Moody's Affirms Humana Inc. (HUM) Ratings Following New Debt Issuance, Buyback Plans

Moody's Investors Service has affirmed Humana Inc.'s (NYSE: HUM)(Humana's) debt ratings (senior debt at Baa3) and assigned a Baa3 senior unsecured debt rating to the company's new debt issuance which is expected to be approximately $1.75 billion. Humana expects to use the net proceeds of the issuance to redeem the $500 million aggregate principal amount of its 2016 Notes, to repurchase shares of common stock, and for general corporate purposes. The A3 insurance financial strength (IFS) ratings of Humana's operating subsidiaries, Humana Insurance Company (HIC) and Humana Medical Plan, Inc. (HMP) were also affirmed. The outlook on all the ratings is stable.

RATINGS RATIONALE

Moody's said Humana's Baa3 senior unsecured debt rating and the A3 insurance financial strength ratings for Humana Insurance Company (HIC) and Humana Medical Plan, Inc. (HMP), reflect the combination of a historically consistent financial profile, highlighted by solid capital adequacy with a consolidated risk-based capital (RBC) ratio in excess of 200% of company action level (CAL), stable earnings margins with EBITDA margins averaging approximately 6.5% over the last several years, and a moderate financial leverage ratio (debt to capital where debt includes operating leases) of 28% as of June 30, 2014, together with a significant market position with approximately 9.7 million medical members in 23 states. While these consistent results have led to some upward pressure on the company's credit profile, the considerable amount of additional debt being added for stock re-purchase offsets these positive factors. With the new issuance, the financial leverage ratio is expected to increase to approximately 34%, which remains within the parameters for the current rating.

Also reflected in the rating, according to the rating agency, is the company's increased risk profile as a result of having a significant portion of its earnings and revenue dependent on its Medicare Advantage (MA) business. Moody's stated that Humana's MA business currently accounts for approximately 66% of Humana's premiums and fees. Moody's major concern with MA business is the change in government reimbursement levels under the healthcare reform law; it is not clear how current MA members will respond to the resulting benefit and premium changes that will likely result from the reduced reimbursement levels over the next several years. That said, the rating agency noted that despite significant reimbursement reductions over the last several years, Humana and other Medicare Advantage carriers have continued to show increased membership.

In addition to Medicare Advantage, Humana offers a wide array of health, pharmacy and supplemental benefit products for employer groups and individuals. This includes Humana's TRICARE contract, representing approximately 3 million members, and its commercial health business with over 3.5 million commercial members including approximately 600,000 individual members who purchased Humana policies both on and off the healthcare exchanges during the first half of 2014.

The rating agency stated that Humana's ratings could be upgraded if EBITDA margins are sustained above 6%, if Humana's consolidated risk-based capital (RBC) ratio is maintained at or above 200% of company action level (CAL), if annual organic membership grows by at least 3% balanced between commercial and Medicare Advantage products, and if there is a more balanced distribution between Medicare and Commercial premiums. However, if annual medical membership declines by 25% or more, if adjusted financial leverage increases above 40%, if Medicare Advantage premiums account for over 70% of total premiums and fees, if there is a decrease in the consolidated RBC ratio below 150% of CAL, or if there is a loss or impairment of a major Medicare contract, Moody's said that the ratings may be downgraded.

The following ratings were affirmed with a stable outlook:

Humana Inc. -- senior unsecured debt at Baa3; provisional senior unsecured debt at (P)Baa3; provisional subordinated debt at (P)Ba1; provisional preferred stock at (P)Ba2.

Humana Insurance Company -- insurance financial strength at A3;

Humana Medical Plan, Inc. - insurance financial strength at A3.

The following ratings were assigned with a stable outlook:

Humana Inc. -- senior unsecured debt at Baa3.

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