Last week, A.M. Best Co. affirmed the issuer credit rating
(ICR) of
Humana Inc.
(
HUM
) at "bbb-" along with its debt ratings. The rating agency also
assigned a "bbb-" rating to the new debt issued by Humana.
Further, A.M. Best affirmed the financial strength rating
(FSR) of most of Humana's insurance subsidiaries at "A-" and
affirmed the ICR at "a-." The rating agency also affirmed the FSR
of a subsidiary - Kanawha Insurance Company - at "B++" and its
ICR at "bbb+."
Additionally, A.M. Best raised the FSR of Humana Insurance of
Puerto Rico, Inc. and Humana Health Plans of Puerto Rico, Inc. to
"B++" from "B+" and their ICR to "bbb+" from "bbb-." All the
above-mentioned ratings, except the ICR of Kanawha, carry a
stable outlook. The ICR of Kanawha carries a negative
outlook.
The affirmation of the ratings on Humana's American
subsidiaries was based on sturdy membership growth during 2012.
The company's organic growth, membership gains through
acquisitions, incremental Medicare membership allotted by the
Centers for Medicare and Medicaid Services (CMS) and increase in
prescription drug membership led to the surge in membership.
Moreover, Humana has a trend of reporting strong underwriting
gains and positive earnings. The company also has a strong
inorganic growth strategy and is following an integrative care
initiative that aims to expand the range of services and reduce
cost.
However, these positive factors were offset by the downturn in
earnings after the historical high in 2011, along with the
business concentration risk faced by it.
Nevertheless, the strong revenues, good underwriting results
and steady capital growth of Humana's Puerto Rican insurance
subsidiaries led to the upgrade in their rating. A.M. Best
projects the financial leverage of Humana to stay in the range of
20%-30%.
The rating agency expects to upgrade the ratings of Humana in
the event of continued premium growth, capital generation,
diversified product development and growth in integrative health
and wellness care. On the other hand, disruption in cash flow or
the termination or cutback of any major part of Humana's benefits
or provider structure, resulting in deterioration in the
integrative care initiative and provider networks, can lead to a
downgrade in the ratings.
Currently, the shares of Humana carry a Zacks Rank #3 (Hold).
We maintain a long-term Neutral recommendation on the stock. The
company's peer,
American Caresource Holdings, Inc.
(
ANCI
) carries a Zacks Rank #2 (Buy).
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