2008-08-01 22:24:04 -
- Fitch Ratings has affirmed the Issuer Default Rating (IDR) and Insurer Financial Strength (IFS) ratings of Health Net, Inc. (Health Net) and its insurance operating subsidiaries (detailed rating list appears below). The Outlook on Health Net's ratings remains Negative.
Today's rating action considers developments related to Health Net's operating performance in the first quarter of 2008 (1Q08), which
resulted in the company reporting a $51 million pre-tax loss for the quarter, as well as ongoing challenges that are expected to place moderate pressure on earnings for the year. The 1Q08 loss was driven in part by $82.4 million in pre-tax charges: $43.2 million of which is related to estimated liability for litigation and regulatory actions, $35.8 million primarily driven by severance costs related to the company's initiatives to reduce general and administrative expenses, and $3.4 million related to the estimated loss on the sale of a small subsidiary.
The 1Q08 results were also affected by $50 million in pre-tax adverse prior period development, $24 million from higher than expected utilization in Health Net's Medicare Advantage and Medicare Part D stand-alone business, and $20 million in higher claims associated with the severe flu season. In lowering expectations for 2008 performance, management cited these developments as well as a proposed large rate cut on Medi-Cal, California's Medicaid program, and a higher than expected tax rate associated with changing business mix.
The Negative Outlook on Health Net's rating is driven by the company's reduced earnings profile in the near term, which could adversely affect debt service capabilities. In addition, Fitch is concerned by ongoing competitive pressures in Health Net's core California market, and significant uncertainty surrounding the company's performance through the balance of 2008 and into 2009. Further deterioration in Health Net's operating performance or capital position could potentially lead to a rating downgrade.
Fitch's ratings on Health Net continue to reflect the company's reasonable financial leverage, good competitive position in the health insurance/managed care markets in California, and strong presence in the traditionally stable-margin TRICARE business.
The ratings also reflect industry challenges related to the unsustainable increase in the cost of providing health care, increasing competitive pressures, and regulatory and legal challenges that may affect the extent to which sector participants can manage costs and price their products appropriately.
Health Net is among the nation's largest publicly traded managed health care companies. The company's health plans and government contracts subsidiaries provide health benefits to approximately 6.8 million individuals across the country through group, individual, Medicare (including the Medicare prescription drug benefit commonly referred to as 'Part D'), Medicaid, TRICARE and Veterans Affairs programs.
Fitch has affirmed the following ratings with a Negative Outlook:
Health Net
--IDR at 'BBB-';
--6.375% senior unsecured notes due 2017 at 'BB+'.
Health Net of California
Health Net of Arizona
Health Net Health Plan of Oregon
Health Net of Connecticut
Health Net of New Jersey
Health Net of New York.
--IFS at 'BBB+'.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings
Bradley S. Ellis, CFA, +1-312-368-2089 (Chicago)
Manish Patel, +1-312-368-3188 (Chicago)
Sandro Scenga, +1-212-908-0278 (Media Relations,
New York)
