Investing in insurance stocks is a good strategy for long-term gains because the industry has proven itself to be strong and resilient even amid uncertainty surrounding the global public health crisis.

According to a report by CMS, healthcare spending in the United States was projected at $4 trillion in 2020 and might touch $6 trillion by 2028. In fact, approximately $3 trillion of healthcare spending last year was passed through insurers, and this figure might hit $5 trillion by 2028. Hence, insurance underwriting margins have been on a rise and the insurance space is shaping up as a big investment opportunity over the coming decade.

A case in point is New York City-based, recently listed health insurance start-up Oscar Health, Inc. (OSCR). The company offers health plans in the individual insurance market across 18 states and is the third-largest for-profit insurer in the individual, small group, and Medicare Advantage markets. Notably, OSCR is the first health insurance company built around a full-stack technology platform, and is backed by Google parent, Alphabet, Inc. (GOOGL).

Click here to checkout our Healthcare Sector Report for 2021

Let’s take a closer look at what could shape OSCR’s performance in the near term:

Doomed Market Debut

OSCR was founded in 2012 but was listed on an exchange as recently as March 3, 2021. The company priced its shares at $39, above its target range of $36 – $38, thereby raising $1.44 billion. However, the stock began trading at $36 per share and lost 10.7% on its first trading day to close its debut session at $34.80. Notably, OSCR failed to garner investor confidence despite timing the IPO amid robust interest in virtual services. In fact, the stock has since tumbled 31.2%.

Innovative Product Offerings

On April 20, OSCR launched a tech-driven platform business under “+Oscar” designed help healthcare clients drive improved efficiency, growth and superior engagement with their patients. The platform offers its partners the ability to lower the cost of health plan infrastructure, and drive growth and retention through industry-leading member experiences.

The COVID-19 pandemic severely impacted most businesses, but small businesses suffered the most. Rising to the occasion, OSCR collaborated with Cigna Corporation (CI), a leading global health service company, to deliver small group health insurance catering to the unique needs of small businesses and their employees. Covered employees will have 24/7 access to virtual doctor visits at no cost, along with low-cost prescription coverage, behavioral health support, and CI’s networks of quality physicians, specialists and hospitals. This service is already in force in California and will be made available in Connecticut and Arizona beginning in July.

Unprofitable Business

As of March 31, 2021, OSCR had 542,220 insured members under its various offerings. However, despite operating for nearly a decade, the company has not been able to generate a profit. In fact, despite the pandemic provision of a solid business boost, OSCR’s revenue decreased by 5.2% to $462.8 million in 2020 and it reported a $406.8 million net loss, which was significantly wider than its  $261.2 million year-ago loss.

In the first quarter of 2021, OSCR generated $369.4 million in total revenue, a 319.3% year-over-year increase. Its total direct policy premiums were $820.8 million, rising 43.5% from the comparable period last year, driven primarily by higher membership growth in existing and new states and business mix shifts. Its membership increased 28.9% year-over-year during the quarter.

In addition, OSCR’s Medical Loss Ratio (MLR)–the metric measuring percentage of premium dollars a health plan spends on claims and quality improvements–came in at 74.4%, improving 670 bps year-over-year, and driven by the absence of reserve increases and a modest benefit from favorable prior-period development during the quarter. Nevertheless, OSCR reported a  $87.37 million net loss for the quarter, compared to the $96.88 million year-ago loss.

POWR Ratings Indicate Ambiguous Prospects 

OSCR has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. Of these categories, OSCR has a grade of D for Sentiment, in line with the weak analyst confidence.

In addition, the stock has a C grade for Momentum, indicating the stock’s inability to generate market-beating returns in the near-term. Of the 11 stocks in the B-rated Medical – Health Insurance industry, OSCR is ranked #7.

Beyond what we’ve stated above, we also have given OSCR grades for Growth, Value, Stability and Quality. Get all the OSCR’s ratings here.

Bottom Line

OSCR’s business model looks viable and promising because its sleek technology has been delivering value. Over the past year, OSCR’s direct policy premiums and memberships have grown substantially, and the company is reinvesting a major chunk of its cash flows into expanding its product offerings and acquiring new customers. However, OSCR’s unprofitability and the company’s expensive premiums compared to its profitable peers is a major turn-off. OSCR has been paying more than 70% of its premiums under reinsurance to transfer risks relating to unprecedented claims.

There has been growing talk around the return of mandatory individual healthcare insurance in the United States. This potential federal mandate could act as a tailwind for OSCR’s innovative product offerings. However, OSCR’s newer initiatives are still at their nascent stage and a significant portion of the company’s total membership is composed  of Individual and Small Group offerings. Furthermore, the company’s management expects MLR for the full-year 2021 to be around 85%, which is much higher than the value conveyed in the last reported quarter.

The company’s IPO has provided OSCR with sufficient funds to scale up and reduce its reinsurance costs. OSCR must now focus on capturing further market share by lowering its prices and turning around its bottom-line. Hence, we believe it is too early for investors to bet on OSCR’s bright future in the hypercompetitive health insurance industry.

Click here to access A or B-rated stocks in the Medical – Health Insurance industry.

Click here to checkout our Healthcare Sector Report for 2021

OSCR shares were trading at $23.21 per share on Tuesday afternoon, down $0.74 (-3.09%). Year-to-date, OSCR has declined -33.30%, versus a 12.19% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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