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Fitch Comments on UnitedHealth Group's Earnings Revision
CHICAGO-(Business Wire)-July 3, 2008 - Fitch Ratings is taking no action on the ratings of UnitedHealth Group (UnitedHealth) and its insurance operating subsidiaries following the company's downward earnings revision this morning and agreement in principal to settle two pending class action lawsuits. The Rating Outlook remains Negative.
In a press release issued this morning, UnitedHealth announced a downward revision of approximately $1 billion in its expectation for operating earnings for full year 2008 relative to earlier guidance given during its first quarter earnings call in April 2008. The revision was driven by a continuation of pressures cited in the earlier revision, including lower revenue growth driven by recent developments in enrollment trends, in terms of both volume and mix, as well as competitive pressures that have placed downward pressure on premium yields.
The company also announced in a separate press release that it had reached an agreement in principal with the lead plaintiff to settle the federal securities class action lawsuit relating to its historical stock options practices. The terms of the proposed settlement call for the company to pay $895 million into a fund to benefit members of the class. The company also announced an agreement in principal to resolve the Employee Retirement Income Security Act class action litigation, related to the same matter, for a proposed payment of $17 million into a settlement fund for the benefit of members of the class.
While the potential settlement of the two class action lawsuits is a positive development, the earnings revision maintains downward pressure on the company's current ratings. Given the new guidance provided today, the company's debt-to-EBITDA, which Fitch uses as its primary measure of financial leverage, will increase to approximately 1.8 times (x) in 2008, from 1.5x to 1.6x based on guidance given in the company's first quarter 2008 earnings conference call. While Fitch views this as high for the company's current ratings, its operating fundamentals remain strong, lending support to its ability to meet its financial obligations. While the company's expected EBIT margin of 8.0% in 2008 is down from its 2007 level of 10.4%, profitability remains strong from an historical perspective.
Fitch further believes that UnitedHealth's long-term cash flow strength is likely to return to historical levels, and that debt-to-EBITDA will not increase meaningfully from the estimated 2008 full-year level.
Fitch's ratings on UnitedHealth reflect the inherent strength and diversity of the company's health services operations, good balance sheet fundamentals, very 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 markets driven by price competition, unsustainable medical cost trends, and the evolving regulatory and political environment affecting the health insurance and managed care industry.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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