Senior Financial Analyst
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FOR IMMEDIATE RELEASE
OLDWICK - OCTOBER 20, 2021 03:08 PM (EDT)
AM Best has affirmed the Financial Strength Rating (FSR) of A- (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of “a-” (Excellent) 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 affirmed the Long-Term ICR of “bbb-” (Good) and the Long-Term Issue Credit Ratings (Long-Term IRs) of Humana Inc. AM Best also has affirmed the Short-Term Issue Credit Rating (Short-Term IR) of AMB-2 (Satisfactory) for Humana Inc. Additionally, AM Best has affirmed the FSR of B++ (Good) and the Long-Term ICR of “bbb” (Good) 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. The outlook of these Credit Ratings (rating) is stable. (See below for a detailed listing of Humana Health Group members and Long-Term IRs.)
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 an adequate level of risk-adjusted capital, as measured by Best’s Capital Adequacy Ratio (BCAR), primarily supported by solid earnings. Humana has managed to maintain adequate levels of risk-adjusted capital while still paying sizable annual dividends in excess of $1 billion to the holding company. Invested assets for Humana Health Group are composed primarily of high quality fixed-income securities. Liquidity measures remain high and provide flexibility to adjust asset allocation. Strong cash flow from operations are supplemented by the parent’s ample liquidity to support its legal entities.
Humana Health Group has reported solid earnings for the past five years, with net income exceeding $1.5 billion in each of the past four years, and underwriting income exceeding $1 billion in three of the past five years. Earnings strengthening in 2020 was driven primarily by the decline in the utilization and deferral of care due to the COVID-19 pandemic; earnings are expected to temper in 2021. However, return on revenue has been in the 3% range for the past few years. Given that a large percentage of Humana’s revenues and earnings are derived from Medicare Advantage, which is government-funded business, the ability to achieve and sustain a higher level of margins is unlikely given the minimum loss ratio requirements on the Medicare Advantage segment. The five-year compounded average growth rate for premium was 4.6%, reflecting increased new business and top-line scale, in which the Medicare Advantage segment has been leading that growth. Humana Health Group has a favorable business profile driven by its competitive market position in the Medicare Advantage segment as one of the nation’s leading writers. Furthermore, Humana offers a variety of product offerings through its Retail, Group and Specialty and Healthcare Services segments. Additionally, AM Best notes that the earnings from the Healthcare Services segment is non-regulated. The Healthcare Services segment provides pharmacy solutions, provider services and clinical programs to internal and external customers.
Humana Inc. has good financial flexibility through its dividends from its regulated insurance entities, and earnings from its non-regulated entities, which comprise nearly 37% of Humana Inc.’s consolidated revenue from operations. In addition, Humana Inc. has a $4 billion, five-year credit facility, commercial paper program and cash at the parent company. Financial leverage is expected to be above 40%, as calculated by AM Best, when Humana reports its third-quarter financials, which would exceed the company’s targeted range. The increase follows the completion of the acquisition of the remaining interest of Kindred at Home, which was funded with debt issuance of $3 billion in August 2021. Humana plans to divest its majority stake in Kindred At Home’s hospice and personal care services through an IPO. Humana is expected to delever over the near to medium term utilizing the proceeds of the IPO in combination with continued favorable earnings.
Humana’s earnings before interest and taxes (EBIT) interest coverage remains strong, at over 10 times EBIT at year-end 2020, based on solid earnings from operations. Furthermore, Humana’s goodwill and intangibles to equity remained below 40%, but increased significantly following the Kindred At Home acquisition.
The ratings of Humana Health of Puerto Rico Group reflect its balance sheet strength, which AM Best assesses as adequate, as well as its marginal operating performance, limited business profile and appropriate ERM. The stable outlooks reflect Humana Health of Puerto Rico Group’s very strong assessment of risk-adjusted capital, as measured by BCAR. The improvement in risk-adjusted capitalization in 2020 was driven primarily by higher net income at both companies, which was retained in Humana Health of Puerto Rico Group. Following a few years of earnings volatility, the group reported improved underwriting and net income in 2020, mainly due to lower utilization resulting from the deferral of elective procedures during the COVID-19 pandemic. For the first half of 2021, the companies in the group remained profitable, albeit at lower levels due to continued premium decline in the Medicare Advantage line of business. Humana Health of Puerto Rico Group is integrated fully into the company’s overall strategy and continues to receive support from the parent. Furthermore, Humana Inc. has provided a parental guarantee to Humana Health Plan of Puerto Rico to provide capital as needed to remain in compliance with regulatory capital requirements.
The FSR of A- (Excellent) and the Long-Term ICRs of “a-” (Excellent) have been affirmed with stable outlooks for the following health and dental insurance subsidiaries of Humana Inc.:
The following Long-Term IRs have been affirmed with stable outlooks:
— “bbb-”(Good) on $600 million 3.15% senior unsecured notes, due 2022
— “bbb-” (Good) on $400 million 2.9% senior unsecured notes, due 2022
— “bbb-” (Good) on $1.5 billion 0.65% senior unsecured notes, due 2023
— “bbb-” (Good) on $600 million 3.85% senior unsecured notes, due 2024
— “bbb-” (Good) on $600 million 4.5% senior unsecured notes, due 2025
— “bbb-” (Good) on $750 million 1.35% senior unsecured notes, due 2027
— “bbb-” (Good) on $600 million 3.95% senior unsecured notes, due 2027
— “bbb-” (Good) on $500 million 3.125% senior unsecured notes, due 2029
— “bbb-” (Good) on $500 million 4.875% senior unsecured notes, due 2030
— “bbb-” (Good) on $750 million 2.15% senior unsecured notes, due 2032
— “bbb-” (Good) on $250 million 8.15% senior unsecured notes, due 2038
— “bbb-” (Good) on $400 million 4.625% senior unsecured notes, due 2042
— “bbb-” (Good) on $750 million 4.95% senior unsecured notes, due 2044
— “bbb-” (Good) on $400 million 4.8% senior unsecured notes, due 2047
— “bbb-” (Good) on $500 million 3.95% senior unsecured notes, due 2049
The following indicative Long-Term IRs have been affirmed with stable outlooks for the shelf registration:
— “bbb-” (Good) on senior unsecured debt securities
— “bb+” (Fair) on subordinated debt securities
— “bb” (Fair) on preferred shares
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 use of Best’s Credit Ratings, Best’s Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best’s Ratings & Assessments.
AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City.