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