp declines in value at UnitedHealth. For the most part, the big names in health insurance are profitable. They reports billions annually. Profits are not growing as expected.
For all the attention it has received, UnitedHealth still reported net profits above $6 billion in the first quarter, 2025.
Health insurers, for the most part, are consolidated corporate organizations, mandated to provide benefits to shareholders without taking advantage of consumers and within constraints outlined by government regulators.Consumers become irritated when they observe large insurers accumulating billions in profits. Shareholders require a return and hope company managers can boost "shareholder value." Shareholder value comes when profit margins widen and when revenue growth soars. Profits grow when costs are managed (or claims paid on insurance are limited and operations are managed efficiently); profits grow, too, when premiums increase--either from volume of customers or from the price of insurance.
Shareholders, bank lenders and bond investors help fund the activities of insurers, which goes beyond mere medical insurance and includes additional activities like providing actual health services or managing retail stores (CVS, e.g.). While consumers seek care and insurance and want assurance that exorbitant medical costs will be covered, shareholders and other stakeholders look for a predictable flow of earnings, operating cash flows and returns.
The insurance model is influenced by many categories of risk—including underwriting and claims-paying risks (medical costs), pricing risks related to the premiums received from customers, investment risks in a portfolio of securities, and operating risks related to business operations. Risks evolve over time, and companies seek to expect them, measure them, and manage or contain them.
Analytic approaches
To analyze a health insurance company requires an understanding and analysis of balance sheets, earnings statements and operating cash flows. It also involves understanding the essentials of insurance-related accounting and financial reporting. There is insurance accounting subject to IFRS and GAAP standards, but there is also insurance accounting for statutory purposes (accounting standards used by insurance regulators). Just like bank and broker/dealer regulators, insurance regulators (under the supervision of the NAIC in the U.S.) prefer to examine conservative, stress-scenario balance sheets and earnings.
The financial information is interpreted and analzyed as a basis for quantifying risks and forming conclusions about financial condition. Shareholders, beyond earnings growth, look for the prospects of a steady dividend and occasional share buybacks. Lenders and debt investors look for assurance that debt interest and principal can be repaid or the debt can be comfortably refinanced (or debt can be refinanced with no difficulty). Insurance regulators are more concerned about the insurance company's ability to make payments on claims. For health insurers, that would be medical and drug costs of all kinds.
Debt investors may rely on the analysis and interpretations of ratings agencies, which provide ratings, updates and perspectives on the bonds issued by insurance companies. They also provide ratings on the ability of the same company to pay out claims for the benefit of policyholders ("financial strength" ratings).
In 2025, health insurance companies in the U.S. must address widespread public and consumer concern about high price of coverage and the uncertainty in whether the company will actually provide coverage or pay on a claim. (Some argue the "denial of claims" is an inherent part of the business model. Insurance companies maximize earnins on the underwriting side by boosting premiums and managing operatingcosts, but also by effectively minimizing the amounts of claims paid.)
The financial information is interpreted and analzyed as a basis for quantifying risks and forming conclusions about financial condition. Shareholders, beyond earnings growth, look for the prospects of a steady dividend and occasional share buybacks. Lenders and debt investors look for assurance that debt interest and principal can be repaid or the debt can be comfortably refinanced (or debt can be refinanced with no difficulty). Insurance regulators are more concerned about the insurance company's ability to make payments on claims. For health insurers, that would be medical and drug costs of all kinds.
Debt investors may rely on the analysis and interpretations of ratings agencies, which provide ratings, updates and perspectives on the bonds issued by insurance companies. They also provide ratings on the ability of the same company to pay out claims for the benefit of policyholders ("financial strength" ratings).
In 2025, health insurance companies in the U.S. must address widespread public and consumer concern about high price of coverage and the uncertainty in whether the company will actually provide coverage or pay on a claim. (Some argue the "denial of claims" is an inherent part of the business model. Insurance companies maximize earnins on the underwriting side by boosting premiums and managing operatingcosts, but also by effectively minimizing the amounts of claims paid.)
There are also ongoing consumer worries about government regulation and legislation related to Medicare/Medicaid, trade policies, drug prices, rising healthcare costs, costs related to medical devices, and more. In 2025, there are GLP-1 (obesity and diabetes-related) drugs; insurance companies grapple with strategies related to coverage (premium pricing, expected medical costs).
