Rating agency Standard & Poor's ("S&P") has lifted the
long- and short-term credit ratings on
UnitedHealth Group Inc.
) to 'A' and 'A-1,' respectively, from 'A-' and 'A-2.' The
financial strength and counterparty credit ratings on the company's
subsidiaries were also pulled up to 'AA-' from 'A+.'
The ratings are of an investment grade with a good credit
quality. These carry a stable outlook, signifying that the company
is experiencing steady financial fundamentals, which will help it
maintain the ratings over an intermediate term.
S&P is impressed with the way UnitedHealth has protected and
improved its earnings despite the numerous challenges posed by the
Health Care Reform Act. It is one of the most diversified of the
listed managed care companies in the U.S.
With a broad product and service offering, the company targets
the full spectrum of the population. As a result, its earnings
remained stable to a certain degree in spite of changes in market
dynamics at the divisional level. This is witnessed by the growth
in the company's revenues over the past few years.
The ratings upgrade acknowledges UnitedHealth's significant
market presence in the government-sponsored business segments,
which is expected to grow exponentially. It is also expanding the
size of its health services business segment and has made a number
of acquisitions in this regard.
S&P was also liberal in maintaining the rating of the parent
company two levels below the core operating units (generally the
rating agency keeps a difference of three notches between the
parent and the core operating units). A lower rating of the parent
signifies its dependence on the subsidiaries for cash flow in the
form of dividend.
The two-notch gap in the ratings reflects consistent dividends
from UnitedHealth's diversified units, which minimize fluctuations
in cash flow from the subsidiaries to the holding company. S&P
expects the company to get $4.0 billion in dividends from its
The rating agency expects UnitedHealth's total revenue to be in
the range of $105-$110 billion, medical membership of 36.0 million;
operating income (EBIT) and cash flow (EBITDA) of $8.0-$8.5
billion. If these expectations turn good then adjusted EBITDA
interest coverage would be well above 10x and financial flexibility
and general liquidity would also remain very strong. The rating
agency also expects the company to maintain a moderate leverage of
The rating agency recognizes the strong performance of the
company, which has been exceeding the expectations. It, however,
views that that the profitability may decline in 2013-14.
Factors supporting the stable outlook are an improvement in the
health insurance market environment and a sound capital management.
However near term negatives are increase in implementation costs
related to Health Care Reform, reduced funding in Medicare and
Medicaid etc. If these factors hinder company's profitability a
rating downgrade might occur.
Late last week Fitch ratings also came out with rating
affirmation of UnitedHealth's senior unsecured debt at 'A-.' The
Insurer Financial strength ratings of its subsidiaries were also
affirmed at 'AA-.' All the ratings carried a stable
Standard & Poor's also rates the financial strength ratings
) at 'A+' and counterparty credit rating at A-/A-2.
UnitedHealth currently retains a Zacks #3 Rank, which translates
into a short-term Hold rating. We are also maintaining our
long-term Neutral recommendation on its shares.
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