People believe the health insurance industry is doing better than the reality.

As people seeking health care reform call for the end to health insurers’ profits, the reality is that the health insurance industry’s net income for the first nine months of the year fell by 12.4%, while underwriting costs rose, according to a new analysis by Highline Data, a data provider of financial and marketing information to the insurance industry.

“While the public perception is that health companies are recording record profits, the reality they face is clearly a reduction in profit margins [net underwriting margin], which reached a four-year low of 2.4%,” Laurie Dallaire, vice president and director of Highline Data, said in a statement.

With comprehensive federal health care reform likely in the next few years, health insurers already are battling their bottom lines, she said.

“Even before the anticipated impact of pending health reform legislation, the industry will continue to see depressed margins as companies strive to control premiums and benefits costs,” Dallaire said.

The industry’s net income was $8.2 billion for January through September, falling from the same period last year.

Underwriting costs, which primarily include health benefit payments, increased by 6.9% from 2008, totaling $332 billion Sept. 30.  Underwriting costs showed a five-year compound annual growth rate of 9.5%, outpacing total revenue, which showed a five-year compound annual growth rate of 9.2%.

A total of 335 health insurance companies – more than one-third – reported underwriting losses in the third quarter, with larger market players considerably outperforming their smaller competitors, the analysis found.

Exactly 35% ($2.8 billion) of total industry net income in the first nine months of the year was earned by the top 1% of companies ranked by 2008 total assets, researchers found.

Overall, the industry saw gains in total assets, member months and capital and surplus, which was an improvement over 2008 results, all of which reported declines. Return on average equity continued to decline, however, reaching a six-year low of 11.2%, according to the analysis.