Insurer Majors Eye Acquisition

Media reports revealed that XL Health Corp. is being chased by WellPoint Inc. (WLP - Analyst Report), UnitedHealth Group Inc. (UNH - Analyst Report) and Aetna Inc. (AET - Analyst Report), as each of these big insurers are eyeing the company’s Medicare Advantage business,  which is expected to grow overwhelmingly over the next five years.

It is also reported that the purchase consideration may range between $1.5 billion and $2 billion for Matlin Patterson Global Advisers owned XLHealth Corp., a provider of managed care for chronically ill Medicare members.

The acquisition of XLHealth Corp. will follow the similar strategic acquisition of  HealthSpring Inc. (HS) by Cigna Corp. (CI - Analyst Report) for $3.8 billion in late October.

Rationale of the Acquisition

A Medicare Advantage Plan is offered by private health insurance companies for the elderly and disabled.

The first baby boomers will hit their retirement ages soon and will opt for managed care plans. Health Insurers will thus look to acquire providers of managed care plans which in turn will help them generate higher revenues.

Also, according to reports, managed-care plans for Medicare, the U.S. health program for the elderly and disabled will generate incremental revenue of $10 billion by 2015, which would justify such acquisitions.

The companies earlier have acquired providers of chronically ill coverage. Brentwood-based Inspiris was acquired by UnitedHealth in March 2011 while CareMore Health Group was purchased by WellPoint in June 2011.

Capital Position of Prospective Acquirers

UnitedHealth Group ended the third quarter with cash and cash equivalents of $13.7 billion, almost a 50% increase over 2010 level. Year to date cash from operation totaled $7.4 billion, a 53% year-over -year increase.

Aetna exited the third quarter with cash and cash equivalents of $1.9 billion, a 5% increase over the 2010 level. Year- to -date, cash from operations totaled $2 billion, a whopping year-over- year increase of 138%.

WellPoint exited the quarter with cash and cash equivalents of $2.5 billion, an increase of 39% from 2010 end level. Year-to-date, operating cash flows totaled $3.3 billion, up 300% year over year.

The companies’ solid capital position will enable it to fund the acquisition once it materializes.

Earnings Recap of Prospective Acquirers

Aetna has posted third quarter 2011 earnings of $1.40 per share, significantly ahead of the Zacks Consensus Estimate of $1.14 as well as the year-ago quarter’s earnings of $1.00.

Declining utilization, strong performance across all the product lines, disciplined pricing and medical cost trends accounted for the earnings upside.

WellPoint reported third-quarter adjusted income of $1.77 per share, striding ahead of the Zacks Consensus Estimate of $1.69. Results were also 1.7% higher than $1.74 earned in the year-ago quarter.

The quarter benefited from improved membership growth and a decline in selling, general and administrative expenses.

UnitedHealth reporting third quarter earnings of $1.17 per share, higher than the Zacks Consensus estimate of $1.12. Earnings also compared favorably with $1.14 reported in the prior-year quarter.

The out-performance was driven by strong revenue growth from UnitedHealthcare, as well as from the Optum businesses, partially offset by higher medical cost.

Zacks Rank

The quantitative Zacks #1 Rank (short-term Strong Buy rating) for Aetna Inc. indicates upward pressure on the stock over the near term.

The quantitative Zacks #2 Rank (short-term Buy rating) for WellPoint indicates upward pressure on the stock over the near term.

The quantitative Zacks #3 Rank (short-term Hold rating) for UnitheHealth indicates no clear directional pressure on the stock over the near term.

Read the full analyst report on WLP

Read the full analyst report on AET

Read the full analyst report on CI

Read the full analyst report on UNH

Read the full analyst report on HS