Recently, the debt rating on
) senior unsecured notes were raised to "BBB" from "BBB-" by Fitch
Ratings, according to Reuters. Additionally, the insurer financial
strength rating (IFS) of the company's insurance subsidiaries was
upgraded to "A" from "A-". The outlook on both ratings was reduced
to stable from positive.
The upgrade was driven by Humana's favorable operating results
and financial strength, which are evident in the long-term trend of
improving revenues, earnings, and return on capital. The company's
shareholders' equity has also been witnessing impressive growth for
quite sometime, while premium growth has moderated. These factors
have resulted in enhanced National Association of Insurance
Commissioners (NAIC) risk-based capital (RBC) ratios and
underwriting leverage ratios, which are also partly responsible for
Moreover, Fitch expects Humana to aggressively engage in capital
management in the upcoming months in order to meet its targeted
debt-to-capital ratio of 25-30%. The ratio has stayed between 15%
and 20% over the past 12-24 months due to slower capital management
compared to earnings growth and capital formation.
The rating agency also expects Humana to move on with its
inorganic growth strategy by vigorously acquiring companies to
augment its medical membership, healthcare services and
technological capacity. However, since the company has funded most
of its recent acquisitions from cash reserves and these
acquisitions are not expected to have a material impact on the
earnings in the near term, these have not affected the ratings of
the company. Nevertheless, these are expected to enhance Humana's
competitive position and financial strength in the long term.
Humana's ratings were also influenced by the company's reliance
on its Medicare Advantage business for a large portion of its
premium revenues and membership growth. This is considered to be
unfavorable by Fitch since Medicare Advantage providers have
limited command over pricing due to the government's role as the
primary financer. On the other hand, the increasing age of the U.S.
population is boosting the demand for Medicare Advantage
While the revision of the outlook to stable indicates that Fitch
does not expect any rating revision in the near term, certain
rating triggers can lead to change in ratings. Triggers such as
lower downward pressure on premium rates due to enhanced Medicare
environment, slowdown in growth of medical care cost trends leading
to lower cost pressure on providers, decline of targeted
debt-to-capital ratio to 20%, rise of company-wide NAIC RBC to 350%
and maintenance of important financial metrics at the present
level, can lead to an upward revision of ratings.
Meanwhile, if there is a freeze or decline in Medicare Advantage
rates for multiple years, Humana's financial leverage target is
raised beyond 30%, organization-wide NAIC RBC ratio target is
lowered below 25%, run-rate EBITDA-based interest coverage falls
below 7x or EBITDA/revenue ratios decline beyond 5%, then a rating
downgrade is possible. Moreover, if Humana undertakes an
acquisition involving high integration risk or which is financed
aggressively in the opinion of Fitch, then also a downward revision
of ratings is probable.
Humana is one of the largest health care plan providers in the
U.S. and competes with other industry heavyweights like
). The company currently carries a short-term Zacks #4 rank (Sell).
We maintain our long-term 'Underperform' recommendation on the
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