A.M. Best Affirms Ratings of Health Net, Inc. and Its Subsidiaries

OLDWICK, N.J.--(BUSINESS WIRE)-- A.M. Best Co. has affirmed the financial strength rating (FSR) of B++ (Good) and issuer credit ratings (ICR) of “bbb” of Health Net of California, Inc., Health Net Life Insurance Company, Health Net Health Plan of Oregon, Inc. and Health Net of Arizona, Inc. A.M. Best also has affirmed the ICR of “bb” of the parent company, Health Net, Inc. (Health Net) (Delaware Corporation, headquartered in Woodland Hills, CA) [NYSE: HNT]. Additionally, A.M. Best has affirmed the debt rating of “bb” on $400 million senior unsecured notes at 6.375% due 2017 of Health Net. The outlook for the above ratings is stable.

The affirmation of the ratings reflects the organization’s strong brand recognition, especially in its core market of California. Furthermore, the organization has diverse operations that include both regulated and non-regulated subsidiaries. The insurance subsidiaries’ products are mostly full risk and include commercial, Medicare and Medicaid (known as Medi-Cal in the state of California). Non-regulated subsidiaries include Health Net Federal Services, LLC, which retained the Department of Defense’s TRICARE contract, and behavioral health services offered to veterans and service members of the military. Additionally, the non-regulated subsidiaries, particularly the TRICARE T-3 contract, provide the overall organization with financial flexibility as earnings have been in excess of $100 million annually. However, A.M. Best recognizes that margins on the TRICARE T-3 may narrow as the new agreement has been converted to an administrative services only (ASO) product.

Offsetting rating factors include flattened premium development and concentration risk. Health Net is recovering from sanctions imposed by Centers for Medicare and Medicaid Services (CMS) in 2010. Also, California’s depressed economy has negatively impacted commercial enrollment. As a result of these factors, the rate of growth in premium revenues has flattened and for some affiliates, premiums have decreased. The organization resumed marketing Medicare Advantage in the latter half of 2011. Additionally, Health Net sold its Medicare stand-alone prescription drug plans (PDP) business in April 2012. The majority of the insurance operations’ business is concentrated in California, representing more than 70% of the consolidated insurance companies’ premiums, net income and capital, which represents concentration risks. A.M. Best expects that the operating earnings at the insurance subsidiaries may be lower in 2012 as a consequence of the reserving issues attributable to the previous year and the resulting net loss at the lead company in the first quarter of 2012. Furthermore, the company is experiencing growth in certain government-funded lines of business, particularly Medi-Cal. Budget pressures in California could delay payments and reduce reimbursement levels in the future.

The Health Net insurance subsidiaries are well positioned for the current ratings.

Key factors that could lead to negative rating actions for the organization include recurrences of unexpected items in the operating companies that negatively impact earnings and/or surplus or a significant deterioration in risk-adjusted capital.

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: “Understanding BCAR for Life/Health Insurers”; “Risk Management and the Rating Process for Insurance Companies”; “Rating Members of Insurance Groups”; and “Insurance Holding Companies and Debt Ratings.” Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2012 by A.M. Best Company, Inc.ALL RIGHTS RESERVED.

A.M. Best Company, Inc.
David Mitchell, 908-439-2200, ext. 5556
Senior Financial Analyst
[email protected]
or
Sally Rosen, 908-439-2200, ext. 5280
Managing Senior Financial Analyst
[email protected]
or
Rachelle Morrow, 908-439-2200, ext. 5378
Senior Manager, Public Relations
[email protected]
or
Jim Peavy, 908-439-2200, ext. 5644
Assistant Vice President, Public Relations
[email protected]

Source: A.M. Best Company, Inc.