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Rating Action:

Moody's affirms Health Net (sr. debt at Ba3); outlook changed to positive

Global Credit Research - 27 Aug 2013

Approximately $400 million of rated debt affected

New York, August 27, 2013 -- Moody's Investors Service today affirmed Health Net, Inc.'s (Health Net) (NYSE: HNT) Ba3 senior debt rating and the Baa3 insurance financial strength (IFS) rating of its operating company, Health Net of California, Inc. The outlook on the ratings has been changed to positive from stable.

RATINGS RATIONALE

Moody's stated that the positive outlook reflects Health Net's improved earnings results over the last 12 months as the company repositioned its commercial book of business and addressed risks regarding its California Medicaid contract. Moody's Senior Vice President, Steve Zaharuk, added that, "In addition to improved financial results, Health Net has positioned itself for growth through participation in the individual health exchanges, Medicaid expansion, and the dual-eligibles pilot program in California. These growth opportunities are important for the company as it continues to re-price and lose membership in the group commercial segment."

The rating agency noted that for the 12 month period ending June 30, 2013, Health Net reported a healthy EBITDA margin of 2.5% and a medical loss ratio (MLR) of 87%. This follows a problematic first half of 2012 when the company reported an EBITDA margin of 1.2% and a MLR approaching 90%, above Moody's expectations.

However, Moody's noted that Health Net's growth strategies present additional risks for the company over the next few quarters. In particular, the new health care exchanges are untested and it is not clear what levels of enrollment will be achieved. While there are some financial safeguards built into the program (reinsurance, risk corridors, and risk-based premium adjustments) to mitigate losses from the potential adverse selection by new insureds, a great deal of uncertainty surrounds the financial impact from this business.

Moody's commented that a key risk with the California Medicaid business and the new dual eligible program is the level of reimbursement from the state. To address this concern, Health Net announced in November 2012 that the company and the state of California's Department of Health Care Services (DHCS) had entered into a comprehensive risk-sharing agreement between the company and California covering all of Health Net's state-sponsored programs, including any potential future Medicaid expansion under federal health care reform. The agreement includes five-year extensions on each of Health Net's four existing Medi-Cal contracts covering seven counties and a new settlement account agreement, which includes the calculation of a surplus or deficit based on contract performance above or below a defined pre-tax margin target. The rating agency noted that this should promote greater financial stability and predictability over the term of the agreement; however, in the short term the company may be still be subject to some earnings volatility.

Commenting on another positive factor supporting Health Net's credit profile, Moody's noted the company's substantial membership base of over 5 million members, including 3 million TRICARE members. The most recent TRICARE contract contains a number of option periods, which if exercised, would extend the contract until March 31, 2015.

Moody's indicated that if 1) EBITDA margin is sustained above 2%; 2) organic membership growth is flat or growing and 3) financial leverage (debt to capital where debt includes operating leases) is below 35%, Health Net's ratings could be upgraded. Since the outlook is positive, a downgrade in the near term is unlikely; however, if EBITDA margins fall below 2%; 2) membership declines over a 12 month period; or 3) the consolidated risk based capital (RBC) ratio decreases to below 180% of company action level (CAL), the outlook may be returned to stable.

The following ratings were affirmed with a positive outlook:

Health Net, Inc. -- senior unsecured debt rating at Ba3;

Health Net of California, Inc. -- insurance financial strength rating at Baa3.

Health Net, based in Woodland Hills, California, reported total revenues of $5.5 billion for the first six months of 2013. As of June 30, 2013, the company had total medical and administrative services only membership of approximately 5.4 million and reported shareholders' equity of $1.5 billion.

The principal methodology used in rating Health Net was Moody's Rating Methodology for U.S. Health Insurance Companies published in May 2011.

Moody's insurance financial strength ratings are opinions about the ability of insurance companies to punctually pay senior policyholder claims and obligations.

Visit Moody's website at www.moodys.com/insurance.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Stephen Zaharuk
Senior Vice President
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert Riegel
MD - Insurance
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Health Net (sr. debt at Ba3); outlook changed to positive
No Related Data.

 

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