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 Change Healthcare Inc. (Change Healthcare) (Nashville, TN) [NASDAQ:CHNG], a leading health care technology company. The outlooks of the ratings remain positive.

It is anticipated that Change Healthcare will be combined with UnitedHeath Groups’ OptumInsight operations. The combination of OptumInsight and Change Healthcare will further advance the organization toward its corporate goal of enhancing the performance of the health care system and improve overall health and well-being of individuals. The transaction follows OptumInsight’s focus on modernizing health care through the utilization of technology.

The cost of the transaction is estimated at approximately $13 billion, including the retirement of Change Healthcare’s current debt. AM Best anticipates that UnitedHealth Group will finance the transaction through a combination of debt and cash, and the transaction will close in the second half of 2021 once the necessary approvals are received. Additionally, while this transaction initially will increase UnitedHealth Groups’ financial leverage, AM Best expects it to remain within the tolerance for the current rating level. Furthermore, financial leverage will moderate in the medium term, based on equity growth and/or management’s capital deployment strategy. UnitedHealth Group manages its debt-to-capital ratio at 40% on a long-term basis and the company has demonstrated its ability to de-leverage to its target range in a relatively short time. However, UnitedHealth Group maintains strong interest coverage, which was greater than 11 times for full-year 2019. 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 its $12.5 billion revolving credit facility. Furthermore, UnitedHealth Group has significant non-regulated operating earnings and cash flows from its Optum operations, which include OptumRx, OptumCare and OptumInsight.

The positive outlooks reflect the continued strengthening of profitability metrics of UnitedHealth Group’s UnitedHealthcare health insurance operations. The Change Healthcare transaction is not anticipated to materially alter the operating performance of UnitedHealthcare in the near to medium term. Furthermore, the risk-adjusted capital for the health insurance companies will not expected to be impacted by this transaction.

Nevertheless, UnitedHealth Group’s percentage of goodwill and intangible assets to equity is high and was at 115% at Sept. 30, 2020, and the Change Healthcare transaction likely will increase this metric. Additionally, potential changes in the credit market could cause the cost of capital for financing to increase.

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