Health insurers' debt obligations have soared in the last decade

Debt issued by publicly traded health insurers has soared over the past decade as the companies have looked to the bond market to raise money for large-scale mergers and acquisitions.

Combined short and long-term debt among nine publicly traded insurers reached its highest point in at least 10 years at $115.5 billion in 2018 compared with $24.8 billion in 2009, according to a recent report by credit rating agency AM Best.

"A lot of this debt is related to the M&A wars that have been occurring over the past few years — sort of an arms race if you will," explained Jason Hopper, an associate director at AM Best.

He added that just two insurers — Cigna Corp. and UnitedHealth Group — account for two-thirds of the debt issued by publicly traded insurers.

Cigna raised capital by issuing bonds to buy pharmacy benefit manager Express Scripts for $67 billion in 2018 while UnitedHealth closed its $4.3 billion deal with DaVita Medical Group this year and picked up PBM Catamaran in 2015. The analysis did not include the large CVS-Aetna deal.

Insurers have opted to issue bonds to fund their mergers and acquisitions instead of using equity because of the historically low interest rates, analysts said. Deep Banerjee of rating agency S&P Global added that insurance companies have also issued more debt as their business mix changes and they wade into care delivery.

"More and more of especially the larger public insurers are no longer just health insurance companies," Banerjee explained. "Part of the debt goes toward running or managing the providers that they own."

Insurers' debt-to-capital ratios have also increased, driven by the rise in debt obligations. Among the nine insurers in the AM Best analysis, the aggregate debt-to-capital ratio rose to 43% at end of 2018 from 33% in the first quarter of 2009.

While there are no hard and fast rules as to how much debt is too much, AM Best's Hopper indicated the ratings agency would put pressure on a company if its debt-to-capital ratio topped 60%, and Banerjee said he would be concerned with a ratio of over 50%. Ratings agencies may downgrade insurers with high amounts of debt, which could in turn make it harder for those companies to borrow money at the lowest rates.

But generally, the biggest publicly traded insurers are generating more earnings today and have been able to handle the debt that they've raised. Brad Ellis, a senior director at Fitch Ratings, explained that insurers are increasingly able to predict their costs and price their premiums correctly, which has helped stabilize their earnings over time. Ellis said Fitch analyzes the ability of a company to handle its debt obligations on a case by case basis.

"A company like UnitedHealth Group that has increased debt repeatedly to make acquisitions has a lot of credibility in both their willingness and ability to pay that debt down. What they say they are going to do to the public and to us, they do," Ellis said. "So when a company has been able to do that and has done it, we are much more comfortable with the company's financial leverage."

Analysts said insurers will likely continue to issue bonds to refinance older debt with higher interest rates, and companies may raise capital for small acquisitions. But beyond the already announced merger between Centene Corp. and WellCare Health plans, which would be financed by a mix of debt and equity, analysts doubted insurers will be issuing large amounts of debt to fund another mega-merger any time soon.

"It doesn't appear as though most of them are hungry to add a lot more leverage to their balance sheet," Ellis said.