The income statements and balance sheet of a health-insurance company are similar to other insurance companies, subject in similar accounting rules and principles. IFRS and U.S. GAAP accounting standards may differ in presenting financial information. Insurance accounting focuses especially on the accounting for the risks and expected amounts of claims during the current period and over a defined time period. Life insurers must account for a potential payout that may occur decades from now, is not known and can only be estimated. Health insurers have expected medical-cost payouts over a current period, but may have expected payouts over a certain time. Accountants require insurers to quantify these payouts (amounts paid and amounts expected to be paid out) and report them as liabilities and expenses on the income statement.
For all insurance companies, in the analysis of debt, analysts review the purpose of debt and assess whether leverage is too high based on metrics and based on whether cash flows are adequate to cover related obligations (especially interest expense). In general, most companies will seek to refinance long-term debt at maturity.
Cash flows from operations (after payment of claims and infrastructure expenditures) will be funneled into the investment portfolio, but may also be used to fund growth and expansion and reward shareholders via dividends or share buybacks.
At such point, as with the assessment of corporates, the assessment of an insurer becomes an observation and projection of cash flows. For public companies, it too becomes of an assessment of what is the best and most prudent use of operating cash flow: reinvest in the operation, maintain cash reserves for emergency purposes, pay out the cash as rewards to shareholders (dividends and buybacks).
The income statements and balance sheet of a health-insurance company are similar to other insurance companies, subject in similar accounting rules and principles. IFRS and U.S. GAAP accounting standards may differ in presenting financial information. Insurance accounting focuses especially on the accounting for the risks and expected amounts of claims during the current period and over a defined time period. Life insurers must account for a potential payout that may occur decades from now, is not known and can only be estimated. Health insurers have expected medical-cost payouts over a current period, but may have expected payouts over a certain time. Accountants require insurers to quantify these payouts (amounts paid and amounts expected to be paid out) and report them as liabilities and expenses on the income statement.
Compared to other insurance companies, the products health insurance companies offer and the risks they assume will differ from other insurance groups (P&C insurance, life insurance, e.g). In all cases, by convention, insurance companies are paid for the risks they accept by generating premiums and seek to increase earnings and bolster returns for shareholders from growth in premiums. All insurance companies want to ensure their premiums received cover their expected and actual payouts (as well as operating costs).
In all cases, they must measure and project the payments they make on claims. The projection of payments is based on historical data, but other factors as well (demographics, use of insurance, regions, government regulation, etc.).
Most insurance companies supplement the underwriting businesses with other sources of income. Life insurers offer retirement services and asset management; some in the past have ventured into securities brokerage. Health insurance companies, like CVS, manage a well-known retail (drug) store operation. UnitedHealth Group provides medical insurance, but also offers health services. Hence, it provides insurance for customers who might be serviced by a medical center it also controls. It might provide drug coverage for a customer who purchases the drugs at a pharmaceutical network it runs.
All insurance companies address the challenge in determining how to price premiums and how to ensure they adequately cover medical costs in current periods and over extended timeframes. Premiums often do cover medical costs and operating costs, which explains why many well-known insurers are consistently profitable. But health premium pricing is often restrained by competitive factors and by regulation. Government bodies and regulations seek to ensure premiums are fairly priced.
If the company provides coverage, for example, for those who fall within U.S. Medicare and Medicaid programs, U.S. regulators might cap premiums to put a limit on the profit margin the company might generate.
Like all companies with shareholders, management adopts and implements strategies (by products, risks, regions, e.g.) based on the ability to be profitable and ensure a proper return to shareholders. Like all, shareholders seek not mere profits, but value from profit growth and the possibility of consistently and sometimes increasing dividends.
Like all companies with shareholders, management adopts and implements strategies (by products, risks, regions, e.g.) based on the ability to be profitable and ensure a proper return to shareholders. Like all, shareholders seek not mere profits, but value from profit growth and the possibility of consistently and sometimes increasing dividends.
