S&P Raises UnitedHealth Group (UNH) to 'A+'; Business Profile Strong vs. Peers

Standard & Poor’s Ratings Services raised its long-term counterparty credit rating on UnitedHealth Group Inc. (NYSE: UNH) to ‘A+’ from ‘A’. At the same time, we raised our long-term counterparty credit and financial strength ratings on the group’s core operating companies to ‘AA’ from 'AA-' (see list). The outlook is stable.

UnitedHealth’s business and financial profiles are strong relative to its peers’. We believe the company has executed well through a sensitive period of heightened sector risk that was strained by sluggish economic conditions and significant legislative development.

Key factors supporting the upgrade include sustained improvement in the company’s business risk profile relative to its peer group and the sector, driven by superior scale and operating performance consistency. Operating performance and overall growth have been very strong relative to the diversity of its business lines, and remain better than expected. Although we expect profitability to moderate somewhat relative to historical levels, through 2014-2015 we believe cash-flow generation will remain strong and operating performance will be commensurate with the ratings (upper quartile results, approximately 6%-8% EBIT return on revenues [ROR]). If UnitedHealth were to perform at a level consistent with these expectations, adjusted EBITDA interest coverage would remain more than 10x and financial flexibility would remain strong.

We rate the holding company, UnitedHealth Group Inc., two notches lower than the core operating companies to reflect the holding company’s dependence on dividends from the operating companies for debt servicing and the regulatory restrictions that prevent the free flow of funds within the organization. The two-notch gap is narrower than the standard three-notch gap because the dividends from UnitedHealth’s subsidiaries are fairly well diversified, and we consider UnitedHealth’s holding-company metrics (financial leverage and interest coverage) to be strong for the rating category. In 2014, we expect the holding company to receive total dividends of about $4 billion.

We expect other key holding-company metrics to remain moderately conservative for the rating category. Adjusted debt leverage (including net present value of operating leases and unfunded post-retirement liabilities) will likely be stable and slightly more than 35% and we expect the adjusted debt-to-EBITDA ratio to be near 1.5x. We expect capitalization at the operating companies to remain significantly in excess of regulatory requirements and adequate relative to our capital model. The difference is due to the effect of our double-leverage adjustment, which reduces the amount of recognized statutory capital supporting the company’s business.

The stable outlook reflects our expectations that UnitedHealth will preserve and enhance its leading market positions across all key market segments and that it will sustain its pricing flexibility in most of its key commercial markets.

Although unlikely, we could lower the ratings if UnitedHealth were to adopt a more-aggressive financial profile resulting in meaningfully lower operating risk-adjusted capitalization, adjusted (including the discounted present value of operating leases and unfunded post-retirement obligations) debt leverage of materially more than 35%, or adjusted (excluding realized gains and losses and imputed interest on operating leases) EBITDA coverage of less than 10x. We could also lower the ratings if UnitedHealth's operating margin (adjusted EBIT ROR) falls to less than 6% on a sustained basis, and the company is not willing or able to offset this sufficiently by changing its financial-management policy.

We see limited upside for the ratings, given that the upgrade results in UnitedHealth having a rating level that is among the highest for U.S. insurance companies. In addition, the ratings are constrained by the company’s focus on U.S. health insurance and related businesses.

Summary:

• UnitedHealth has a very strong business risk profile and a strong financial risk profile.
• We applied a one-notch upward holisitc adjustment reflecting UnitedHealth's high level of operating performance consistency, economies of scale, and unregulated cash flows that are significantly higher than peers.
• We are raising our ratings on UnitedHealth and its core operating companies.
• The stable outlook reflects our expectation that UnitedHealth will preserve and enhance its leading market positions across all key market segments and sustain its pricing flexibility.

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