OREANDA-NEWS. Fitch Maintains Humana's Ratings on Positive Watch Fitch Ratings has maintained the 'BBB' ratings assigned to Humana Inc.'s (HUM) senior notes and 'A' Insurer Financial Strength (IFS) ratings assigned to certain HUM subsidiaries on Rating Watch Positive.

Today's rating action follows the completion of a periodic review of HUM's ratings. Fitch previously placed HUM's rating on Rating Watch Positive on July 6, 2015, following the company's announcement that it had entered into a definitive agreement under which it would be acquired by Aetna Inc. (AET). Excluding the ratings positive aspects of that planned acquisition, Fitch's review would have resulted in the affirmation of HUM's ratings and Stable Rating Outlooks.

The Positive Rating Watch reflects rating benefits expected to be derived from HUM's anticipated acquisition by AET. These benefits include HUM's integration into the AET organization, which Fitch views as maintaining a more diverse market position and greater size and scale benefits than HUM maintains on its own.

HUM's planned acquisition by AET is expected to close by year-end 2016. Although regulators may require the divestiture of operations in various markets as a condition to granting the merger approval, Fitch believes that the impact of such divestitures is unlikely to have meaningful rating implications.

If the acquisition closes as expected, Fitch expects to upgrade the ratings on HUM's senior notes to 'BBB+' and the IFS ratings of certain HUM insurance company subsidiaries to 'A+'; aligning HUM's ratings with AET's expected ratings. Under this scenario Fitch anticipates using its group rating methodology to assess HUM's ratings and expects to categorize HUM as a "core" subsidiary of AET and to refer financial strength from AET to HUM. Fitch also expects its view of HUM's financial profile to primarily be shaped by AET's post-acquisition consolidated financial profile.

If the acquisition fails to close, Fitch would likely affirm HUM's ratings at their current levels. Fitch believes that the company's stand-alone financial profile and competitive positon would continue to support its existing ratings, even in a potentially more concentrated and competitive marketplace.

'Scores' assigned to rating factors underlying HUM's current ratings and the factor's forward trend are discussed below under Key Rating Drivers. Collectively, these scores support HUM's ratings and their rating watch positive status.

KEY RATING DRIVERS

Market Position and Size/Scale scored 'a'; positive forward trend. The positive forward trend reflects Fitch's belief that assuming the planned acquisition closes, HUM's ratings will benefit from being part of an organization with strong market share in both the commercial health insurance and Medicare Advantage (MA) markets. HUM has historically maintained a leading market position in the MA market, but comparatively modest market positon in the commercial insurance market. Additionally, Fitch considers the credit-quality of commercial health insurance membership to be higher than that of MA membership. The agency's view is that the U. S. Government's ability to set reimbursement rates and influence conditions in the MA market dampens EBITDA-based margins and capital stability. These factors have historically supressed HUM's ratings due to its concentration in MA business, but will become less of a factor upon HUM's inclusion into the AET organization. Further, while the company's stand-alone membership and revenue base already meets Fitch's "large" characteristic guidelines, Fitch expects HUM's market position and earnings to benefit from the combined scale generated by a combined HUM-AET platform.

Financial Performance and Earnings scored 'a'; positive forward trend. The positive forward trend reflects Fitch's belief that a combined HUM-AET organization's EBITDA-based margins are likely to be higher than HUM's margins have historically been. Fitch expects this improvement to primarily be derived from the impact of AET's higher-margin commercial membership and combined HUM-AET expense efficiencies that the companies' have projected at $1.3 billion annually by 2018. In recent years Fitch believes that HUM's market position, size and scale characteristics and integrated care delivery capabilities have helped offset margin pressure in the MA market. The company's first quarter 2016 results were adversely affected by higher than expected utilization trends within HUM's individual commercial membership. HUM's first quarter 2016 medical benefit, EBITDA-to-revenues and annualized net return on average capital ratios were 84.8%, 4.8% and 6.5% respectively. From 2013 through 2015 the company's medical benefit, EBITDA-to-revenues and annualized net return-to-average capital ratios averaged 83.8, 5.8% and 9.7% respectively.

Capitalization and Financial Leverage scored 'a+'; negative forward trend. The negative forward trend reflects Fitch's expectation that a combined HUM-AET's post-acquisition financial leverage ratios will be markedly higher than those reported by HUM in recent years. At close of the acquisition, Fitch expects AET's consolidated ratio of debt-to-EBITDA to be higher than 3.0x and the company's financial leverage ratio (FLR) to be approximately 46%. At March 31, 2016 HUM's ratio of debt-to-annualized EBITDA was 1.5x and the company's FLR was 28%. From 2013 through 2015 these ratios averaged 1.2x and 26% respectively.

Debt Service Capabilities and Financial Flexibility scored 'aa'; negative forward trend. The negative forward trend reflects Fitch's expectation that a combined HUM-AET organization's debt-service capabilities and financial flexibility will deteriorate relative to HUM's on a stand-alone basis reflecting the significant amount of debt issued to fund the acquisition. HUM's operating EBITDA-based interest coverage ratio averaged 15.4x from 2013 through the first quarter 2016. In recent years, HUM has maintained solid financial flexibility with comparatively low financial leverage metrics, proven access to the debt capital markets and significant cash and equivalents and short-term holding company assets that totaled $1.4 billion at March 31, 2016.

RATING SENSITIVITIES

Fitch believes that HUM's ratings are most sensitive to the company's ability to benefit from the combined HUM-AET organization's more diversified market position, which is expected to mitigate the company's exposure to the U. S. Government's ability to set reimbursement rates and influence conditions in the MA market. Over time, Fitch believes that this reduced exposure will result in higher and potentially more stable consolidated post-close EBITDA-to-revenue margins than HUM would have been able to generate on its own. If Fitch remains convinced that HUM will benefit from these characteristics subsequent to the company's acquisition by AET, it will likely upgrade HUM's ratings one notch upon the acquisition's close. Fitch would likely remove HUM's ratings from Rating Watch Positive and affirm the ratings if the HUM-AET merger fails to close.

The following ratings remain on Rating Watch Positive:

Humana, Inc.

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

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

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

--$400 million 2.625% senior unsecured notes due Oct. 1, 2019 'BBB';

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

--$600 million 3.850% senior unsecured notes due Oct. 1, 2024 'BBB';

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

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

--$750 million 4.950% senior unsecured notes due Oct. 1, 2044 'BBB'.

The following companies' 'A' Insurer Financial Strength (IFS) remain on Rating Watch Positive:

Humana Insurance Company

Humana Medical Plan, Inc.

Humana Health Plan, Inc.

Humana Health Benefit Plan of Louisiana

Careplus Health Plans, Inc.