A.M. Best Reiterates HUM Ratings - Analyst Blog

On Wednesday, rating agency A.M. Best Co. reaffirmed the financial, debt and credit ratings of Humana Inc. (HUM) and its subsidiaries, thereby reiterating its stable outlook for the firm’s operations. Besides, A.M. Best also upgraded its ratings for some of Humana’s subsidiaries. The rating agency confirmed its secure outlook for most of Humana’s core insurance and health maintenance organizations.

Accordingly, A.M. Best asserted its issuer credit rating (ICR) of “bbb-" for Humana, reflecting a sound credit rating. Alongside, the rating agency affirmed its financial strength ratings (FSR) of “A-" (Excellent) and ICR of “a-" for its subsidiaries.

On the other hand, A.M. Best also reaffirmed its ratings on all of Humana’s existing debt, which are as follows:

Concurrently, the rating agency also upgraded its FSR to “A-" from “B++" (Good) and the ICRs to “a-" from “bbb" for its subsidiaries.

The outlook for all ratings remains stable, reflecting the strong financial position and claims paying ability of Humana and its subsidiaries. These subsidiaries help Humana significantly by offering a comprehensive product portfolio of health, dental and vision products across targeted geographies.

Further, having expanded from a regional to a national presence, Humana’s Medicare Advantage product offering is on the rise, thereby channeling premium top-line growth over the past few quarters. Besides, the company continues to experience modest growth in its commercial business through the expansion of its specialty benefits portfolio. In 2009, this core fundamental growth led to an ascent of 61% in operating income year over year and a hike of 38% in the first quarter of 2010.

However, A.M. Best remains concerned about Humana’s high dependence on government business, particularly in the Medicare segment. During 2009, 73% of the company’s premiums and administrative service fees came from contracts with the federal government.

Moreover, as per the recently passed health care reform, the Medicare Advantage program is expected be cut back, which may impel some seniors to drop the extra benefits that they avail. The Medicare Advantage program costs the government substantially more per person than regular Medicare. This is a bad news for Humana as it is heavily reliant on this segment particularly when the commercial medical segment is on a declining trend. A modest subsidiary consolidated risk-based capitalization is another concern viewed by the rating agency.

Overall, while an impressive fundamental growth warranted a reaffirmation of the ratings, excessive government dependence for its business and competitive pricing is expected to continue with downward pressure on the stock.