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UnitedHealth Faces Moody's Rating Action, Outlook Upgraded

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UnitedHealth Group Inc. (UNH - Free Report) has witnessed a rating action from Moody's Investors Service. Moody's affirmed the senior debt rating of the UnitedHealthcare Insurance Company (UHIC) unit at ‘A3’ and the insurance financial strength (IFS) rating at 'A1.’

Moody’s also upgraded the outlook on UnitedHealth and UHIC to stable from negative.

Looking back, Moody’s had put the company’s rating on negative watch following its acquisition of pharmacy benefit manager Catamaran in 2015. This raised the company’s leverage ratio as the deal was financed by debt.

The rating action takes into account the company’s leadership position in the industry, its diversified business product profile, its profitable health benefits and health service segments. Consistent cash generation by UnitedHealth has enabled it to lower its debt levels.

An offsetting factor is the company’s use of debt for acquisitions, which makes it more leveraged. Also, high goodwill and lower risk based capital ratio (as at the end of 2016) is another blip.

Volatility in medical cost and regulatory uncertainties are the other headwinds facing the company.

Nevertheless, the rating agency is of the opinion that the company will continue to post strong earnings driven by stable medical utilization trends, disciplined medical management, and efforts toward reducing debt levels to 40% from 44% as of Mar 31, 2017.

In the last one year, the stock has returned 32%, a little lower than the Zacks categorized Medical - HMOs industry’s gain of 35%. However, the underperformance is not a matter of concern and we expect shares to gain traction soon, given the company’s strong fundamentals.

Early during the year, two major players in the same industry — Humana Inc. (HUM - Free Report) and Aetna Inc. (AET - Free Report) — got their respective debt ratings affirmed, with a stable outlook from Moody’s, after they mutually terminated their merger.

UnitedHealth carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Another stock in the same space with the same Zacks Rank is Cigna Corp. (CI - Free Report) .

Cigna is expected to deliver a positive earnings surprise when it reports second-quarter results on Aug 4, since it has a favorable Zacks Rank and an Earnings ESP of +0.81%.

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