A.M. Best has affirmed the financial strength rating (FSR) of A
(Excellent) and the issuer credit ratings (ICR) of “a” for 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 debt ratings of UnitedHealth. The outlook
for the majority of the ICRs has been revised to stable from positive.
The outlook for the FSR remains stable for most of the insurance
entities.
The revision of the rating outlook to stable on the majority of the ICRs
and all debt ratings reflects UnitedHealth’s recent announcement of its
plan to acquire the outstanding equity of Catamaran Corporation
(Catamaran) [NASDAQ: CTRX] and combine it with OptumRx, UnitedHealth’s
free-standing pharmacy care services business. The purchase price is
approximately $12.8 billion, the majority of which the group plans to
finance with new debt. As a result of the additional debt,
UnitedHealth’s financial leverage is expected to increase significantly.
This is somewhat mitigated by UnitedHealth’s strong interest coverage,
which, although is expected to decline slightly, should remain greater
than 10 times. Additionally, UnitedHealth’s ratio of goodwill plus
intangibles to shareholders’ equity exceeded 100% at year-end 2014 and
is expected to increase to a range of 128%-130% as a result of the
Catamaran transaction.
UnitedHealth has diversified operations and a significant market
presence in its insurance and non-insurance businesses. UnitedHealth’s
insurance operations, UnitedHealthcare, include a broad customer segment
with significant market presence covering more than 40 million
individuals. In addition, UnitedHealth’s health care services
operations, Optum, are expanding and currently represent approximately
32% of its operating earnings and more than 37% of its revenue prior to
eliminations. Furthermore, Catamaran’s earnings are expected to be
immediately accretive to OptumRx’s already strong earnings.
Partially offsetting these strengths are the significant increase in
UnitedHealth’s financial leverage and reduced financial flexibility due
to the Catamaran transaction. While growth in earnings and cash flows is
anticipated and should be ample to service the additional debt, A.M.
Best is concerned that the increased debt and interest payments may
place additional pressure on the insurance entities for additional
dividends. Furthermore, UnitedHealthcare has been experiencing declining
operating margins, which is an industry trend. The lower margins are
driven by several factors, which include the non-deductible insurance
fees imposed by the Patient Protection and Affordable Care Act (ACA),
reduced Medicare Advantage reimbursement and a changing business mix
with a growing share of lower margin, government-funded products. The
ACA prompted a significant number of employer groups to migrate from
risk to self-funded arrangements leading to lower risk and narrower
margins, thus reducing earnings potential for UnitedHealth’s insurance
operations.
Key rating drivers that may lead to positive rating actions for
UnitedHealth and its subsidiaries include significant reduction in
UnitedHealth’s financial leverage to at least the 2014 year-end levels;
revenue and earnings growth at UnitedHealthcare’s insurance entities;
successful absorption of new membership in government programs; and
improvement in risk-adjusted capital at regulated entities. Key rating
drivers that may lead to negative rating actions include a sizeable
decline in risk-adjusted capital at UnitedHealth’s lead operating
entity, UnitedHealthcare Insurance Company; significant weakening
of operating performance across the enterprise; deterioration of market
share; an increase in financial leverage or material deterioration in
interest coverage; or problems with the integration of Catamaran.
For a complete listing of UnitedHealth Group Incorporated and its
subsidiaries’ FSRs, ICRs and debt ratings, please visit UnitedHealth
Group.
The methodology used in determining these ratings is Best’s Credit
Rating Methodology, which provides a comprehensive explanation of A.M.
Best’s rating process and contains the different rating criteria
employed in the rating process. Best’s Credit Rating Methodology can be
found at www.ambest.com/ratings/methodology.
Key insurance criteria reports utilized:
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Rating Members of Insurance Groups
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Risk Management and the Rating Process for Insurance Companies
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Understanding BCAR for U.S. and Canadian Life/Health Insurers
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Insurance Holding Company and Debt Ratings
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Analyzing Insurance Holding Company Liquidity
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Evaluating Country Risk
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Equity Credit for Hybrid Securities
This press release relates to rating(s) that have been published on
A.M. Best's website. For all rating information relating to the
release and pertinent disclosures, including details of the office
responsible for issuing each of the individual ratings referenced in
this release, please visit A.M. Best’s Ratings
& Criteria Center.
A.M. Best Company is the world's oldest and most authoritative
insurance rating and information source. For more information, visit www.ambest.com.
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