OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best has affirmed the financial strength rating of A (Excellent) and the issuer credit ratings (ICR) of “a” of the majority of the insurance subsidiaries of UnitedHealth Group Incorporated (UnitedHealth) (Minnetonka, MN) [NYSE:UNH]. Concurrently, A.M. Best has affirmed the ICR of “bbb+” and issue ratings of UnitedHealth. The outlook for each rating is stable.
The rating affirmations reflect UnitedHealth’s strong diversified operations supported through continuous profitable growth of insurance and non-insurance businesses. UnitedHealth has maintained its leadership positions in the health insurance market through consistent growth in multiple commercial and government products, and services over 47 million individuals. In line with an industry trend, over the past several years, Medicare and Medicaid lines of business have been the main source of enrollment growth for UnitedHealth. The company successfully absorbed the revenue resulted from the Medicaid expansion attributable to the Patient Protection and Affordable Care Act (ACA). In addition, following the acquisition of Catamaran, the revenue at UnitedHealth’s health care services operation, Optum, experienced significant growth, and as of first-quarter 2016 accounted for 37% of earnings and 35% of revenue prior to eliminations. Moreover, the earnings generated from Optum operations are non-regulated and do not require approvals for dividend payment. Furthermore, Optum businesses provide technological and product support to insurance operations, bringing innovations and enhancing capabilities for better quality of care and management of members’ health. UnitedHealth’s earnings remain strong, with the lead insurance entity, UnitedHealthcare Insurance Company (UHIC), generating $14.7 billion of underwriting gains and $11.9 billion of net earnings over the past five years.
Partially offsetting these strengths are declining operating margins at insurance and non-insurance operations. Lower profitability at UnitedHealthcare entities is in line with an industry trend and resulted from risk to self-funded conversion in the commercial segment, lower Medicare Advantage reimbursement, ACA fees and a growing share of lower margin government products. In addition, during 2015, UnitedHealth, similar to other carriers, incurred substantial losses in ACA exchanges following higher-than-expected utilization, especially for members who signed up outside of the annual open enrollment period. The losses in 2015 include premium deficiency reserves to offset potential weak performance in 2016. UnitedHealth announced the exit from the majority of exchange markets for 2017. A.M. Best is concerned that the lack of presence on the exchange markets may result in future deterioration of market share in the individual market, as more members are expected to enroll through exchanges in the medium term. Furthermore, the level of risk-adjusted capitalization at UHIC and other insurance affiliates remain lower compared with peers. A.M. Best acknowledges that UHIC has historically generated strong operating results; and although the trend is expected to continue, earnings margins have moderated. UnitedHealth has the resources and willingness to provide support to UHIC if needed. However, following the acquisition of Catamaran in 2015, UnitedHealth’s financial leverage increased to above 45%, and goodwill plus intangibles to equity ratio now exceeds 150%. While UnitedHealth’s earnings before interest and taxes (EBIT) interest coverage remains above 10 times, and the company plans to reduce financial leverage to below 40% by year-end 2017 through reduced share repurchase and earnings accretion, A.M. Best is concerned that declined balance sheet quality may put pressure on regulated entities in the near to medium term.
For a complete listing of UnitedHealth Group Incorporated and its subsidiaries’ FSRs, ICRs and issue ratings, please visit UnitedHealth Group.
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