Overview -- HealthPartners Inc.'s operating performance has strengthened during the past two years. -- Although we don't expect the company to maintain 2010-2011 levels of profitability, we believe it can achieve annual returns on revenue of around 3%. -- We are raising our financial strength and counterparty credit ratings on HealthPartners to 'A-' from 'BBB+'. At the same time, we are revising the outlook to stable from positive. -- The stable outlook reflects our expectation that the company will sustain its good competitive position, strong earnings, and very strong capitalization. Rating Action On Oct. 1, 2012, Standard & Poor's Ratings Services raised its ratings on Minneapolis, Minn.-based HealthPartners Inc. to 'A-' from 'BBB+'. At the same time, we revised the outlook to stable from positive. Rationale The rating upgrade reflects HealthPartners's strengthened operating performance over the past two years, stemming from its growing revenue base. This reflects the company's rising insurance enrollment and greater revenues from its healthcare facilities, along with a lower level of medical cost increases. The rating reflects HealthPartners' leading position in the Minneapolis/St. Paul market, very strong statutory capitalization, and financial leverage that is supportive of the rating. Although the company is expanding geographically, the rating also continues to reflect its concentration within the Twin Cities area. HealthPartners' operating earnings increased to $220 million--a 5.7% return on revenue (ROR) in 2011--from $135 million (3.8% ROR) in 2010 and $92 million (2.7% ROR) in 2009. During the first half of 2012, operating earnings decreased to $83 million (4.2% ROR) from $90 million (4.8% ROR) in the comparable prior-year period. The earnings improvement from 2009 to 2011 was driven by a 14% increase in revenue, relative to a 9% increase in medical costs. The increase in revenue incorporated a 9% increase in premium volume and a 31% increase in health service revenues. Although we do not believe the level of profitability the company achieved in the past two years will be sustainable, we do believe that HealthPartners will be able to generate a level of operating performance that's consistent with the rating. While the company experienced consistent annual enrollment growth in 2007-2011 (up 25% during this time), it expects enrollment to decline 2%-3% in 2012 due to the loss of a couple of sizeable accounts. Despite the loss of these accounts, we expect HealthPartners' revenue to increase 2%-4% during the year and anticipate enrollment growth will resume in 2013. We believe HealthPartners is a well-managed health plan, and that its seasoned management team understands its core market very well. The management team has considerable experience in operating the company's lines of business and exercises prudent control over these operations. HealthPartners seeks to differentiate itself by offering innovative products, efficient care coordination, and competitive pricing. The company's statutory capitalization remains very strong, with a redundancy at the 'AAA' level as calculated by Standard & Poor's capital model, and financial leverage continues to be supportive of the rating. As of June 30, 2012, debt/capital was 23%. Including lease and unfunded pension obligations, the ratio increases to 32%. EBITDA fixed-charge coverage (including interest, principle payments, and lease payments) was above 7x in 2011. Outlook The stable outlook reflects our expectation that HealthPartners will sustain its good competitive position, enabling it to continue generating strong earnings and maintain very strong capitalization. We anticipate the company should be able to generate annual ROR of around 3%. At the current rating level, we view the company's concentrated business profile as a key constraint to any upside rating movement. If its competitive position erodes, annual ROR declines to around 2%, or capitalization falls so that there is only a redundancy at the 'A' level, we could lower the rating. Related Criteria And Research Analysis of Nonlife Insurance Operating Performance, April 22, 2009 Ratings List Upgraded; Outlook Action To From HealthPartners Inc. Group Health Plan Inc. Counterparty Credit Rating Local Currency A-/Stable/-- BBB+/Positive/-- Financial Strength Rating Local Currency A-/Stable/-- BBB+/Positive/-- Upgraded To From HealthPartners Inc. Sr unsecured notes A- BBB+ Group Health Plan Inc. Sr unsecured notes A- BBB+ Regions Hospital Sr unsecured notes A- BBB+ Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.