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Recently, Fitch Ratings affirmed the issuer default rating (IDR) of Health Net Inc. (HNT - Analyst Report) at “BB+” and the ratings on its senior secured notes at “BB”. Additionally, the rating agency affirmed the insurer financial strength rating (IFS) on the company’s operating subsidiaries – Health Net Of California Inc., Health Net of Arizona Inc. and Health Net Plan of Oregon Inc. – at “BBB”. All these ratings carry a stable outlook.

The affirmation of Health Net’s ratings was based on the small market share of the company along with the impact of its modest size and scale compared to its peers and high geographic concentration. Further, the ratings take into account the projection of comparatively stable earnings in the future and the capitalization level of Health Net, which falls within the category guidelines for median ratings.

The stable outlook indicates a low possibility of a rating change in the near term. However, if Health Net maintains stable and strong earnings over the long term, measured by an EBITDA (earnings before interest, taxes, depreciation and amortization) margin of more than 3%, return on capital in the range of 7%–9% and lack of one-time charges, then Fitch may raise the IFS.

Additionally, if the company maintains the consolidated risk-based capital ratio above 200% of the company action level and debt-to-EBITDA at lower than 2.5x, or reserve development does not become unfavorable, or Health Net expands globally as well as increases its earnings and membership, the IFS can be upgraded.

Alternatively, if Health Net witnesses weak or volatile earnings over a sustained time period, commercial membership could fall below expectations, or the risk-based capital falls below 175% or debt-to-EBITDA rises above 3.0x, then the ratings can be revised downward.

Health Net carries a Zacks Rank #2 (Buy). Other health maintenance organizations worth considering are Molina Healthcare Inc. (MOH - Analyst Report) – Zacks Rank #1 (Strong Buy), Aetna Inc. (AET - Analyst Report) – Zacks Rank #2 (Buy) and Humana Inc. (HUM - Analyst Report) – Zacks Rank #2 (Buy).

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