The Pulse

Health Insurers Take More Cautious Approach To Raising Capital Through Debt In 2022

The segment’s leverage ratios are high due to M&A, but capitalization remains strong

A new report from AM Best reveals interest coverage remains strong due to favorable earnings, despite the increase in leverage, while capital returns continue to grow as health companies see strong earnings through the third
quarter of 2022. To access the full copy of this special report, please visit here.

OLDWICK, N.J., January 12, 2023—Many publicly traded U.S. health insurance companies continue to carry elevated debt balances, although they have taken a more cautious approach to capital raising via debt issuance in 2022 given the rising interest rate environment, according to a new AM Best special report.

The Best’s Special Report, Health Insurers Take More Cautious Approach to Raising Capital Through Debt in 2022,” notes that health companies took advantage of the prolonged low interest rate environment to issue new debt to fund mergers and acquisitions (M&A), as well as refinance existing debt attached to higher interest rates. The 10 publicly traded U.S. health companies followed for this report have kept their appetite for long-term debt in check in 2022. According to the report, total debt and notes payable, as well as long-term debt, decreased slightly through the third quarter of 2022 compared with a five-year high at year-end 2021. However, at several companies, capital on a GAAP basis has declined due to the rising interest rates, which has led to unrealized losses on fixed-income portfolios from the drop in bond values.

“In their pursuit of vertical integration, many insurers have been taking on more debt to finance M&A since 2018, when debt rose more than 60%,” said Helen Andersen, industry analyst, AM Best. “The recent increase in the cost of debt has not yet changed the public health insurers’ commitment to M&A, especially as it relates to vertical integration build-up. Furthermore, a higher cost of debt may dampen the valuation of some assets and weaken the competition from parties such as private equity players.”

The Effects Of Strong Overall Earnings

In their pursuit of vertical integration, many insurers have been taking on more debt to finance M&A since 2018, when debt rose more than 60%...

Earnings for most companies were strong in 2021 and the first three quarters of 2022. Although higher COVID-19 costs pressured profitability in the commercial segment, government business has been very strong, supported by elevated margins in the Medicaid segment due to the public health emergency and lack of eligibility checks. Insurers with diversified lines of business found themselves in a better financial position than carriers with revenue and earnings concentrations in the commercial segment. However, Medicaid redetermination will dampen Medicaid results when the public health emergency ends.

Despite strong overall earnings through third quarter 2022, sizable unrealized losses impacted capital and surplus negatively, which counterbalanced about a third of underwriting gains. Given the direction of interest rates, unrealized losses are likely to grow through the end of 2022 and into 2023.

As a result, AM Best expects the industry’s capitalization to decline in 2023, but remain solid, to support underwriting and investment risks. The decline due to unrealized losses is viewed as temporary in nature, and, as fixed-income holdings mature, insurers will have an opportunity to recover the losses and reinvest proceeds at a higher rate.




AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit