Rating Action on UnitedHealth - Analyst Blog

Following the revision of rating outlook to stable from negative over the U.S. Health Insurance and Managed Care sector, the rating agency Fitch Ratings also took rating action on UnitedHealth Group Inc. (UNH) one of the major companies of the sector.

The rating actions included the affirmation of UnitedHealth's long-term issuer default rating (IDR) at “A” and issuer financial strength ratings of “AA-“on fifteen of its subsidiaries. The ratings carry a stable outlook.

Fitch's upward revision of the rating outlook acknowledges that the impact of Patient Protection and Affordable Care Act (PPACA) on UnitedHealth Group will be manageable.

Earlier, in October 2010, Fitch placed a negative outlook on the company reflecting uncertainty related to the said reform.

The PPACA enacted as a result of the health care reform has been a cause of uncertainty for the players in the industry. The act carries a number of regulations which will come into effect gradually.

The mandate regarding the compliance of the minimum medical loss ratio for individual plans that has come into effect this year is not expected to cause much of a downside risk as the exposure to the Individual/Small Group market appears manageable at an estimated ~10% of 2010 earnings. However, reduction of funding from the Medicare Advantage plans will have an adverse effect on the company since it derives approximately 25% of earnings from these plans.

UnitedHealth is considered to be the bellwether of the health insurance industry as it is the first to release earnings indicating the trend within the industry. The company is slated to release fourth quarter and full year 2010 earnings on January 20, 2011, before the opening bell.

The Zacks consensus estimates earnings of 84 cents per share for the fourth quarter and $3.99 for full year 2010 , higher than the management's expectation of earnings range of $3.85–3.95.

Peers WellPoint Inc. (WLP), Aetna Inc.  (AET), Cigna Corp. (CI), Humana Inc. (HUM) Coventry Health Care Inc. (CVH) also witnessed rating actions.

UnitedHealth carries a Zacks #2 Rank, which implies a Buy recommendation over the short term (1-3 months). However, over the longer term (6+ months) we rate the shares as Neutral.

 
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