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Fitch Affirms UnitedHealth Group After Pacificare Acquisition

Posted on: Wednesday, 6 July 2005, 18:00 CDT

Fitch Ratings has affirmed the 'A' long-term issuer and senior debt ratings and the 'F1' commercial paper rating of UnitedHealth Group, Inc. (UnitedHealth). In addition, Fitch has affirmed the insurer financial strength ratings of UnitedHealth's operating subsidiaries. A list of Fitch's ratings on UnitedHealth and its subsidiaries can be found below. The rating affirmation affects approximately $4.25 billion of outstanding long-term debt and commercial paper. The Rating Outlook is Stable.

Today's rating action follows the announcement by UnitedHealth of an agreement to acquire Cypress, California-based Pacificare Health Systems, Inc. (Pacificare), for consideration of approximately $9.0 billion. The deal is expected to be financed 27% in cash and 73% in shares of UnitedHealth common stock. Fitch expects UnitedHealth to fund the cash portion of the purchase price primarily with debt, resulting in reported consolidated leverage of approximately 28.5%, which is essentially the company's run rate leverage and is within Fitch's expectations. The transaction is expected to close in the first quarter of 2006.

Fitch views the transaction as strategically beneficial to UnitedHealth. Approximately 1.8 million, or 57% of Pacificare's 3.2 million members are located in California, which is a state where UnitedHealth has historically lacked a competitive market share. Pacificare's provider network within the State of California will be of significant value to UnitedHealth, which currently gains use of a provider network through a network access agreement with Blue Shield of California. In addition, UnitedHealth will be acquiring the largest player in the Medicare Advantage program. Pacificare will add approximately 720,000 Medicare Advantage members to UnitedHealth's existing Medicare Advantage membership of approximately 345,000 and will give an additional boost to UnitedHealth's plans to participate in the Medicare drug benefit beginning in 2006.

Fitch's primary concerns are related to integration challenges. While UnitedHealth's strong track record in integrating acquired companies and management's plans for a slow migration to UnitedHealth's strong administrative platform, Fitch notes that the company is still involved in the integration of two significant acquisitions completed in 2004, Mid Atlantic Medical Services, Inc. and Oxford Health Plans, Inc. Both of these transactions were smaller than the Pacificare deal announced today. Another large acquisition by UnitedHealth within the next 12-18 months could have negative implications for the company's assigned ratings.

UnitedHealth's very strong balance sheet fundamentals will weaken modestly due to the increased debt levels and additional goodwill but will remain within Fitch's rating expectations. The company's debt/EBITDA ratio is expected to increase from a projected 0.7 times in 2005 to an estimated 1.0x range in 2006.

Fitch's ratings on UnitedHealth reflect the inherent strength and diversity of the company's health services operations, good balance sheet fundamentals, strong earnings track record, and excellent cash flow. UnitedHealth has a balanced mix of risk-based and fee-based businesses, which have contributed significantly to the stability of the company's financial performance.

The ratings also consider the competitive pressures in several of the company's core markets driven by price competition, increasing medical costs, and the evolving regulatory and political environment. Also, risks associated with the ongoing integration of recent acquisitions are incorporated into the rating.

Fitch expects UnitedHealth to maintain financial leverage below 30%. The company's very strong liquidity profile is supported by strong operating cash flow and access to external financing sources. Fitch expects earnings-based interest coverage in excess of 25x in 2005. UnitedHealth's active share repurchase program is expected to be managed in line with Fitch's expectations for financial leverage.

The following ratings are affirmed with a Stable Rating Outlook by Fitch:

UnitedHealth Group, Inc.

-- Long-term issuer at 'A';

-- 7.500% senior notes due Nov. 15, 2005 at 'A';

-- 3.375% senior notes due Aug. 15, 2007 at 'A';

-- 5.200% senior notes due Jan. 17, 2007 at 'A';

-- 3.300% senior notes due Jan. 30, 2008 at 'A';

-- 3.750% senior notes due Feb. 10, 2009 at 'A';

-- 4.125% senior notes due Aug. 15, 2009 at 'A';

-- 4.875% senior notes due April 1, 2013 at 'A';

-- 4.750% senior notes due Feb. 10, 2014 at 'A';

-- 5.000% senior notes due Aug. 15, 2014 at 'A';

-- 4.875% Senior notes due March 15, 2015 at 'A';

-- Commercial Paper at 'F1'.

United HealthCare Insurance Company

United HealthCare Insurance Company of Illinois

United HealthCare Insurance Company of Ohio

United HealthCare Insurance Company of New York

-- Insurer financial strength at 'AA-'.

United HealthCare of Florida, Inc.

United HealthCare of Ohio, Inc.

United HealthCare of the Midwest, Inc.

UnitedHealthcare of North Carolina, Inc.

UnitedHealthcare of New England, Inc.

UnitedHealthcare of Illinois, Inc.

UnitedHealthcare of Wisconsin, Inc.

United HealthCare of Alabama, Inc.

United HealthCare of Kentucky, Ltd.

UnitedHealthcare of New York, Inc.

United HealthCare of Georgia, Inc.

UnitedHealthcare of New Jersey, Inc.

United HealthCare of the Midlands, Inc.

United HealthCare of Arkansas, Inc.

United HealthCare of Mississippi, Inc.

MAMSI Life and Health Insurance Company

AmeriChoice of New York, Inc.

Optimum Choice, Inc.

MD-Individual Practice Association, Inc.

Oxford Health Insurance, Inc.

Oxford Health Plans of Connecticut, Inc.

Oxford Health Plans of New Jersey, Inc.

Oxford Health Plans of New York, Inc.

-- Insurer financial strength at 'A+'.

United HealthCare of Texas, Inc.

United HealthCare of Arizona, Inc.

UnitedHealthcare of the Mid-Atlantic, Inc.

United HealthCare of Utah, Inc.

United HealthCare of Tennessee, Inc.

United HealthCare of Louisiana, Inc.

United HealthCare of Colorado, Inc.

AmeriChoice of New Jersey, Inc.

AmeriChoice of Pennsylvania, Inc.

Great Lakes Health Plan, Inc.

-- Insurer financial strength at 'A'.

Source: Business Wire

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