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Fitch Places Humana's Ratings on Rating Watch Positive

July 6, 2015 6:41 PM EDT

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has placed Humana Inc.'s (HUM) ratings on Rating Watch Positive. The rating action follows HUM's July 3 announcement that it had entered into a definitive agreement under which it will be acquired by Aetna Inc. (AET) in exchange for cash and AET shares valued at $37 billion. Fitch rates HUM's senior unsecured notes 'BBB' and the Insurer Financial Strength (IFS) ratings of certain HUM insurance company subsidiaries 'A'.

KEY RATING DRIVERS

Fitch's decision to place HUM's ratings on Rating Watch Positive reflect ratings benefits derived from AET's more diverse market positon and greater size/scale benefits. Upon the close of HUM's acquisition by AET, which is expected in the second half of 2016, Fitch anticipates upgrading the ratings assigned to HUM' senior notes by one notch to 'BBB+' and the IFS ratings assigned to HUM's insurance subsidiaries by one notch to 'A+'.

Fitch believes that HUM's strong market position in the Medicare Advantage (MA) market and AET's positions in the employer group and individual health insurance markets provides the combined organization with a stronger market position and size/scale characteristics than either company maintained on a stand-alone basis. Fitch views HUM as maintaining the second strongest MA market position in the U.S. behind UnitedHealth Group, Inc.

Partially offsetting these ratings positives is the effect of AET's post-acquisition financial leverage, which Fitch expects to increase materially above current levels to fund a portion of the cash consideration paid to HUM shareholders, and potential operational and earnings disruptions that could arise as the companies integrate operationally.

Fitch's ratings on HUM have historically reflected Fitch's view that MA enrollment generally supports lower ratings than employer group and individual health insurance enrollment due to the U.S. government's large role in the MA market that in Fitch's view, effectively suppresses margins and capital formation. The agency believes that the rating pressure HUM's MA enrollment brings will be mitigated somewhat by HUM's inclusion into the more diverse and larger AET organization.

Fitch estimates the consideration to be paid to HUM shareholders at approximately $18 billion in cash and $16 billion in newly issued AET shares. Fitch's expectation is that AET will fund approximately $16 billion of the cash consideration through new debt issuance. The acquisition is subject to HUM shareholder approval and to issuance of AET shares to be issued in connection with the acquisition, is subject to AET shareholder approval.

RATING SENSITIVITIES

Upon the close of HUM's acquisition by AET, which is expected in the second half of 2016, Fitch anticipates upgrading the ratings assigned to HUM's senior notes by one notch to 'BBB+' and the IFS ratings assigned to HUM's insurance subsidiaries by one notch to 'A+'. Fitch plans to establish rating sensitivities for HUM's then current ratings at that time.

Fitch has placed the following ratings on Rating Watch Positive:

Humana, Inc.

--Long-term Issuer Default Rating (IDR) 'BBB+';

--$500 million of 7.2% senior unsecured notes due June 15, 2018 'BBB';

--$300 million of 6.3% senior unsecured notes due Aug. 1, 2018 'BBB';

--$400 million of 2.625% senior unsecured notes due October 1, 2019;

--$600 million of 3.15% senior unsecured notes due Dec. 1, 2022 'BBB';

--$600 million of 3.850% senior unsecured notes due October 1, 2024

--$250 million of 8.15% senior unsecured notes due June 15, 2038 'BBB';

--$400 million of 4.625% senior unsecured notes due Dec. 1, 2042 'BBB';

--$750 million of 4.950% senior unsecured notes due October 1, 2044.

The following companies' 'A' Insurer Financial Strength (IFS) ratings:

Humana Insurance Company

Humana Medical Plan, Inc.

Humana Health Plan, Inc.

Humana Health Benefit Plan of Louisiana

Careplus Health Plans, Inc.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria

Exposure Draft: Insurance Notching Criteria (Proposed Methodology Changes) (pub. 12 May 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865576

Insurance Rating Methodology (pub. 04 Sep 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987495

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings, New York
Media Relations
Alyssa Castelli, +1-212-908-0540
[email protected]
or
Primary Analyst
Senior Director
Mark Rouck, CPA, CFA, +1-312-368-2085
or
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Senior Director
Doug Pawlowski, CFA, +1-312-368-2054
or
Committee Chairperson
Managing Director
Jim Auden, CFA, +1-312-368-3146

Source: Fitch Ratings



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