Rating agency Standard & Poor's (“S&P”) has lifted the long- and short-term credit ratings on UnitedHealth Group Inc. (UNH) 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 subsidiaries.
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 30%–35%.
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 outlook.
Standard & Poor's also rates the financial strength ratings of peer Aetna Inc. ( AET) 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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