International credit rating agency, Fitch Ratings recently
affirmed the long-term issuer default rating (IDR) of
Health Net Inc.
) at "BB+" and 6.375% senior unsecured notes due June 2017 at
"BB". Additionally, the rating agency affirmed the insurer
financial strength rating (IFS) of the company's operating
subsidiaries at "BBB". All the ratings carry a stable outlook,
which implies a low possibility of a rating change in the near
The ratings reflect Health Net's small operating scale and
limited market share, with the concentration of a majority of
policyholders in California. These factors put the company at a
competitive disadvantage compared with its peers with better
Further, the capitalization levels of Health Net fall within
Fitch's guidelines for companies with medium ratings. The lack of
stability in earnings is also responsible for the ratings,
although Health Net's operating and financial leverage are
significantly superior to the category's requirement. However,
following the company's agreement with California's Department of
Health Care Services, signed in the fourth quarter of 2012, the
volatility in earnings is expected to reduce.
At the end of September 2012, the company had a debt-to-total
capital ratio (excluding unrealized bond gains from stockholders'
equity) of 25%, which falls within the median category guideline
range of 35%. Additionally, debt-to-EBITDA (earnings before
interest, taxes, depreciation and amortization) ratio was 5.3x,
higher than the guidance range, due to weak operating results in
the first nine months of 2012. However, it is expected to reduce
to 3.0x, within the guideline range, by the end of 2013.
Moreover, Health Net has a run-rate interest coverage ratio of
1.7x, which is expected to improve to 3.0x, in line with Fitch's
guidelines for the current rating category. The National
Association of Insurance Commissioners (NAIC) risk-based capital
(RBC) ratio for the company's underwriting subsidiaries was 200%,
in line with the rating agency's guidelines. However, operating
leverage was 6.7x, lower than the guideline of 9.0x.
Going ahead, strong and stable earnings, improvement in the
run-rate EBITDA margin, geographic expansion, increase in
premiums and substantial membership growth can lead to an upward
revision in ratings. Moreover, if the risk-based capital ratio
crosses 250% of the Company Action Level (CAL), then Health Net's
ratings will be upgraded by Fitch.
On the other hand, a decline in the commercial risk enrollment
beyond management's 2013 guidance, a large reduction in the
shareholders' equity, a material litigation or regulatory charge
and unexpected operations problems that raise doubts regarding
Health Net's risk management policies could lead to a downgrade.
A surge in financial leverage beyond 30% can also lead to a
downward revision of the ratings.
Currently, Health Net carries a Zacks Rank #3 (Hold). We
maintain our long-term Neutral recommendation on the stock. Peer
Molina Healthcare Inc.
) carries a Zacks Rank #2 (Buy).
HEALTH NET INC (HNT): Free Stock Analysis
MOLINA HLTHCR (MOH): Free Stock Analysis
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