Cigna to buy Great-West Healthcare for $1.5 billion

In a push to sell health insurance to small businesses, Philadelphia insurer Cigna Corp., announced today that it agreed to pay $1.5 billion in cash for Great-West Healthcare Holdings Inc., of Denver.

Great-West, the health-care division of Great-West Life & Annuity Insurance Co., of Winnipeg, Canada, insures 2.2 million people, specializing in working with companies that have fewer than 200 employees.

Cigna's health insurance business focuses on large and mid-size national companies with thousands of employees.

"We perceive the small-employer segment to be a good growth opportunity for us," chairman and chief executive officer H. Edward Hanway said in an interview today.

Even though it costs more to market to smaller businesses, he said, "there continues to be employment growth in that sector, and the competition, while certainly intense, is more diffused."

Once completed, the acquisition will give Cigna's medical membership numbers a healthy boost - raising enrollment 20 percent.

While Cigna insures 47 million people through its various accident, life, dental, vision and medical plans, it has had to struggle to build its medical membership.

From 2001, when it had 13.4 million medical members, Cigna lost ground, declining to 9.1 million in 2005. Now the numbers are up, having reached 10.2 million by the end of September.

"They have a very efficient operation and very strong relationships with brokers and agents," Hanway said of Great-West.

It also has strength in the Pacific Northwest and other western regions where Cigna does not have strong market penetration.

Great-West's key advantage is its expertise in selling small employers a type of coverage that is usually purchased by large companies, Hanway said.

Many large companies will pay most of their employees' health bills with available cash. An insurance company such as Cigna handles administrative work, and sells the companies extra insurance to cover big, unexpected bills.

That works for large companies with thousands of employees because, in aggregate, their year-to-year expenses are predictable.

Great-West sells similar insurance to smaller employers. "That is complemented with very robust reporting tools, so the company has a good understanding of what is driving their medical costs," Hanway said.

Cigna thinks it will be able to increase Great-West's medical enrollment, which has been flat, because it has the ability to negotiate better prices with health-care providers such as hospitals.

Cigna plans to spend $400 million to support the acquisition, which is expected to close in the first half of 2008, subject to regulatory approvals. It will borrow some money to finance the deal, and also will stop repurchasing its shares for a year.

The company said it expected the acquisition to add to forecast earnings of $4.00 to $4.20 a share for 2008.

Most of the increase, Hanway said, will come through new business opportunities, not operational efficiencies. He said it was too early to tell about layoffs, but he said he doubted if Philadelphia operations would be affected.

"We will get efficiencies," he said, "but that's not the economic driver in this transaction."