News Column

Fitch Affirms Humana's Sr. Notes at 'BBB' & IFS Ratings at 'A'; Outlook Stable

August 14, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'BBB' ratings assigned to Humana Inc.'s (HUM) senior unsecured notes and the 'A' Insurer Financial Strength (IFS) ratings assigned to various Humana insurance company subsidiaries. The Rating Outlooks are Stable.

HUM's 'A' IFS ratings reflect financial metrics and performance that in recent years have generally been supportive of 'AA' category IFS ratings and the impact of the companies' concentrations in the Medicare market in the U.S., the characteristics of which Fitch views as supportive of IFS ratings in the 'A' to 'BBB' rating categories.

KEY RATING DRIVERS

Industry Profile and Operating Environment: Fitch believes that the U.S. Government's ability to set reimbursement rates and influence conditions in the Medicare Advantage market makes it difficult for health insurers with Medicare Advantage membership concentrations, such as HUM, to generate sustained EBITDA-based margins and capital stability required to support IFS ratings higher than 'A'. Fitch views on-going federal government fiscal pressures and heightened demands on Medicare tied to the aging U.S. population, as factors that effectively limit the ratings levels of health insurers with membership concentrations in Medicare Advantage. Favorably from a ratings perspective, Fitch believes that these same fiscal and demographic pressures contribute to consistent demand for Medicare Advantage products.

Market Position and Size/Scale: Fitch views HUM as maintaining 'medium' sized market position and size/scale characteristics. Under Fitch's health insurance rating guidelines, such characteristics are consistent with 'A' category IFS ratings. HUM maintains a leading market share in the Medicare Advantage market and the company's membership is well diversified throughout the country. Additionally, HUM has built integrated delivery capabilities, primarily through acquisitions, in geographic regions where the company maintains significant membership. Fitch believes that HUM maintains large membership and revenue bases that help the company generate significant amounts of EBITDA and capital and benefit from economies of scale.

Financial Performance and Earnings: Fitch believes that HUM's financial performance and earnings over the next 12-24 months will remain supportive of the company's ratings. Fitch's view is that HUM's market position, size and scale characteristics and benefits derived from aspects of the company's integrated care delivery capabilities will help offset margin pressure from consistent reductions in Medicare funding rates, the Affordable Care Act's (ACA) imposition of an 85% minimum benefit ratio on Medicare Advantage products, and various ACA-related fees.

In recent years HUM's financial performance has been strong relative to Fitch's 'A' category guidelines. In the first half of 2014 HUM generated $24 billion of revenues and $1.6 billion of EBITDA. The company's 1H'14 ratios of EBITDA-to-revenues and annualized net return on average capital were 6.7X and 11.8% respectively and from 2011-2013 these ratios averaged 6.4% and 12.9%.

Capitalization and Financial Leverage: Fitch views HUM's targeted capitalization and financial leverage metrics to be consistent with those expected at the 'A' IFS rating category, while the company's reported metrics for the past several years have been more consistent with those expected at the 'AA' rating category. At June 30, 2014 HUM's ratio of debt-to-annualized EBITDA was 0.8X and its financial leverage ratio was 21%. From 2011-2013 these ratios averaged 0.9x and 21% respectively. The company targets a debt-to-capital ratio of 25%-30% and Fitch believes that debt-funded acquisitions and share repurchases are potential ways in which HUM may manage its debt-to-capital ratio toward its target.

Debt Service Capabilities and Financial Flexibility: HUM's debt service capabilities and financial flexibility have historically been consistent with Fitch's 'AA' rating category guidelines. The company's operating EBITDA-based interest coverage ratio through 1H'14 was 23.0X and from 2011-2013 averaged 21.2x. HUM has access to an untapped $1 billion credit facility that expires in 2018. At June 30, 2014, the company maintained $11.1 billion of cash and high-quality and liquid investment securities that exceeded the value of its medical benefit and future policy benefit reserves by $4 billion.

RATING SENSITIVITIES

Key rating triggers that could lead to an upgrade of HUM's ratings are:

--Over the longer term, an improved outlook for Medicare Advantage funding;

--Reduced near-term uncertainty surrounding the impact on HUM's margins of the Affordable Care Act's (ACA) minimum medical benefit ratio and industry-wide fees designed to fund portions of the ACA;

--A reduction in HUM's targeted debt-to-capital ratio to 20% and increase in the company's organization-wide NAIC RBC to 350%;

--Financial metrics, especially interest coverage and EBITDA/revenue margin ratios that approximate current levels.

Key rating triggers that could lead to a downgrade of the ratings are:

--Over the longer-term, a deterioration in the outlook for Medicare Advantage funding;

--EBITDA-based interest coverage and EBITDA/revenue ratios below 7x and 5%, respectively;

--Debt-to-annualized (prior four quarters) EBITDA ratios above 1.5x;

--HUM increasing its targeted or reported financial leverage ratio above 30% or reducing its organization-wide NAIC RBC ratio target below 200%;

--Acquisitions that Fitch views as aggressively financed or containing an excessive amount of integration risk.

Fitch has affirmed the following ratings:

Humana, Inc.

--Long-term Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook;

--$500 million of 6.45% senior unsecured notes due June 1, 2016 at 'BBB';

--$500 million of 7.2% senior unsecured notes due June 15, 2018 at 'BBB';

--$300 million of 6.3% senior unsecured notes due Aug. 1, 2018 at 'BBB';

--$600 million of 3.15% senior unsecured notes due Dec. 1, 2022 at 'BBB';

--$250 million of 8.15% senior unsecured notes due June 15, 2038 affirmed at 'BBB';

--$400 million of 4.625% senior unsecured notes due Dec. 1, 2042 at 'BBB'.

The following companies' Insurer Financial Strength (IFS) ratings are affirmed at 'A' with a Stable Outlook:

Humana Insurance Company

Humana Medical Plan, Inc.

Humana Health Plan, Inc.

Humana Health Benefit Plan of Louisiana

Careplus Health Plans, Inc.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Insurance Rating Methodology', November 2013;

--'Health Insurance and Managed Care (U.S.) Sector Credit Factors', December 2013.

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Health Insurance and Managed Care (U.S.)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=699758

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=851774

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Mark Rouck, CPA, CFA

Senior Director

+1-312-368-2085

Fitch Ratings, Inc.

70 W. Madison Street

Chicago IL 60602

or

Secondary Analyst

Greg Dickerson

Director

+1-212-908-0220

or

Committee Chairperson

Martha M. Butler, CFA

Senior Director

+1-312-368-3191

or

Media Relations

Brian Bertsch, New York, +1-212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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