Recently, A.M. Best Co. affirmed the issuer credit ratings (“ICR”) of Health Net Inc. (HNT) as well as the debt rating on the company’s $400 million senior unsecured notes, due 2017, at ‘bb.’
Additionally, the rating agency affirmed the financial strength rating (“FSR”) and ICR of the company’s subsidiaries – Health Net of California Inc., Health Net Life Insurance Company, Health Net Health Plan of Oregon Inc. and Health Net of Arizona Inc. – at ‘B++’ and ‘bbb’, respectively. A. M. Best also holds a stable outlook for all the ratings.
The rating affirmation came on the back of Health Net’s strong brand name and varied businesses. Moreover, the company’s non-regulated subsidiaries generate strong earnings, thereby providing financial flexibility.
However, A.M. Best expects the conversion of the TRICARE T-3 contract into an administrative services only (“ASO”) product to result in margin contraction in the business, which contributes a major part of the earnings from non-regulated subsidiaries.
Health Net’s premium growth has become flat and the company is also facing substantial concentration risk. Also, membership in the Commercial business has been dented by the weak economy in California, while the increased regulations imposed by the Centers for Medicare and Medicaid Services (CMS) in 2010 are still hurting the company.
Though Health Net’s government businesses are growing, reimbursement rates are expected to decline owing to budget pressures, while payment delays are also anticipated. Moreover, A. M. Best expects earnings of the operating subsidiaries for 2012 to be negatively affected by the net loss incurred during the first quarter resulting from reserve creation.
Nevertheless, the ratings are not expected to change in the short term. However, substantial decline in the risk-adjusted capital of Health Net or repeated losses from unforeseen items in the subsidiaries could lead to a downward revision of the ratings.
The company competes with WellPoint Inc. (WLP) and UnitedHealth Group Inc. (UNH).
Currently, Health Net carries a Zacks #5 Rank (short-term Strong Sell rating), implying a strong downward pressure on the shares in the near term.
HEALTH NET INC (HNT): Free Stock Analysis Report
UNITEDHEALTH GP (UNH): Free Stock Analysis Report
WELLPOINT INC (WLP): Free Stock Analysis Report
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