November 14, 2008
A.M. Best Downgrades Ratings of Health Net, Inc. And Its Subsidiaries
A.M. Best Co. has downgraded the financial strength ratings (FSR) to B+ (Good) from B++ (Good) and issuer credit ratings (ICR) to "bbb-" from "bbb+" of Health Net of California, Inc. and Health Net Life Insurance Company. Concurrently, A.M. Best has downgraded the FSR to B+ (Good) from B++ (Good) and ICRs to "bbb-" from "bbb" of Health Net Health Plan of Oregon, Inc. and Health Net of Arizona, Inc.
A.M. Best also has downgraded the ICR and debt rating to "bb-" from "bb+" of the parent company, Health Net, Inc. (Health Net) (headquartered in Woodland Hills, CA) (NYSE: HNT). The outlook for all the above ratings has been revised to stable from negative, except for the outlook of Health Net Arizona, Inc., which remains negative and the outlook for the debt, which is stable.
The ratings of Health Net reflect the trend of declining risk-based capitalization, the increase in debt to capital to above 27% and forecasted lower interest coverage below 10 times, which demonstrates the enterprise's reduced financial flexibility. In addition, near-term earnings have declined due to increased medical cost trends and litigation charges stemming from a settlement against company practices. Health Net has experienced higher physician and hospital utilization trends negatively impacting earnings, coupled with higher utilization in the Medicare Advantage products. The profitability of the Medicare Advantage product line should improve in 2009 with the implementation of new rates and product design changes. However, the higher physician and hospital utilization trends may take longer to correct as Health Net evaluates the causes for the increase and implements corrective measures. Furthermore, on November 4, 2008, Health Net announced changes in its senior management responsibilities. The board has instructed the Chief Executive Officer to focus efforts on the company's strategy, with particular emphasis on how best to deploy Health Net's assets in the current competitive and economic environment.
The positive rating factors include the earnings strength added from the TRICARE contract. Earnings from administering the TRICARE contract have been very favorable since the contract was awarded in 2003, and while the contract is up for renewal it has been extended into 2010. In addition to the TRICARE contract, Health Net maintains a diversified stream of revenues generated from Medicare/Medicaid, behavioral health services through Managed Health Network, Inc. and the remainder from commercial risk business. However, commercial membership has been declining over the past few years, and this trend is expected to continue due to the economic environment. A.M. Best believes the commercial segment still may be challenged for membership growth as it competes with large national and Blue Cross and Blue Shield plans in an economically challenging environment that is expected to see a rise in employer group dis-enrollment.
The negative outlook for Health Net of Arizona, Inc. reflects a 13.6% increase in membership through June 2008, resulting from the Medicare Advantage product line, combined with a statutory underwriting loss of $7.2 million for the same time period.
The negative outlook for Health Net of Connecticut, Inc., Health Net of New Jersey, Inc., Health Net of New York, Inc. and Health Net Insurance of New York, Inc., reflects the Northeast operations' struggle to return to and maintain profitability, declining membership and operating in the very competitive New York City metropolitan area.
The following debt rating has been downgraded:
Health Net, Inc.--
-- to "bb-" from "bb+" on $400 million 6.375% of senior unsecured notes, due 2017
Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.