Tuesday, March 12, 2013

US Big Health Insurance Corps 2012 Annual Earnings Up Only 1.6%, But EPS Up a Much Higher 7.0%

I found 6 US Big Health Insurance Corps filing with the SEC which generated Non-GAAP Adjusted After-tax Net Income of over $500 mil each in either annual 2012 or annual 2011.

Non-GAAP Adjusted After-tax Net Income, which is generally used by the investment community to value common stocks, was used when this amount was disclosed in the company's earnings release, and it excludes Special, Unusual Items which are significant in amount relative to Reported GAAP Net Income.

The Total Non-GAAP Adjusted After-tax Net Income of these 6 US Health Insurance Corps in 2012 increased by only 1.6% over 2011.

This modest 1.6 % total earnings growth was caused by the very well designed Affordable Care Act (ACA), coupled with the excellent implementation of it, which is being led by the very competent, hard-working Kathleen Sebelius, one of many very fine US Cabinet Secretaries in the Obama Administration.  Granted much more is needed here, but the ACA has removed some of the excess profits of health insurance corporations, which has substantially ballooned up US health care costs in the past decade.

But the true earnings story here is that on a company-earnings-weighted Earnings Per Share basis, the total growth was a substantially higher 7.0%, due to the huge common stock buyback programs of five of these health insurance companies.

So, what's with this substantial add-on 5.4% earnings growth on an EPS basis, as compared with the 1.6% growth on just an earnings growth basis.  And yeah, the add-on EPS growth is more than 3 times the earnings growth.

Well, EPS and EPS growth are what drive common stock prices.

This add-on 5.4% Earnings Per Share growth is due to the massive common stock buyback programs that five of these US Big Health Insuarance Corps have, and especially WellPoint and Aetna.  The US Fed has facilitated this with its extremely low interest rates, which makes these common stock buyback programs incredibly lucrative for all large US Corps, and the US Big Health Insurance Corps have taken this common stock buyback strategy to a completely different level.   

But the problem with these massive stock buyback programs is that they only benefit the very wealthy and they further expand the huge wealth gap between the very wealthy and everyone else, including small businesses, who are not able to take economic advantage of it.

And these massive common stock buyback programs have been one of the major reasons for the US stock market advancing so high as compared what has been happening with the US general economy and with US real GDP growth.

Why?  Well, by increasing annual earnings growth from 1.6% to 7.0% on a long-term annual EPS growth basis, the intrinsic value of the common stock goes up dramatically, thus causing an artificially high stock market bubble.  The US stock market is not increasing so dramatically because the US economy is growing at the same pace.  Instead, the US stock market is growing so dramatically because of the artificially high EPS growth, caused by the massive common stock buybacks, which have been fueled by US Fed action on interest rates and by clear lack of US Congressional oversight.  And this artificially high US stock market predominantly benefits economically only the top 1%, leaving the remaining 99% even further behind.

And who are the outsized major beneficiaries of these massive common stock buyback programs?  It's the top executives of these corporations, since their total compensation is predominately based on company stock price appreciation. 

It's bad enough that the overwhelming majority of US Big Corps are allowed a free reign to buy back as many shares as they wish.

But it's even worse that the US Health Insurance Corps are able to do it and to pile on by using the front-end insurance premiums they receive from individuals and companies to fund their massive common stock buybacks.

And instead of legislating to more fairly deal with this, the US Congress just sits there and twittles its thumbs.  

Below here is the Non-GAAP Adjusted After-tax Net Income for both annual 2012 and 2011 for each of these 6 US Big Health Insurance Corps:




Annual Annual Adjusted Adjusted

2012 2011 Net Net Adjusted Growth

Non-GAAP Non-GAAP Income Income EPS Positive

Adjusted Adjusted Increase Increase Increase %

Net Net (Decrease) (Decrease) (Decrease) Spread
Income Income Amount % %

mils of $s mils of $s mils of $s

US Big Health Insurance Corps

5,526 5,142 384 7.5% 11.6% 4.1%
2,456 2,555 (99) -3.9% 8.0% 11.9%
1,770 1,966 (196) -10.0% 0.8% 10.8%
1,734 1,361 373 27.4% 20.8% -6.6%
1,222 1,419 (197) -13.9% -11.7% 2.2%
Coventry Health Care
487 543 (56) -10.3% -4.1% 6.2%

Total all 6
13,195 12,986 209 1.6% 7.0% 5.4%