AET Aetna Inc. (delisted)

The rating agency Standard and Poor’s Rating Services (S&P) yesterday pulled up the ratings outlook on the Minnesota-based health insurer UnitedHealth Group Inc. (UNH) to “stable” from “negative”.

UnitedHealth ranks first among the major health insurers in the U.S. on the basis of revenues. It is currently carrying a credit rating “A-” from S&P, which implies that the company has a strong capacity to meet its financial commitment.

S&P acknowledges UnitedHealth’s ability to swim successfully through the difficult market conditions for the past two years and generate solid earnings. The revision of outlook to stable from negative is indicative of a potential ratings upgrade over the next year or two.

UnitedHealth Group is one of the most diversified of the listed managed care companies in the U.S. With a broad product and service offering, the company targets the full spectrum of the population. As a result,its earnings are buffered to a certain degree against any single change in market dynamics at the divisional level. This is witnessed by he growth in the company’s revenues for the past five years.

UnitedHealth stands healthy from a balance sheet perspective as well. The company maintained its debt-to-capital ratio at favorable levels of 30.8% as of March 31, 2011. For the past five years, its debt ratio has stood at an average of 32.1%. The company is also consistent in its dividend paying capability. Its annualized 10-year dividend growth rate has been 52.2%. Historically, the company hasfavored share buybacks and mergers over dividend payments as a way to deploy capital. The company has been generating a strong cash flow from operations, which further signals strong longer-term cash flow prospects.

With the easing out of the uncertainty related to the Health Care reform passed last year, S&P has been revising its outlook on other players in the industry as well. In April 2011, S&P revised its outlook on Aetna Inc. (AET) to stable from negative and also affirmed its credit rating at “A-“. Similarly, in March 2011, the rating agency affirmed the counter party credit rating of health insurer WellPoint Inc. (WLP) and revised the outlook to stable from negative.

Going forward, we expect an upward rating revision on most of the players in the health insurance industry, given the solid earnings posted by most of them year till date, with most of them tweaking their EPS estimates upward.

 
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