Anthem Should Benefit by Acquiring Cigna

Updates on Probable Acquisition of Cigna by Anthem

(Continued from Prior Part)

Financials

In this part of the series, we will look at how Anthem (ANTM) could benefit by acquiring Cigna (CI). The graph below shows net profit margins of the major health insurers in 2014 and the expected margins in 2015.

Cigna is the top-performing company, followed by Aetna (AET), UnitedHealth Group (UNH), and Anthem. This indicates that Cigna has a better cost structure than Anthem.

Increased scale

Both Cigna and Anthem gain the majority of their customers from the employer-sponsored commercial segment. However, both companies focus on different employer categories. Local employers mainly comprise Anthem’s membership, with the majority of eligible employees located in the headquarter state of the employer.

On the other hand, Cigna mainly serves employers with employees spread across multiple states in the US. In addition to increased membership, the Cigna–Anthem deal should enable Anthem to develop capabilities required for dealing with integration issues present in multistate employer accounts.

Market expansion

Cigna has expanded its footprint in international markets such as:

• Belgium

• Brazil

• India

• Japan

• Nigeria

• Taiwan

• Thailand

• Turkey

• United Kingdom

Cigna offers medical benefits to about 1.3 million people around the globe, especially in Europe, focusing on the needs of local and multinational companies. International markets are not as penetrated, making them less competitive than US markets.

The Cigna–Anthem deal should enable the combined entity to actively pursue opportunities overseas to earn higher margins than those earned in domestic markets.

Specialty business

Cigna’s acquisition is also expected to strengthen Anthem’s specialty business, offering insurance policies specifically focused on medical services related to dental, vision, disability, and critical illnesses such as cancer, heart attack, and kidney failure.

Both Cigna and Anthem have strong presence in the dental insurance markets, and they offer dental HMO (dental health maintenance organization plans), dental PPO (dental preferred provider organization plans), and traditional dental indemnity plans. To understand more about the different types of managed care plans, please read Making sense of health insurance types: An investor’s guide.

Anthem’s members have access to additional dental providers through the National Dental Grid, a national dental network developed by and for BCBS (Blue Cross Blue Shield) plans. Cigna’s acquisition will add a strong dental network of 134,000 dental PPO health care professionals and 20,000 dental HMO health care professionals to Anthem. Additionally, Cigna should also add a strong behavioral health provider network and vision network to the combined entity.

You can get diversified exposure to Anthem by investing in the Health Care Select Sector SPDR ETF (XLV), which holds 1.49% of the stock.

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - Will Anthem Acquire Cigna?

• Part 3 - The Cigna–Anthem Deal: What’s in It for Cigna?

• Part 4 - Is UnitedHealth Group a Better Partner for Cigna?