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Genworth's stock soars, holds most gains after CFIUS OKs China Oceanwide deal

Shares of Genworth Financial Inc. touched their highest levels since September 2016 after a federal regulator approved the company's merger with China Oceanwide Holdings Group Co. Ltd.

Genworth's stock spiked more than 27% on the first trading day after the Committee on Foreign Investment in the U.S., or CFIUS, gave its blessing to the long-delayed tie-up. Shares finished the week up 22.31% at $4.66.

Insurance companies mostly tracked with the broader market as the SNL U.S. Insurance Index edged down 0.07% to 1,015.30, while the S&P 500 ended the week almost unchanged, ticking up 0.01% to 2,779.42.

Though the CFIUS approval was a major step in bringing the Genworth/China Oceanwide deal to the finish line, the transaction still needs to pass muster at the state level.

According to several industry analysts the Delaware Department of Insurance may be the deal's toughest obstacle. However, a key part of the new arrangement struck by the companies, to exclude "unstacking" Genworth Life & Annuity Insurance Co. from its parent company Genworth Life Insurance Co., may help it get the necessary approvals.

"Removing the unstacking plan meaningfully increases the chances of Delaware regulatory approval," Keefe Bruyette & Woods analyst Ryan Krueger wrote in a June 10 research note. He pegged the deal's chance of going through at 75%.

Another important consideration for the Delaware regulator will be evaluating the companies' commitments to seeking future long-term care rate increases, according to Krueger. Because Genworth's long-term care reserves already include an $8 billion present value of future assumed rate increases, Genworth Life Insurance's solvency "depends on diligent rate increase requests over many years," he said.

In managed care, shares of Aetna Inc. rose nearly 5% to $188.50 per share the same week a federal judge approved an $85.4 billion landmark deal between AT&T Inc. and Time Warner Inc. The deal between the two media giants was seen by experts as a pathway for other so-called "vertical mergers."

Vertical mergers are transactions between two companies that are alike, but sell or offer different products or services. Aetna, a health insurance company, is on track to merge with pharmacy benefit manager and retail giant CVS Health Corp. for $69 billion.

"The announcement seems to suggest there is an easier path to vertical integration in these large mega-deal contexts than there has been in the last few years, than in horizontal integrations that you would expect to bear out including healthcare," Matthew Brow, president of Washington, D.C.-based research and consulting firm Avalere Health, said in an interview.

Management teams of both Aetna and CVS imagine a one-stop pharmacy, pharmacy benefit manager and healthcare provider all in the same brick-and-mortar retail space.

Developments in the AT&T/Time Warner case likely also bode well for another healthcare vertical merger, this one between Cigna Corp. and pharmacy benefit manager Express Scripts Holding Co., Brow said.

The Cigna/Express Scripts deal, valued at $67 billion, would take the last stand-alone pharmacy benefit manager and merge it with an insurance company, if the CVS/Aetna deal also closes.

The strategy to incorporate pharmacy benefit managers with insurers is to cut overhead costs by integrating drug price negotiations with manufacturers with drug benefits for members.

Shares of other managed care companies Molina Healthcare Inc. and Anthem Inc. also jumped in the week, trading up 8.86% and 7.39%, respectively.