Health Net reports net earnings of $16.1M in 2010 first quarter

May 5 2010

Health Net, Inc. (NYSE: HNT) today announced 2010 first quarter GAAP net income of $16.1 million, or $0.16 per diluted share, compared with $22.0 million, or $0.21 per diluted share, for the first quarter of 2009.

“Cash flow was strong, and our balance sheet is solid. We remain confident about the company's performance for the balance of this year and are increasing our full year 2010 guidance for earnings per diluted share by $0.05.”

The GAAP results include:

1. $37.7 million in pretax losses from run-off and other operations related to the company's Northeast businesses that were divested on December 11, 2009; and
2. $14.5 million in pretax losses from the company's operations strategy cost reduction efforts and other expenses.

The company's Western Region Operations and Government Contracts segments produced combined earnings of $0.47 per diluted share in the first quarter of 2010.

"We are very pleased with our first quarter 2010 results," said Jay Gellert, Health Net's chief executive officer. "Cash flow was strong, and our balance sheet is solid. We remain confident about the company's performance for the balance of this year and are increasing our full year 2010 guidance for earnings per diluted share by $0.05."

CONSOLIDATED RESULTS

Health Net's total revenues decreased 13.1 percent in the first quarter of 2010 to $3.4 billion from $3.9 billion in the first quarter of 2009. Health plan services premium revenues decreased by approximately 19.5 percent to $2.5 billion in the first quarter of 2010 compared with $3.1 billion in the first quarter of 2009. Health Net's consolidated results for the first quarter of 2009 and for the fourth quarter of 2009 until December 11, 2009 include the Northeast businesses.

Investment income decreased to $19.9 million in the first quarter of 2010 compared with $24.3 million in the first quarter of 2009.

Health plan services expenses decreased to $2.2 billion in the first quarter of 2010 from $2.7 billion in the first quarter of 2009.

WESTERN REGION OPERATIONS SEGMENT

Health Plan Membership

Total enrollment in the Western Region Operations segment (Western Region) at March 31, 2010 was approximately 3.0 million members, a decrease of approximately 2.6 percent compared with enrollment at March 31, 2009. Total enrollment in the company's California health plan decreased approximately 1.5 percent from March 31, 2009 to March 31, 2010.

Western Region commercial enrollment declined by 10.5 percent from March 31, 2009 to 1.4 million members on March 31, 2010. The company believes that persistently high unemployment in its markets, particularly California, is the primary cause of the decrease.

Enrollment in the company's small group and individual markets in the Western Region increased by 1.6 percent sequentially, from 440,000 at December 31, 2009 to 447,000 at March 31, 2010.

"We are very pleased that our focused sales strategy, based on affordable, narrow network products, is driving what we believe are market share gains in our small group business," said Jim Woys, Health Net's chief operating officer.

Enrollment in the company's Medicare Advantage plans in the Western Region at March 31, 2010 was 218,000 members, a decrease of approximately 1.0 percent compared with March 31, 2009.

Membership in the company's Medicare Part D plans was 457,000 at the end of the first quarter of 2010, a 1.8 percent increase compared with the end of the first quarter of 2009. The company's Medicare Part D plans are currently offered in 49 states and the District of Columbia and were offered in 50 states and the District of Columbia in the first quarter of 2009.

Medicaid enrollment in California on March 31, 2010 increased by 80,000 members, or 10.1 percent, from March 31, 2009 to 873,000 members. The company attributes the increase in Medicaid enrollment to an increase in the Medicaid-eligible population due to the economy.

Revenues

Total revenues in the Western Region in the first quarter of 2010 increased 1.3 percent to more than $2.5 billion compared with the first quarter of 2009. Health plan services premiums revenues in the Western Region increased 1.0 percent to more than $2.5 billion in the first quarter of 2010 compared with the first quarter of 2009.

Investment income in the Western Region was $19.6 million in the first quarter of 2010 compared with $11.5 million in the first quarter of 2009 and $24.2 million in the fourth quarter of 2009.

Health Plan Services Expenses

Health plan services expenses in the Western Region were essentially flat at approximately $2.2 billion in the first quarter of 2010 compared with approximately $2.2 billion in the first quarter of 2009.

Commercial Premium Yield and Health Care Cost Trends

In the Western Region, commercial premiums per member per month (PMPM) increased by 8.4 percent to $336 in the first quarter of 2010 compared with $310 in the first quarter of 2009.

Commercial health care costs PMPM in the Western Region increased by 8.3 percent to approximately $290 in the first quarter of 2010 compared with approximately $268 in the first quarter of 2009.

Medical Care Ratios (MCR)

The health plan services MCR in the Western Region was 87.5 percent in the first quarter of 2010 compared with 87.7 percent in the first quarter of 2009.

The Western Region commercial MCR was 86.3 percent in the first quarter of 2010 compared with 86.5 percent in the first quarter of 2009.

The Medicare Advantage MCR in the Western Region was 88.2 percent in the first quarter of 2010 compared with 89.7 percent in the first quarter of 2009. The 150 basis point improvement was the result of higher revenues and moderating health care cost trends that were consistent with the company's expectations.

