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Managed care companies tick up even as ACA, merger uncertainties persist

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Managed care companies tick up even as ACA, merger uncertainties persist

Managed care stocks increased moderately for the week ended Feb. 2 amid an uncertain backdrop for the health insurance industry as legislators mulled what form an Affordable Care Act repeal and replacement could take.

Shares of Aetna Inc. rose more than 2.5% for the period, even as CEO Mark Bertolini disclosed that the Hartford, Conn.-based insurer incurred full-year, pre-tax operating losses of $450 million from ACA-compliant products in 2016. Aetna is facing a Feb. 15 deadline to appeal a federal judge's rejection of Aetna's proposed merger with Humana Inc. A judge in a separate antitrust trial has yet to issue a decision in Anthem Inc.'s pending acquisition of Cigna Corp.

Insurance stocks fell slightly for the week, largely tracking the broader market as fourth-quarter 2016 earnings season kicked into high gear. The SNL Insurance Index fell 0.76% to 862.54, and the S&P 500 dipped 0.60% to 2,280.85.

Addressing analysts on a Jan. 31 conference call, Bertolini said he expects the risk pools containing ACA-compliant individual commercial products from public exchanges to deteriorate further in 2017. In response, Bertolini indicated that Aetna has taken steps to reduce its risk exposure to the individual markets. According to company projections, Aetna expects first-quarter individual commercial membership to decline to 240,000 from 965,000 at year-end 2016, Bertolini said on the call.

Although Aetna plans to offer individual Medicare plans in 863 U.S. counties in 2017, after expanding into 134 new counties this year, Jefferies analyst David Windley said the company's Medicare Advantage business pales in comparison with Humana's. Windley noted in an interview that the outlook for Medicare Advantage has been enhanced by a Republican-led administration under President Donald Trump. Consequently, Windley said, Jefferies has increased Humana's valuation substantially in the post-election period, while only raising its target slightly for Aetna.

"Our view, especially in the last two and a half months since the election, is that Aetna needs Humana more than Humana needs Aetna," Windley said.

Cigna, which reported fourth-quarter 2016 adjusted income from operations of $485 million, or $1.87 per share, closed on Feb. 2 at $148.29 per share, up 1.01% for the week. Cigna's earnings for the three-month period ended Dec. 31 were almost flat compared with the year-ago quarter, when the managed care company finished with adjusted income of operations of $486 million, or $1.87 per share. CEO David Cordani said Cigna will hold off on making any major decisions regarding its participation on the exchanges until Trump's administration provides further guidance on potential changes to the ACA.

Anthem shares gained 2.81% on the week, closing on Feb. 2 at $157.66. In January, Anthem extended the end date for the close of the merger to April 30.

Meanwhile, MetLife Inc. shares tumbled 7.46% on the same week the company saw heavy derivative losses dragging down fourth-quarter 2016 earnings. MetLife ended the week at $51.46 per share, with the majority of the losses occurring on Feb. 2, one day after the company posted an after-tax net derivative loss of $3.2 billion for the quarter.

MetLife Chairman, President and CEO Steve Kandarian attributed the losses in part to post-election volatility and to higher interest rates, telling analysts that the company owns derivatives "almost exclusively" to hedge against against market fluctuations and interest rate, equity, and currency changes. Sandler O'Neill director John Barnidge reiterated a "buy" rating on MetLife, citing the company's positive core operations, following the earnings announcement.

Shares of Aflac Inc. dropped 3.47% on the week to $67.83. Aflac's fourth-quarter 2016 operating earnings per diluted share fell to $1.54, a decline of 1.3% from the prior-year period, attributable partly to a reserve adjustment of 8 cents per diluted share, the company said. Aflac is also bracing for a challenging first quarter, Aflac U.S. President Teresa White said on a Jan. 31 conference call. S&P Capital IQ analyst Cathy Seifert reduced Aflac's 12-month target by $2.00 per share to $75 per share, while discounting the recent appreciation of the Japanese yen on the company's Asian business.

"We think the benefit from a stronger yen is already reflected in AFL's premium" compared with its historical valuation, Seifert wrote in a research note.