April 5, 2012 / 4:42 PM / 5 years ago

TEXT-Fitch affirms Health Net

April 5 - Fitch Ratings has affirmed the 'BB+' Issuer Default 	
rating of Health Net, Inc. (Health Net) and the 'BBB' Insurer Financial
Strength ratings on Health Net's operating subsidiaries. The Rating Outlook is
Stable. A complete list of ratings is shown at the end of this release. 	
	
Health Net maintains a comparatively small market position and size/scale 	
characteristics consistent with Insurer Financial Strength (IFS) ratings in the 	
'BBB' category.	
	
The ratings also consider financial metrics such as NAIC risk-based capital 	
ratios and volatility in earnings that Fitch views as supportive of 'BBB' IFS 	
ratings. Other metrics such as financial leverage and interest coverage are 	
generally consistent with the higher 'A' IFS rating category.	
	
Health Net's market position is considered small given the fact that the company	
primarily operates in California with only modest diversification from three 	
other Western states. Size and scale of Health Net's operations relative to 	
Fitch's rated universe are considered modest when measured by membership of six 	
million individuals and total revenue of less than $12 billion.	
	
Health Net's NAIC risk-based capital (RBC) ratio remains adequate, but well 	
below higher rated peers. Management targets an NAIC RBC ratio of 200% of the 	
Company Action Level (CAL) for its underwriting subsidiaries, which is 	
consistent with Fitch's median guidelines for the current rating category.	
	
Fitch believes that Health Net has been plagued by a series of operational 	
issues in recent years that in some cases have led to litigation, regulatory 	
inquiries, and material earnings disruptions. The agency believes that Health 	
Net's current ratings incorporate the potential for such issues of similar 	
financial and capital impact. However, Fitch also believes that any new concerns	
around Health Net's risk management capabilities could adversely affect the 	
company's ratings.	
	
Fitch believes that Health Net uses a reasonable amount of financial leverage. 	
The company's debt-to-total capital ratio was 27% at year-end 2011, excluding 	
unrealized investment gains from stockholders' equity. Health Net's ratio of 	
debt-to-EBITDA was 2.1 times (x) at year-end 2011 and the total financing and 	
commitment (TFC) ratio was 0.4x at year-end 2011, both ratios are comparable 	
with health sector norms and viewed by Fitch as consistent with the 'A' rating 	
category. 	
	
Health Net's operating EBITDA, excluding net realized investment gains, covered 	
interest expense by 6.5x in 2011, which is also consistent with the 'A' rating 	
category. Interest coverage would have been significantly better in 2011 	
excluding the impact of a $180 million litigation-related charge. 	
	
Key ratings triggers that could lead to an upgrade for Health Net include: 	
	
--Solid earnings with less volatility;	
	
--Significant capital strengthening with Risk-Based Capital (RBC) sustained 	
above 250% Company Action Level (CAL);	
	
--Improved run-rate profitability measured by EBITDA margin;	
	
--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:	
	
--Unforeseen operational issues that cause Fitch to question the company's risk 	
management practices; 	
	
--Material loss of commercial membership;	
	
--A substantial regulatory fine or litigation charge;	
	
--A significant decline in stockholders' equity or increase in financial 	
leverage above 30%.	
	
Fitch has affirmed the following ratings with a Stable Rating 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'.

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