AM Best Comments on Credit Ratings of UnitedHealth Group Incorporated and Subsidiaries Following Announcement of LHC Group Inc. Acquisition

AM Best has commented that the Credit Ratings (ratings) of UnitedHealth Group Incorporated (UnitedHealth Group) (Minnetonka, MN) [NYSE: UNH] and its insurance subsidiaries remain unchanged following the announcement that the group will acquire LHC Group Inc. (LHC) (Lafayette, LA) [NASDAQ: LHCG], a national provider of home-health care services. The outlooks of the ratings remain stable.

LHC is to be combined with UnitedHealth Group’s Optum Health operations. The combination of LHC and Optum Health will aim to strengthen its presence for in-home care, which when facilitated through Optum Health’s value-based care and experience, could become a lower-cost alternative to nursing homes and a way to reduce hospital stays, especially among the senior population.

The transaction, valued at approximately $6 billion, including $600 million debt of LHC that UnitedHealth Group would retire, was announced on March 29, 2022. The transaction is expected to close during the second half of the year, subject to customary regulatory approval, as well as approval from LHC’s shareholders. Concurrently, UnitedHealth Group expects to close the $13 billion acquisition of Change HealthCare, as previously announced, in the second half of 2022, which was delayed following an antitrust suit from the U.S. Department of Justice.

Given the scale of the two transactions combined, as well as uncertainties around regulatory approval and credit markets later in the year, AM Best is concerned that UnitedHealth Group’s balance sheet metrics could be pressured. AM Best anticipates that UnitedHealth Group will finance a portion of the two transactions through a combination of debt and cash. The combined cost of the two transactions would result in an initial increase in financial leverage to approximately 41% at year-end 2022, as estimated by AM Best. Furthermore, UnitedHealth Group’s percentage of goodwill and intangible assets to equity is high and was 114.4% at Dec. 31, 2021, and the completion of the two transactions would increase this metric and put pressure on the enterprise’s balance sheet. However, UnitedHealth Group has managed its financial leverage at 40% over the long term, experiencing temporary fluctuations following sizeable acquisitions. AM Best anticipates that the group will continue to deploy deleveraging actions to revert to the 40% range, as it has done in the past. Year-end 2021 financial leverage was 39.4%, as calculated by AM Best, which was supported by equity growth and capital management.

UnitedHealth Group also has a high level of financial flexibility, supported by its large commercial paper program, parent company cash and substantial subsidiary dividend capacity, as well as a revolving credit facility that increased to $15 billion through year-end 2021. Furthermore, UnitedHealth Group has significant nonregulated operating earnings and cash flows from its Optum operations, which include Optum Rx, Optum Health and Optum Insight.

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