The shares of
UnitedHealth Group Inc.
) reacted positively to the rating upgrade made by Moody's
Investor's Service, a wing of
), on Friday. The shares increased 1.1% to close at $74.72 on Oct
Rating affirmations or upgrades from credit rating agencies
play an important part in retaining investor confidence on the
stock as well as in maintaining credit worthiness in the
Moody's rating action included the affirmation of
UnitedHealth's senior debt rating at A3 and the insurance
financial strength (IFS) rating of UnitedHealthcare Insurance
Company (UHIC) at A1. The ratings agency also revised its outlook
towards the company to stable from negative.
Moody's rating action acknowledges UnitedHealth's efforts to
bring down its debt ratio since the acquisition of Amil
Participacoes S.A. (Amil) in Brazil.
UnitedHealth's solid operating performance, strong balance
sheet, a diversified product profile along with a niche presence
in the industry also drove the rating action.
Back in Oct 2012, Moody's conferred a negative outlook on
UnitedHealth in contemplation of increased leverage and
integration and acquisition risks associated with the acquisition
of Amil. However, it changed its view after observing that the
debt ratio at the company has come down to levels which match
with the targeted range of the rating agency. The company has
also grown its retained earnings which reflect its inherent
Moody's also noted that despite the two companies operating in
two different geographies; there has been a significant decline
in integration risks. Also with the help of senior management of
Amil, operations risks have decreased considerably.
UnitedHealth membership has also increased along with revenue
growth and strong margin levels. The company's service segment -
Optum, has also been increasing earnings.
Moody's anticipates that UnitedHealth will continue to target
a NAIC consolidated risk-based capital (RBC) ratio target at 250%
of company action level (CAL).
Going forward, a rating upgrade may follow if financial
leverage stays below 25%; EBIDTA interest coverage remains north
of 15x; and RBC is of 275% or up.
However, an adverse rating action could be seen if the debt
ratio increases above 40%, RBC declines below 250%; goodwill or
intangibles get written off; and if there is decline in
membership by more than 10% over a 12 month period.
We believe the current strong ratings of UnitedHealth will
help the company retain investor confidence and help it write
more businesses going forward, thereby boosting results.
UnitedHealth carries a Zacks Rank #2 (Buy). Other players
) also carry investment ratings from Moody's.
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