CHICAGO--(BUSINESS WIRE)--Fitch Ratings has maintained on Rating Watch Positive the 'BBB' ratings assigned to Humana Inc.'s (HUM) senior notes and the 'A' Insurer Financial Strength (IFS) ratings assigned to certain HUM subsidiaries.
Today's rating action follows the completion of a periodic review of HUM's ratings. Fitch had previously placed HUM's rating on Rating Watch Positive on July 6, 2015 following the company's announcement that it had entered into a definitive agreement under which it would be acquired by Aetna Inc. (AET). Excluding the ratings positive aspects of that planned acquisition, Fitch believes that today's review would have resulted in the affirmation of HUM's ratings with a Stable Rating Outlook.
The Rating Watch Positive status assigned to HUM's ratings reflects rating benefits expected to be derived from the company's anticipated acquisition by AET. These benefits include HUM's integration into the AET organization, which Fitch views as maintaining a more diverse market position and greater size and scale benefits than HUM maintains on its own.
Fitch's expects that the merger will close in the second half of 2016. Although there is the potential that regulators may require the divestiture of operations in various markets as a condition to granting approval for the merger, Fitch believes that the impact of any such divestitures is unlikely to be meaningful relative to HUM's and AET's recent financial results.
Subsequent to the close, Fitch anticipates using its group rating methodology (GRM) to assess HUM's ratings. Under this approach Fitch expects to categorize HUM as a 'core' subsidiary of AET and to refer financial strength from AET to HUM. Fitch also expects its view of HUM's financial profile to primarily be shaped by AET's post-acquisition consolidated financial profile.
Applying its GRM, Fitch expects the ratings on HUM's senior notes and the IFS ratings of HUM subsidiaries to be aligned with those of AET. AET's senior notes are currently rated 'A-' and certain AET subsidiaries' IFS ratings are rated 'AA-'. Upon the announcement of the HUM-AET merger agreement, Fitch placed AET's ratings on Rating Watch Negative.
Scores assigned to rating factors underlying HUM's ratings, the factors' relative influence on HUM's ratings, and the factors' forward trends are discussed below under Key Rating Drivers. Collectively, these scores support HUM's ratings and the continued Rating Watch Positive.
KEY RATING DRIVERS
Industry Profile & Operating Environment (Score 'bbb' to 'a+': higher influence on ratings, stable forward trend)
Fitch considers the credit-quality of commercial health insurance membership to be higher than that of Medicare Advantage (MA) and Medicaid membership. The agency's view is that the U.S. Government's ability to set reimbursement rates and influence conditions in the MA market dampens EBITDA-based margins and capital stability. These factors have historically supressed HUM's ratings but will become less of a factor upon HUM's inclusion into the AET organization.
Market Position and Size/Scale (Score 'a': 'higher' influence on ratings, positive forward trend)
HUM has historically maintained a leading market position in the MA market but comparatively modest market positons in segments other than MA. The positive forward trend reflects Fitch's expectation that upon completion of HUM's acquisition by AET, HUM's ratings will benefit from being part of an organization with strong market share in both the commercial health insurance and MA markets. Further, while the company's stand-alone membership and revenue base already meets Fitch's 'large' characteristic guidelines, Fitch expects HUM's market position and earnings to benefit from the combined scale generated by a combined HUM-AET platform.
Financial Performance and Earnings (Score 'a': 'higher influence on ratings, positive forward trend)
The positive forward trend reflects Fitch's belief that the combined HUM-AET organization's EBITDA-based margins are likely to be higher than HUM's stand-alone margins. Fitch expects this improvement to primarily be derived from the impact of AET's higher-margin commercial membership and combined HUM-AET expense efficiencies. HUM's recent financial performance has been strong relative to Fitch's 'A' rating category guidelines as the company's market position, size and scale characteristics and integrated care delivery capabilities helped offset margin pressure in the MA market. In the first half of 2015 HUM generated $27.6 billion of revenues and $1.9 billion of EBITDA. From 2012 through the first half of 2015, HUM's ratios of EBITDA-to-revenues and annualized net return-to-average capital were 6.1% and 11.1% respectively.
Capitalization and Financial Leverage (Score 'a+': 'moderate' influence on ratings, negative forward trend)
The negative forward trend reflects Fitch's expectation that the combined HUM-AET's post-acquisition financial leverage ratios will be markedly higher than those reported by HUM in recent years. At June 30, 2015, HUM's debt-to-annualized EBITDA was 1.4x and the company's debt-to-capital ratio was 29%.
Debt Service Capabilities and Financial Flexibility (Score 'aa': 'lower' influence on ratings, negative forward trend)
The negative forward trend reflects Fitch's expectation that the combined HUM-AET organization's debt-service capabilities and financial flexibility will deteriorate relative to HUM's stand-alone profile HUM's operating EBITDA-based interest coverage ratio averaged 18.5x from 2012 through the first half 2015. In recent years, HUM has maintained solid financial flexibility with comparatively lower leverage metrics, proven access to the debt capital markets, significant cash and invested holding company assets that totaled $1.9 billion at June 30, 2015.
Fitch believes that HUM's ratings are most sensitive to the company's ability to benefit from the combined HUM-AET organization's more diversified market position, which is expected to mitigate the company's exposure to the U.S. Government's ability to set reimbursement rates and influence conditions in the MA market. Over time, Fitch believes that this reduced exposure will result in higher and potentially more stable consolidated post-close EBITDA-to-revenue margins than HUM would have been able to generate on its own. If Fitch remains convinced that HUM will benefit from these characteristics subsequent to the company's acquisition by AET, it will likely upgrade HUM's ratings one notch upon the acquisition's close. Fitch would likely remove HUM's ratings from Rating Watch Positive and affirm the ratings if the HUM-AET merger fails to close.
Fitch maintains the following ratings on Rating Watch Positive:
--Long-term Issuer Default Rating 'BBB+';
--$500 million 7.2% senior unsecured notes due June 15, 2018 'BBB';
--$300 million 6.3% senior unsecured notes due Aug. 1, 2018 'BBB';
--$400 million 2.625% senior unsecured notes due Oct. 1, 2019 'BBB';
--$600 million 3.15% senior unsecured notes due Dec. 1, 2022 'BBB';
--$600 million 3.850% senior unsecured notes due Oct. 1, 2024 'BBB';
--$250 million 8.15% senior unsecured notes due June 15, 2038 'BBB';
--$400 million 4.625% senior unsecured notes due Dec. 1, 2042
--$750 million 4.950% senior unsecured notes Due Oct. 1, 2044 'BBB'.
Humana Insurance Company
Humana Medical Plan, Inc.
Humana Health Plan, Inc.
Humana Health Benefit Plan of Louisiana
Careplus Health Plans, Inc.
Additional information is available at 'www.fitchratings.com'
Insurance Rating Methodology (pub. 14 Jul 2015)