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

Tue Aug 27, 2013 5:28pm EDT

(The following statement was released by the rating agency) CHICAGO, August 27 (Fitch) 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. KEY RATING DRIVERS Fitch's ratings on HUM reflect the company's consistently solid financial results, large market share in the Medicare Advantage (MA) market, very strong interest coverage, and robust liquidity. They also reflect financial leverage and operating company capitalization metrics that are generally consistent with Fitch's guidelines for HUM's current rating categories. The ratings also consider the large and influential role the U.S. government plays in HUM's core MA market, margin pressure faced by HUM and other Medicare MA writers from various provisions of the Affordable Care Act (ACA), and the impact of HUM's revenue and earnings concentration in MA products. Fitch believes that HUM is likely to continue to generate solid earnings going forward despite margin pressure on the company's core MA product including pressure derived from the ACA's imposition of an 85% minimum benefit ratio on MA business and a non-deductible annual fee on health insurers that becomes effective Jan. 1, 2014. Fitch's view is that operational and financial benefits derived from acquisitions HUM has completed in recent years to enhance its integrated care delivery capabilities should be sufficient to offset much of this margin pressure. Additionally, HUM's earnings should continue to benefit from the aging U.S. population and corresponding increase in MA eligibility and from benefits derived from the company's large scale and efficient operating platforms. HUM consistently produces solid financial results and in the first half of 2013 (1H'13) generated $20.8 billion of revenues and $1.7 billion of EBITDA. The company's 1H'13 ratios of EBITDA-to-revenues and net return on average capital were 8.0% and 15.7%, respectively, and from 2008-2012 these ratios averaged 6.1% and 13.4%, both solidly supportive of HUM's ratings. Fitch considers HUM's EBITDA-based interest coverage to be strong and its liquidity profile to be robust. The company's operating EBITDA-based interest coverage ratio through 1H'13 was 23.6x and from 2008 through 2012 averaged 20.2x. HUM has access to an untapped $1 billion credit facility that expires in 2018, and at June 30, 2013 maintained $10.8 billion of cash and high-quality and liquid investment securities that exceeded the value of its insurance obligations by $4.9 billion. HUM's ability to fund annual interest requirements is further bolstered by unregulated cash flows from the company's HealthCare Service segment, which generated $328 million in EBITDA in 1H'13 and $581 million in 2012. In addition, HUM maintains management service contracts with its operating company subsidiaries, under which the company collected $1.2 billion in 2012 and $1.4 billion in 2011 from its five largest (measured by net premiums) insurance subsidiaries. Fitch believes that HUM has the second largest market share in the MA market in the U.S. The company provides MA and other health insurance and related products and services nationwide and Fitch views the company's membership and revenue bases to be reasonably well diversified from a geographic perspective. HUM's debt-to-capital ratio at June 30, 2013 was 22% and its ratio of debt-to-annualized EBITDA was 0.9x. 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. Fitch believes that HUM is materially more exposed to potential actions by the federal government than its large publicly traded peers due to the company's membership and premium concentration in MA business. Further, the government's role as the primary funder of MA programs acts as an on-going constraint on HUM's margins. RATING SENSITIVITIES Key Rating Triggers that could lead to an upgrade include: --Improvements in Medicare funding and evidence of a sustained deceleration of MA medical care cost trends; --Reduced uncertainty surrounding the impact on HUM's margins of the MA minimum medical benefit ratio and annual non-deductible industry fee; --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 include: ----A multi-year freeze or reduction in reimbursement rates paid to MA plan providers; --Run-rate EBITDA-based interest coverage and EBITDA/revenue ratios below 7x and 5%, respectively; --Run-rate debt-to-annualized (prior four quarters) EBITDA ratios above 1.25x; --HUM increasing its financial leverage target 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 Benefit Plan of Louisiana, Inc. Careplus Health Plans, Inc. Contact: Primary Analyst Mark Rouck, CPA, CFA Senior Director +1-312-368-2085 Fitch Ratings, Inc. 70 W. Madison Street Chicago IL 60602 Greg Dickerson Director +1-212-908-0220 Committee Chairperson Martha M. Butler, CFA Senior Director +1-312 368-3191 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com' Applicable Criteria and Related Research: --'Insurance Rating Methodology', dated Aug. 19, 2013; --'Health Insurance and Managed Care (U.S.) Sector Credit Factors, Jan. 29, 2013. Applicable Criteria and Related Research: Insurance Rating Methodology here Health Insurance and Managed Care (U.S.) here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. 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