NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed UnitedHealth Group Incorporated'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 UnitedHealth's 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's ratings also reflect the U.S. government's prominent role in the sector derived from its public policy goal of promoting affordable health insurance, and by the possibility that under various scenarios, the government could seek an even larger role in the sector. Fitch remains concerned about the U.S. government's continued high degree of involvement in the health insurance sector and its potential unfavorable effect on UnitedHealth's profits, primarily in government-sponsored businesses.
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. 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.
The Optum business segment, which is a predominantly unregulated business, contributed over $2.3 billion of operating income in 2013, an $875 million annual increase. Optum's earnings continued to grow in first half 2014. Fitch expects Optum to represent an increasing portion of the company's revenues and earnings for the foreseeable future, which will further enhance UNH's financial flexibility.
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.
Despite a modest year-over-year decline, UnitedHealth's operating margins remain supportive of the company's current rating category. UnitedHealth reported net earnings of $2.5 billion in the first half of 2014, which translates into an EBITDA margin of 8.3%, versus 8.6% for the prior year period.
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.
The company's financial leverage as measured by annualized debt/ EBITDA was 1.6x as of June 30, 2014, which approximates levels reported for the prior two calendar years. UnitedHealth reported EBITDA-to-interest coverage of 16.9x in the first half of 2014, continuing a trend of mid-to-high teen's EBITDA interest coverage that has persisted for several years and appears to be sustainable for the near to medium term.
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 June 30, 2014, the company's debt-to-total capital ratio stood at 34%, which is considered high for UnitedHealth's current rating category.
RATING SENSITIVITIES
Fitch could upgrade UnitedHealth's ratings if the company were to report debt/EBITDA ratios approximating 1.3x and debt-to-capital below 30% on a sustained basis, while maintaining EBITDA/interest coverage ratios in the mid-teens or better.
Key rating triggers that could result in a downgrade to 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';
--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-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Sept. 4, 2014);
--'Health Insurance and Managed Care (U.S.) Sector Credit Factors Special Report' (Aug. 28, 2014).
Applicable Criteria and Related Research:
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650
Health Insurance and Managed Care (U.S.) Sector Credit Factors
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686930
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=875995
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