A.M. Best Affirms Ratings of Humana Inc. and Its Subsidiaries

By a News Reporter-Staff News Editor at Managed Care Weekly Digest -- A.M. Best affirmed the financial strength rating (FSR) of A- (Excellent) and the issuer credit ratings (ICR) of "a-" for the majority of the insurance subsidiaries of Humana Inc. (Humana) (headquartered in Louisville, KY) (NYSE:HUM). Concurrently, A.M. Best has affirmed the ICR of "bbb-" as well as the existing debt ratings of Humana (see also A.M. Best Company).

Additionally, A.M. Best has affirmed the FSR of B++ (Good) and the ICR of "bbb+" of Kanawha Insurance Company (Kanawha) (Lancaster, SC). A.M. Best has also affirmed the FSR of B++ (Good) and the ICRs of "bbb+" for the following subsidiaries of Humana: Humana Insurance of Puerto Rico, Inc. and Humana Health Plans of Puerto Rico, Inc. (both domiciled in Puerto Rico). All ratings have a stable outlook. (See link below for a detailed listing of all companies and ratings.)

The rating affirmations for Humana's core insurance subsidiaries reflect strong overall membership growth, which was reflected in higher consolidated premiums, service revenues and investment income. Additionally, Humana experienced favorable underwriting and pre-tax operating results in its three core segments: retail, employer group and healthcare services. The organization strengthened its participation in government-sponsored business and established its position in targeted exchange markets. Humana exhibited significantly higher enrollment in Medicare Advantage, stand-alone Medicare prescription drug plans, state-based Medicaid, and made a significant recovery in the individual commercial segment. The company has participated in both federal and state-based exchanges and, as a consequence of select business acquisitions, is leveraging its mission to provide integrative care services to a broader spectrum of enrollees. Additionally, Humana has made substantial investments in health information technology, positioning the company to simplify and better coordinate health care while reducing costs. This has enhanced the company's ability to leverage predictive modeling capabilities that help health insurers better anticipate members' needs. Moreover, some of Humana's insurance subsidiaries received capital infusions from the parent company in order to bolster risk-adjusted capital and maintain levels consistent with A.M. Best's expectations.

Offsetting these positive rating factors are the potential for business concentration risk, margin suppression due to higher utilization and reductions in government reimbursement, low investment returns and the mandated migration to a higher medical loss ratio standard. Because Humana has a long history of providing health insurance services through government-sponsored programs, including military members and their families, there is guarded potential for business concentration risk. The regularity of claim reimbursement cash flows was tempered through the recent government sequester on spending. Additionally, A.M. Best believes that if no external funding can be allocated to the risk-corridor pool, the ultimate payment for risk-corridor receivables is uncertain. Furthermore, while Humana is proactively managing its operating expenses, assessments such as the non-deductible health industry fee and costs to implement regulatory requirements related to the Patient Protection and Affordable Care Act (ACA) have impacted profitability. Finally, A.M. Best believes that certain Humana subsidiaries could benefit from enhanced capitalization to keep pace with future premium growth.

Following Humana's $1.75 billion debt issuance in September 2014, the organization's financial leverage increased to a level closer to its peers. Generally, A.M. Best expects Humana to maintain a debt-to-capital ratio of 20%-30%, and the company is currently at the high end of this range. A.M. Best believes Humana maintains solid liquidity and good financial flexibility by recently establishing a $1 billion commercial paper program and with interest coverage well over 10 times. Moreover, Humana's recent announcement to sell its wholly owned subsidiary, Concentra Inc. for roughly $1 billion will afford the organization the opportunity to support growth in its health insurance subsidiaries. A.M. Best anticipates that Humana will utilize the majority of the proceeds to advance its strategic growth priorities or for general corporate purposes rather than to fund additional share repurchases under its existing $2 billion authorization.

Although Kanawha continues to report poor underwriting results and net losses, A.M. Best acknowledges Humana's willingness to provide explicit financial support in the form of direct capital infusions over the past several years. Additionally, in October 2014, Kanawha entered into a ceded reinsurance agreement with an affiliate, Humana Insurance Company, which covers life, disability income, Medicare supplement, stop loss, cancer, critical illness and accident policies. A.M. Best believes that Humana should continue to closely monitor Kanawha operations in order to take direct action to stem the tide of unfavorable results should the need arise.

After considering the loss of the health reform (Medicaid) business in Puerto Rico and the intensifying competition for commercial business in the Commonwealth, A.M. Best will continue to monitor the consolidated financial strength of the Puerto Rico subsidiaries. The reduction in enrollment and operating scale increased unit costs as the company has had to maintain a good portion of its infrastructure in order to sustain continuing operations. A.M. Best believes the current capitalization remains adequate for the level of business operations within these entities.

Factors that could result in the upward movement of the organization's ratings include improved capitalization at the legal entities, sustained steady earnings and less reliance on government-sponsored business. Conversely, factors that could result in negative rating actions include low or declining capitalization, sharp decrease in earnings trends, and concentration of revenues and earnings.

For a complete listing of Humana Inc. and its subsidiaries' FSRs, ICRs and debt ratings, please visit Humana Inc. The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Keywords for this news article include: Medicaid, Medicare, Investing, Legal Issues, Health Policy, Health Insurance, A.M. Best Company, Investment and Finance.

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