A.M. Best has affirmed the Financial Strength Rating (FSR) of A (Excellent) and the Long Term Issuer Credit Ratings (Long-Term ICR) of “a” for the majority of the insurance subsidiaries of UnitedHealth Group Incorporated(UnitedHealth Group) (Minnetonka, MN) [NYSE: UNH]. Concurrently, A.M. Best has affirmed the Long-Term ICR of “bbb+” and the Long-Term and Short-Term Issue Credit Ratings of UnitedHealth Group. The outlook of these Credit Ratings (ratings) is stable.
Additionally, A.M. Best has upgraded the FSR to A (Excellent) from A- (Excellent) and Long-Term ICR to “a” from “a-” for Neighborhood Health Partnership, Inc. (Miami, FL). The outlook of these ratings is stable.
A.M. Best has also affirmed the FSR of A- (Excellent) and Long-Term ICR of “a-” for Harken Health Insurance Company (Harken Health) (Onalaska, WI). The outlook of these ratings is stable. Concurrently, A.M. Best has withdrawn the rating of Harken Health at the request of its parent, UnitedHealth Group. (See link below for a detailed listing of the companies and ratings.)
The affirmations of the ratings reflect UnitedHealthcare’s solid market presence, consistent top line growth, diversified premium revenue and strong earnings. UnitedHealthcare’s insurance entities collectively maintain a solid market presence across the United States. The membership base is very strong with continued growth being reported. The organization has reported material growth in both Medicare Advantage and Managed Medicaid membership. UnitedHealthcare’s relationship with AARP contributes to UnitedHealthcare’s growth momentum in Senior products, as well as to the increasing number of Medicare Advantage plans with 4 stars. UnitedHealthcare also continues to expand its Medicaid enrollment through new contract awards from states for Managed Medicaid business, as well as for expanded services for additional segments of the Medicaid eligible population. However, commercial membership was negatively impacted by the company’s decision to exit the majority of its individual exchange markets, which more than offset the growth in commercial group enrollment.
UnitedHealth Group has diversified operations through both its insurance and non-insurance operations. Optum provides technological and product support to the market, bringing innovations and enhancing capabilities for better quality of care and management of consumers’ health. Optum services the insurance operations of UnitedHealthcare and external customers and is among the market leaders in high value ambulatory care delivery and pharmacy care services. UnitedHealth Group generates strong earnings driven by both its insurance and non-insurance operations. Optum provides the organization with a growing stream of earnings and cash flows that are non-regulated and do not require approval for dividend payments. Over 50% of the cash flow to the holding company is non-regulated. Furthermore, the insurance entities, led by UnitedHealthcare Insurance Company, generate strong underwriting and operating results for the organization, which also drives their high dividend capacity.
Partially offsetting rating factors include pressure on meaningful margin expansion as net margins for the majority of UnitedHealthcare’s insurance entities have declined over the last several years. The decreased profitability is in line with the industry trend and is a result of competitive pricing, growing fee-based business, pressure on Medicare Advantage reimbursement rates, Patient Protection and Affordable Care Act fees and a changing business mix. In addition, UnitedHealthcare earnings from its insurance operations in 2015 and 2016 were suppressed due to losses in its individual exchange business. However, A.M. Best acknowledges that UnitedHealthcare has exited from the majority of exchange markets for 2017. Meaningful margin expansion will be difficult in the future due to the growing share of government business as a percent of total business, as these products typically produce lower margins. Furthermore, the level of risk-adjusted capital at UnitedHealthcare’s insurance subsidiaries remains lower when compared with health plan peers. Although risk-adjusted capital is low, UnitedHealthcare’s insurance subsidiaries have historically generated strong operating results and UnitedHealth Group has the resources and willingness to provide support if needed. In addition, there continues to be a high level of dividends to the holding company from the insurance entities, which suppresses capital and surplus growth.
Following Optum’s acquisition of Catamaran Corp. in 2015, financial leverage for the organization increased significantly. The company is executing a plan to reduce financial leverage to below 40% by the end of 2017 mainly through reduced share repurchases and earnings accretion, but pressure remains on the regulated entities for debt service and to fund capital expenditures for the organization. Moreover, UnitedHealth Group has a high level of goodwill plus intangibles to equity at approximately 140%. Furthermore, while A.M. Best acknowledges UnitedHealth Group’s strong earnings before interest and taxes (EBIT) interest coverage at more than 10 times, the EBIT interest coverage has been declining steadily. UnitedHealth Group’s debt has been serviced by the substantial dividend capacity at the regulated subsidiaries, as well as growing cash flow from the non-regulated operating subsidiaries.
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