(The following statement was released by the rating agency)
Oct 8 - Fitch Ratings announced today that it is affirming UnitedHealth Group Inc.'s
(UNH) ratings and maintaining a Stable Rating Outlook on the company. The rating action follows today's announcement by UNH that it will acquire Amil Participacoes S.A. (Amil), a Brazil-based managed care company in a predominately debt-financed transaction expected to be valued at approximately $4.9 billion. A complete list of ratings is provided at the end of 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 that UNH's post-acquisition run-rate interest coverage and financial leverage will remain supportive of the company's current ratings.
The affirmation of UNH's domestic operating company subsidiaries' 'AA-' Insurer Financial Strength (IFS) ratings reflects Fitch's belief that the companies' operations and financial condition are unlikely to be materially impacted by the acquisition of Amil.
As with any acquisition of meaningful size, Fitch believes that UNH's purchase of Amil presents integration risk. In this case, Fitch views the integration risk as significant, due to the fact that the transaction represents UNH's first large international acquisition and because Amil's business is focused on a developing 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 transaction as 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 $4.9 billion of incremental debt expected to be issued to fund the acquisition on a pro forma basis at approximately 12.0x. The company's EBITDA-based interest coverage ratio through the first half of 2012 based on reported data was a strong 17.2x and from 2007 through 2011 it averaged 15.3x.
Fitch estimates UNH's June 30, 2012 ratios of debt-to-annualized EBITDA and debt-to-capital, including the above referenced debt on a pro forma basis at 1.7x and 38% respectively. Fitch views both of these ratios as moderately higher than expected for UNH's ratings and higher than the company's reported ratios of 1.2x and 31% at June 30, 2012. However, Fitch believes that through a combination of earnings retention and a reduction in near-term share repurchases, UNH will be successful reducing the ratios to approximately 1.5x and 35% by mid-2013.
Fitch believes that UNH's operating company subsidiaries will be largely unaffected by the acquisition and that the companies will continue to generate strong earnings and generate capital necessary to retain their leading competitive positions and maintain capitalization metrics at current levels.
UNH plans to acquire 60% of Amil's founder and chief executive officer's current approximate 70% ownership interest in a transaction expected to close in late October, and to conduct a tender offer for the approximate 30% of Amil's shares that are publicly owned in the first quarter of 2013.
In addition to retaining his 10% ownership interest in Amil, terms of the acquisition call for the company's founder and CEO to retain his position as Amil's CEO for five years, to acquire and retain for at least five years, $470 million of UNH stock, and to join UNH's board of directors.
Amil is a leading provider of private health insurance and managed care in Brazil that is currently rated 'AA'(bra) on Fitch's national rating scale. Based on the company's June 30, 2012 financial statements and current exchange rates, the company has $813 million of shareholders' equity and in 2011 generated $88 million of net income. Fitch's expectation is that Amil's contributions 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 unlikely over the next 12-24 months. Upward rating pressure on the company's IFS ratings is constrained by the fact that the companies' current ratings are approaching the high end of Fitch's ratings range for health insurers, at a time when Fitch remains concerned about the potential for continued unfavorable regulatory developments and their potential impact on UNH's profits, primarily in government sponsored businesses.
--Fitch could consider compressing the notching between UNH's operating company subsidiaries' IFS ratings and holding company IDRs, which would result in a one notch upgrade to UNH's debt ratings, if the company were to report debt-to-EBITDA ratios approximating 1.0x and debt-to-capital below 30% on a sustained basis, while maintaining EBITDA-to-interest coverage ratios in the mid-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's ability to appropriately price its products, or otherwise severely restrict the company's cash flow.
--Expectations for sustained ratios of debt/EBITDA above 1.9x, debt/total capital above 35% and EBITDA/interest below 8x could lead to negative rating actions.
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 Company UnitedHealthcare Insurance Company of Illinois UnitedHealthcare Insurance Company of New York Sierra 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, Inc UnitedHealthcare Benefits of Texas, Inc. UHC of California PacifiCare Life & Health Insurance Company UnitedHealthcare Plan of the River Valley --IFS at 'AA-'.
(Caryn Trokie, New York Ratings Unit)