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A.M. Best Comments On Humana Inc.’s Announced Joint Venture To Acquire Kindred’s Homecare Business

A.M. Best has commented that the Credit Ratings (ratings) of Humana Inc. (Humana) (headquartered in Louisville, KY) (NYSE:HUM) and its insurance subsidiaries remain unchanged following the announcement that Humana has an agreement to acquire a 40 percent minority interest in the home healthcare provider Kindred at Home.

The acquisition cost is estimated at approximately $800 million, plus any related expenses related to separation charges from Kindred at Home’s Long-Term Acute Care and Rehabilitation businesses. Humana’s portion of the acquisition will focus solely on the home health care and hospice business; therefore it will have no exposure to the Specialty Hospital company. A.M. Best expects Humana to fund the initial contribution with parent company cash. The transaction is not expected to close until the mid-2018.

RELATED READING: Humana To Acquire 40% Minority Interest In Kindred’s Homecare Business For Approximately $800M

A newly created consortium of two equity firms (the Sponsors), TPG Capital (TPG) and Welsh, Carson, Anderson & Stowe (WCAS), and Humana will jointly purchase the outstanding shares and issued securities of Kindred Healthcare, Inc. Through the separation process, Kindred at Home will be split from the Specialty Hospital company and a separate joint venture with Humana will be formed with TPG and WCAS as owners of Kindred at Home.

Kindred at Home is the largest home health provider and the second largest hospice service provider in the nation, respectively, and it has over 40,000 caregivers serving 130,000 patients daily. The organization has annual revenues of approximately $2.5 billion and an implied company value of $3.15 billion.

The joint venture is expected to be headed by David Causby, current executive vice president and president of Kindred at Home, who will serve as CEO of Kindred at Home. Humana will have heightened oversight of quality, clinical outcomes and compliance, and is expected to have involvement in the strategic direction of the home health segment. Additionally, the agreement structure will include protective rights for Humana and the sponsors.

There is a put option with the sponsors, under which they have the right to require that Humana purchase their interest at the end of the third and fourth year after the close of the deal; this will include an exit multiple of 10.5 times the preceding 12 months earnings before interest, income taxes, depreciation and amortization (EBITDA). There are additional provisions allowing this multiple to adjust should certain pre-defined value-based clinical metrics be met. Humana has a call option should it wish to exit the joint venture, which requires the sponsors to sell their interest to Humana at the end of the fourth and fifth year post-close for cash consideration. The same valuation as the sponsors’ put option will be used.

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