TEXT-Fitch expects to rate UnitedHealth note offering 'A-'
Feb 25 - Fitch Ratings expects to assign an 'A-' rating to UnitedHealth Group Inc.'s (UNH) proposed issue of senior unsecured notes. The rating on the planned issuance, which Fitch expects to be comprised of a mix of 3-year, 5-year, and 30-year maturities, is equivalent to the ratings on UNH's existing senior unsecured notes. Fitch is also affirming UNH's existing ratings. The Rating Outlook is Stable. A complete list of today's ratings actions follows at the end of this release. Fitch's understanding is that UNH will use a portion of the proceeds of today's planned issuance to help fund the second step of UNH's previously announced acquisition of Amil Participacoes S.A. (Amil), a Brazil-based managed care company. Fitch expects the remainder of the proceeds to be used for general corporate purposes, including paying down a portion of UNH's existing debt. Following UNH's Oct. 8, 2012 announcement of its plan to acquire Amil, Fitch affirmed the ratings on UNH's outstanding securities and its Insurer Financial Strength (IFS) ratings on various UNH operating company subsidiaries. As the first step of the Amil transaction, UNH purchased approximately 60% of the outstanding Amil shares from controlling shareholders and management of Amil for approximately $3.2 billion in cash. The first step of the transaction took place in the fourth quarter of 2012. UNH has also purchased an additional 5% of outstanding Amil shares through a local open market purchase. As the second step of the Amil transaction, UNH will conduct a tender offer for approximately 25% of Amil's shares that are publicly owned in the first quarter of 2013, bringing the total expected value of the transaction of approximately $4.9 billion. KEY RATING DRIVERS The ratings affirmation reflects Fitch's recognition that UNH has continued to report solid operating margins and strong key credit metrics, despite the headwinds presented by the implementation of various elements of the Patient Protection and Affordable Care Act (PPACA). UNH reported net earnings of $5.5 billion in 2012, which translates into an EBITDA margin of 9.5%, versus 9.4% for the prior year. The company's financial leverage as measured by debt/annualized EBITDA was 1.6 times (x) in 2012, up from 1.2x for in 2011, reflecting incremental debt issued in the fourth quarter of 2012 to finance the first step of the Amil acquisition. UNH reported EBITDA-to-interest coverage of 17.2x in 2012, a moderate decline from very strong levels of 20.5x in the prior year period. Fitch considers UnitedHealth's performance under each of these measures to be strongly supportive of UNH's the current rating category. UnitedHealth's financial leverage as measured by its ratio of debt-to-total capital remains at a level that is adequate to support the current ratings. As of Dec. 31, 2012, the company's debt-to-total capital ratio stood at 35%, which approximates levels reported for the past several years. Fitch expects that following the issuance of debt to complete the Amil acquisition UNH's run-rate interest coverage and financial leverage will remain supportive of the company's current ratings. Fitch views UnitedHealth's overall market position within health insurance and managed care sector as largely unique, in that it enjoys strength cross a broad spectrum of products, services, and geographies. Fitch also notes the increasing scale and diversity of UNH's businesses, including its sources of unregulated earnings and cash flows, which have grown steadily over the past several years. In Fitch's view, UnitedHealth's diversified business platform and scale advantages provide increased confidence that the company will continue to generate results that support the company's current high rating category, despite the uncertainty created by the evolving regulatory environment facing the health insurance industry. Fitch nevertheless remains cognizant of the risks associated with the ongoing implementation of health reform legislation, the competitive pressures in several of the company's markets, and the effect of medical cost inflation. RATING SENSITIVITIES An upgrade to UNH's insurer financial strength (IFS) ratings is unlikely over the next 12 - 24 months. Upward rating pressure is constrained due to UNH's current ratings approaching the high end of Fitch's ratings range for health insurers. Fitch remains concerned about potential continued unfavorable regulatory developments and their potential effect on UNH's profits, primarily in government-sponsored businesses. If the company were to report debt/EBITDA ratios approximating 1.0x and debt/capital below 30% on a sustained basis, while maintaining EBITDA/interest coverage ratios in the midteens or better, Fitch could compress the notching between UNH's operating company IFS ratings and holding company Issuer Default Ratings (IDRs. This would result in a one-notch upgrade to UnitedHealth's debt ratings, Key rating triggers that could result in a downgrade to all of UNH's ratings include developments related to healthcare reform that significantly impair UNH's ability to appropriately price its products, or otherwise severely restrict the company's cash flow. In addition expectations for sustained ratios of debt/EBITDA above 1.9x, debt/total capital above 35% and EBITDA/interest below 8x could lead to negative rating actions. Fitch has affirmed the following ratings with a Stable Rating Outlook: UnitedHealth Group, Incorporated --Long-term IDR 'A'; --Short-term IDR 'F1'; --Commercial paper rating 'F1'; --4.875% senior unsecured notes due 2013 'A-'; --4.75% senior unsecured notes due 2014 'A-'; --5% senior unsecured notes due 2014 'A-'; --4.875% senior unsecured notes due 2015 'A-'; --0.850% senior unsecured notes due 2015 'A-'; --5.375% senior unsecured notes due 2016 'A-'; --1.875% senior unsecured notes due 2016 'A-'; --6% senior unsecured notes due 2017 'A-'; --1.400% senior unsecured notes due 2017 'A-'; --6% senior unsecured notes due 2017 'A-'; --6% senior unsecured notes due 2018 'A-'; --3.875% senior unsecured notes due 2020 'A-'; --4.7% senior unsecured notes due 2021 'A-'; --3.375% senior unsecured notes due 2021 'A-'; --2.875% senior unsecured notes due 2022 'A-'; --0% senior unsecured notes due 2022 'A-'; --2.75% senior unsecured notes due 2023 'A-'; --5.8% senior unsecured notes due 2036 'A-'; --6.5% senior unsecured notes due 2037 'A-'; --6.625% senior unsecured notes due 2037 'A-'; --6.875% senior unsecured notes due 2038 'A-'; --5.7% senior unsecured notes due 2040 'A-'; --5.95% senior unsecured notes due 2041 'A-'; --4.625% senior unsecured notes due 2041 'A-'; --4.375% senior unsecured notes due 2042 'A-'. --3.95% senior unsecured notes due 2042 'A-'. UnitedHealthcare Insurance Company UnitedHealthcare Insurance Company of Illinois UnitedHealthcare Insurance Company of New York Sierra Health & Life Insurance Company, Inc. Health Plan of Nevada, Inc. UnitedHealthcare of Florida, Inc. UnitedHealthcare of Arizona, Inc. Oxford Health Insurance, Inc. Oxford Health Plans of New York, Inc. UnitedHealthcare of Wisconsin, Inc UnitedHealthcare Benefits of Texas, Inc. UHC of California PacifiCare Life & Health Insurance Company UnitedHealthcare Plan of the River Valley --IFS 'AA-'. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Insurance Rating Methodology' (Jan. 11, 2013); --'Health Insurance and Managed Care (U.S.) Sector Credit Factors Special Report' (Jan. 29, 2013). Applicable Criteria and Related Research Insurance Rating Methodology - Amended Health Insurance and Managed Care (U.S.) Sector Credit Factors