TEXT-S&P revises Health Net outlook to negative

Fri Aug 3, 2012 2:30pm EDT

Overview
     -- Health Net announced that it expects operating results for 
second-quarter and full-year 2012 to be significantly worse than previously 
expected.
     -- We are revising our outlook on Health Net to negative from stable and 
affirming the ratings.
     -- We could lower the rating by one notch if the company's operating 
earnings continue to deteriorate.

Rating Action
On Aug 3, 2012, Standard & Poor's Ratings Services revised its outlook on 
Health Net Inc. to negative from stable. At the same time, we affirmed our 
'BB' long-term counterparty credit rating on Health Net Inc. and our 'BBB-' 
long-term counterparty credit and financial strength ratings on core 
subsidiaries Health Net of California Inc., Health Net Life Insurance Co., 
Health Net of Arizona Inc., and Health Net Health Plan of Oregon Inc.

Rationale
The outlook revision resulted from Health Net's announcement that its 
operating performance was significantly worse than expected for second-quarter 
and will be worse than expected for full-year 2012. The results were primarily 
driven by higher-than-expected medical costs from its Medicaid senior and 
persons with disabilities members, and its commercial large groups with 
full-network benefits members.

We have revised our adjusted EBIT return on revenues (ROR) margin expectations 
for 2012 to 1% to 1.5% from the 3%-3.5% range. EBITDA interest coverage 
(including imputed lease obligations interest) would diminish to about 4x from 
our previous expectation of 7x. Nevertheless, we believe that the expected 
EBIT margin (about 1%-1.5%), EBITDA interest coverage (about 4x), and debt 
leverage (less than 35%) still support the current rating.

Health Net's mix of business in commercial and government-sponsored managed 
care plans (Medicaid, Medicare Advantage, and TRICARE) supports its very good 
business profile. The company's main product offering is structured as an 
insured HMO, marketed primarily to commercial and government customers. In 
addition, with TRICARE's conversion to a nonrisk business effective April 
2011, the mix of Health Net's membership business is now 54% nonrisk (TRICARE 
members) and 46% risk. This very good business profile helps to mitigate our 
concerns about the company's limited geographic and product scope.

Outlook
The negative outlook indicates that we could lower the rating by one notch if 
the company's EBIT ROR were to decline to less than 0.5%-1.5% for a sustained 
period. In 2012, we expect Health Net to report an adjusted EBIT ROR of about 
1%-1.5% on revenue of more than $11 billion. We expect debt 
leverage--including postretirement benefit and operating lease obligations--of 
less than 35%, and EBITDA interest coverage--including imputed interest on 
operating lease obligations--to be greater than 4x at year-end 2012. We expect 
consolidated risk-adjusted capitalization--including the effects of double 
leverage--to remain redundant at the 'BBB' level.

Related Criteria And Research
     -- Holding Company Analysis, June 11, 2009
     -- Analysis Of Nonlife Insurance Operating Performance, April 22, 2009

Ratings List
Ratings Affirmed

Health Net Inc.
 Senior Unsecured                       BB                 

Ratings Affirmed; Outlook Action
                                        To                 From
Health Net Inc.
 Counterparty Credit Rating
  Local Currency                        BB/Negative/--     BB/Stable/--

Health Net Health Plan of Oregon Inc.
Health Net of California Inc.
Health Net of Arizona Inc.
Health Net Life Insurance Co.
 Counterparty Credit Rating
  Local Currency                        BBB-/Negative/--   BBB-/Stable/--
 Financial Strength Rating
  Local Currency                        BBB-/Negative/--   BBB-/Stable/--