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

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

OLDWICK, N.J.--(BUSINESS WIRE)-- A.M. Best Co. has affirmed the financial strength rating (FSR) of B++ (Good) and issuer credit ratings (ICR) of "bbb" of 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. Best also has affirmed the ICR of "bb" of the parent company, Health Net, Inc. (Health Net) (headquartered in Woodland Hills, CA) (NYS: HNT) . Additionally, A.M. Best has affirmed the debt rating of "bb" on $400 million 6.375% senior unsecured notes due 2017 of Health Net. The outlook for all ratings is stable.

The rating affirmations for Health Net and its subsidiaries reflect a rebuilding and stabilizing business development trend, improved balance sheet strength at the holding company and excess operating capacity. After refocusing its operations in the western regional operating segment, which includes the states of California, Washington, Oregon and Arizona, the Health Net organization is working to further build strength in its main lines of business, government-sponsored programs and the commercial sector. Over the last year, the organization scored a number of gains by successfully overcoming other competitors, and recently it was awarded as one of the participants for the California Public Employees' Retirement System (also known as CalPERS) agreement. The organization has worked to extend existing contracts and has made efforts to secure its place in the new business environment. Health Net's subsidiaries are known for their expertise in managing Medicare, Medicaid, state employee programs, military retirees programs and a number of ancillary services including behavioral health, dental and vision. Operations over the last few quarters have improved. In 2012, the company netted a substantial addition to the capital at the holding company from the residual profit of the sale of one of its lines of business.

Offsetting rating factors include reduced operating performance and business concentration risk, both geographical and by type of payer. Retention rates in the commercial business sector have slipped somewhat. Nevertheless, Health Net has made progress in stabilizing its membership but has lost ground in the large group commercial market. Health Net has focused its operation on the western region, where membership is largely based in California, posing geographic concentration risk. Furthermore, Health Net was awarded part of the California dual eligible contract and part of the Arizona Medicaid contract. The California contract is scheduled to begin in 2014. The Arizona contract is scheduled to begin in late 2013. Both are expected to increase the company's exposure to government sponsored programs. However, somewhat balancing the organization's exposure to government funded programs is the selection of Health Net as one of the qualified plans called, Covered California, to participate in the state exchange program. During the last three years, Health Net has completed a number of financial settlements in some major cases. Consequently, some of Health Net's businesses were discontinued and others were sold. Additionally, inconsistency in the organization's earnings trend can be tied to pricing issues in its commercial line, the conversion of TRICARE to a cost plus basis and some contractual issues with California on its Medi-Cal. California's Medicaid contract was re-negotiated at the end of 2012.

Health Net and its subsidiaries are well-positioned for their current rating level.

Key rating factors that could lead to negative rating actions are insufficiently capitalized revenue development, which could lead to very high leverage ratios, a decline in Health Net's risk-adjusted capitalization and sustained losses that negatively impact its balance sheet.

The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visitwww.ambest.com.

Copyright © 2013 by A.M. Best Company, Inc.ALL RIGHTS RESERVED.

A.M. Best Co.
David Mitchell, Senior Financial Analyst, 908-439-2200, ext. 5556
Rachelle Morrow, Senior Manager, Public Relations, 908-439-2200, ext. 5378
Jeffrey Lane,Managing Senior Financial Analyst, 908-439-2200, ext. 5567
Jim Peavy, Assistant Vice President, Public Relations, 908-439-2200, ext. 5644

KEYWORDS:   United States  Europe  North America  New York


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