Fitch Affirms UnitedHealth Group's IDR at 'A': Outlook Stable

Thu Apr 10, 2014 3:18pm EDT

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(The following statement was released by the rating agency) NEW YORK, April 10 (Fitch) Fitch Ratings has affirmed UnitedHealth Group Inc.'s (UnitedHealth) ratings, including the rating on the company's senior unsecured securities at 'A-' and insurance-company subsidiaries' Insurer Financial Strength (IFS) ratings at 'AA-'. A complete list of rating actions follows at the end of this release. The Rating Outlook is Stable. KEY RATING DRIVERS The ratings affirmation reflects Fitch's recognition that UnitedHealth has continued to report strong operating margins and solid key credit metrics, despite the headwinds presented by the implementation of various elements of the Patient Protection and Affordable Care Act (PPACA). UnitedHealth reported record net earnings of $5.6 billion in 2013, which translates into an EBITDA margin of 9.0%, versus 9.5% for the prior year period. Despite the modest year-over-year decline, UnitedHealth's operating margins remain strongly supportive of the company's current rating category. UnitedHealth's financial leverage improved moderately, benefitting from earnings growth related to increased medical membership. UnitedHealth completed its purchase of Amil SA Participacoes S.A. (Amil)during the first quarter of 2013 and issued debt in the second half of 2012 to help fund the first step of the multi-stage transaction. The company's financial leverage as measured by debt/ EBITDA improved to 1.5x at Dec. 31, 2013 from 1.6x in the prior year. UnitedHealth reported EBITDA-to-interest coverage of 15.5x in 2013, a moderate decline from very strong levels of 16.7x in 2012. Fitch considers UnitedHealth's Debt-to-EBITDA ratio to be adequate relative to the current rating category, while EBITDA-to-interest coverage remains strong relative to its current ratings. UnitedHealth's financial leverage as measured by its ratio of debt-to-total capital also remains at a level that is adequate to support the current ratings. As of Dec. 31, 2013, the company's debt-to-total capital ratio stood at 34%, which is moderately higher than levels reported for the several years prior to the Amil acquisition. Fitch views UnitedHealth's overall market position within the health insurance and managed care sector as largely unique, in that it enjoys strength across a broad spectrum of products, services, and geographies. Fitch also notes the increasing scale and diversity of UnitedHealth's businesses, particularly its sources of unregulated earnings and cash flows, which have grown steadily over the past several years. UnitedHealth's Optum business segment, which is comprised predominantly of unregulated businesses, contributed over $2.3 billion of operating income in 2013, a $900 million increase versus 2012. 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. RATING SENSITIVITIES An upgrade to UnitedHealth's IFS ratings is unlikely over the next 12-24 months. Upward rating pressure is constrained due to UnitedHealth's current ratings approaching the high end of Fitch's ratings range for health insurers and the possibility of continued unfavorable regulatory developments and their potential effect on UnitedHealth's profits, primarily in government-sponsored businesses. If the company were to report debt/EBITDA ratios approximating 1.0x and debt-to-capital below 30% on a sustained basis, while maintaining EBITDA/interest coverage ratios in the mid-teens or better, Fitch could compress the notching between UnitedHealth'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 UnitedHealth's ratings include developments related to healthcare reform that significantly impair UnitedHealth'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-to-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 at 'A'; --Short-term IDR at 'F1'; --Commercial paper rating at 'F1'; --5% senior unsecured notes due 2014 at 'A-'; --Floating rate senior unsecured notes due 2014 at 'A-'; --4.875% senior unsecured notes due 2015 at 'A-'; --0.850% senior unsecured notes due 2015 at 'A-'; --5.375% senior unsecured notes due 2016 at 'A-'; --1.875% senior unsecured notes due 2016 at 'A-'; --6.000% senior unsecured notes due 2017 at 'A-'; --1.400% senior unsecured notes due 2017 at 'A-'; --6.000% senior unsecured notes due 2017 at 'A-'; --6.000% senior unsecured notes due 2018 at 'A-'; --1.625% senior unsecured notes due 2019 at 'A-'; --3.875% senior unsecured notes due 2020 at 'A-'; --4.700% senior unsecured notes due 2021 at 'A-'; --3.375% senior unsecured notes due 2021 at 'A-'; --2.875% senior unsecured notes due 2022 at 'A-'; --0% senior unsecured notes due 2022 at 'A-'; --2.750% senior unsecured notes due 2023 at 'A-'; --2.875% senior unsecured notes due 2023 at 'A-'; --5.8% senior unsecured notes due 2036 at 'A-'; --6.5% senior unsecured notes due 2037 at 'A-'; --6.625% senior unsecured notes due 2037 at 'A-'; --6.875% senior unsecured notes due 2038 at 'A-'; --5.7% senior unsecured notes due 2040 at 'A-'; --5.95% senior unsecured notes due 2041 at 'A-'; --4.625% senior unsecured notes due 2041 at 'A-'; --4.375% senior unsecured notes due 2042 at 'A-'; --3.95% senior unsecured notes due 2042 at 'A-'; --4.25% senior unsecured notes due 2043 at '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 at 'AA-'. Contact: Primary Analyst Greg Dickerson Director +1-212-908-0220 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Mark E. Rouck, CPA, CFA Senior Director +1-312-368-2085 Committee Chairperson Douglas L. Meyer, CFA Managing Director +1-312-368-2061 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Insurance Rating Methodology' (Nov. 13, 2013); --'Health Insurance and Managed Care (U.S.) Sector Credit Factors Special Report' (Dec. 18, 2013). Applicable Criteria and Related Research: Health Insurance and Managed Care (U.S.) here Insurance Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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