TEXT-S&P raises UnitedHealth Group rating to 'A'

Mon Sep 24, 2012 3:24pm EDT

Overview
     -- The consolidated UnitedHealth Group Inc. has a very strong
business profile, strong earnings and cash flow, and very strong financial
flexibility.
     -- We are raising our long- and short-term credit ratings on UnitedHealth 
Group to 'A' and 'A-1', respectively, from 'A-' and 'A-2', respectively. At 
the same time, we are raising our financial strength and counterparty credit 
ratings on UnitedHealth Group's operating companies to 'AA-'from 'A+'.
     -- We are revising the outlook on all companies to stable from positive.
     -- The stable outlook reflects our expectation that UnitedHealth will 
experience sustained revenue growth, very strong discretionary cash flow 
generation, and very strong liquidity.

Rating Action
On Sept. 24, 2012, Standard & Poor's Ratings Services raised its long- and 
short-term credit rating on UnitedHealth Group Inc. to 'A' and 'A-1', 
respectively, from 'A-' and 'A-2', respectively. At the same time, we raised 
our counterparty credit and financial strength ratings on UnitedHealth's core 
operating companies to 'AA-' from 'A+'. We are revising the outlook on all 
companies to stable from positive.

Rationale
UnitedHealth's business and financial profile is strong relative to its peers. 
Most recently, the company managed well through a sensitive period of 
heightened sector risk that was strained by weak economic conditions and 
significant U.S. legislation.

Key factors supporting the ratings upgrade and outlook revision include 
sustained improvement in the company's business profile relative to its peer 
group and sector. UnitedHealth operates as the established market leader 
across all key health benefits segments (particularly in the higher growth and 
more operational sensitive government-sponsored segments), possesses extensive 
technological capability, and has demonstrated relatively keen market 
awareness about prospective risks and opportunities. Exposure to reform driven 
margin compression has generally been contained and partly offset by its 
growing health-services service business development, which has been a recent 
focus of acquisition activity.

We rate the holding company, UnitedHealth Group Inc., two notches lower than 
the core operating companies to reflect the holding company's dependence on 
dividends from them for debt servicing and the regulatory restrictions that 
prevent the free flow of funds within the organization. The two-notch gap is 
narrower than the standard three-notch one because the dividends from 
UnitedHealth's subsidiaries are fairly well diversified, and we consider 
UnitedHealth's holding-company metrics (financial leverage and interest 
coverage) to be strong for the rating category. In 2012, we expect the holding 
company to receive total dividends of more than $4.0 billion. This reflects a 
very strong level of discretionary cash flow generation and significant 
financial resource allocation capacity beyond debt service and capital 
investment needs.

For year-end 2012, we expect total revenue of $105 billion-$110 billion and 
for enrollment to increase moderately toward 36.0 million medical members. We 
expect operating income (EBIT) income and cash flow (EBITDA) of $8.0 
billion-$8.5 billion, 7%-8% return on revenues (ROR), and $9.0 billion-$9.5 
billion (8%-9% margin), respectively. If UnitedHealth were to perform at a 
level consistent with these expectations, adjusted EBITDA interest coverage 
would be well above 10x and financial flexibility and general liquidity would 
remain very strong. Operating performance has been very strong relative to the 
diversity of its business lines (qualitative benefit) and continues to trend 
above expectation. We believe that profitability is likely to moderate 
somewhat through 2013-2014, but remain at a level that supports the ratings.

We expect other key holding-company metrics to remain moderately conservative 
for the rating category, with adjusted debt leverage (including net present 
value of leases) of 30%-35%. We also expect capitalization at the operating 
companies to remain significantly in excess of regulatory requirements and 
prudent relative to our capital model. The difference is due to the effect of 
our double leverage adjustment, which reduces the amount of recognized 
statutory capital supporting the company's business.

Outlook
The stable outlook reflects the limited potential for an upgrade in the next 
12-24 months. It also reflects our expectation that UnitedHealth will not 
meaningfully alter its financial management policies, and will preserve its 
generally strong market share in its core market segments, which should 
facilitate sustained revenue growth, very strong discretionary cash flow 
generation, and very strong liquidity. Other factors in support of a stable 
outlook include improved business environment visibility and generally prudent 
balance-sheet management. Despite some anticipated moderation, we expect cash 
flow generation, debt leverage, and interest coverage to remain at levels 
generally consistent with the rating. We expect the rating to be somewhat 
constrained by intermediate-term sector headwinds, including potentially 
moderate economic erosion, costs associated with health care reform 
implementation, and constrained funding for public sector benefit programs 
such as Medicare and Medicaid. 

While we expect prospective profitability to moderate somewhat through 
2013-2014 (partly due to more normalized medical inflationary trends), we 
believe this will be commensurate with our ratings expectations (about 6%-8% 
EBIT ROR). We could lower the rating if we expect these factors to stress 
UnitedHealth's operating performance materially on a sustained basis and the 
company was not willing or able to sufficiently compensate with offsetting 
changes in financial management policy.

Related Criteria And Research
Holding Company Analysis, June 11, 2009.

Ratings List
Upgraded; Outlook Action
                                        To                 From
UnitedHealth Group Inc.
 Counterparty Credit Rating
  Local Currency                        A/Stable/A-1       A-/Positive/A-2

Golden Rule Insurance Co.
UnitedHealthcare of Wisconsin Inc.
UnitedHealthcare of New York Inc.
United Healthcare of Arizona Inc.
United Healthcare of Alabama Inc.
United HealthCare of the Midwest Inc.
United HealthCare of Texas Inc.
United HealthCare of Ohio Inc.
United HealthCare of North Carolina Inc.
United HealthCare of New England Inc.
United HealthCare of Kentucky Ltd.
United HealthCare of Illinois Inc.
United HealthCare of Georgia Inc.
United HealthCare of Florida Inc.
United HealthCare Insurance Co. of Ohio
United HealthCare Insurance Co. of New York
United HealthCare Insurance Co. of Illinois
United HealthCare Insurance Co.
 Counterparty Credit Rating
  Local Currency                        AA-/Stable/--      A+/Positive/--
 Financial Strength Rating
  Local Currency                        AA-/Stable/--      A+/Positive/--

Upgraded
                                        To                 From
UnitedHealth Group Inc.
 Senior Unsecured                       A                  A-
 Commercial Paper                       A-1                A-2
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