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Analyst Blog

Following the announcement of its decision to buy Amil Participações S.A of Brazil, all the leading rating agencies – A.M.Best Co., Moody’s Corp. (MCO - Analyst Report), Standard and Poor’s as well as Fitch ratings – have taken rating action on UnitedHealth Group Inc. (UNH - Analyst Report).

A.M. Best has kept the financial strength rating (“FSR”), issuer credit ratings (“ICR”) and issuer debt ratings (“IDR”) unchanged for UnitedHealth as well as its subsidiaries at the current levels. Though the company will witness an increase in its debt ratio due to the acquisition, the rating agency is of the view that the increased leverage level as well as the interest coverage ratio will support its current ratings.

The rating agency is confident of the company’s ability to eventually cut down its debt level by deploying money for share repurchases.

A.M. Best is positive about the abovementioned acquisition, which will position the company as a leading insurer in Brazil, one of the fastest emerging economies of the world. Though at the initial level, the acquisition will only be slightly accretive to the company’s cash flow, huge synergies can be reaped eventually.

Moody’s has also affirmed UnitedHealth’s senior debt rating at ‘A3’ and the insurance financial strength (“IFS”) rating of UnitedHealthcare Insurance Company (UHIC) at A1. It has, however, lowered the outlook to negative from stable, reflecting concerns about the rise in leverage ratio attributable to the acquisition.  

Standard and Poor’s maintained its existing rating and outlook. In its view, the acquisition marks a giant step by UnitedHealth to diversify its operations internationally and it will result into long-term growth. It is also confident of the company’s ability to successfully integrate the acquisition given its past track record.

Another rating agency, Fitch Ratings also affirmed ‘A’ rating to the company’s long-term IDR and the 'A-' to senior unsecured securities.  It also kept its stable outlook intact. Fitch is of the opinion that the company’s debt and interest servicing capabilities will remain strong enough and will commensurate with the current levels. It is however, concerned with the integration risk relating to the acquisition as it views this large international purchase as one of its kind for the company.

Given UnitedHealth’s mammoth size and a very strong management team and a successful track record of successfully integrating businesses, we expect the same in case of the acquisition of Amil.  

UnitedHealth currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. We are also maintaining our long-term Neutral recommendation on the shares.

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