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


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Published in Health and Fitness on Friday, December 17th 2010 at 13:25 GMT by Market Wire   Print publication without navigation


OLDWICK, N.J.--([ BUSINESS WIRE ])--A.M. Best Co. has upgraded the financial strength rating to B++ (Good) from B+ (Good) and issuer credit ratings (ICR) to abbba from abbb-a for 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. Besta™s Ratings & the Treatment of Debt"

A.M. Best also has upgraded the ICR to abba from abb-a for the parent company, Health Net, Inc. (Health Net) (headquartered in Woodland Hills, CA) (NYSE: HNT). Additionally, A.M. Best has upgraded the debt rating to abba from abb-a on $400 million senior unsecured notes at 6.375% due 2017 of Health Net. The outlook for all the above ratings has been revised to stable from negative.

The upgrading of the ratings of Health Neta™s insurance entities reflects the improved profit margins, diversified earnings sources that include government and state-sponsored business, and their strategic importance to Health Net by providing managed care products in the Arizona, California and Oregon markets. The commercial segment margins have improved as Health Net priced its products above claims trends and it has re-priced unprofitable accounts. The expansion in margins across the segments is somewhat mitigated by margin contraction in the Medicaid line. In addition to their commercial businesses, Health Net insurance companiesa™ diversified sources of earnings include Californiaa™s Medi-Cal program (Medicaid managed care), Medicare Advantage and Medicare Prescription Drug, Part D, specialty products and behavioral health business. The majority of these earnings are derived from Health Net of California, which plays a strategic role in Health Neta™s regional approach to operating as a health insurer in the western United States.

Offsetting these favorable rating factors is Health Neta™s decline in commercial membership and operating losses stemming from the northeast segmenta™s operating services agreement with the acquiring company of that segment. The companya™s commercial membership declined over the medium term and is expected to decline 3%-4% in 2010. The decline is driven by a highly competitive market and unfavorable economic conditions, which includes a persistently high unemployment rate and large group dis-enrollment. While Health Net divested its northeastern operations in late 2009, under the terms of the northeastern divestiture, the potential for additional losses exists for Health Net should the experience in that block underperform; however, that potential should diminish over time as the membership acquired renews over into the acquiring companya™s contracts.

A negative outlook was assigned by A.M. Best in July 2009 after the announcement that the TRICARE contract was awarded to another carrier. Health Net appealed the decision, and earlier this year the Department of Defense (DoD) granted the TRICARE contract to Health Net. The revised outlook recognizes DoDa™s decision to award the TRICARE or T3 contracts to Health Net. The current TRICARE contract has been extended by the DoD until the new terms of the T3 contract take effect on April 1, 2011. Through nine months ended September 30, 2010, the TRICARE contract adds more than 50% to Health Neta™s pre-tax earnings and is Health Neta™s strongest source of non-regulated earnings.

The principal methodology used in determining these ratings is [ Besta™s Credit Rating Methodology -- Global Life and Non-Life Insurance Edition ], which provides a comprehensive explanation of A.M. Besta™s rating process and highlights the different rating criteria employed. Additional key criteria utilized include: aRating Health Insurance Companiesa; aUnderstanding BCAR for Life and Health Insurersa; a[ A.M. Besta™s Ratings & the Treatment of Debt ]a; aRisk Management and the Rating Process for Insurance Companiesa; aRating Members of Insurance Groupsa; and aAssessing Country Risk.a Methodologies 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 © 2010 by A.M. Best Company, Inc.ALL RIGHTS RESERVED.


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