The Cigna Group (CI, Financial) is experiencing a decline toward August lows after reports emerged that it has resumed merger discussions with fellow insurer Humana (HUM, Financial). Last year, Cigna proposed a cash-and-stock deal, but the dilutive nature of the stock component led to investor dissatisfaction and a sharp stock pullback. Talks ended in mid-December over pricing issues, leading Cigna to focus on smaller acquisitions and announce a $10 billion repurchase plan, which boosted its shares by 40% as of last Friday.
With merger talks resurfacing, Cigna's shares are slipping, while Humana's are gaining. However, the current circumstances for both companies differ significantly from last year.
- Since last year, Humana's shares have fallen by over 40%, primarily due to its Medicare Advantage (MA) business struggles. The Centers for Medicare & Medicaid Services (CMS) implemented new rate cuts for 2025, and proposed changes to the Star Ratings for 2025, reducing the percentage of Humana's MA members in high-rated plans from 94% to 25%.
- The updated star rating system led to a sharp decline in Humana's stock, dropping around 25% in a few sessions last month, making it a more appealing takeover target. This situation might reduce the stock component's impact in a cash-and-stock deal, which could explain why Cigna's shares are not declining as sharply as before.
- In January, Cigna agreed to sell its Medicare business, including MA, to Health Care Services Corp for $3.3 billion due to prolonged underperformance. While Cigna was a small player in Medicare, Humana derived over 80% of its FY23 revenue from Medicare premiums. Acquiring Humana could quickly elevate Cigna to a leading position in the Medicare market, competing with giants like UnitedHealth Group (UNH, Financial) and CVS Health's (CVS, Financial) Aetna.
The previous breakdown in talks between Cigna and Humana might have been beneficial. Humana's stock has depreciated, making it more affordable, while Cigna's shares have appreciated, enhancing its purchasing power. Although price was a contentious issue in the past, Humana's declining bargaining power due to ongoing challenges may facilitate a potential deal.
