The total debt obligations among U.S. publicly traded health insurers have increased significantly over the last ten years to $115.5 billion in 2018, driven by the low interest rate environment supporting companies’ diversification and acquisition efforts, says A.M. Best in a recent report.
From total debt obligations of $24.8 billion in 2009, the figure has grown by almost 366% in ten years as U.S. publicly traded health insurance firms have looked to take advantage of low interest rates.
At the same time, finds the report, the long-term debt among the nine publicly traded U.S. health insurers also grew significantly in the period, hitting $106.4 billion in 2018 versus $22.1 billion in 2009.
In 2018, long-term debt grew by almost 66% year over year, says A.M. Best, adding that this is mostly a result of the Cigna-Express transaction. Short-term debt has increased also, albeit in a less dramatic manner, reaching $9.1 billion in 2018 compared with $2.7 billion in 2009.
“In the last decade, 2010 was the only year that publicly traded health insurers paid down more long-term debt than they raised; in six of the other nine years, aggregate long-term debt obligations increased by over 5%, driven largely by a series of merger and acquisition deals, some of which have been extremely large,” explains the ratings agency.
According to A.M. Best, in recent times companies have turned their focus to lowering the cost of care and increasing scale, a trend driven by a lack of organic growth opportunities in the commercial/employer sector, and also the expansion of government-backed programs.
By the end of 2018, the aggregate debt-to-capital ratio increased to 43% versus 33% in the first-quarter of 2019, which is a result of the increase in debt obligations noted above.
“Should the appetite for mergers and acquisitions, as well as vertical integration, continue, additional increases in financial leverage over the medium term are likely. The rise in debt has led to a rise in interest expense that has outpaced the growth of the companies’ operating income.
“As a result, the aggregate interest coverage ratio declined to 9.1x in 2018 from 11.7x in 2014, although interest coverage remains strong,” says A.M. Best.
