AET Aetna Inc. (delisted)

Earlier this week, UnitedHealth Group Inc. (UNH), the biggest insurer in the U.S., sold $750 million of long-term notes in two tranches.

The first tranche consists of $400 million of 10-year notes, yielding a return of 115 basis points above the similar featured treasury securities. The other consists of $350 million with a 30-year maturity, which will yield a return of 130 basis points above the similar featured treasury securities.

The interest spread between the treasury securities and the company’s corporate debt indicates uncertainty prevailing in UnitedHealth because of the health care reform and its implications.  

 The proceeds flowing out of the issuance will be used for general corporate purposes including share buyback, funding acquisitions, repaying debt or financing working capital requirements.  

UnitedHealth’s balance sheet has a long-term debt to equity ratio of 0.335, implying that for every dollar of long-term debt, there is about $­­­­­­­­­­­­­­­­­­­­­­­­­­3.0 of equity on the balance sheet.

Minnesotabased UnitedHealth stands healthy from a balance sheet perspective. The company has reduced its debt-to-capital ratio to 30.1% as of December 31, 2010, down from 32.1% at 2009 end, thus giving itself substantial future flexibility. For the past five years, its debt ratio stands at an average of 32.1%.

UnitedHealth, which employs 87,000 individuals, ended 2010 with a fixed charge coverage ratio of 14.0X. It implies that the company earns enough before taxes to cover its interest payments 14 fold, thus providing a strong coverage.

We also note that UnitedHealth has long term debt-to-cash ratio of 0.8:1 (as of December 31, 2010, United had $8,662 million in long-term debt outstanding and their cash and short term investment accounts held $11,195.0 million in assets). This indicates that with short-term assets at current levels, it can absorb earnings hit, if any, and survive.

The notes have “bbb+” rating along with a stable outlook from the rating agency, A.M.Best. The “bbb+” rating reflects investment grade status with a good credit quality, and the stable outlook implies lower possibility of a rating change due to stable financial/markets trends.

As of December 31, 2010, UnitedHealth’s senior unsecured debt was rated Baa1 with a stable outlook and A- with a negative outlook by Standard & Poor’s and Fitch, respectively. 

Prior to this issuance, UnitedHealth, the biggest U.S. health insurer by revenue, came out with $750 million of long-term notes in two tranches in October 2010, which had been the first bond offering since February 2008, when it raised $3.0 billion through senior unsecured notes. 

UnitedHealth continues to be disciplined in its capital allocation this year (2011). It has historically returned a substantial portion of its net earnings to shareholders through share repurchase and dividends, which have averaged more than 80% of the net income over the past five years.

UnitedHealth competes with other players in the health insurance sector, such as WellPoint Inc. (WLP), CIGNA Corp. (CI), Aetna Inc. (AET), Humana Inc. (HUM), etc.

 
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