News of mergers and acquisitions at giant health insurers could lead to a flood of M&A activity at smaller insurers.
Analysts at Fitch Ratings, one of the companies that influence how much insurers pay to borrow money, make that prediction in a commentary on the recent flurry of rumors about dealmaking at the big five carriers — Aetna Inc. (NYSE:AET), Cigna Corp. (NYSE:CI), Humana Inc. (NYSE:HUM), UnitedHealth Group Inc. (NYSE:UNH) and Anthem Inc. (NYSE:ANTM).
Many securities analysts have noted that health insurers see this as a good time to court because investors now seem comfortable with the effects of the Patient Protection and Affordable Care Act (PPACA) on health insurers, health insurer stock prices are high, interest rates are low, and hunger for expanding Medicare Advantage and Medicare supplement operations is strong.
Other commenters have pointed to strategies focusing on the possible effects of the upcoming Supreme Court decision on King v. Burwell and of the PPACA “three R’s” risk-management programs, which, in some cases, could force successful insurers with relatively low-risk enrollees to provide cash to shore up weaker competitors.
Fitch analysts say PPACA is also encouraging insurers to combine forces by squeezing profit margins.
The companies now face a “heightened need to invest heavily in technology,” and the need for big investments at a time when margins are shrinking is pushing insurers to do whatever they can to increase efficiency, the Fitch analysts say. They also say the effects of deals could be mixed.
Getting bigger and getting more diverse sources of revenue could help insurers’ finances, and their ratings.
But, at many publicly traded health insurers, “the financial leverage metrics are at the high end of rating category guidelines,” the analysts say. “M&A activity would likely pressure these metrics.”
In other words: Health insurers would be using their high ratings to try to hold down the cost of capital needed to complete big deals, but, at the same time, making the deals could hurt the insurers’ ratings.