UnitedHealth Group And Its Units Gets Rated By A.M. Best

UnitedHealth Group Incorporated (NYSE:UNH) recently received rating action from A.M. Best. The rating agency affirmed the financial strength rating of A (Excellent) and the issuer credit ratings (ICR) of “a” of most of the insurance subsidiaries of the insurer.

Also, the ICR of “bbb+” and issue ratings of UnitedHealth Group have been affirmed by the credit rating giant. The outlook for all ratings remained stable.

UnitedHealth Group has been witnessing consistent growth in its insurance and non-insurance businesses, which in turn, have been supporting its diversified operations. The rating affirmations too reflect the company’s operational strength.

The rating agency also acknowledges the company’s leadership position in the health insurance market on the back of continued growth in multiple commercial and government products as well as a customer base of 47 million. The company’s thriving Medicare and Medicaid lines of business have mainly contributed to the enrollment growth. The revenues generated from the Medicaid expansion have added to the insurer’s overall improvement.

Further, revenues at UnitedHealth Group’s health care services operation – Optum – witnessed significant increase after the Catamaran acquisition.

Over the past five years, the lead insurance affiliate of the company, UnitedHealthcare Insurance Company, has generated $14.7 billion of underwriting gains and $11.9 billion of net earnings. This has contributed to UnitedHealth Group’s overall bottom-line growth.

However, contracting operating margins at insurance and non-insurance operations partially offset the aforementioned positives. Risks to self-funded conversion in the commercial segment, lower Medicare Advantage reimbursement, Affordable Care Act (ACA) fees as well as an increasing share of lower margin government products lowered profitability of the company’s subsidiaries. Notably, the tepid results reflect the prevailing weakness in the industry.

Higher-than-expected utilization, precisely by members from outside of the annual open enrollment period, had led UnitedHealth incur substantial losses in ACA exchanges, like most other carriers in 2015. Such losses included the premium deficiency reserves, which in turn will offset the potential weak performance in 2016.

The company’s absence in exchange markets raises risks of market share loss in the individual market. Hence, the rating agency remains skeptical about the anticipated increase in the company’s number of member enrollment through exchanges in the medium term. Also, the level of risk-adjusted capitalization at UnitedHealth Insurance and other insurance entities remain lower than competitors. UnitedHealth Insurance’s solid operating results in the past have been recognized by the credit rating giant. Although this trend is more likely to continue, the entity has experienced moderation in its earnings margins.

The company has enough resources and interest to offer support to UnitedHealth Insurance, if necessary. However, subsequent to the Catamaran acquisition in 2015, the financial leverage at UnitedHealth Group increased to above 45%. Goodwill plus intangibles to equity ratio presently has soared above 150%.

The rating agency views favorably UnitedHealth’s interest coverage ratio which remains above 10 times. The company also intends to reduce financial leverage to below 40% by the end of 2017. This can be achieved through reduced share repurchase and earnings accretion. However, A.M. Best remains skeptical as the dwindling balance sheet quality might put pressure on regulated entities in the near to medium term.

Rating affirmations or upgrades from credit rating agencies play an important role in retaining investor confidence on the stock as well as maintaining credit worthiness in the market. Hence, the ratings raise optimism about the stock performance.

Zacks Rank and Stocks to Consider

Currently, UnitedHealth Group carries a Zacks Rank #3 (Hold). Some better-ranked stocks are Centene Corp. (NYSE:CNC) , Select Medical Holdings Corporation (NYSE:SEM) and WellCare Health Plans, Inc. (NYSE:WCG) . Each of these stocks hold a Zacks Rank #2 (Buy).

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