The Medicare Part D MCR was 96.9 percent in the first quarter of 2010 compared with 93.8 percent in the first quarter of 2009. The 310 basis point deterioration is consistent with the company's expectations for the first quarter and the full year of 2010.

"The performance of both our Medicare Advantage and Medicare Part D businesses in the first quarter of 2010 is tracking with what our bids anticipated," said Woys.

General & Administrative (G&A) and Selling Expenses

G&A expense in the Western Region was $223.9 million in the first quarter of 2010 compared with $208.7 million in the first quarter of 2009. The G&A expense ratio increased 50 basis points from 8.4 percent in the first quarter of 2009 to 8.9 percent in the first quarter of 2010 primarily as a result of higher premium taxes in the company's Medicaid plan in California in the first quarter of 2010.

Selling expense in the Western Region was $57.7 million in the first quarter of 2010 compared with $58.5 million the first quarter of 2009.

GOVERNMENT CONTRACTS SEGMENT

The company's Government Contracts revenues increased approximately 6.6 percent in the first quarter of 2010 to $809.5 million from $759.3 million in the first quarter of 2009.

The Government Contracts cost ratio was 95.3 percent in the first quarter of 2010 compared with 95.5 percent in the first quarter of 2009.

BALANCE SHEET

Health Net's condensed consolidated balance sheets, attached as an exhibit to this press release, include the Northeast businesses in the first quarter of 2009. As a result of the sale of the Northeast businesses in December 2009, the balance sheets exclude those businesses from the fourth quarter of 2009 and the first quarter of 2010.

Cash and investments as of March 31, 2010 were $2.0 billion compared with $2.1 billion as of March 31, 2009.

Reserves for claims and other settlements as of March 31, 2010 were $995.6 million compared with $1.3 billion as of March 31, 2009. The decline is due to the divestiture of the Northeast businesses. Compared with reserves at December 31, 2009, reserves for claims and other settlements rose sequentially by more than $43 million.

Days claims payable (DCP) for the first quarter of 2010 was 40.5 days compared with 43.9 days in the first quarter of 2009 and 34.2 days in the fourth quarter of 2009.

On an adjusted basis, DCP in the first quarter of 2010 was 55.8 days compared with 58.0 days in the first quarter of 2009 and 56.8 days in the fourth quarter of 2009. The sequential decline in adjusted¹ DCP was primarily due to an approximate 7 percent decline in commercial and Medicare claims inventories on a dollar basis from December 31, 2009 to March 31, 2010.

The company's debt-to-total capital ratio was 23.5 percent as of March 31, 2010 compared with 26.2 percent as of December 31, 2009 and 26.3 percent as of March 31, 2009. Both the quarter-over-quarter and sequential decreases were the result of a $100 million paydown of the company's revolving credit facility in the first quarter of 2010.

Interest expense was $9.9 million in the first quarter of 2010 compared with $9.6 million in the first quarter of 2009.

CASH FLOW

Operating cash flow was $127.4 million in the first quarter of 2010 and included the December 2009 payment of approximately $44 million received in January 2010 for California Medicaid.

"Excluding the additional monthly Medi-Cal payment, cash flow was more than three-and-one-half times net income plus depreciation and amortization. This performance sets the stage for what we believe will be a strong year for operating cash flow," said Joe Capezza, chief financial officer for Health Net, Inc.

NORTHEAST OPERATIONS SEGMENT

Health Net continues to serve the members of the sold Northeast companies under administrative services agreements (ASAs) that the company entered into with UnitedHealthcare and its affiliates on the closing date of the transaction. Health Net will serve these members until they are either transitioned to other UnitedHealthcare products or not renewed. The company expects the ASAs to remain in effect through 2011.

The revenues and expenses associated with providing services under the ASAs in the first quarter of 2010 were $50.4 million and $81.9 million, respectively, and they are shown separately in the accompanying consolidated statement of operations.

"This performance is consistent with our expectations and reflects the expected timing of payments from the transaction," said Capezza. "We are maintaining our full year 2010 guidance for total Northeast-related costs of approximately $53 million. We also continue to expect to receive approximately $25 million in net cash proceeds from the Northeast in 2010."

SHARE REPURCHASE UPDATE

Health Net resumed its share repurchase program in December 2009. On March 18, 2010, Health Net's board of directors approved a new $300 million share repurchase program. In the first quarter of 2010, Health Net repurchased 3.3 million shares for approximately $81.2 million at an average price of $24.37 per share. At March 31, 2010, approximately $298.2 million of authorization under the new program remained.

"The board's action underscores its confidence about our future, and we remain committed to increasing shareholder value," said Gellert.

2010 GUIDANCE

Health Net is increasing its 2010 annual guidance for GAAP earnings per diluted share to a range of $1.97 to $2.07, or $2.37 to $2.47 per diluted share for the combined Western Region Operations and Government Contracts segments.

Source: Health Net, Inc.