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Rating Action on UnitedHealth

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As a part of its annual review, the rating agency A.M.Best, yesterday disclosed its findings on UnitedHealth Group Inc. (UNH - Free Report) and its subsidiaries. Details of the findings are as follows :

  • A.M.Best reaffirmed the financial strength ratings (FSR) of A (Excellent) and issuer credit ratings (ICR) of “a” along with a stable outlook on 26 of its subsidiaries.
  • Another 12 of subsidiaries received FSR affirmation of A- (Excellent) and ICRs affirmation of “a-”, with a stable outlook.
  • Twenty one subsidiaries saw their FSR upgraded to A from A- and ICRs to “a” from “a-” with a stable outlook.
  • Three entities were assigned FSR of A- and ICRs of “a-” with a stable outlook.
  • Four entities saw affirmation of their FSR of B++ (Good) and ICRs of “bbb” with a stable outlook.
  • One of UnitedHealth’ssubsidiaries – PacifiCare Behavioral Health, California, Inc., witnessed a withdrawal of ratings of FSR of A- (Excellent) and ICR of “a-”.

The rating agency acknowledges UnitedHealth’s significant market niche and diversified business operations with no more than 37% coming from any one segment. The largest exposure is commercial risk at 37% followed by Medicare Advantage at 27% and the remaining segments are under 10%. A.M.Best also finds the company’s size (it is largest publicly traded health insurer based on revenue) favorable.

However, A.M.Best is concerned with high debt leverage, which stood at 30.1% at the end of third quarter 2010. Also, a large amount of goodwill in the company’s balance sheet due to several acquisitions is a cause for worry.

Another offsetting factor is the earnings improvement seen at the company in fiscal 2010 compared with the prior year due to lower medical ratios. However, with the mandatory compliance of minimum medical ratios, the company will have to give rebates to members or increase the medical ratios to the required level, which may result in an earnings decline.

UnitedHealth, along with other players in the health insurance sector -- CIGNA Corp. (CI - Free Report) , Humana Inc. (HUM - Free Report) and Welllpoint Inc. (WLP), is exposed to the uncertainties that surfaced due to the recently enacted health care reform.

The anticipated headwinds include: a continued weak employment outlook; continued state and municipal budget deficits; the phase-down of enhanced Federal Medical Assistance Percentage (FMAP) in mid 2011; higher costs related to the implementation of health care reform; challenging Medicare Advantage rates for the second consecutive year; a continued low interest rate environment pressuring investment income, and higher expenses to prepare for compliance with the federally mandated ICD-10 coding and HIPAA 5010 standards.

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