AM Best has revised the outlooks to stable from positive and affirmed the Financial Strength Rating (FSR) of A- (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of “a-” for the majority of the health and dental insurance subsidiaries of Humana Inc. (Humana) (headquartered in Louisville, KY) [NYSE: HUM]. These subsidiaries collectively are referred to as Humana Health Group. Concurrently, AM Best has revised the outlook to stable from positive and affirmed the Long-Term ICR of “bbb-” and the Long-Term Issue Credit Ratings (Long-Term IRs) of Humana. AM Best also has affirmed the Short-Term Issue Credit Rating (Short-Term IR) of Humana.
In addition, AM Best has revised the outlooks to stable from negative and affirmed the FSR of B++ (Good) and the Long-Term ICRs of “bbb” of the following Humana subsidiaries: Humana Insurance of Puerto Rico, Inc. and Humana Health Plans of Puerto Rico, Inc. These companies are domiciled in Puerto Rico and collectively are referred to as Humana Health of Puerto Rico Group. (See below for a detailed listing of Humana’s subsidiaries and ratings.)
On April 27, 2021, Humana announced it would acquire the remaining 60% interest in Kindred at Home, accelerating integration of the largest provider in the home health space into Humana’s existing capabilities and network. The acquisition price of $5.7 billion excludes Humana’s current 40% ownership stake, which is valued at $2.4 billion. Humana expects to pay the $5.7 billion with a combination of debt and cash. The deal is expected to close in the third quarter of 2021, subject to state and federal regulatory approvals.
The revision of the outlooks to stable for Humana and the entities of Humana Health Group reflect the increased financial leverage at the close of the transaction to above 40%, which is higher than Humana’s financial leverage at year-end and above its targeted range. Humana also announced it would divest the majority of its hospice and personal care services in the fall via an IPO, subject to economic conditions, after which financial leverage would potentially begin to improve by year-end 2021 and continue to decline to targeted levels in 2022. However, AM Best has concerns that should Humana not undertake an IPO on Kindred at Home’s hospice operations in 2021, financial leverage would remain above targeted levels for a longer period of time. Humana’s goodwill to equity has been below 40% but is expected to increase with the transaction. While AM Best recognizes Humana currently owns 40% of Kindred at Home and has other home care services operations, the transaction represents one of the largest to date for Humana and carries integration risk that comes with such acquisitions.
The affirmation of the ratings of Humana Health Group reflect its balance sheet strength, which AM Best assesses as strong, as well as its adequate operating performance, favorable business profile and appropriate enterprise risk management (ERM).
Humana Health Group has been able to maintain an adequate level of risk-adjusted capital, as measured by Best’s Capital Adequacy Ratio (BCAR), despite paying dividends in excess of $1 billion annually to the parent organization. AM Best notes that Humana does have a history of providing capital support to its subsidiaries when needed. Humana Health Group has reported a trend of consistent earnings, with underwriting and net income each exceeding $1.5 billion in each of the past four years and return on revenue (ROR) consistently in the 3% range. Earnings strengthened in 2020, driven by the decline in utilization and deferral of care due to the COVID-19 pandemic; however, earnings are expected to temper in 2021. Furthermore, Humana Health Group has reported favorable premium growth that continued in 2020 and is largely driven by Medicare Advantage, and to a lesser extent, Medicaid managed care. Humana Health Group has a favorable business profile with product offerings throughout the United States and a strong market position in Medicare Advantage.
With the increase in financial leverage from the Kindred at Home acquisition, financial flexibility will become more limited. However, liquidity is supplemented by dividends from its insurance subsidiaries, a $2 billion credit facility, commercial paper program and cash at the parent. Additionally, earnings before interest and taxes (EBIT) interest coverage has been in the high teens and is expected to remain strong at over 10 times.
The ratings of Humana Health of Puerto Rico Group reflect its balance sheet strength, which AM Best assesses as weak, as well as its marginal operating performance, limited business profile and appropriate ERM. The revision of the outlooks to stable reflects the expected improvement in risk-adjusted capitalization for 2020. The strengthening of risk-adjusted capitalization was derived from the combination of favorable net income and a decline in net premiums written. Underwriting and net income turned profitable in 2020 after multiple years of losses, which was largely due to the decline in utilization and deferral of care due to the COVID-19 pandemic.
The FSR of A- (Excellent) and the Long-Term ICRs of “a-” have been affirmed with the outlooks revised to stable from positive for the following health and dental insurance subsidiaries of Humana Inc.:
- Humana Insurance Company
- Humana Medical Plan, Inc.
- Humana Health Plan, Inc.
- Humana Health Benefit Plan of Louisiana, Inc.
- Humana Health Plan of Texas, Inc.
- Humana Health Insurance Company of Florida, Inc.
- Humana Benefit Plan of Illinois, Inc.
- Humana Health Plan of Ohio, Inc.
- Humana Employers Health Plan of Georgia, Inc.
- Humana Insurance Company of New York
- Humana Wisconsin Health Organization Insurance Corporation
- Humana Insurance Company of Kentucky
- Cariten Health Plan Inc.
- CarePlus Health Plans, Inc.
- HumanaDental Insurance Company
- DentiCare, Inc.
- CompBenefits Insurance Company
- CompBenefits Company
- CompBenefits Dental, Inc.
- The Dental Concern, Inc.
The FSR of B++ (Good) and the Long-Term ICRs of “bbb” have been affirmed with the outlooks revised to stable from negative for the following health insurance subsidiaries of Humana Inc.:
- Humana Insurance of Puerto Rico, Inc.
- Humana Health Plans of Puerto Rico, Inc.
The following Long-Term IRs have been affirmed with the outlook revised to stable from positive:
-- “bbb-” on $600 million 3.15% senior unsecured notes, due 2022
-- “bbb-” on $400 million 2.9% senior unsecured notes, due 2022
-- “bbb-” on $600 million 3.85% senior unsecured notes, due 2024
-- “bbb-” on $600 million 4.5% senior unsecured notes, due 2025
-- “bbb-” on $600 million 3.95% senior unsecured notes, due 2027
-- “bbb-” on $500 million 3.125% senior unsecured notes, due 2029
-- “bbb-” on $500 million 4.875% senior unsecured notes, due 2030
-- “bbb-” on $250 million 8.15% senior unsecured notes, due 2038
-- “bbb-” on $400 million 4.625% senior unsecured notes, due 2042
-- “bbb-” on $750 million 4.95% senior unsecured notes, due 2044
-- “bbb-” on $400 million 4.8% senior unsecured notes, due 2047
-- “bbb-” on $500 million 3.95% senior unsecured notes, due 2049
The following indicative Long-Term IRs have been affirmed with the outlook revised to stable from positive for the shelf registration:
-- “bbb-” on senior unsecured debt securities
-- “bb+” on subordinated debt securities
-- “bb” on preferred shares
The following Short-Term IR has been affirmed:
-- AMB-2 on commercial paper program
This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best’s Credit Ratings. For information on the proper media use of Best’s Credit Ratings and AM Best press releases, please view Guide for Media - Proper Use of Best’s Credit Ratings and AM Best Rating Action Press Releases.
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