Asset manager and life insurer Principal Financial Group, Inc. (PFG) announced Thursday that it will exit the medical insurance business, saying that the investment of additional capital into the rapidly changing business in order to offer competitive products did not make sense.
As part of the exit strategy, the company has entered into an agreement with healthcare services provider UnitedHealth Group Inc. (UNH) to renew medical insurance coverage for its customers as the business transitions within the next 36 months. The decision will initially impact about 150 employees of the 1,500-strong workforce in the company's medical insurance business.
Des Moines, Iowa-based Principal Financial noted that its medical business has been declining in relative size for a number of years, reflecting strong growth from its retirement and asset management businesses. The company added that the decision does not impact its other businesses that include retirement, asset management, life insurance, wellness, disability, dental and vision.
The company's decision comes amid a new healthcare reform law that was signed into law by President Obama earlier this year, marking the biggest change in the U.S. healthcare system since the creation of Medicare in the 1960s.
Larry Zimpleman, chairman, president and chief executive officer of Principal Financial, said, "By making this decision, we are positioned to focus our capital and our resources on the strategic opportunities in the asset accumulation and asset management businesses, both domestically and internationally. And it allows us to continue the growth in our risk businesses, which is important to our overall diversification as well as maintaining our leadership among small - and medium-sized businesses."
Principal Financial said that sales will cease and the renewal process with UnitedHealthcare will begin immediately. The company's medical insurance business employs about 1,500 people. Initially, about 150 of the 1,500 positions will be impacted as some functions cease more quickly. Positions will be eliminated as the business transfers, the company noted.
The company said that impacted employees will be considered for other positions, and will be given severance and outplacement assistance if they are unable to find a position within the company.
The company said that the decision to exit its medical insurance business will negatively impact its earnings per share for the third quarter by $0.03 to $0.04 and full-year earnings per share by $0.18 to $0.20 due to the exclusion of the business from operating earnings.
However, the company expects to release between $100 million and $120 million of capital over the next 36 months as a result of this change. The amount primarily reflects the capital allocated to the medical insurance business less a reduction in the diversification benefit that will result from the exit of this business.
In early August, Principal Financial reported an 11% decline in its second-quarter profit from a year ago, hurt by losses related to investments and higher expenses. The company recorded a 7.1% decline in quarterly revenues at its Life and Health Insurance segment.
Separately, Minnetonka, Minnesota-based UnitedHealthcare said that as Principal Financial's customers reach their medical plan renewal dates, it will work to enroll them in a comparable UnitedHealthcare plan. Until plan participants are enrolled in a replacement plan, their current benefits will remain in effect under their existing contract, the company added.
The company noted that Principal Financial currently covers customers in 31 markets nationwide, predominantly throughout the Central United States, where UnitedHealthcare offers an extensive network of physicians, hospitals and other health care providers.
In Thursday's regular trading session, PFG is trading at $26.20, up $0.25 or 0.96% on a volume of 0.37 million shares. In the past 52 weeks, the stock has been trading in a range of $20.89-$31.41.
UNH is trading at $35.37, up $0.17 or 0.48% on a volume of 0.54 million shares. The stock has been trading in a range of $23.50-$36.07 in the past 52 weeks.
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