KEY RATING DRIVERS
Improved earnings in 2013 were an important consideration in today's affirmation of Health Net's ratings. The affirmation also considers Health Net's overall 'medium' market position and size/scale features, which typically span the 'A' and 'BBB' IFS rating categories. Further, most of Health Net's capitalization metrics are comparable with Fitch's median guidelines for the 'A' IFS rating category or higher.
Balanced against these ratings positives are uncertainties regarding the Affordable Care Act's (ACA) effect on the composition and profitability of the health insurance market which led Fitch to assign a Negative Sector Outlook to health insurers in
Health Net reported improved earnings in 2013 with an EBITDA margin of 3.1%, consistent with Fitch's 'BBB' IFS rating category guideline, and up from 0.9% in 2012. The company's return on average capital was 8.1% in 2013, up from 6.2% in 2012 and comparable to Fitch's 'A' IFS guidelines.
Importantly, earnings disruptions that created material volatility in past years were absent from 2013's results. The company's ability to sustain profitability at 2013 levels, could favorably impact the company's rating outlook and ultimately ratings. Net income from continuing operations was
Fitch considers Health Net's market position consistent with its 'medium' categorization given the company mix of commercial,
Health Net's year-end 2013 NAIC RBC ratio is expected to be near 200% of the company action level. Management targets an NAIC RBC ratio of 200% excluding its community solutions segment, for its underwriting subsidiaries. This RBC ratio remains consistent with Fitch's median guideline of 175% for the 'BBB' IFS rating category.
The company's ratio of debt to EBITDA was 1.5x and operating EBITDA to interest expense was 10.5x during 2013. Both ratios showed significant improvement from 2012's 5.2x debt-to-EBITDA and 1.8x EBITDA to-interest expense. The 2013 ratios were better than Fitch's median guidelines for the current rating category.
If Health Net's first half 2014 earnings are comparable to 2013's levels and there is no further deterioration in Fitch's macro view of the Health Insurance Sector, Fitch is likely to revise the rating outlook to positive during the second half of 2014. Specific Health Net measurements include: EBITDA margin exceeding 3%, return on average capital in the high single digits, and the absence of restructuring and reserve charges that materially disrupt earnings.
If the above conditions are met and maintained through the subsequent 12 - 24 months, and the following conditions are met, Fitch believes that a rating upgrade is possible:
--Maintenance of consolidated
--Flat-to-favorable reserve development.
Key ratings triggers that could lead to a downgrade for Health Net include:
--Poor earnings results or significant volatility in earnings;
--Deterioration in commercial membership relative to relative to year-end 2013 levels.
--A significant decline in consolidated
Fitch has affirmed the following ratings with a Stable Rating Outlook:
Health Net Inc.
--Long-term IDR at 'BB+';
--6.375% senior notes due
Health Net of
Health Net Health Plan of
--IFS at 'BBB'.
Additional information is available at 'www.fitchratings.com'.
--'Insurance Rating Methodology' (
--'Health Insurance and Managed Care (U.S.)' Sector Credit Factors (
Insurance Rating Methodology - Effective
Source: Fitch Ratings
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