Back to top

Analyst Blog

International credit rating agency, Fitch Ratings recently affirmed the long-term issuer default rating (IDR) of Health Net Inc. (HNT - Analyst Report) at “BB+” and 6.375% senior unsecured notes due June 2017 at “BB”. Additionally, the rating agency affirmed the insurer financial strength rating (IFS) of the company’s operating subsidiaries at “BBB”. All the ratings carry a stable outlook, which implies a low possibility of a rating change in the near future.

The ratings reflect Health Net’s small operating scale and limited market share, with the concentration of a majority of policyholders in California. These factors put the company at a competitive disadvantage compared with its peers with better credit ratings.

Further, the capitalization levels of Health Net fall within Fitch’s guidelines for companies with medium ratings. The lack of stability in earnings is also responsible for the ratings, although Health Net’s operating and financial leverage are significantly superior to the category’s requirement. However, following the company’s agreement with California's Department of Health Care Services, signed in the fourth quarter of 2012, the volatility in earnings is expected to reduce.

At the end of September 2012, the company had a debt-to-total capital ratio (excluding unrealized bond gains from stockholders' equity) of 25%, which falls within the median category guideline range of 35%. Additionally, debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio was 5.3x, higher than the guidance range, due to weak operating results in the first nine months of 2012. However, it is expected to reduce to 3.0x, within the guideline range, by the end of 2013.

Moreover, Health Net has a run-rate interest coverage ratio of 1.7x, which is expected to improve to 3.0x, in line with Fitch’s guidelines for the current rating category. The National Association of Insurance Commissioners (NAIC) risk-based capital (RBC) ratio for the company’s underwriting subsidiaries was 200%, in line with the rating agency’s guidelines. However, operating leverage was 6.7x, lower than the guideline of 9.0x.

Going ahead, strong and stable earnings, improvement in the run-rate EBITDA margin, geographic expansion, increase in premiums and substantial membership growth can lead to an upward revision in ratings. Moreover, if the risk-based capital ratio crosses 250% of the Company Action Level (CAL), then Health Net’s ratings will be upgraded by Fitch.

On the other hand, a decline in the commercial risk enrollment beyond management’s 2013 guidance, a large reduction in the shareholders’ equity, a material litigation or regulatory charge and unexpected operations problems that raise doubts regarding Health Net’s risk management policies could lead to a downgrade. A surge in financial leverage beyond 30% can also lead to a downward revision of the ratings.

Currently, Health Net carries a Zacks Rank #3 (Hold). We maintain our long-term Neutral recommendation on the stock. Peer Molina Healthcare Inc. (MOH - Analyst Report) carries a Zacks Rank #2 (Buy).

Please login to Zacks.com or register to post a comment.

New to Zacks?

Start Here

Zacks Investment Research

Close

Are you a new Zacks Member or a visitor to Zacks.com?

Top Zacks Features

My Portfolio Tracker

Is it Time to Sell?

One of the most important steps you can take today is to set up your portfolio tracker on Zacks.com. Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts.

More Zacks Resources

Zacks Rank Home - Evaluate your stocks and use the Zacks Rank to eliminate the losers and keep the winners.

Mutual Fund Rank Home - Evaluate your funds with the Mutual Fund Rank for both your personal and retirement funds.

Stock/Mutual Fund Screening - Find better stocks and mutual funds. The ones most likely to beat the market and provide a positive return.

My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
ERBA DIAGNO… ERB 3.00 +3.09%
SANCHEZ ENE… SN 34.18 +2.67%
THE PANTRY… PTRY 21.02 +2.09%
INTEL CP INTC 35.15 +1.88%
PIPER JAFFR… PJC 54.54 +1.70%