TEXT-S&P raises HealthPartners ratings to 'A-' from 'BBB+'

Mon Oct 1, 2012 10:55am EDT

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+



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