Obamacare Triumphs: 2 Insurance Picks - Analyst Blog


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President Barack Obama has said that eight million people have opted for Obamacare during its very first year. This statement was made just a few days before enrollment for the year for the Patient Protection and Affordable Care Act (ACA) comes to a close.

Enrollment Exceeds Estimates

At this point, there is no denying the fact that the ACA as a whole is an unqualified success.  The enrollment figure of eight million exceeds the original Congressional Budget Office (CBO) estimate by one million. The CBO estimate was made before the exchange was hampered by computer errors. In fact, the CBO had reduced the estimate to 6 million signups in February.

Speaking at a news conference, President Obama said: "We've got a sizeable part of the U.S. population now that are -- for the first time, in many cases -- in the position to enjoy the financial security of health insurance."

Balancing Out Costs

The President said 35% of those who have signed up are below the ages of 35. This implies that enrollments for young adults and children are 4% higher than on March 1st. This figure is particularly significant because it improves the odds for insurers. Insurance companies want more young and (therefore) healthy people to sign up. This would cover the costs and risk involved with providing coverage to the old and the sick.

At the same time, it is important to note that this figure includes those children below the age of eighteen who are still covered by their parents' plans. What is crucial are the numbers for the young adult age bracket which will really make a difference, since they will pay for their own plans.

Effect on Premiums

The increase in the number of young individuals signing up could help to keep costs down, especially if most are healthy. This was the view expressed by an important member of the nonprofit Kaiser Family Foundation, based out of Menlo Park, California.

However, insurance commissioner for North Dakota, Adam Hamm, has said that an increase in the enrollment of younger individuals does not guarantee a reduction in rates across the board. What could be crucial is not just the age but also the health of those signing up.

Insurers' Prospects Brighten

Despite certain misgivings, the increase in the number of enrollments is good news for insurers. Allowing for the finer details of the numbers, the rise in the number of younger people is particularly significant. Below we present two insurance stocks which possess the potential to grow appreciably in the new environment, each of which also has a good Zacks Rank:

WellPoint Inc

WellPoint Inc ( WLP ) is our first pick. In its latest guidance on 2014, published on March 21, 2014, the company stated that it expects full-year 2014 net income to exceed $8.20 per share, higher than the previous guidance of over $8.00 per share.  The outlook was raised on the back of projected growth of 1-1.3 million or 3-4% in new medical members, 4% in operating revenue and 5% operating gain.

WellPoint has been undertaking a number of marketing and enrolment initiatives that are expected to boost memberships in 2014. Moreover, the company's core business enhancement initiatives are also quite impressive and position the company to capitalize on core growth opportunities.

WellPoint holds a Zacks Rank #2 (Buy) and has expected earnings growth of 8.3% for the next financial year. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 10.94.

Aetna Inc

Next up we have Aetna Inc ( AET ). The medical insurance major should benefit from growth in the Medicaid and Medicare segments, its fast-growing health services segment and an expanding provider network.

Meanwhile, Aetna is witnessing earnings accretion from the acquisition of Coventry. The Coventry takeover has enabled the company to position itself in the fast-growing government businesses. The company expects revenues of $200 million in 2014 which is expected to increase to $400 million in 2015.

Currently the company holds a Zacks Rank #2 (Buy) and has expected earnings growth of 11.20% for the next financial year. It has a P/E (F1) of 10.58.

The success of Obamacare means that the scenario is now increasingly in favor of insurers. Given their past performance and the proven ability to deal with legislative changes, these choices would make good additions to your portfolio.

AETNA INC-NEW (AET): Free Stock Analysis Report

WELLPOINT INC (WLP): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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