A.M. Best Co. has affirmed the financial strength ratings (FSR) of A- (Excellent) and issuer credit ratings (ICR) of “a-” for the majority of the insurance subsidiaries of Humana Inc. (Humana) (Louisville, KY) (NYSE: HUM). A.M. Best also has affirmed Humana’s ICR of “bbb-” and existing debt ratings. Ratings also have been assigned on new debt for Humana. The outlook for all ratings remains stable.
Additionally, A.M. Best has affirmed the FSR of B++ (Good) and ICR of “bbb+” of Kanawha Insurance Company (Lancaster, SC) (Kanawha). The outlook for the FSR is stable, while the outlook for the ICR is negative.
Concurrently, A.M. Best has upgraded the FSR to B++ (Good) from B+ (Good) and the ICR to “bbb+” from “bbb-” of Humana’s Puerto Rico insurance subsidiaries, Humana Insurance of Puerto Rico, Inc. and Humana Health Plans of Puerto Rico, Inc. The outlook for these ratings remains stable. (See link below for a detailed listing of all companies and ratings.)
The rating affirmation for Humana’s U.S. subsidiaries reflects strong membership gains over the last year, partly as a function of organic growth, acquired members and being awarded additional Medicare members by CMS, as well as large quantities of prescription drug members. The organization continues to report solid underwriting gains and favorable overall earnings trends.
Humana has followed a strong merger and acquisition strategy. The organization is also pursuing an integrative care initiative, requiring the coming together of various medical, administrative and health insurance services, making for a more complete, sophisticated, efficient and complementary operating environment that is expected to provide more comprehensive care delivery services at a lower cost. Expanding the integrated care environment drove several acquisitions in order to complete underrepresented parts of the service delivery process.
Offsetting rating factors include Humana’s somewhat lower earnings after the historical peak of the prior year and business concentration risk. The overall organization reported strong earnings in 2012; however, the results were somewhat below the prior year as significant membership growth led to some margin suppression. Additionally, A.M. Best has observed an increase in the concentration of government-sponsored programs in the overall product mix. This is of concern because any significant interruption in benefits reimbursement cash flows could have unfavorable repercussion in the delivery of services and disruptions within the vast provider community. Federal and state governments have reported many challenges maintaining the mandates of their budgets, where health care services are a significant part.
The rating upgrade of Humana’s Puerto Rico insurance subsidiaries reflects a solid revenue trend, favorable underwriting performance and consistent capital development. After being awarded Medicaid administrative contracts for three regions in Puerto Rico, net premium revenues grew sharply, reflecting the shift in operating scale. The companies were profitable and self-sustaining, and regulatory capital ratios have been well above statutory required minimums.
Humana's financial leverage, including the newly issued securities, is manageable at 20%. In general, A.M. Best expects Humana to manage its financial leverage in the 20%-30% range. Humana’s interest coverage remains strong at over ten times, factoring in the debt service on the $1.0 billion of new senior notes.
Factors that could result in the upward movement of the organization's ratings include sustained profitable premium development and capital growth, broader diversification in product development and further progress in integrative health and wellness care. Conversely, factors that could result in downward movement are the interruption of cash flow and the cancellation, discontinuance or reduction of any major part of Humana’s benefits or provider structure, which could leave the organization's integrative care initiative and provider networks severely weakened and Humana's customers left underserved.
For a complete listing of Humana Inc. and its U.S. subsidiaries’ FSRs, ICRs and debt ratings, please visit www.ambest.com/press/011104humana.pdf.
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
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