Best’s News & Research Service - November 09, 2017 05:17 PM (EST)
A.M. Best Places the Credit Ratings of Kanawha Insurance Company Under Review; Comments on Credit Ratings of Humana Inc.
- November 09, 2017 05:17 PM (EST)
Oldwick //BestWire// - A.M. Best has placed under review with negative implications the Financial Strength Rating of B++ (Good) and the Long-Term Issuer Credit Rating of “bbb+” of Kanawha Insurance Company (Kanawha) (Lancaster, SC). Additionally, A.M. Best has commented that the Credit Ratings (ratings) of Humana Inc. (Humana) (headquartered in Louisville, KY) [NYSE: HUM] and its subsidiaries, excluding Kanawha, are unaffected by Humana’s announcement that it has signed a definitive agreement to sell its wholly owned subsidiary, KMG America Corporation (KMG), to Continental General Insurance Company, (Continental General) a Texas-based insurance company wholly owned by HC2 Holdings, Inc. (HC2 Holdings). Kanawha, a KMG subsidiary that is included in the transaction, wrote and carries a closed block of long-term insurance policies.
The under review with negative implications status reflects the history of losses and required capital contributions needed at Kanawha, unclear financial support of the acquiring organization and the loss of the financially strong current parent, Humana. Furthermore, the under review with negative implications status also reflects the relatively weak credit profile of Continental General’s parent, HC2 Holdings, based upon its current leverage position and debt ratings issued by other Nationally Recognized Statistical Rating Organizations. A.M. Best anticipates that the ratings of Kanawha will remain under review until the transaction closes, which is estimated to be in the third quarter 2018, subject to regulatory approval. Furthermore, A.M. Best will need to conduct discussions with both Continental General Insurance Company and HC2 Holdings to determine the ultimate impact on the ratings. Negative rating actions could occur upon close of the transaction with the loss of the rating enhancement afforded to Kanawha from its current parent, Humana; based upon the operating plans under Kanawha’s new ownership; or if A.M. Best believes that the credit profile of HC2 Holdings is weak enough to warrant rating drag.
Based on the terms of the definitive agreement, Humana expects to record a net loss associated with the sale of KMG of approximately $400 million on a GAAP basis. The estimated pretax loss of approximately $900 million is partially offset by the expected tax benefit of approximately $500 million. The sale of Kanawha is expected to improve Humana’s overall business profile, by disposing of a non-strategic entity that has placed a strain on the organization through required capital and reserve strengthening to support its run-off long-term care business. Humana will fund the transaction with approximately $203 million of parent company cash contributed into KMG, in addition to the transfer of approximately $150 million of statutory capital with the sale, which Humana expects to be offset by the associated favorable tax treatment of the sale.
Excluding the loss on the sale, Humana does not anticipate a material impact to earnings in 2017 or 2018 from the sale of the business. Furthermore, Humana has a trend of strong earnings and received over $1 billion in 2017 from Aetna Inc. as part of the break-up fee from the terminated merger agreement, which aids in offsetting the pretax loss for the sale of Kanawha.
This press release relates to Credit Ratings that have been published on A.M. 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 A.M. Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Understanding Best’s Credit Ratings. For information on the proper media use of Best’s Credit Ratings and A.M. Best press releases, please view Guide for Media - Proper Use of Best’s Credit Ratings and A.M. Best Rating Action Press Releases.
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