AET Aetna Inc. (delisted)

Rating agencies Fitch Ratings, Standard & Poor’s and A.M. Best have provided their respective rating grades on the recently issued $1 billion of notes by UnitedHealth Group Inc. (UNH).

Fitch and S&P both have assigned “A-“rating. The notes have garnered a rating of “bbb+” from A.M. Best, with a stable outlook. The “bbb+” rating implies an investment grade type with a good credit quality while a stable outlook translates into minimum possibilities of a rating change owing to stable financial/market trends.

The $1 billion notes consist of two tranches – $400 million with a 30 year maturity and $600 million with a 10 year maturity.

The proceeds from the issue will be used for general corporate purposes including share buybacks, acquisitions, debt repayment and working capital finance.  

Minnesota-based UnitedHealth is on a firm footing from a balance sheet perspective. The company has reduced its debt-to-capital ratio to 29.2% as of December 31, 2011, down from 30.1% at the end of 2010, thus giving itself substantial financial flexibility. For the past five years, its debt-to-capital ratio stands at an average of approximately 32.0%.

UnitedHealth ended the year with a fixed charge coverage ratio of approximately 10.0x, which implies that it earns enough to cover its interest payments, giving it a strong coverage. The rating agency A.M. Best is of the opinion that though at present the company has a strong coverage ratio, it may deteriorate going forward as interest expense increases. Future earnings may also decline in the backdrop of competitive markets, implementation of minimum loss ratio requirements and the growing share of Medicare and Medicaid in the company business mix, which generate lower margins.

We also note that UnitedHealth has long-term debt-to-cash ratio of 0.4:1.0 (As of December 31, 2011, the company had $11,638 million in long-term debt outstanding and cash and short-term investment accounts worth $28,172.0 million). This implies that it is able to absorb an earnings hit and survive in the near term.

UnitedHealth continues to be disciplined with its capital management. It has historically returned a substantial portion of its net earnings to shareholders through share repurchase and dividends. Together, this has averaged more than 80% of its net income over the past five years.

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

 
AETNA INC-NEW (AET): Free Stock Analysis Report
 
CIGNA CORP (CI): Free Stock Analysis Report
 
HUMANA INC NEW (HUM): Free Stock Analysis Report
 
UNITEDHEALTH GP (UNH): Free Stock Analysis Report
 
WELLPOINT INC (WLP): Free Stock Analysis Report
 
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