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The shares of UnitedHealth Group Inc. (UNH - Analyst Report) reacted positively to the rating upgrade made by Moody’s Investor’s Service, a wing of Moody’s Corp. (MCO - Analyst Report), on Friday. The shares increased 1.1% to close at $74.72 on Oct 14.
 
Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence on the stock as well as in maintaining credit worthiness in the market. 
 
Moody’s rating action included the affirmation of UnitedHealth’s senior debt rating at A3 and the insurance financial strength (IFS) rating of UnitedHealthcare Insurance Company (UHIC) at A1. The ratings agency also revised its outlook towards the company to stable from negative.
 
Moody’s rating action acknowledges UnitedHealth’s efforts to bring down its debt ratio since the acquisition of Amil Participacoes S.A. (Amil) in Brazil. 
 
UnitedHealth’s solid operating performance, strong balance sheet, a diversified product profile along with a niche presence in the industry also drove the rating action.  
 
Back in Oct 2012, Moody’s conferred a negative outlook on UnitedHealth in contemplation of increased leverage and integration and acquisition risks associated with the acquisition of Amil. However, it changed its view after observing that the debt ratio at the company has come down to levels which match with the targeted range of the rating agency. The company has also grown its retained earnings which reflect its inherent capital strength.
 
Moody’s also noted that despite the two companies operating in two different geographies; there has been a significant decline in integration risks. Also with the help of senior management of Amil, operations risks have decreased considerably. 
 
UnitedHealth membership has also increased along with revenue growth and strong margin levels. The company’s service segment – Optum, has also been increasing earnings.
 
Moody’s anticipates that UnitedHealth will continue to target a NAIC consolidated risk-based capital (RBC) ratio target at 250% of company action level (CAL).
 
Going forward, a rating upgrade may follow if financial leverage stays below 25%; EBIDTA interest coverage remains north of 15x; and RBC is of 275% or up. 
 
However, an adverse rating action could be seen if the debt ratio increases above 40%, RBC declines below 250%; goodwill or intangibles get written off; and if there is decline in membership by more than 10% over a 12 month period. 
 
We believe the current strong ratings of UnitedHealth will help the company retain investor confidence and help it write more businesses going forward, thereby boosting results.
 
UnitedHealth carries a Zacks Rank #2 (Buy). Other players Aetna Inc. (AET - Analyst Report) and CIGNA Corp. (CI - Analyst Report) also carry investment ratings from Moody’s.

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