A.M. Best has affirmed the financial strength rating of B++ (Good) and the 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 has also affirmed the ICR of “bb” and the debt rating of “bb” on the $400 million 6.375% senior unsecured notes due 2017 of the parent company, Health Net, Inc. (Health Net) (Woodland Hills, CA) [NYSE:HNT]. The outlook for all ratings is stable.

The ratings affirmations for Health Net and its subsidiaries reflect the organization’s long established and solid presence in the southern California market, recent membership growth, adequate risk-adjusted capitalization and the overall financial flexibility of Health Net. Health Net has executed on a number of its business development, geographic expansion and diversification initiatives. A.M. Best notes that, after several years of enrollment decline, the trend reversed in 2014 through its strong participation in health exchanges and Medicaid expansion. While Health Net’s insurance operations are largely concentrated in California, Health Net Federal Services also provides a number of services to the military, which includes contracts with TRICARE and the U.S. Department of Veterans Affairs. Health Net has historically provided financial support to help fund core insurance operations through capital contributions. A.M. Best believes that Health Net’s financial leverage is manageable at roughly 23% as of year-end 2014, with adequate interest coverage that is consistent within A.M. Best’s guidelines for the current ratings.

A.M. Best expects Health Net’s growth trends to persist as a result of continued involvement in exchanges and Medicaid programs. A.M. Best has some concerns with this level of growth, which not only places a strain on risk-adjusted capitalization, but could also result in unfavorable morbidity experience. A.M. Best acknowledges the existence of risk-mitigating programs that may temper these concerns. In addition, the costs of participating in the exchange and other fees related to the Patient Protection and Affordable Care Act has led to a significant decline in earnings at some of Health Net’s core insurance subsidiaries. Health Net set up a premium deficiency reserve adding downward pressure on the capital balances of some of its subsidiaries. A number of capital infusions from the holding company were made to several of its insurance subsidiaries in an effort to ensure risk-adjusted capital levels were maintained in 2014. A.M. Best expects that the parent company will continue to provide capital support when necessary.

Key rating factors that could lead to a positive rating action are profitable membership growth, overall favorable trends in operating performance and improved risk-adjusted capitalization. Key rating factors that could lead to a negative rating action are a decline in risk-adjusted capital, continued lower level of earnings at the core insurance subsidiaries, and a material increase in financial leverage or deterioration in interest coverage at Health Net, Inc.

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.

Key insurance criteria reports utilized:

  • Risk Management and the Rating Process for Insurance Companies
  • Understanding BCAR for U.S. and Canadian Life/Health Insurers
  • Rating Members of Insurance Groups
  • Insurance Holding Company and Debt Ratings
  • Analyzing Insurance Holding Company Liquidity
  • A.M. Best's Liquidity Model for U.S. Life Insurers

This press release relates to rating(s) that have been published on A.M. Best's website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best’s Ratings & Criteria Center.

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