CHICAGO--(BUSINESS WIRE)--
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'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria & Related Research:
--'Insurance Rating Methodology' (Sept. 22, 2011);
--'Health Insurance and Managed Care (U.S.)' Sector Credit Factors (March 28, 2012).
Applicable Criteria and Related Research:
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651018
Health Insurance and Managed Care (U.S.) Sector Credit Factors
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=674555
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