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

A.M. Best has affirmed the financial strength ratings (FSR) of A- (Excellent) and issuer credit ratings (ICR) of “a-” for the majority of the insurance subsidiaries of Humana Inc. (Humana) (Louisville, KY) [NYSE: HUM]. A.M. Best also has affirmed the ICR of “bbb-” and the existing debt ratings of Humana. The outlook for these ratings is stable.

Additionally, A.M. Best has revised the outlook of the ICR to stable from negative and affirmed the FSR of B++ (Good) and ICR of “bbb+” of Kanawha Insurance Company (Kanawha) (Lancaster, SC). The outlook for the FSR is stable.

Concurrently, A.M. Best has affirmed the FSR of B++ (Good) and 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). The outlook for these ratings is stable. (See link below for a detailed listing of all companies and ratings.)

The rating affirmations for Humana’s key U.S. subsidiaries reflect the enterprise’s strong earnings in 2013, mainly as a result of improved revenue development, cost containment strategies and favorable overall operating performance. Humana again reported considerable membership gains in 2013, which represents the outcome of merger and acquisition activity, increased access to available Medicare Advantage and Medicare Part D members and some organic growth.

As a result of changes in the scope of its ongoing business operations and in preparation for the structural shifts inherent in The Patient Protection and Affordable Care Act, Humana revamped its organizational structure to make seamless the implementation of new operating requirements impacting employer groups, retail members, health care services and other business operations. Additionally, Humana chose an integrative care delivery approach that lowers the number of provider touch points to patients in lieu of a more comprehensive service environment that has the potential to cut redundancies and meaningfully reduce costs.

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.

Over the last two years, Humana experienced solid enrollment growth, particularly in the retail segment, which includes individual Medicare, state-based Medicaid, Medicare supplement and individual commercial business. Additionally, the organization must now comply with the required 85% minimum medical loss ratio (MLR) for large group business as well as an 80% minimum MLR for small group and individual member business. In anticipation of these requirements, a comprehensive strategy has been implemented to reduce costs by 15% while controlling rate increases. A.M. Best believes that the application of these tactical adjustments, including enterprise risk management policies, will help to meet the goals of the new regulations, and the implementation of these initiatives is expected to bring the operations of Humana in line.

Humana's financial leverage is manageable at around 22%. In general, A.M. Best expects Humana to maintain financial leverage in the 20%-30% range. Humana’s interest coverage remains strong at over 10 times.

As the underwriting operations at Kanawha continue to falter, A.M. Best acknowledges Humana's willingness to provide explicit financial support in the form of direct capital infusions over the last several years. Based on these actions, the company's capital adequacy and claim reserves provide the balance sheet strength needed in support of the continuing operation. However, unfavorable operating trends have quickly weakened risk-based capital in recent years, and the company anticipates that there will be a favorable turnaround in the near future. 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. However, 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 sustained profitable premium development and capital growth, broader product diversification and further progress in its integrative health and wellness care. Conversely, factors that could result in negative rating actions include a sharp increase in financial leverage or a decline in interest coverage, as well as the interruption of cash flow and the cancellation, discontinuance or reduction of any major part of Humana’s benefits or provider structure, which could leave the organization's integrative care initiative and provider networks severely weakened and its customers left underserved.

For a complete listing of Humana Inc. and its U.S. subsidiaries’ FSRs, ICRs and debt ratings, please visit www.ambest.com/press/022806humana.pdf.

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.

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