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A.M. Best Takes Various Rating Actions on Humana, Inc and Its Subsidiaries; Revises All Outlooks to Negative

Category:

Friday, May 19, 2006 5:33 pm EDT

Dateline:

OLDWICK, N.J.

Public Company Information:

NYSE:
HUM
OLDWICK, N.J.--(BUSINESS WIRE)--May 19, 2006--A.M. Best Co. has taken various rating actions on the financial strength ratings (FSR), issuer credit ratings (ICR) and debt ratings of Humana Inc (Humana) (NYSE: HUM) (Louisville, KY) and its insurance and HMO subsidiaries. The outlook for the FSRs, ICRs and debt ratings has been revised to negative from stable. (See below for a detailed list of ratings.)

A.M. Best has downgraded the debt ratings on both the existing debt and shelf. The downgrading of the holding company's rating does not signify deterioration of its financial fundamentals. This rating action better reflects A.M. Best's traditional notching policy. The negative outlook reflects the enterprise's significant growth in Medicare Advantage and Medicare Part D, dependency on government contracts and increased capitalization pressure related to the large membership growth in the Medicare products. Government contracts will account for about two-thirds of Humana's revenue. To support this growth Humana will be required to increase its leverage.

Offsetting rating factors include geographic diversity, strong membership and revenue growth and improving commercial segment performance. Humana's multi-regional presence, brand recognition and good marketing strategy have contributed to its good market position in the Medicare market. Humana is working to continue to improve the profitability of its commercial segment. Margins in this segment are expected to improve slightly in the medium term mostly due to improved business mix.

A.M. Best will be monitoring Humana's operations closely as to the impact of the significant growth of the Medicare business, as well as the operating results of this core business. The maintenance of Humana's current A- (Excellent) ratings reflects A.M. Best's expectation that Humana will comply with several key financial and operational measures:

-- Humana follows through on a plan to contribute $600 million-$700 million of capital into its subsidiaries and maintain that level of capital. This includes adding capital if business growth exceeds projections.

-- Humana's 2006 pre-tax operating income will be approximately $740 million on a GAAP basis.

-- Results from Medicare Advantage and Medicare Part D will be within the forecasted pre-tax margins of 1-3 %.

-- Debt-to-capital ratio will not exceed the expected level of 31%, and A.M. Best would expect this ratio will trend downward in 2007 with future equity growth through retained earnings.

-- Cash at the holding company will be maintained to cover at least six months of interest service, a level which Humana has consistently exceeded.

-- Humana will not undertake any major acquisitions.

The FSR of A- (Excellent) and the ICRs of "a-" have been affirmed with a negative outlook for the following Humana Inc subsidiaries:

-- Humana Health Plan, Inc.

-- Humana Insurance Company, Inc.

-- Humana Insurance Company of Kentucky

-- Humana Health Insurance Company of Florida, Inc.

-- HumanaDental Insurance Company

-- Humana Health Plan of Ohio, Inc.

-- Humana Wisconsin Health Organization Insurance Corporation

-- Humana Medical Plan, Inc.

-- Humana Employers Health Plan of Georgia, Inc.

The FSR and ICRs have been downgraded to B+ (Very Good) from B++ (Very Good) and to "bbb-" from "bbb+" with a negative outlook, respectively, for the following Humana Inc subsidiaries:

-- Humana Health Plans of Puerto Rico, Inc.

-- Humana Insurance of Puerto Rico, Inc.

An FSR of B++ (Very Good) and an ICR of "bbb" have been assigned with a negative outlook to CarePlus Health Plans, Inc.

The FSR and ICR have been upgraded to B++ (Very Good) from B+ (Very Good) and to "bbb" from "bbb-", respectively, for CHA HMO, Inc. The ratings have been removed from under review and assigned a negative outlook.

The FSR of B++ (Very Good) and the ICR of "bbb+" have been affirmed with a negative outlook for the following Humana Inc subsidiaries:

-- Humana Health Plan of Texas, Inc.

-- Humana Health Benefit Plan of Louisiana, Inc.

The following debt ratings have been downgraded with a negative outlook:

Humana Inc--

-- to "bbb-" from "bbb" on the $300 million 7.25% senior notes, due 2006

-- to "bbb-" from "bbb" on the $300 million 6.30% senior notes, due 2018

The following indicative ratings have been assigned with a negative outlook

Humana Inc--

-- "bbb-" on senior note securities

-- "bb+" on subordinated debt securities

-- "bb" on preferred shares

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.

Contact:

A.M. Best Co.
Public Relations:
Jim Peavy, 908-439-2200, ext. 5644
james.peavy@ambest.com
or
Rachelle Striegel, 908-439-2200, ext. 5378
rachelle.striegel@ambest.com
or
Analysts:
Bridget Maehr, 908-439-2200, ext. 5321
bridget.maehr@ambest.com
or
Sally Rosen, 908-439-2200, ext. 5280
sally.rosen@ambest.com