(The following statement was released by the rating agency)
Oct 8 - Fitch Ratings announced today that it is affirming UnitedHealthGroup Inc.'s
(UNH) ratings and maintaining a Stable Rating Outlookon the company. The rating action follows today's announcement by UNH that itwill acquire Amil Participacoes S.A. (Amil), a Brazil-based managed care companyin a predominately debt-financed transaction expected to be valued atapproximately $4.9 billion. A complete list of ratings is provided at the endof this release.
The affirmation of UNH's 'A' long-term Issuer Default Rating (IDR) and the 'A-'ratings on the company's senior unsecured securities reflects Fitch's view thatUNH's post-acquisition run-rate interest coverage and financial leverage willremain supportive of the company's current ratings.
The affirmation of UNH's domestic operating company subsidiaries' 'AA-' InsurerFinancial Strength (IFS) ratings reflects Fitch's belief that the companies'operations and financial condition are unlikely to be materially impacted by theacquisition of Amil.
As with any acquisition of meaningful size, Fitch believes that UNH's purchaseof Amil presents integration risk. In this case, Fitch views the integrationrisk as significant, due to the fact that the transaction represents UNH's firstlarge international acquisition and because Amil's business is focused on adeveloping economy in a sector that is currently undergoing rapid change.
However, Fitch views the sheer size of UNH's earnings and capital bases,historically successful acquisition track-record, and terms of the transactionas factors that mitigate this risk.
Fitch calculates UNH's first half 2012 EBITDA-based interest coverage ratio,including interest on Amil's currently outstanding debt and interest on $4.9billion of incremental debt expected to be issued to fund the acquisition on apro forma basis at approximately 12.0x. The company's EBITDA-based interestcoverage ratio through the first half of 2012 based on reported data was astrong 17.2x and from 2007 through 2011 it averaged 15.3x.
Fitch estimates UNH's June 30, 2012 ratios of debt-to-annualized EBITDA anddebt-to-capital, including the above referenced debt on a pro forma basis at1.7x and 38% respectively. Fitch views both of these ratios as moderatelyhigher than expected for UNH's ratings and higher than the company's reportedratios of 1.2x and 31% at June 30, 2012. However, Fitch believes that through acombination of earnings retention and a reduction in near-term sharerepurchases, UNH will be successful reducing the ratios to approximately 1.5xand 35% by mid-2013.
Fitch believes that UNH's operating company subsidiaries will be largelyunaffected by the acquisition and that the companies will continue to generatestrong earnings and generate capital necessary to retain their leadingcompetitive positions and maintain capitalization metrics at current levels.
UNH plans to acquire 60% of Amil's founder and chief executive officer's currentapproximate 70% ownership interest in a transaction expected to close in lateOctober, and to conduct a tender offer for the approximate 30% of Amil's sharesthat are publicly owned in the first quarter of 2013.
In addition to retaining his 10% ownership interest in Amil, terms of theacquisition call for the company's founder and CEO to retain his position asAmil's CEO for five years, to acquire and retain for at least five years, $470million of UNH stock, and to join UNH's board of directors.
Amil is a leading provider of private health insurance and managed care inBrazil that is currently rated 'AA'(bra) on Fitch's national rating scale.Based on the company's June 30, 2012 financial statements and current exchangerates, the company has $813 million of shareholders' equity and in 2011generated $88 million of net income. Fitch's expectation is that Amil'scontributions to UNH's earnings and EBITDA will be modest for several years.
Key rating factors that could result in an upgrade of UNH's ratings:
--Fitch believes that an upgrade to UNH's subsidiaries' IFS ratings is unlikelyover the next 12-24 months. Upward rating pressure on the company's IFS ratingsis constrained by the fact that the companies' current ratings are approachingthe high end of Fitch's ratings range for health insurers, at a time when Fitchremains concerned about the potential for continued unfavorable regulatorydevelopments and their potential impact on UNH's profits, primarily ingovernment sponsored businesses.
--Fitch could consider compressing the notching between UNH's operating companysubsidiaries' IFS ratings and holding company IDRs, which would result in a onenotch upgrade to UNH's debt ratings, if the company were to reportdebt-to-EBITDA ratios approximating 1.0x and debt-to-capital below 30% on asustained basis, while maintaining EBITDA-to-interest coverage ratios in themid-teens or better.
Key rating triggers that could result in a downgrade to UNH's ratings include:
--Developments related to health care reform that significantly impair UNH'sability to appropriately price its products, or otherwise severely restrict thecompany's cash flow.
--Expectations for sustained ratios of debt/EBITDA above 1.9x, debt/totalcapital above 35% and EBITDA/interest below 8x could lead to negative ratingactions.
Fitch has affirmed the following ratings with a Stable Outlook:
UnitedHealth Group, Incorporated--Long-term IDR at 'A';--Short-term IDR at 'F1';--Commercial paper rating at 'F1';--5.500% senior unsecured notes due 2012 at 'A-';--4.875% senior unsecured notes due 2013 at 'A-';--4.875% senior unsecured notes due 2013 at 'A-';--4.75% senior unsecured notes due 2014 at 'A-';--5% senior unsecured notes due 2014 at 'A-';--4.875% senior unsecured notes due 2015 at 'A-';--1.875% senior unsecured notes due 2016 at 'A-';--5.375% senior unsecured notes due 2016 at 'A-';--6% senior unsecured notes due 2017 at 'A-';--6% senior unsecured notes due 2017 at 'A-';--6% senior unsecured notes due 2018 at 'A-';--3.875% senior unsecured notes due 2020 at 'A-';--3.375% senior unsecured notes due 2021 at 'A-';--4.7% senior unsecured notes due 2021 at 'A-';--0% senior unsecured notes due 2022 at 'A-';--2.875% senior unsecured notes due 2022 at 'A-';--5.8% senior unsecured notes due 2036 at 'A-';--6.5% senior unsecured notes due 2037 at 'A-';--6.625% senior unsecured notes due 2037 at 'A-';--6.875% senior unsecured notes due 2038 at 'A-';--5.7% senior unsecured notes due 2040 at 'A-';--5.95% senior unsecured notes due 2041 at 'A-';--4.625% senior unsecured notes due 2041 at 'A-';--4.375% senior unsecured notes due 2042 at 'A-'.UnitedHealthcare Insurance CompanyUnitedHealthcare Insurance Company of IllinoisUnitedHealthcare Insurance Company of New YorkSierra Health & Life Insurance Company, Inc.Health Plan of Nevada, Inc.UnitedHealthcare of Florida, Inc.PacifiCare of Arizona, Inc.Oxford Health Insurance, Inc.Oxford Health Plans of New York, Inc.UnitedHealthcare of Wisconsin, IncUnitedHealthcare Benefits of Texas, Inc.UHC of CaliforniaPacifiCare Life & Health Insurance CompanyUnitedHealthcare Plan of the River Valley--IFS at 'AA-'.
(Caryn Trokie, New York Ratings Unit)