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13 Mar 2008
Moody's affirms Humana's Baa3 senior debt rating; negative outlook
Approximately $800 million in senior notes affected
New York, March 13, 2008 -- Moody's Investors Service today affirmed Humana Inc.'s (Humana;
NYSE: HUM; senior unsecured debt at Baa3) ratings and changed
the outlook on the ratings to negative from stable following the company's
announcement that it has revised its earnings guidance for 2008.
The A3 insurance financial strength ratings (IFSR) of Humana Insurance
Company (HIC) and Humana Medical Plan, Inc. (HMP) were also
affirmed with a negative outlook.
Moody's stated that although the reduced earnings forecast was isolated
to Humana's stand alone Part D prescription drug products (PDP)
and did not significantly impact key financial metrics, the revision
highlighted potential risk management issues at Humana. According
to the rating agency, incorrect actuarial assumptions led to pricing/benefit
design flaws in Humana's 'Enhanced' PDP product offerings.
As a result, members with higher prescription drug utilization were
attracted to this product, leading to higher claim costs for Humana.
While the actuarial errors were confined to the 'Enhanced'
product and the pricing and benefit design can be changed for 2009,
Moody's has concerns with Humana's ability to correctly price
and design this particular product in the future given the complexities
surrounding it. These include CMS pricing rules, anti-selection
by seniors, and competitors' offerings. Humana's
indication that it may obtain an independent actuarial review of its pricing
for its 2009 product offerings is viewed positively by the rating agency.
Moody's also noted that while actual experience on PDP products
emerge rather quickly during the year (allowing companies to validate
their pricing assumptions in the first few months of the year),
it will take another several months to determine whether the experience
on the balance of Humana's other Medicare business is consistent
with pricing assumptions. As noted above, while the lowered
guidance did not significantly impact key financial metrics, any
further adverse revisions would place downward pressure on the ratings.
Although Humana has demonstrated success in managing these other products
during the last two years, the rating agency stated that recent
spikes in healthcare costs experienced throughout the sector exposes the
company to the risk that some additional slippage may occur.
Offsetting these concerns, Moody's noted that Humana's
improved commercial segment and growing specialty business have provided
diversity to Humana's credit profile. In addition,
Humana's risk based capital (RBC) remains strong while financial
leverage (debt to capital including operating leases) is being managed
at a moderate level for its rating level.
Moody's indicated that given the negative outlook, a rating upgrade
would be unlikely. However, the outlook could be returned
to stable if Humana's results for 2008 are not significantly below
current guidance and it can demonstrate in early 2009 that the pricing
for its 2009 PDP product offerings are in line with emerging experience.
Conversely, the following could result in a rating downgrade:
RBC decreasing to below 150% CAL; financial leverage (adjusted
debt to capital) increasing to 40%; pre-tax margins
falling below 1.5%; Medicare premiums accounting for
over 65% of total premium and fees; or a loss or impairment
of one of its government contracts.
The following ratings were affirmed with a negative outlook:
Humana Inc.: senior unsecured debt rating of Baa3; senior
unsecured debt shelf rating of (P)Baa3; subordinated debt shelf rating
of (P)Ba1; preferred stock shelf rating of (P)Ba2;
Humana Insurance Company: insurance financial strength rating of
A3;
Humana Medical Plan, Inc.: insurance financial strength
rating of A3.
Prior to this announcement, the last rating action on Humana occurred
on April 7, 2007, when Moody's affirmed Humana's ratings and
changed the outlook to stable from negative.
Humana Inc., based in Louisville, Kentucky, is
a leading managed care company serving over 8 million medical members
(excluding 3.4 million of Standalone PDP members) as of December
31, 2007. For the full year 2007, the company reported
consolidated GAAP revenues of approximately $25.3 billion
with shareholders' equity at the end of 2007 of approximately $4.0
billion.
Moody's insurance financial strength ratings (IFSR) are opinions
about the ability of life and health insurance companies to punctually
repay senior policyholder claims and obligations.
New York
Stephen Zaharuk
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Robert Riegel
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
No Related Data.
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