Healthcare Insurance Sector Still Hot for M&A

Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

One thing can definitely be said for President Obama's attempt at healthcare reform: It certainly lit a fire under healthcare insurers' mergers and acquisitions. More than $18 billion in M&A activity has occurred over the past 12 months, but the wheeling and dealing in the sector is likely not done yet. In fact, on the international scene, it may just be starting.

Take at a look at some of the recent transactions. In August, No. 3 health insurer Aetna (NYSE: AET) offered to buy Coventry Health Care for $5.7 billion. Aetna aims to increase its market share in the fast-growing, government-backed Medicare and Medicaid programs. The acquisition will add more than 5 million members to Aetna's customer ranks. It also expands the share of revenues Aetna gets from government business to more than 30% from the current 23%. 

This deal follows on the heels of a similar move earlier this year by Wellpoint (NYSE: WLP) to purchase Amerigroup, which specializes in Medicaid programs. The deal nearly doubled Wellpoint's Medicaid business. Under Obamacare, some 16 million additional people are projected to be covered by Medicaid (thanks to easier income requirements) over the next few years.

These deals were preceded last year by Cigna (NYSE: CI) paying $3.8 billion to acquire HealthSpring, a provider of health insurance to over 340,000 senior citizens. This market will expand greatly in the coming decade because of the Baby Boomer generation demographics. By 2016, 8.6 million more Americans will enroll in Medicare. 

International expansion
Now this merger and acquisition trend has expanded overseas. The largest U.S. health insurer, UnitedHealth Group (NYSE: UNH), said it would buy a 90% stake in Brazil's largest health insurer, managed care company and hospital operator Amil Participacoes, for $4.9 billion. The company's management team is well known in Brazil for its strong focus on profitability. Amil covered 5.8 million people last year and owns 3,300 hospitals and 55,000 clinics throughout Brazil. In addition, it is expected to generate $10.24 billion in revenue this year.  

This purchase gives UnitedHealth a major footprint in the fast-growing private insurance market in one of the world's biggest emerging markets. This makes sense at a time of uncertainty about the future of the healthcare industry in the U.S. Through its Optum unit, the company already offers technology and consulting services to health systems in India and China. It also has a joint venture in Abu Dhabi. 

U.S. insurers are looking at international expansion as protection against increasing regulation of their business in the United States. So UnitedHealth is hardly alone in this move into emerging markets. Last year, Cigna struck a deal with Gama Saude, a Brazilian network of hospitals and doctors. Cigna also has signed agreements to sell insurance in India, and has expanded its presence in China as well. 

Investors may wonder why UnitedHealth and Cigna among others are making such a big move into the Brazilian healthcare market specifically. UnitedHealth's CEO Stephen Hemsley called Brazil “a high-potential growth market,” no doubt to the rapid rise of a middle class in the country. Sheryl Skolnick, a healthcare analyst at CRT Capital Group LLC, summed it up nicely when she said Brazil has “a sophisticated private sector hospital system as well as a private insurance system that's ripe for expansion.”

Look for other U.S. healthcare and insurance providers to expand their presence in Latin America and Brazil in particular in the years ahead. As portfolio manager and analyst Les Funtleyder of Poliwogg told the Financial Times, "Brazil is an interesting opportunity because it is more amenable to the kinds of services they [UnitedHealth] provide than a single payer system like in Britain."

Based on increased regulaton of the industry in the United States, the best performing companies (and stocks) in the years ahead will likely end up being those insurance companies that expand most aggressively overseas, particularly in emerging markets like Brazil.

tdalmoe has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus