How to evaluate a health insurers financials?

Based on the most helpful WSO content, evaluating a health insurer's financials involves understanding their regulatory requirements and balance sheet structure. Here's a breakdown:

1. Regulatory Requirements:

   • Health insurers, like other insurers, are subject to Risk-Based Capital (RBC) requirements. The RBC ratio is calculated as Total Adjusted Capital (TAC) / RBC. A ratio above 200% is considered good, while anything below 150% is concerning. If it drops below 70%, state regulators may intervene unless corrected within 90 days.
   • Insurers must maintain a significant portion of their cash and investments to cover potential future losses. This is similar to banks holding reserves for solvency purposes.

2. Balance Sheet Considerations:

   • Statutory Accounting: Insurers use statutory accounting, which focuses on cash received from premiums and payouts for claims. This ensures they have enough liquidity to meet future obligations.
   • Unearned Premium Reserve: Insurers create a liability for premiums received upfront for multi-year policies. This reserve decreases over time as the premiums are earned.
   • Deferred Acquisition Costs (DAC): These represent expenses for acquiring new policies, spread over the policy's life.

3. Key Ratios to Evaluate:

   • Solvency Ratio: Calculated as Capital & Surplus (C&S) / Net Written Premiums (NWP). A higher ratio is safer, typically around 70%, with a minimum of 10-20% depending on the regulator.
   • Loss & LAE Ratio: Measures losses and loss adjustment expenses relative to net earned premiums (NEP). Lower is better, typically ranging between 50-75%.
   • Expense Ratio: Total expenses (commissions + underwriting) divided by NEP. Lower is better, usually around 25%.
   • Combined Ratio: Sum of Loss Ratio and Expense Ratio. A ratio below 90% is rare, while 90-110% is typical.

4. Investment Income:

   • Health insurers generate income from their investments. A higher Investment Income / Total Value of Cash and Investments ratio indicates better utilization of funds.

For more detailed insights, you can explore the WSO thread on FIG (Financial Institutions Group) analysis here: https://www.wallstreetoasis.com/forum/investment-banking/working-in-fig…</a">Working in FIG - An Overview.

Sources: Working in FIG (Financial Institutions Group) - An Overview., Working in FIG (Financial Institutions Group) - An Overview., 20 balance sheet ratios every investor should be aware of, A Banking Primer, How to tell if a bank will fail?