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Health Insurers' Courtship Ends on Valentine's Day

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More than one and a half years of courtship between Anthem Inc. ANTM and Cigna Corp. CI as well as Aetna Inc. AET and Humana Inc. HUM ended yesterday when the parties involved called off their respective mergers. The decision was taken following a 'no' from the federal court with respect to their deals.

The two mega mergers caught the ire of the regulators since the very beginning because of their mammoth size. It was feared that the deals would further consolidate the already concentrated health insurance market which is dominated by a handful of players. The mergers would have reduced the number of major players to three from five. So they were not seen as being in the best interest of consumers, physicians and hospitals, which would end up with weaker negotiation power.

Since the announcement of the merger, shares of both Anthem and Cigna have underperformed the Zacks categorized Health Maintenance Organization industry by generating returns of 8.26% and 0.65% respectively compared with the sector's gain of 21.68%.

Also, shares of Aetna and Humana have underperformed relative to their sector by returning and 0.27% and 9.82% respectively versus 14.91% for the industry, since the merger announcement was made.

The share price performance of each of the players reflects the pessimism that surrounded their stocks following the merger-related uncertainty and investor perception that they may finally be blocked.

Though the companies gave in to the court's decision, management of Anthem and Aetna plan to appeal against it. However, Aetna announced publicly that it is putting off the agreement on grounds that the current environment doesn't provide enough feasibility to pursue the merger.

Aetna now owes $1 billion in severance charges to Humana and $75 million to Molina Healthcare Inc. MOH . It had inked a deal to sell some of its Medicare Advantage assets, to convince the regulators to pass the deal. The regulators were, however, unmoved. They cited that even this divestiture is not enough to address the stiff competition that would arise from the deal. Aetna will also redeem $10.2 billion in mandatory redeemable notes that were issued last June to fund the deal.

Cigna too is a bit pessimistic about the deal seeing the light of the day even if it appeals and therefore called it quits. Cigna also filed a complaint against Anthem, seeking a $1.85 billion termination fee and additional damages of approximately $13 billion or more. These charges relate to the amount of premium that Cigna shareholders did not realize as a result of the failed merger process. The companies were already in a bitter war. Hard feelings against Anthem may have fanned Cigna's decision to call off the deal.

We, however, will not be surprised to see a counter file by Anthem. If this happens, Anthem may also bargain over the termination fee and other damages claimed by Cigna.

Cigna's announced 2017 growth outlook for adjusted income from operations of 12% to 18% will be further aided by its significant capital available for deployment. Cigna also announced that its board of directors has expanded its share repurchase authority to an aggregate amount of $3.7 billion. The amount of buyback will, however, be capped at $250 million per quarter until there is more clarity with respect to the litigation with Anthem.

Following the merger termination news, Humana unveiled its 2017 guidance and capital deployment plans. Humana announced that it will continue to build upon its integrated care delivery strategy to intensify its focus on the rapidly growing Medicare Advantage population and deepen its Healthcare Services platform. For full-year 2017, it expects earnings per diluted common share guidance of $16.65 to $16.85 and adjusted earnings per share of $10.80 to $11.00.

Humana will also exit its Individual Commercial business for 2018. Its also announced a new share repurchase authorization which includes $1.5 billion accelerated share repurchase for the first quarter of 2017, with $500 million in additional repurchases through the remainder of 2017. A cash dividend of 40 cents per share was declared, reflecting a nearly 40% increase from the prior dividend of 29 cents per share.

Despite stubbing their toes with these failed big buys, the companies will not be discouraged from or hesitate to snap up smaller players, since consolidation seems to be the fastest way to grow. The companies will, however, quickly put the hoarded cash to work, and share buyback and dividend payments are the most handy tools for that right now.

Each of the companies, Aetna, Humana, Cigna and Anthem, carries a Zacks Rank # 3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

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Cigna Corporation (CI): Free Stock Analysis Report

Aetna Inc. (AET): Free Stock Analysis Report

Humana Inc. (HUM): Free Stock Analysis Report

Molina Healthcare Inc (MOH): Free Stock Analysis Report

Anthem, Inc. (ANTM): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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