Fitch is currently maintaining all ratings of UnitedHealth Group (UNH) on Rating Watch Negative. A list of Fitch's ratings on UNH can be found below.
UNH filed a Form 8-K with the Securities and Exchange Commission this morning disclosing several new developments related to ongoing issues involving its stock option granting practices. The disclosures included the following:
--The company expects to recognize non-cash charges for stock-based compensation expense which are likely to be material, and significantly greater than the estimate contained in its 10-Q for the first quarter of 2006. The company will also incur higher than previously estimated additional cash charges resulting from potential tax liabilities associated with improper accounting for the stock-based compensation.
--The company has determined that it had a material weakness in internal control over financial reporting relating to stock option plan administration and accounting for and disclosure of stock option grants as of December 31, 2005.
--Patrick Erlandson, the company's former Chief Financial Officer, had resigned effective yesterday, and was replaced by G. Mike Mikan, who has performed various roles within the company and its subsidiaries, most recently Senior Vice President of Finance at UNH.
Despite the company's disclosure that the restatement of earnings will be material, Fitch notes that this is a non-cash charge that does not affect overall shareholder capital or the company's ability to service its debt obligations. Although the additional taxes, interest and penalties related to the accounting adjustment will certainly have cash flow implications, given management estimates, Fitch does not consider the amount to be sufficient to significantly impede the company's ability to meet its obligations. Fitch continues to consider UNH's cash flow coverage, although adversely affected by issues surrounding the company's stock option granting practices, to be more than sufficient to justify the company's current ratings given its financial leverage.
Fitch considers the company's disclosure of a material weakness under Sarbanes-Oxley 404 to be troubling. Clearly, such weaknesses in governance can tarnish a company's image, sometimes adversely affecting the company's ability to attract and retain business, and often lead to difficulties similar to those being faced by UNH's management today. However, although too late to aid the company in heading off its current difficulties, Fitch views recent and ongoing changes within the company's governance practices as important in bolstering the company's governance going forward.
Fitch originally placed UNH's ratings on Rating Watch Negative on August 30, 2006, following the company's announcement that it had received a notice of default from a group of persons claiming to hold certain of its debt securities alleging a violation of UNH's indenture governing its debt securities. The company has stated that it believes it is not in default. The company received a purported notice of acceleration on November 2, 2006, from the holders who previously sent the notice of default that purports to declare an acceleration of the Company's 5.80% Notes due March 15, 2036 as a result of the Company's not filing its quarterly report on Form 10-Q for the quarter ended June 30, 2006. Given developments to date, Fitch is working under the assumption that this issue will be tied up in litigation for some time.
Despite the recent departure of several senior executives and board members, Fitch continues to view UNH's management team as being strong in breadth and depth. In addition, Fitch acknowledges that UNH's operating fundamentals remain very strong, and does not believe that the developments announced in recent weeks significantly diminish the company's ability to meet its debt and policyholder obligations.
Fitch will continue to closely monitor UNH's operating performance and other issues that have developed since questions surrounding the company's options granting practices were disclosed, and will take appropriate rating action as conditions warrant.
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, increasing medical cost trends, and the evolving regulatory and political environment affecting the health insurance and managed care industry.
Fitch's existing ratings on UnitedHealth and its operating subsidiaries are listed below:
UnitedHealth Group, Inc.
--Long-term Issuer Default Rating (IDR) 'A+'
--Floating-Rate Senior notes due 2009 at 'A';
--5.250% Senior notes due Mar. 15, 2011 at 'A';
--5.375% Senior notes due Mar. 15, 2016 at 'A';
--5.800% Senior notes due Mar. 15, 2036 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 (IFS) 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.
--IFS at 'A'.
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.
