Credit rating agency A. M. Best Co. has affirmed some ratings of Humana Inc. (HUM) with a stable outlook. Concurrently, the outlook on one of the ratings was revised.
The financial strength rating (:FSR) of the holding company was reiterated at “A–,” the issuer credit rating (:ICR) of most of its insurance subsidiaries were affirmed at “a–” and ICR of the existing debt ratings of the company were confirmed at “bbb–.” The rating affirmations came on the back of strong 2013 earnings fueled by impressive operating performance, expense management and revenue development. Moreover, increase in memberships in the Medicare Advantage and Medicare Part D plans due to mergers and acquisitions also supported the rating affirmations.
However, the rating agency noted that Humana is likely to face business concentration risks, margin suppression, higher medical loss ratio and low investment returns.
Other ratings that were also affirmed include the FSR and ICRs of two subsidiaries of Humana, namely, Humana Insurance of Puerto Rico, Inc. and Humana Health Plans of Puerto Rico, Inc. A.M. Best recognizes the current capital strength of these subsidiaries and has thus affirmed the ratings. However, the overall financial strength of these companies will be monitored by the credit rating agency after taking into consideration the loss from the Health Reform and competition in the Commonwealth.
On the other hand, the ICR (“bbb+”) of Kanawha Insurance Company was affirmed and the outlook was raised to stable from negative. The FSR (“B++”) rating of this subsidiary was also affirmed but with a stable outlook.
At present, although the underwriting operations at Kanawha are weak, A.M. Best stated that Humana’s enthusiasm in providing financial support to this business is encouraging. As a result, the Kanawha business boasts a strong balance sheet. A.M. Best is of the opinion that although operating trends have been unfavorable, things might improve in the near future.
A.M. Best stated that an upward revision in the ratings is possible if the company continues to gain on premiums profitably, generates capital growth and enhances product portfolio. On the other hand, a downward revision in ratings is probable if the company’s debt level widens or its interest coverage lowers. Disruption in Humana’s cash flow, weakening of the company’s care initiatives and a poor customer service might also lead to a downgrade in the ratings.
Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence in the stock as well as maintaining creditworthiness in the market. We believe that Humana’s present score with the credit rating agency will help it write more business going forward.
Humana currently carries a Zacks Rank #4 (Sell). However, some better-ranked stocks in the healthcare industry include Aetna Inc. (AET), LCA-Vision Inc. (LCAV) and Chemed Corp. (CHE). While LCA-Vision and Chemed sport a Zacks Rank #1 (Strong Buy), Aetna carries a Zacks Rank #2 (Buy).