Like all insurance companies, health insurers attempt to grow premiums earned, understanding there will be risks and predictable payouts of claims ("costs" on the income statement). Unfortunately, for the policy holder, the textbook insurance model recognizes profit growth if claims are denied or if claims are paid out at amounts less than expected.
Expected medical costs are especially difficult to model and forecast. The related costs are difficult to quantify, sometimes appear irrational and unexplainable (to consumers), and just seem to soar uncontrollably from period to period.
On the other hand, across all sectors, insurance companies must also prepare for and manage the risks of unexpected risks or extraordinary loss or costs.
Investment portfolio risks
The insurance business model includes an investment portfolio. This applies, too, for health-insurance companies. Premiums are generated and funneled into a portfolio of securities and other investments, where they can generate returns until investments are liquidated to meet claims. Hence, many insurance companies of all kinds supplement insurance operations with investment income. Often the income includes coupon interest received from bond investments. Insurance investments may also include equity securities, loans, mortgages, and other classes of assets--subject to scrutiny from regulators.
However, investments are subject to liquidity and market risks, which are managed by the company and reviewed by analysts.
Insurance companies invest most of the funds into high-quality fixed-income bonds. However, when interest rates rise, as they have done in recent years, the values of those bonds fall. Hence, many insurance companies have suffered bond-related losses and have had to develop strategies regarding reducing related holdings.
Even if performance is satisfactory or good (returns are above expectations), they must ensure investments are liquid—can be easily sold when cash reserves are necessary to meet claims obligations.
The analysis of the investment portfolio includes an analysis of worst-case market scenarios (worst-case losses) and analysis of liquidity under stress.
On the other hand, across all sectors, insurance companies must also prepare for and manage the risks of unexpected risks or extraordinary loss or costs.
Investment portfolio risks
The insurance business model includes an investment portfolio. This applies, too, for health-insurance companies. Premiums are generated and funneled into a portfolio of securities and other investments, where they can generate returns until investments are liquidated to meet claims. Hence, many insurance companies of all kinds supplement insurance operations with investment income. Often the income includes coupon interest received from bond investments. Insurance investments may also include equity securities, loans, mortgages, and other classes of assets--subject to scrutiny from regulators.
However, investments are subject to liquidity and market risks, which are managed by the company and reviewed by analysts.
Insurance companies invest most of the funds into high-quality fixed-income bonds. However, when interest rates rise, as they have done in recent years, the values of those bonds fall. Hence, many insurance companies have suffered bond-related losses and have had to develop strategies regarding reducing related holdings.
Even if performance is satisfactory or good (returns are above expectations), they must ensure investments are liquid—can be easily sold when cash reserves are necessary to meet claims obligations.
The analysis of the investment portfolio includes an analysis of worst-case market scenarios (worst-case losses) and analysis of liquidity under stress.
Just as with banks, regulators intervene to ensure the company doesn't take too much investment risk. While most insurance companies invest in somewhat "safe" assets (government securities, municipal bonds, investment-grade corporates), others are willing to take risk: investments in higher-returning securities that will supplement the earnings from the insurance side of the business. Or investment returns could offset the losses from the insurance-underwriting operation.
Health insurers often supplement the insurance activities with ancillary business activities, such as providing health services (not just insurance) or selling pharmaceuticals (not just drug insurance). They tend not to rely as much on the returns from an investment portfolio as other insurance companies (especially life insurers). But those other businesses come with their own risks, including risks operating inefficiencies and decline in customer demand for the services.
Regulation
Like many other financial institutions (including banks and broker/dealers), insurance companies are highly regulated. Regulators and supervisors seek to ensure that customers are protected against significant, unexpected losses. (In the U.S., states separately regulate the insurance industry, but states have agreed to implement regulation consistently across the country via the National Association of Insurance Commissioners (NAIC).)
Like many other financial institutions (including banks and broker/dealers), insurance companies are highly regulated. Regulators and supervisors seek to ensure that customers are protected against significant, unexpected losses. (In the U.S., states separately regulate the insurance industry, but states have agreed to implement regulation consistently across the country via the National Association of Insurance Commissioners (NAIC).)
