CHICAGO--()--Fitch Ratings has upgraded the ratings on Humana Inc.'s (Humana) senior unsecured notes to 'BBB' from 'BBB-' and the Insurer Financial Strength (IFS) ratings assigned to various Humana insurance company subsidiaries to 'A' from 'A-'. Concurrent with the upgrades, the Rating Outlooks have been revised to Stable from Positive. A complete list of ratings actions is shown at the end of this comment.
The ratings upgrades consider Humana's overall strong operating and financial performance characterized by favorable revenue, earnings, and return on capital trends. The upgrades also recognize material growth in the company's shareholders' equity and moderating premium growth in recent years resulting in improving NAIC risk-based capital (RBC) ratios and underwriting leverage ratios.
The current ratings incorporate Fitch's belief that Humana may adopt more aggressive capital management going forward. The company targets a debt-to-capital ratio of 25%-30%, although over the last 12-24 months the ratio has ranged from 15%-20% as strong earnings and capital formation outpaced capital deployment via operating activities, acquisitions, and share repurchases.
Fitch believes that Humana is likely to continue to be an active acquirer of companies intended to provide health care services, improve technological capabilities, or add medical membership in specific markets. Fitch has viewed these acquisitions as ratings neutrals, since the company has funded them with internal cash and their near-term financial impact has been comparatively modest. Over the longer term, Fitch expects the acquisitions to have a favorable impact on Humana's competitive positioning and financial profile.
Humana's ratings continue to consider its concentrated focus in the Medicare Advantage (MA) market. The company's membership and premiums revenues are materially more concentrated in MA business than those of its peers. Fitch believes this concentration could have an adverse impact on Humana's market position as it believes that the U.S. government's role as the primary funder of MA programs limits MA plan providers' pricing power and flexibility.
From a ratings perspective, these negative characteristics of the MA market are partially offset by the growing market for MA products due to the aging U.S. population, and the desire to implement managed care practices in the Medicare market in an effort to contain health care costs.
Humana's recent financial performance has been strongly supportive of the company's current ratings despite a decline in first half 2012 results compared to those of the prior-year period. Based on Humana's public earnings guidance, which Fitch views as a reasonable proxy, the agency estimates the company's full-year 2012 EBITDA at $2.2 billion, which translates into an EBITDA-based interest coverage ratio of 20.9x and EBITDA/revenue margin of 5.6%.
Through the first half 2012, the company's operating EBITDA-based interest coverage ratio was a very strong 21.8x and from 2007 through 2011 the ratio averaged 20.3x. Fitch projects that Humana's interest coverage ratios would remain supportive of the company's current ratings in scenarios where the company's debt-to-capital ratio increases to its targeted 25%-30%.
EBITDA/revenue margin through the first half 2012 of 5.8% is within Fitch's guidelines for the company's ratings although it declined meaningfully from the prior-year period's 7.6%, reflecting a reduction in favorable reserve development and pressure on premium rates. Humana's net return on average capital was 12.3% in first half 2011, which is well within rating category guidelines.
Humana's debt-to-annualized EBITDA through first half 2012 of 0.7x is conservative for the current rating category and is projected to remain within Fitch's rating category guidelines if Humana utilizes more financial leverage going forward. Fitch calculates Humana's organization-wide NAIC RBC ratio at year-end 2011 at 276% and anticipates that the ratio will approximate 250% or higher going forward.
Key Rating Triggers that could lead to an upgrade include:
--Improvements in Medicare's fiscal condition that reduces downward pressure on MA premium rates or a deceleration of medical care cost trends that reduces pressure on MA providers' costs;
--A reduction in Humana's targeted debt-to-capital ratio to 20% and increase in the company's organization-wide NAIC RBC to 350%;
--Financial metrics, especially interest coverage and EBITDA/revenue margin ratios that approximate current levels.
Key Rating Triggers that could lead to a downgrade of the ratings include:
--A multi-year freeze or reduction in reimbursement rates paid to MA plan providers;
--Acquisitions that Fitch views as aggressively financed or containing an excessive amount of integration risk;
--Humana increasing its financial leverage target above 30% or reducing its organization-wide NAIC RBC ratio target below 250%;
--Run-rate EBITDA-based interest coverage and EBITDA/revenue ratios below 7x and 5%, respectively.
Fitch has taken the following rating actions:
--Long-term Issuer Default Rating (IDR) upgraded to 'BBB+' and Outlook revised to Stable from Positive;
--$500 million of 6.45% senior unsecured notes due June 1, 2016 upgraded to 'BBB';
--$500 million of 7.2% senior unsecured notes due June 15, 2018 upgraded to 'BBB';
--$300 million of 6.3% senior unsecured notes due Aug. 1, 2018 upgraded to 'BBB';
--$250 million of 8.15% senior unsecured notes due June 15, 2038 upgraded to 'BBB'.
Humana Insurance Company
Humana Medical Plan, Inc.
Humana Health Plan, Inc.
Humana Benefit Plan of Louisiana, Inc.
Careplus Health Plans, Inc.
--IFS rating upgraded to 'A' from 'A-'; Outlook revised to Stable from Positive.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology', dated Sept. 22, 2011;
--'Health Insurance and Managed Care (U.S.) Sector Credit Factors, Aug. 21, 2012.
Applicable Criteria and Related Research:
Health Insurance and Managed Care (U.S.) Sector Credit Factors
Insurance Rating Methodology