CHICAGO--(Business Wire)--
Fitch Ratings has affirmed the ratings of Humana Inc. (Humana)
(NYSE: HUM) (IDR 'BBB') following the announcement earlier today that
the company is lowering earnings expectations that were announced in
early February for 2008 by approximately 25%. The Rating Outlook is
Stable.
The lower earnings expectation is related to changes in actuarial
assumptions made in the company's stand-alone Enhanced Medicare Part D
product for 2008 based on experience witnessed during the first two
months of the year. Earnings are also impacted by expected
profitability of new members in the stand-alone Enhanced Medicare Part
D product and an overall shift in member mix, which reflects members
moving from the Standard to Enhanced plan this year.
If the new earnings expectations are realized, it will reflect a
15% decline in year-over-year pre-tax earnings. However, Fitch also
notes that earnings in 2008 will be the second best in the company's
history and approximately 44% higher than pre-tax earnings reported in
2006.
While Fitch does not view today's announcement favorably, the
ratings are affirmed today for the following reasons:
--Humana has reported very strong growth in earnings and cash flow
in recent years, with improved profit margins; the setback in 2008
earnings offsets the very strong trend and much of the improvement
reported in 2007, but does not cause the company's financial profile
to weaken below Fitch's considerations for the ratings;
--the company's concentration in government business - which
includes TRICARE, Medicare and Medicaid - has led Fitch to consider
the potential for additional volatility in earnings and cash flow
within the current ratings, and the size of today's change in 2008
earnings expectations is material but not outside of Fitch's
volatility expectations;
--Fitch does not view the change in 2008 earnings to reflect a
systemic problem within Humana's book of business; a more problematic
issue would be reductions in earnings and cash flows caused by
longer-term changes in government business funding;
--statutory capitalization of the operating subsidiaries will not
deteriorate as a result, and overall capitalization of the
organization will remain consistent with the past several years; and
--while membership trends may be impacted in future periods, Fitch
does not anticipate this event to be a driver of continued earnings
weakness in 2009.
Fitch's ratings on Humana continue to reflect the company's stable
balance sheet fundamentals, good cash flows, and competitive position
in several markets and product lines. Fitch's concerns include the
increasing capital demands from rapid business growth in the Medicare
market and the overall growing dependence on government business.
While Humana's debt to EBITDA (earnings before interest, taxes,
depreciation and amortization) levels improved with strong cash flow
generation in 2007, the company is expected to return to the 1.3x
range in 2008 following today's announcement, which is consistent with
2004-2005 periods. Financial leverage is expected to remain within
management's 25-30% targets for debt to total capitalization. Humana's
NAIC risk-based capital (RBC) of approximately 185-190% at December
2007 is up from 175% at year-end 2006 and consistent with management
targets. The company's capitalization quality benefits by targeted
$300-$400 million of holding company cash.
Humana is among the largest publicly traded health and managed
care insurance operations in the U.S., reporting year-end 2007 medical
enrollment of 11.5 million individuals. The company provides a variety
of indemnity, PPO, POS, and HMO plans in the group, individual,
Medicare, Medicaid, and TRICARE markets on a medical risk and
administrative services only basis.
The following ratings are affirmed:
Humana Inc.
--Issuer Default Rating (IDR) at 'BBB';
--6.45% senior unsecured notes due 2016 at 'BBB-';
--6.30% senior unsecured notes due 2018 at 'BBB-';
--Commercial paper at 'F2'
--Short-term IDR at 'F2'
Humana Health Benefit Plan of Louisiana, Inc.
--Insurer Financial Strength (IFS) at 'BBB+'.
Humana Health Plan of Texas, Inc.
--IFS at 'BBB+';
Humana Insurance Company
-IFS at 'BBB+'.
HumanaDental Insurance Company
--IFS at 'BBB+'.
Humana Health Insurance Company of Florida, Inc.
--IFS at 'BBB+'.
Humana Health Plan, Inc.
--IFS at 'BBB+'.
Humana Medical Plan, Inc.
--IFS at 'BBB+'.
Careplus Health Plans Inc.
--IFS at 'BBB+'
Humana Health Plan of Ohio, Inc.
--IFS at 'BBB'.
Humana Employers Health Plan of Georgia, Inc.
--IFS at 'BBB'.
Humana Wisconsin Health Organization Insurance Corp.
--IFS at 'BBB'.
Fitch's rating definitions and the terms of use of such ratings
are available on the agency's public site, 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 Ratings, Chicago
Peter Patrino, CFA, +1-312-368-3266
Manish Patel, +1-312-368-3188
Kenneth Reed, +1-212-908-0540
(Media Relations, New York)
Copyright Business Wire 2008
