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The Cigna Group (CI -3%) is gapping down toward August lows today after Bloomberg reported that the health insurance giant resumed its merger talks with fellow insurer Humana (HUM). The two discussed a potential merger late last year. CI reportedly proposed a cash-and-stock deal with stock comprising a significant component. This dilutive characteristic disgruntled investors and prompted a sharp pullback. Ultimately, talks broke down over price in mid-December. CI decided to consider bolt-on acquisitions instead and announced a $10 bln repurchase plan. That news thrilled shareholders, sparking a rally that saw CI shares climb +40% as of Friday's close.

With M&A talks back on the table, a similar reaction is unfolding today as CI slips while HUM gains. However, the situations CI and HUM find themselves in are drastically different from last year.

• Since last year, HUM shares have taken an opposite path from CI, plunging by over 40%. The culprit has been HUM's Medicare Advantage (MA) business. To kickstart the problems, the Centers for Medicare & Medicaid Services (CMS) implemented new rate cuts across the board for 2025 at the same time that costs are swelling. Meanwhile, the CMS proposed changes to the Star Ratings for 2025, causing only 25% of HUM's Medicare Advantage (MA) members to be in plans with four stars or higher, down from 94% this year.
• The impact of the updated star rating system was a bad-to-worse scenario for HUM, resulting in the stock dropping by around 25% over the course of a few trading sessions late last month. This significant correction, with shares hovering near April 2020 levels, has made HUM a more attractive takeover candidate. It may also lessen the weight of the stock component in a cash-and-stock deal, a potential factor in why shares of CI are not pulling back as significantly as they did when the rumors first swirled of a possible merger.
• CI agreed to offload its Medicare business, which includes MA, to Health Care Services Corp in January for $3.3 bln. CI noted that the divestiture followed extended under-performance. The company was already a relatively tiny player in the Medicare industry. On the flip side, HUM derived over 80% of its FY23 revenue from Medicare premiums. By acquiring HUM, CI would be instantly propelled toward the top of the Medicare market, competing with giants UnitedHealth Group (UNH) and CVS Health's (CVS) Aetna.

Former talks between CI and HUM fizzling out last year may have been a benefit in disguise. The health of HUM's stock has only withered away since, making it much cheaper to acquire, while CI shares have soared, providing it with solid buying power. Price was the sticking point last time the two discussed a merger and could again be a point of contention. However, given the headwinds pushing against HUM, which only seem to be worsening, its bargaining power is fading, making a deal more likely.