AM Best Assigns Issue Credit Ratings to Humana Inc.’s New Senior Unsecured Notes and New Shelf Registrations

Rhea-AI Summary

AM Best assigns 'bbb' Long-Term Issue Credit Ratings to Humana Inc.'s recently announced senior unsecured notes. The outlook is stable. Humana plans to use the proceeds for general corporate purposes and debt repayment.

Insights

Financial Analyst

The assignment of Long-Term Issue Credit Ratings to Humana Inc.'s senior unsecured notes by AM Best reflects a significant financial event for the company and its investors. The ratings of 'bbb' for both the $1.25 billion and $1 billion notes due in 2031 and 2054, respectively, indicate a good ability to meet ongoing financial obligations, which can be seen as a positive signal for current and potential investors. The stable outlook suggests a low likelihood of a near-term rating change, implying a stable financial environment for the company.

However, it is important to note that Humana's financial leverage slightly exceeds its target debt-to-capital ratio of 40%, standing at 42% at year-end 2023. This could indicate a slightly higher risk profile in terms of debt management. Investors might be concerned that excessive leverage could affect the company's financial flexibility. Nonetheless, the planned use of proceeds for repayment of existing debt and outstanding commercial paper could mitigate such concerns by improving the company's debt maturity profile and potentially reducing interest costs.

Market Research Analyst

From a market perspective, the issuance of senior unsecured notes by Humana could be interpreted as a strategic move to optimize its capital structure amidst fluctuating interest rates. The interest rates of 5.375% and 5.75% on the newly issued notes are indicative of the current cost of borrowing for corporations and should be compared with industry benchmarks for a comprehensive analysis. Investors and analysts will likely monitor the impact of these notes on Humana's EBIT interest coverage, which remains solid. A strong interest coverage ratio suggests that Humana is well-positioned to cover its interest expenses, a reassuring factor for debt holders.

Additionally, the withdrawal of ratings on the expired shelf registration is a routine administrative process and is unlikely to have a material impact on the company's financial health or market perception. The key takeaway for the market is the company's proactive approach to managing its debt portfolio, which can be a positive indicator of its financial prudence and strategic planning.

Economist

The broader economic implications of Humana's recent financial activities must be considered, especially in the context of the healthcare industry's capital requirements. The decision to issue long-term debt in a potentially rising interest rate environment can be a double-edged sword. On one hand, it locks in capital for long-term projects at fixed rates, which can be advantageous if interest rates rise further. On the other hand, it could increase the cost of future borrowing if rates stabilize or fall.

Given the stable outlook, it appears that the economic environment and industry-specific factors are favorable for Humana, which may have contributed to the decision to proceed with the issuance. The company's ability to maintain a solid EBIT interest coverage ratio in this context suggests a robust operational performance capable of sustaining higher levels of debt without jeopardizing financial stability. This strategic financial maneuvering is indicative of a responsive management team attuned to both market conditions and the company's long-term financial strategy.

OLDWICK, N.J.--(BUSINESS WIRE)-- AM Best has assigned Long-Term Issue Credit Ratings (Long-Term IRs) of “bbb” (Good) to Humana Inc.’s (Humana) (headquartered in Louisville, KY) [NYSE: HUM] recently announced $1.25 billion 5.375% senior unsecured notes, due 2031, and $1 billion 5.75% senior unsecured notes, due 2054. In addition, AM Best has assigned indicative Long-Term IRs of “bbb” (Good) to senior unsecured issues, “bbb-” (Good) to subordinated issues and “bb+” (Fair) to preferred stock and of the recently filed shelf registration of Humana. The outlook assigned to these Credit Ratings (ratings) is stable. Concurrently, AM Best has withdrawn the ratings on the previous shelf registration, which expired.

Humana is anticipated to use the proceeds from the senior unsecured notes issuance for general corporate purposes, including the repayment of existing debt and outstanding commercial paper. As such, AM Best expects the issuance to be mostly neutral to financial leverage. Financial leverage, as measured by AM Best, was approximately 42% as of year-end 2023, slightly exceeding the organization's long-term target debt-to-capital ratio of 40%. Humana’s earnings before interest and taxes (EBIT) interest coverage remains solid at about 8 times; however, it did decrease at year-end 2023 due to a moderate decline in operating results driven by increased utilization in its Medicare Advantage segment in the fourth quarter of 2023, as well as higher interest expense.

Humana has sound liquidity measures as the organization maintains consolidated cash holdings of $4.7 billion and generates consistently strong operating cash flows, which totaled $4 billion in 2023. Liquidity is also supported by subsidiary dividends, its $4 billion commercial paper program, and access to short-term borrowings from the Federal Home Loan Bank of Cincinnati through its subsidiary, Humana Insurance Company.

The organization’s consistent profitability has driven equity growth over the past five years. Humana generated strong premium growth in 2023, driven by a membership increase in its core Medicare Advantage segment. However, service revenue derived from its CenterWell segment declined because of the divestiture of its 60% ownership in Gentiva Hospice operations. While profitability remained solid in 2023, net income was impacted by increased utilization in Medicare Advantage and supplementary benefits in the fourth quarter of 2023. AM Best expects the company’s earnings to remain positive albeit with margin compression.

This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best's Credit Ratings. For information on the proper use of Best’s Credit Ratings, Best’s Performance Assessments, Best’s Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best’s Ratings & Assessments.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

Copyright © 2024 by A.M. Best Rating Services, Inc. and/or its affiliates. ALL RIGHTS RESERVED.

View source version on businesswire.com: https://www.businesswire.com/news/home/20240313694339/en/

Timothy Willey

Financial Analyst

+1 908 882 2433

timothy.willey@ambest.com

Christopher Sharkey

Associate Director, Public Relations

+1 908 882 2310

christopher.sharkey@ambest.com

Joseph Zazzera

Director

+1 908 882 2442

joseph.zazzera@ambest.com

Al Slavin

Senior Public Relations Specialist

+1 908 882 2318

al.slavin@ambest.com

Source: AM Best

FAQ

What are the Long-Term Issue Credit Ratings assigned to Humana Inc.'s senior unsecured notes?

AM Best has assigned Long-Term Issue Credit Ratings of 'bbb' (Good) to Humana Inc.'s recently announced $1.25 billion 5.375% senior unsecured notes, due 2031, and $1 billion 5.75% senior unsecured notes, due 2054.

What is the intended use of the proceeds from the senior unsecured notes issuance?

Humana Inc. plans to use the proceeds from the senior unsecured notes issuance for general corporate purposes, including the repayment of existing debt and outstanding commercial paper.

What is the outlook assigned to the Credit Ratings for Humana Inc.'s senior unsecured notes?

The outlook assigned to these Credit Ratings is stable, indicating a positive outlook for the company's financial standing.

What is Humana Inc.'s current financial leverage ratio?

Humana Inc.'s financial leverage, as measured by AM Best, was approximately 42% as of year-end 2023, slightly exceeding the organization's long-term target debt-to-capital ratio of 40%.