Insurance companies project loss and payouts, based on expected-loss models, based on historical payouts and demographics and regions. Regulators step in to determine what would be unexpected loss losses far beyond what a company might have forecasted. For P&C insurers, that would be classifed as "catastrophic" losses, exceptional losses when there are hurricanes or California wildfires. For health insurers, that might be losses that occurred during the pandemic of 2020. Few health-insurance models in 2021 would likely have accounted for the widespread medical costs because of CoVid.
In insurance, regulators still want to ensure the company has means and resources to pay those expected losses---claims and meet other operating liabilities on an ongoing basis. Similar to banks and broker/dealers, unexpected losses should be absorbed by shareholders. In essence, in the way bank supervisors want to protect depositors, insurance regulators want to protect policy-holders.
Therefore, based on balance-sheet information and other off-balance-sheet risks, regulatory capital is based on a computation of unexpected losses from underwriting risks, investment risks, interest-rate risks, operations risks and other factors. “Unexpected loss” is determined by regulatory assumptions and methodology. Insurance regulators revise financial information and require more conservative approaches in presenting a balance sheet and income statement (statutory accounting principles).
In insurance, regulators still want to ensure the company has means and resources to pay those expected losses---claims and meet other operating liabilities on an ongoing basis. Similar to banks and broker/dealers, unexpected losses should be absorbed by shareholders. In essence, in the way bank supervisors want to protect depositors, insurance regulators want to protect policy-holders.
Therefore, based on balance-sheet information and other off-balance-sheet risks, regulatory capital is based on a computation of unexpected losses from underwriting risks, investment risks, interest-rate risks, operations risks and other factors. “Unexpected loss” is determined by regulatory assumptions and methodology. Insurance regulators revise financial information and require more conservative approaches in presenting a balance sheet and income statement (statutory accounting principles).
Shareholders, therefore, are supposed to absorb the unusual losses, not the policy-holder (and not any supplier, vendor, or senior lender, for that matter). Insurance companies are expected to maintain capital in excess of minimum requirements. In the U.S., insurance companies are regulated by each state. An alliance of state regulators (“NAIC”) permits insurance regulation to be consistent across states.
In practice, insurance companies will be organized by holding companies owning several insurance subsidiaries. Each insurance subsidiary would be subject to regulatory requirements.
Rating agencies, including Fitch Ratings, often use their own internal models to determine appropriate amounts of capital to absorb worst-case losses. (Fitch uses a “PRISM” model.)
Financial analysis
The financial analysis of an insurance company often blends approaches in analysis of a financial institution (capital adequacy; investment portfolios and sufficient liquidity to meet claims payments) with an analysis of a corporate enterprise (consistent operating cash flow to meet long-term debt obligations).
Insurance companies use long-term debt to support infrastructure, fixed assets, expansion, growth and acquisitions. (Life insurers may use debt to leverage the investment portfolio to enhance returns.)
The analysis entails the analysis of revenue growth, cost control, operating efficiencies, and returns on invested capital. Most revenues are generated from net premiums. Health insurance companies may also generate revenues from other sources: health services, products, pharmaceuticals, etc. The non-insurance business activities, essential to supplementing insurance revenues, can vary, based on corporate strategies. Large companies may have substantial stakes in companies that act as pharmaceutical intermediaries, "pharmaceutical benefit managers" (PBMs) who decide how and where to distribute drugs manufactured by drug companies.
For non-life insurers, profitability is also measured by “combined ratios” that measure whether premiums can cover claims, reserves and operating expenses comfortably. Operating losses may occur because claims are higher than expected or operating expenses have risen substantially. Ideally, to generate returns that please sharesholders, company management may target a "return on invested capital" to exceed, say, 13%. And to reach 13%, it may strive to maintain a "combine" ratio of less than 90% (10% implying pre-tax margin).
The investment portfolio should generate returns that supplement underwriting earnings or offset underwriting-related losses. But the portfolio itself is subject to market risks that can result in losses that might eliminate underwriting profits. No matter the efforts to invest in "safe" assets, market risks exist, as many insurers observed in 2023-24 as rising interest rates led to billions in losses in "safe" U.S. Government securities or investment-grade corporate bonds.
