Fitch Expects to Rate Humana's New Senior Notes 'BBB'
CHICAGO -- December 05, 2012
Fitch Ratings said today that it expects to assign 'BBB' ratings to Humana
Inc.'s (HUM) planned issue of approximately $1 billion of senior unsecured
The 'BBB' ratings are equivalent to Fitch's ratings on HUM's currently
outstanding senior unsecured notes.
Fitch's expectation is that the notes will be issued with a mix of 10 and 30
year maturities and that proceeds will be used to fund a portion of HUM's
previously announced acquisition of Metropolitan Health Networks, Inc. (MDF)
and for general corporate purposes. HUM plans to acquire MDF's common shares
and repay MDF's outstanding debt in exchange for approximately $850 million.
Fitch estimates HUM's EBITDA-based interest coverage ratio through Sept. 30,
2012 including the planned $1 billion issue on a pro forma basis, and assuming
the issue is split evenly between 10 and 30 year maturities, at 17.8x. Fitch
considers the pro forma ratio strongly supportive of the company's current
ratings and notes that from 2007-2011, HUM's EBITDA coverage ratio averaged
Including the planned $1 billion issue on a pro forma basis, HUM's Sept. 30,
2012 debt-to-annualized EBITDA and debt-to-capital ratios are 1.0x and 25%
respectively, both of which are consistent with Fitch's median ratio
guidelines for the company's current ratings. HUM's reported Sept. 30, 2012
debt-to-annualized EBITDA and debt-to-capital ratios were 0.6x and 16%.
HUM's ratings continue to reflect the company's strong operating and financial
performance characterized by favorable revenue and earnings trends. The
ratings also recognize material growth in HUM's shareholders' equity and
moderating premium growth in recent years resulting in improving NAIC
risk-based capital (RBC) ratios and underwriting leverage ratios.
Humana's ratings also consider its concentrated focus in the Medicare
Advantage (MA) market. The company's membership and premiums revenues are
materially more concentrated in MA business than those of its peers. Fitch
believes this concentration could have an adverse impact on Humana's market
position as it believes that the U.S. government's role as the primary funder
of MA programs limits MA plan providers' pricing power and flexibility.
From a ratings perspective, these negative characteristics of the MA market
are partially offset by the growing market for MA products due to the aging
U.S. population, and the desire to implement managed care practices in the
Medicare market in an effort to contain health care costs.
Key Rating Triggers that could lead to an upgrade include:
--Improvements in Medicare's fiscal condition that reduces downward pressure
on MA premium rates or a deceleration of medical care cost trends that reduces
pressure on MA providers' costs;
--A reduction in Humana's targeted debt-to-capital ratio to 20% and increase
in the company's organization-wide NAIC RBC to 350%;
--Financial metrics, especially interest coverage and EBITDA/revenue margin
ratios that approximate current levels.
Key Rating Triggers that could lead to a downgrade of the ratings include:
--A multi-year freeze or reduction in reimbursement rates paid to MA plan
--Acquisitions that Fitch views as aggressively financed or containing an
excessive amount of integration risk;
--Humana increasing its financial leverage target above 30% or reducing its
organization-wide NAIC RBC ratio target below 250%;
--Run-rate EBITDA-based interest coverage and EBITDA/revenue ratios below 7x
and 5%, respectively.
Additional information is available at www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Oct. 18, 2012);
--'Health Insurance and Managed Care (U.S.) Sector Credit Factors' (Aug. 21,
Applicable Criteria and Related Research:
Insurance Rating Methodology - Amended
Health Insurance and Managed Care (U.S.) Sector Credit Factors
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Mark Rouck, +1-312-368-2085
70 W. Madison Street
Chicago IL 60602
Greg Dickerson, +1-212-908-0220
Martha M. Butler, CFA, +1-312-368-3191
Brian Bertsch, New York, +1 212-908-0549
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