Fitch Affirms Humana's Ratings; Outlook Remains Negative

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Humana Inc.'s (Humana) 'BBB' Issuer Default Rating (IDR) and the 'BBB-' ratings on Humana's various senior unsecured note issues. Additionally, Fitch has affirmed the Insurer Financial Strength (IFS) ratings of Humana's various insurance company subsidiaries. All of the Rating Outlooks are Negative.

Fitch's rating rationale includes Humana's record of solid interest coverage and earnings, reasonable financial leverage, and support provided by the company's high-quality and liquid investment portfolio. The rating rationale also includes the impact of Humana's comparatively high concentration to Medicare business, which has contributed 85% of pretax earnings through the first half of 2010, and targeted operating company capital levels, which are adequate for the current ratings. Additionally, the rationale considers risks associated with Humana's comparatively rapid growth, both organically and through acquisitions.

Key rating drivers that could lead to a downgrade are derived from uncertainty surrounding the ultimate impact on Humana's competitive position and financial and operating profile from the Patient Protection and Affordable Care Act (PPACA) which was signed into law by President Obama on March 23, 2010. Key potential consequences of PPACA that Fitch believes could generate downward ratings pressure include adverse risk selection, potential operating margin compression and the potential to lose membership. Absent these uncertainties and given Fitch's expectations around Humana's operating fundamentals over the next 12-24 months, the company's Rating Outlook would likely be Stable.

Outside of the PPACA's uncertain impact, Humana-specific key rating drivers that could lead to a downgrade include a decline in consolidated NAIC risk-based capital (RBC) ratios below 150%, a decline in cash interest coverage (subsidiary dividends relative to holding company interest expense) below 2.5 times (x) for a multi-year period, or a sustained increase in debt-to-EBITDA above 1.5x.

If Fitch were to remove its PPACA driven Negative Rating Outlook on the company, Humana-specific key rating drivers that could lead to a rating upgrade include growth in membership and margin expansion in the company's commercial segment, the potential for stable earnings growth following the implementation of PPACA, a change in management's consolidated NAIC RBC ratio targets above 225%, or improvements in cash interest coverage above 5.0x on a run-rate basis.

Fitch views Humana's recent overall operating and financial performance as solid characterized by favorable revenue, earnings, and return on equity (ROE) trends. The company's strategy to enhance its competitive position in the Medicare market, including Medicare Advantage, Part D and Private Fee For Service (PFFS) business, has increased revenues and membership significantly over the past five years. From year-end 2007 through June 30, 2010, Humana's revenues (excluding net realized capital gains or losses) grew at a 11% compound annual growth rate (CAGR).

Humana has also grown shareholders' equity rapidly and generated corresponding moderate declines in its debt-to-tangible capital ratio in recent years. At June 30, 2010, Humana's debt-to-tangible capital and debt/annualized EBIT ratios were 27% and 1.0x compared to 44% and 1.8x as recently as year-end 2008. The company's operating earnings-based interest coverage has been strong averaging over 16x from 2007 through the first half of 2010. Fitch also notes that Humana's share repurchases have been modest, particularly relative to those of peers. At June 30, 2010, Humana had $2 billion of goodwill from such acquisitions on its balance sheet which was equal to 30% of the company's total shareholders equity. Fitch views this as a material exposure and could lead to a modest charge if the TRICARE business is ultimately lost; however, goodwill for Humana is markedly less than that reported by many peer companies.

Fitch has affirmed the following ratings:

Humana, Inc.

--Long-term Issuer Default Rating (IDR) at 'BBB';

--Short-term IDR affirmed at 'F2';

--6.45% senior unsecured notes due June 1, 2016 at 'BBB-';

--7.2% senior unsecured notes due June 15, 2018 at 'BBB-';

--6.3% senior unsecured notes due Aug. 1, 2018 at 'BBB-';

--8.15% senior unsecured notes due June 15, 2038 at 'BBB-';

--$600 million commercial paper program at 'F2'.

Additionally, Fitch has affirmed the following Insurer Financial Strength (IFS) ratings at 'BBB+' with a Negative Rating Outlook:

Humana Insurance Company

Careplus Health plans, Inc.

Humana Benefit Plan of Louisiana, Inc.

Humana Health Plan of Texas, Inc.

Humana Medical Plan, Inc.

Humana Health Insurance Company of Florida, Inc.

Humana Health Plan, Inc.

HumanaDental Insurance Company

Humana Insurance Company of New York

Fitch has also affirmed the following IFS ratings at 'BBB' with a Negative Rating Outlook:

Humana Employers Health Plan of Georgia, Inc.

Humana Health Plan of Ohio, Inc.

Humana Wisconsin Health Organization Insurance Corp.

Kanawha Insurance Co

Additional information is available at 'www.fitchratings.com'

Related Research:

--'Insurance Rating Methodology', dated Aug. 16, 2010;

--'U.S. Health Insurance and Managed Care Rating Methodology' March 24, 2010.

Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547766

U.S. Health Insurance and Managed Care Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=506365

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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.