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Fitch ratings have taken a rating action on the U.S. health insurer UnitedHealth Group Inc. (UNH - Analyst Report) and also affirmed the company’s senior unsecured debt an ‘A-‘ rating. The Insurer Financial strength ratings of its subsidiaries were also affirmed at ‘AA-.‘ The ratings are of an investment grade with a good credit quality, while a stable outlook translates into minimum possibilities of a change in rating.

Fitch is impressed with the way UnitedHealth has protected and improved its earnings despite the numerous challenges posed by the Health Care Reform Act. It is one of the most diversified of the listed managed care companies in the U.S.
 
Fitch is also satisfied with UnitedHealth’s performance in parameters such as EBIDTA margin of 9.5%, financial leverage of 1.24x, EBIDTA to interest coverage of 17.2x. Fitch also views favorably the company’s balance sheet strength with debt to ratio of 31%.
 
However, the rating agency is watchful of the several external factors that can affect the company’s performance, such as uncertainty related to the implementation of the Health Care Reform Act, the effect of rising medical costs as well as competitive pressure present in few of the markets where the company operates.
 
Hence, it can be assumed that the rating agency may slash its IFS or IDR rating by a notch if UnitedHealth fails to generate strong cash flow, gets impaired to price its products led by regulatory restrictions; increases debt ratio above 35% levels; debt/EBIDTA ratio above 1. 9x; and decline in EBIDTA/interest coverage ratio below 8x.
 
On the other hand, the company’s debt ratings can be pulled up by a notch if it maintains its debt to EBIDTA ratio near 10.0x, leverage ratio near 30.0x and interest coverage ratio at mid-teen or higher.
 
Fitch also rates peer company Aetna Inc.’s (AET - Analyst Report) IDR at “A” and “AA-.“
 
UnitedHealth currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on its shares.

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