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Fitch Affirms Health Net's IFS at 'BBB'; Outlook Stable
May 30, 2013 / 3:07 PM / 4 years ago

Fitch Affirms Health Net's IFS at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, May 30 (Fitch) Fitch Ratings has affirmed Health Net Inc.'s (Health Net) Issuer Default Rating (IDR) at 'BB+', senior unsecured notes at 'BB', and Insurer Financial Strength (IFS) ratings on Health Net's operating subsidiaries at 'BBB'. The Rating Outlook is Stable. A complete list of ratings follows at the end of this press release. KEY RATING DRIVERS Health Net's ratings continue to reflect the company's overall 'small' market position and size/scale features. Specifically, Health Net is concentrated in California with less geographic diversification and size and scale benefits compared to higher rated peers. The ratings also reflect capitalization metrics that are generally consistent with Fitch's median rating category guidelines for the company's current ratings and an expectation that earnings will be less volatile going forward. Balanced against these strengths is a history of uneven operating results due to a series of one-time charges to earnings. Health Net's market position is considered 'medium' given the company operates primarily in California but has an expanding presence in three other Western states. The size and scale of Health Net's operations are considered 'small' by Fitch when measured by a medical membership of 2.5 million individuals and total revenue of less than $11.3 billion for the full year 2012. Health Net's year-end 2012 NAIC RBC ratio of 196% (company action level basis) is consistent with Fitch's median guideline of 175% for the company's rating category but generally below those of higher-rated competitors. Management targets an NAIC RBC ratio of 200% for its underwriting subsidiaries, excluding Health Net Community Solutions, Inc. Health Net's ratio of debt to most recent four quarters' EBITDA was 2.6x and operating EBITDA to interest expense was 9.9x during the first quarter of 2013. Both ratios were better than Fitch's median guidelines for the rating category. Fitch considers these leverage and coverage ratios better run-rate indicators than the 5.2x debt to EBITDA and 1.8x interest coverage posted for full year 2012. During the fourth quarter of 2012, Health Net and the state of California's Department of Health Care Services (DHCS) entered into a comprehensive agreement covering Health Net's state-sponsored programs. The agreement is expected to reduce earnings volatility by establishing mutually agreed upon margin targets for state-sponsored business and working to improve the process for settling rate disputes. RATING SENSITIVITIES Key ratings triggers that could lead to an upgrade within the 'BBB' IFS rating category for Health Net include: --Sustained solid earnings with less volatility measured by EBITDA margin in excess of 3%, return on average capital in the high single digits and absence of 'one-time' charges; --Maintenance of consolidated Risk-Based Capital (RBC) above 200% of the Company Action Level (CAL) and debt-to-EBITDA below 2.5x; --Quality reserves measured by flat-to-favorable reserve development; --Profitable geographic diversification and expansion of the company's premium and membership base. Key ratings triggers that could lead to a downgrade for Health Net include: --Sustained trend of poor earnings results or significant volatility in earnings despite DHCS agreement; --Material loss of commercial membership beyond management's 2013 guidance; --A significant decline in consolidated Risk-Based Capital (RBC) below 175% of the CAL or debt-to-EBITDA greater than 3.0x. Fitch has affirmed the following ratings with a Stable Outlook: Health Net Inc. --Long-term IDR at 'BB+'; --6.375% senior notes due June 2017 at 'BB'; Health Net Of California, Inc Health Net of Arizona, Inc Health Net Plan of Oregon, Inc --IFS at 'BBB'. Contact: Primary Analyst Douglas M. Pawlowski, CFA Senior Director +1-312-368-2054 Fitch Ratings, Inc. 70 W. Madison Street Chicago IL 60603 Secondary Analyst Mark E. Rouck, CPA, CFA Senior Director +1-312-368-2085 Committee Chairperson Julie Burke, CPA, CFA Managing Director +1-312-368-3158 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria & Related Research: --'Insurance Rating Methodology' (Jan. 11, 2013); --'Health Insurance and Managed Care (U.S.) Sector Credit Factors' (Aug. 21, 2012). Applicable Criteria and Related Research: Insurance Rating Methodology — Amended here Health Insurance and Managed Care (U.S.) Sector Credit Factors here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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.

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