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Centene's shares climb as managed care provider closes Fidelis deal

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Centene's shares climb as managed care provider closes Fidelis deal

Centene Corp.'s stock moved higher during a week that saw it complete a significant acquisition to boost its government managed care business.

Insurance companies tracked closely with the broader market as the S&P 500 increased 1.52% for the week ending July 6 to close at 2,759.82, while the SNL U.S. Insurance Index climbed 1.58% to 998.00.

Centene on July 2 said it closed its $3.75 billion deal to purchase substantially all of the assets of Fidelis Care, a health insurance company formed and operated by the Catholic Church in New York state.

Since the transaction was announced in September 2017, analysts have praised Centene's decision to use its capital to purchase a company that fits its government managed care business. Centene "has done a great job deploying capital and creating value for shareholders," Cantor Fitzgerald equity analyst Steven Halper said in an interview.

With the deal's closing Fidelis adds more than 1.3 million Medicaid members to Centene's portfolio. While healthcare for the Medicaid population tends to be more complex than populations, Halper said, Centene's experience leveraging local provider relationships will provide both value for its members and good profits.

"It's a very solid transaction," Halper said. "Fidelis appears to be a very well-run company, and we think there are very natural points of synergy."

Fidelis also brings with it a significant number of Affordable Care Act members into Centene's ACA book, continuing the company's expansion into those markets. Fidelis currently boasts about a quarter of New York state's total ACA population. In 2017, the company began widening its ACA footprint across the country while other insurers were winding down their offerings.

Centene's bid for Fidelis is part of a much broader secular trend of larger health companies acquiring smaller insurers.

"If you look at Centene, they've done an extremely good job of growing, and also completing, acquisitions," Halper said.

Centene's shares rose by 4.83% to $129.16 on the week.

Elsewhere in the managed care space, online insurance brokers eHealth Inc. and Health Insurance Innovations Inc. rebounded after seeing their stocks slide a week ago. The stocks rose, ending up 5.97% and 6.65%, respectively, at the July 6 close.

In mortgage insurance, MGIC Investment Corp. closed the week up 3.36% after it acquired a copy of a revised version of federal regulations covering private mortgage insurance called the Private Mortgage Insurer Eligibility Requirements, or PMIERs.

Even though the company is under a nondisclosure agreement with the Federal Housing Finance Agency, the company disclosed in a regulatory filing that it would continue to have an excess amount of capital beyond the minimum level. However, under the new rules that excess stands to be "materially lower than under the existing PMIERs," the company said. Mortgage Guaranty Insurance Corp. does still expect to be able to pay quarterly dividends to its holding company at the rate at which they were paid in the first and second quarters of this year.

PMIERs are capital requirements for cash liquidity that mortgage insurers must hold in order to write mortgage insurance to home buyers. The rules were revised and updated in 2014 and have been in effect since 2016. The second version of the rules has been closely watched by the mortgage insurance industry since FHFA began updating them.

MGIC now expects the latest iteration of PMIERs to be finalized in the third quarter, with an effective date at the end of the first quarter of 2019. Compass Point analyst Chris Gamaitoni believes that the newest timeline could mean that the rules could be delayed even further given that the effective date now stretches beyond FHFA Director Mel Watt's scheduled departure.

"We do not know who will be FHFA director in the future or what their views on this topic are, but it is something to keep in mind," Gamaitoni wrote in a research report.

Shares of rival mortgage insurers Essent Group Ltd. and Radian Group Inc. rose 3.85% and 2.47%, respectively.