Last week, A.M. Best Co. affirmed the issuer credit rating (ICR) of Humana Inc. (HUM - Free Report) at “bbb-” along with its debt ratings. The rating agency also assigned a “bbb-” rating to the new debt issued by Humana.
Further, A.M. Best affirmed the financial strength rating (FSR) of most of Humana’s insurance subsidiaries at “A-” and affirmed the ICR at “a-.” The rating agency also affirmed the FSR of a subsidiary – Kanawha Insurance Company – at “B++” and its ICR at “bbb+.”
Additionally, A.M. Best raised the FSR of Humana Insurance of Puerto Rico, Inc. and Humana Health Plans of Puerto Rico, Inc. to “B++” from “B+” and their ICR to “bbb+” from “bbb-.” All the above-mentioned ratings, except the ICR of Kanawha, carry a stable outlook. The ICR of Kanawha carries a negative outlook.
The affirmation of the ratings on Humana’s American subsidiaries was based on sturdy membership growth during 2012. The company’s organic growth, membership gains through acquisitions, incremental Medicare membership allotted by the Centers for Medicare and Medicaid Services (CMS) and increase in prescription drug membership led to the surge in membership.
Moreover, Humana has a trend of reporting strong underwriting gains and positive earnings. The company also has a strong inorganic growth strategy and is following an integrative care initiative that aims to expand the range of services and reduce cost.
However, these positive factors were offset by the downturn in earnings after the historical high in 2011, along with the business concentration risk faced by it.
Nevertheless, the strong revenues, good underwriting results and steady capital growth of Humana’s Puerto Rican insurance subsidiaries led to the upgrade in their rating. A.M. Best projects the financial leverage of Humana to stay in the range of 20%–30%.
The rating agency expects to upgrade the ratings of Humana in the event of continued premium growth, capital generation, diversified product development and growth in integrative health and wellness care. On the other hand, disruption in cash flow or the termination or cutback of any major part of Humana’s benefits or provider structure, resulting in deterioration in the integrative care initiative and provider networks, can lead to a downgrade in the ratings.
Currently, the shares of Humana carry a Zacks Rank #3 (Hold). We maintain a long-term Neutral recommendation on the stock. The company’s peer, American Caresource Holdings, Inc. carries a Zacks Rank #2 (Buy).