Life insurers are not generally assessed based on the same combined ratio; therefore, returns from the investment portfolio are critical to overall profitability. That might lead some insurers to take on more risk to achieve higher returns. Life insures must still generate necessary income (usually interest income from fixed-income portfolios) to keep up with growing levels of liabilities (future payouts to beneficiaries of life insurance, e.g.).
In practice, insurance companies will be organized by holding companies owning several insurance subsidiaries. Each insurance subsidiary would be subject to regulatory requirements.
Rating agencies, including Fitch Ratings, often use their own internal models to determine appropriate amounts of capital to absorb worst-case losses. (Fitch uses a “PRISM” model.)
Financial analysis
The financial analysis of an insurance company often blends approaches in analysis of a financial institution (capital adequacy; investment portfolios and sufficient liquidity to meet claims payments) with an analysis of a corporate enterprise (consistent operating cash flow to meet long-term debt obligations).
Insurance companies use long-term debt to support infrastructure, fixed assets, expansion, growth and acquisitions. (Life insurers may use debt to leverage the investment portfolio to enhance returns.)
The analysis entails the analysis of revenue growth, cost control, operating efficiencies, and returns on invested capital. Most revenues are generated from net premiums. Health insurance companies may also generate revenues from other sources: health services, products, pharmaceuticals, etc. The non-insurance business activities, essential to supplementing insurance revenues, can vary, based on corporate strategies. Large companies may have substantial stakes in companies that act as pharmaceutical intermediaries, "pharmaceutical benefit managers" (PBMs) who decide how and where to distribute drugs manufactured by drug companies.
For non-life insurers, profitability is also measured by “combined ratios” that measure whether premiums can cover claims, reserves and operating expenses comfortably. Operating losses may occur because claims are higher than expected or operating expenses have risen substantially. Ideally, to generate returns that please sharesholders, company management may target a "return on invested capital" to exceed, say, 13%. And to reach 13%, it may strive to maintain a "combine" ratio of less than 90% (10% implying pre-tax margin).
The investment portfolio should generate returns that supplement underwriting earnings or offset underwriting-related losses. But the portfolio itself is subject to market risks that can result in losses that might eliminate underwriting profits. No matter the efforts to invest in "safe" assets, market risks exist, as many insurers observed in 2023-24 as rising interest rates led to billions in losses in "safe" U.S. Government securities or investment-grade corporate bonds.
Life insurers are not generally assessed based on the same combined ratio; therefore, returns from the investment portfolio are critical to overall profitability. That might lead some insurers to take on more risk to achieve higher returns. Life insures must still generate necessary income (usually interest income from fixed-income portfolios) to keep up with growing levels of liabilities (future payouts to beneficiaries of life insurance, e.g.).
Because investment income is necessary to boost profitability, life insurers might even use long-term debt to "leverage" the portfolio, achieving higher returns relative to the capital invested in the enterprise.
In recent years, prospective investment funds and other institutions have observed "value" in a life insurance's asset-liability structure. The company's balance sheet is viewed as an "investment vehicle": a large investment portfolio counterbalanced by the expected payouts to beneficiaries. They compute the "embedded value" of the life-insurance portfolio, accounting also for the premiums that will be continued to be paid over a long term. (Embedded value = (present value) premiums earned each year + expected annual returns in the investment portfolio - accrued interest on benefits liabilities and policyholder deposits - beneficiary payouts.)
Such funds or institutions will acquire a life insurer or the net assets related to embedded value, not to become life-insurance operators, but to get access to the portfolio and to have the ability to reallocate assets in the portfolio based on market opportunities.
For all insurance companies, in the analysis of debt, analysts review the purpose of debt and assess whether leverage is too high based on metrics and based on whether cash flows are adequate to cover related obligations (especially interest expense). In general, most companies will seek to refinance long-term debt at maturity.
Cash flows from operations (after payment of claims and infrastructure expenditures) will be funneled into the investment portfolio, but may also be used to fund growth and expansion and reward shareholders via dividends or share buybacks.
At such point, as with the assessment of corporates, the assessment of an insurer becomes an observation and projection of cash flows. For public companies, it too becomes of an assessment of what is the best and most prudent use of operating cash flow: reinvest in the operation, maintain cash reserves for emergency purposes, pay out the cash as rewards to shareholders (dividends and buybacks).
Tracy Williams
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