Most of the nation's leading health insurers posted higher revenues and sizable profits during the first half of 2010 despite commercial enrollment declines due to the weak economy.

Analysts attribute health insurers' first-half performance to lower-than-expected medical expenses. Health insurers had strengthened reserves in anticipation of a flu epidemic and higher medical utilization by unemployed individuals enrolled in COBRA, neither of which materialized.

Moreover, overall medical utilization was down in the first half of 2010, which analysts attributed to Northeast snowstorms that kept people at home, higher cost-sharing in employer-sponsored health plans and the sluggish economy, which may have led some plan members to delay or forgo medical care.

Indianapolis-based WellPoint Inc., for example, acknowledged that its quarterly and first-half results exceeded expectations “primarily due to higher-than-anticipated favorable reserve development.”

Although WellPoint's first-half revenues fell 3.4%, its profits surged 25.5% to $1.6 billion in the first-half of 2010 (see chart).

Hartford, Conn.-based Aetna Inc. also said its 34.3% increase in net income, which rose to $1.05 billion in the first half, was due largely to “a higher commercial underwriting margin from favorable prior-period reserve development and improved underlying performance, partially offset by lower commercial insured membership.”

“The flu went away. COBRA is starting to run off the books,” said Steve Zaharuk, vp and senior credit officer at Moody's Investors Service in New York. “We've also seen some change in patient behavior with the economy,” he said. “The most reasonable theory is that employers have changed benefit levels and people are thinking twice before going to the doctor.”

“With salaries frozen or cut, and out-of-pocket costs up, it may be impacting decisions” to seek medical care, agreed Sally Rosen, managing senior financial analyst at A.M. Best Co. Inc. in Oldwick, N.J.

But historically, utilization generally is lower in the first half of the year than in the second half, analysts said.

“Favorable reserve development is much more likely to affect the first six months than the second half because of the seasonal aspect of the health care business,” said Joe Marinucci, director and credit analyst at Standard & Poor's Corp. in New York.

Still, lower-than-anticipated utilization is likely to temper the upward trend in health care premiums, said Doniella Pliss, senior financial analyst at Best.

“We didn't hear any insurers say they would lower their rates for 2011,” Ms. Pliss said. “When they're setting rates, they still anticipate an increase in trend, but maybe a little less than they did six months ago.”

For example, rather than 2011 premiums increasing by 10%, the rate of increase that insurers projected at the start of 2010, premiums likely will grow by 8% or 9%, Ms. Pliss said.

Insurers also have to make up for higher tax rates because they no longer can deduct 100% of their executives' compensation, said Wayne Kaminski, a financial analyst at Best.

The Patient Protection and Affordable Care Act limits executive compensation that is tax-deductible by health insurers to $500,000 per individual beginning this year.

Insurers also are being conservative about how and where they operate due to uncertainties about how health care reform may affect their business going forward, said Bridget Maehr, senior financial analyst at Best.

“Some of the bigger companies are paring down their offerings to make it more affordable to stay in smaller markets,” Ms. Maehr said. If they previously had offered 20 different plan types, they may only offer 10 in 2011 “because it's cheaper to administer fewer different plan types.”

Minnetonka, Minn.-based UnitedHealth Group Inc. made up for a commercial enrollment decline by capturing a greater share of the Medicare market, which helped improve its health benefits revenue picture.

Revenues climbed to $46.46 billion in the first half of 2010, a 6.4% increase over the same period in 2009. Due to this additional revenue, as well as a 10% growth in revenues produced by four of its business units—Ovations Inc., AmeriChoice Corp., Ingenix Inc. and Prescription Solutions Inc.—UnitedHealth's first-half net income surged 25.6% to $2.31 billion.

Only one of the nation's largest health insurers—Philadelphia-based CIGNA Corp.—reported an increase in enrollment, which grew 1.6% to 11.4 million in the first half of 2010.

“Overall, results in our health care segment reflect focused execution of our growth strategy, driven by strong retention and new sales in our key customer segments and geographies,” David Cordani, president and CEO, said in a statement about CIGNA's earnings. “In addition, results demonstrate strong clinical quality and competitively attractive medical costs for all of our customers, 80% of which we serve through self-funded relationships.”

Because health insurers do not assume the risk on self-insured business, it is more profitable than their fully insured business, Mr. Marinucci said.

While that could enhance insurer revenue from a margin standpoint, it's less premium, which could negatively affect cash flow, he said.

Regardless, CIGNA's revenues grew 14% in the first half of 2010, the most of the group. CIGNA reported $10.56 billion in first-half 2010 revenues. Meanwhile, CIGNA's net income surged 32.7% to $665 million in the first half of 2010 vs. the first half of 2009.