AM Best Affirms Credit Ratings of Humana Inc. and Its Health Insurance Subsidiaries

AM Best has affirmed the Financial Strength Rating (FSR) of A- (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of “a-” (Excellent) for the majority of the health and dental insurance subsidiaries of Humana Inc. (Humana) (headquartered in Louisville, KY) [NYSE: HUM]. These subsidiaries collectively are referred to as Humana Health Group. Concurrently, AM Best has affirmed the Long-Term ICR of “bbb-” (Good) and the Long-Term Issue Credit Ratings (Long-Term IRs) of Humana Inc. AM Best also has affirmed the Short-Term Issue Credit Rating (Short-Term IR) of AMB-2 (Satisfactory) for Humana Inc. Additionally, AM Best has affirmed the FSR of B++ (Good) and the Long-Term ICR of “bbb” (Good) of the following Humana subsidiaries: Humana Insurance of Puerto Rico, Inc. and Humana Health Plans of Puerto Rico, Inc. These companies are domiciled in Puerto Rico and collectively are referred to as Humana Health of Puerto Rico Group. The outlook of these Credit Ratings (rating) is stable. (See below for a detailed listing of Humana Health Group members and Long-Term IRs.)

The affirmation of the ratings of Humana Health Group reflect its balance sheet strength, which AM Best assesses as strong, as well as its adequate operating performance, favorable business profile and appropriate enterprise risk management (ERM).

Humana Health Group has an adequate level of risk-adjusted capital, as measured by Best’s Capital Adequacy Ratio (BCAR), primarily supported by solid earnings. Humana has managed to maintain adequate levels of risk-adjusted capital while still paying sizable annual dividends in excess of $1 billion to the holding company. Invested assets for Humana Health Group are composed primarily of high quality fixed-income securities. Liquidity measures remain high and provide flexibility to adjust asset allocation. Strong cash flow from operations are supplemented by the parent’s ample liquidity to support its legal entities.

Humana Health Group has reported solid earnings for the past five years, with net income exceeding $1.5 billion in each of the past four years, and underwriting income exceeding $1 billion in three of the past five years. Earnings strengthening in 2020 was driven primarily by the decline in the utilization and deferral of care due to the COVID-19 pandemic; earnings are expected to temper in 2021. However, return on revenue has been in the 3% range for the past few years. Given that a large percentage of Humana’s revenues and earnings are derived from Medicare Advantage, which is government-funded business, the ability to achieve and sustain a higher level of margins is unlikely given the minimum loss ratio requirements on the Medicare Advantage segment. The five-year compounded average growth rate for premium was 4.6%, reflecting increased new business and top-line scale, in which the Medicare Advantage segment has been leading that growth. Humana Health Group has a favorable business profile driven by its competitive market position in the Medicare Advantage segment as one of the nation’s leading writers. Furthermore, Humana offers a variety of product offerings through its Retail, Group and Specialty and Healthcare Services segments. Additionally, AM Best notes that the earnings from the Healthcare Services segment is non-regulated. The Healthcare Services segment provides pharmacy solutions, provider services and clinical programs to internal and external customers.