A.M. Best Co. has affirmed the financial strength ratings (FSR) and issuer credit ratings (ICR) of the insurance subsidiaries of UnitedHealth Group Incorporated (UnitedHealth) (Minnetonka, MN) [NYSE: UNH]. Additionally, A.M. Best has upgraded the FSRs to A (Excellent) from A- (Excellent) and the ICRs to “a” from “a-” for the following subsidiaries of UnitedHealth: Health Plan of Nevada Inc. (Las Vegas, NV) and Sierra Health and Life Insurance Company Inc. (Los Angeles, CA). Concurrently, A.M. Best has affirmed the ICR of “bbb+” and debt ratings of UnitedHealth. The outlook for these ratings is stable.
A.M. Best also has assigned debt ratings of “bbb+” to $625 million 0.85% senior unsecured notes, $625 million 1.4% senior unsecured notes, $625 million 2.75% senior unsecured notes and $625 million 3.95% senior unsecured notes all issued on October 17, 2012 by UnitedHealth. The outlook assigned to these debt ratings is stable.
Additionally, A.M. Best has withdrawn the FSR of A (Excellent) and ICR of “a” of PacifiCare Life Assurance Company (Denver, CO), as the company is inactive.
The rating affirmations for the organization reflect its premium growth, strong earnings, highly liquid assets, ability to adjust to market changes and high degree of technological innovations. These strengths are further supported by the significant market presence, diverse non-insurance operations and financial strength of UnitedHealth. The organization has a wide geographic reach and a diversified portfolio, which includes commercial, Medicare and Medicaid managed care products. UnitedHealth also continues to expand its profitable non-regulated businesses and its share of non-regulated earnings remains significantly higher compared to its peers. Furthermore, UnitedHealth’s non-regulated subsidiaries are well positioned for continuous revenue growth. Non-regulated earnings enhance UnitedHealth’s financial flexibility by contributing to its already strong interest coverage as well as reducing its reliance on dividends from its regulated subsidiaries.
Partially offsetting these positive rating factors are A.M. Best’s concerns, which arise from UnitedHealth managing to a lower level of risk-based capitalization at its regulated entities. Following consistently high dividends to UnitedHealth, the level of risk-based capitalization at the leading regulated subsidiary, UnitedHealthcare Insurance Company (UHIC) (Hartford, CT), though improved in 2011 remains low compared to its peers and A.M. Best’s expectations. However, this is offset by the parent’s ability to support the legal entities through capital infusions.
A.M. Best does acknowledge that UHIC is a significant source of dividends and consistently produces strong operating results. In addition, UHIC’s improved ability to predict claims trends and better fund transfer mechanisms within UnitedHealth enhances the entire organization’s ability to support each subsidiary and mitigate lower capitalization concerns. Although A.M. Best expects earnings to remain strong, operating margins at UnitedHealth, in line with the industry trend, have declined compared to its historical levels and are likely to moderate further. The earnings deterioration is due to competitive pressure, implementation of minimum loss ratio requirements related to the Patient Protection and Affordable Care Act and the changing business mix within the organization’s growing share of Medicare and Medicaid products where the margins are lower. In the near term, A.M. Best notes that UnitedHealth’s financial flexibility is reduced because of the expected increase in its financial leverage as well as the increase of the level of goodwill in its related acquisition of Amil Participacoes SA (Brazil). However, both UnitedHealth’s financial leverage and goodwill are in line with peers. Furthermore, UnitedHealth has proven its ability to quickly reduce financial leverage.
The upgrading of the ratings for Health Plan of Nevada Inc. and Sierra Health and Life Insurance Company Inc. acknowledges their strong earnings, improved capitalization and integration into UnitedHealth.
Key rating drivers that may lead to positive rating actions for UnitedHealth and its subsidiaries include substantial earnings growth, improvement in risk-adjusted capital at regulated entities and reduction in financial leverage. Key rating drivers that may lead to negative rating actions include a sizeable decline in risk-adjusted capital at UnitedHealth’s lead operating entity, UHIC, significant weakening of operating performance across the enterprise, an increase in financial leverage beyond A.M. Best’s expectations or substantial deterioration in interest coverage.
For a complete list of UnitedHealth Group Incorporated and its subsidiaries’ FSRs, ICRs and debt ratings, please see www.ambest.com/press/121311unitedhealth.pdf.
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. Key criteria utilized include: “Understanding BCAR for Life/Health Insurers”; “Insurance Holding Company and Debt Ratings”; “Rating Members of Insurance Groups”; “Risk Management and the Rating Process for Insurance Companies”; “Rating Commercial Paper”; and “Evaluating Country Risk.” Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
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