HealthSpring reports net income of $55.8M for second-quarter 2010

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Jul 29 2010

HealthSpring, Inc. (NYSE:HS) today announced its results for the second quarter ended June 30, 2010. Highlights for the 2010 second quarter included:

Net income of $55.8 million, or $0.98 per diluted share, compared with $31.9 million, or $0.58 per diluted share, in the 2009 second quarter.
Premium revenue of $756.3 million, up 12.6% over the 2009 second quarter.
Medicare Advantage membership of 197,436, up 8.3% over the 2009 second quarter and 4.3% over 2009 year-end, and stand-alone PDP membership of 394,599, up 33.9% over the 2009 second quarter and 26.1% over 2009 year-end.

Commenting on 2010 second quarter results, Herb Fritch, Chairman and Chief Executive Officer, said, "Results for the second quarter were strong as we continue to experience favorable member retention and lower inpatient utilization in our health plans. Based on our year-to-date results and because we believe the generally favorable trends in the quarter will continue over the balance of 2010, we are increasing our full year 2010 earnings per share guidance."

Operating Highlights

Revenue

Medicare Advantage premiums (including the prescription drug component of HealthSpring's Medicare Advantage plans, or "MA-PD") were $640.8 million for the 2010 second quarter, reflecting an increase of 9.9% over the 2009 second quarter. The higher premium revenue in the 2010 second quarter was primarily attributable to an 8.3% increase in membership compared with the 2009 second quarter.
Medicare Advantage per member per month, or "PMPM," premiums increased to $1,082 in the 2010 second quarter compared with $1,075 in the 2009 second quarter. The PMPM premium increase in the 2010 second quarter resulted from increases related to member risk scores, which was partially offset by decreases in CMS-calculated base premium rates. On a year-to-date basis, PMPM premiums increased to $1,072 in 2010 compared with $1,061 in 2009.
Stand-alone PDP premium revenue was $115.4 million for the 2010 second quarter, an increase of 32.0% compared with the 2009 second quarter. The increase in revenue was primarily the result of a 33.9% increase in membership. PDP premiums PMPM in the 2010 second quarter were $98 compared with $100 in the 2009 second quarter. On a year-to-date basis, PDP PMPM premiums increased to $105 in 2010 compared with $104 in 2009.

Medical Expense

Medicare Advantage medical loss ratio, or "MLR," was 77.9% for the 2010 second quarter compared with 82.0% for the 2009 second quarter. Changes in benefit design and decreases in inpatient utilization, combined with the premium revenue increases, resulted in a decrease in the current period MLR. On a year-to-date basis, Medicare Advantage MLR was 78.1% for 2010 compared with 81.7% for 2009. Medicare Advantage PMPM medical expense decreased 4.3% in the 2010 second quarter compared with the 2009 second quarter and decreased 3.4% year-to-date compared with the first six months of 2009.
PDP MLR was 91.2% for the 2010 second quarter compared with 91.1% for the 2009 second quarter. On a year-to-date basis, PDP MLR was 95.1% for 2010 compared with 93.5% for 2009.

Selling, General & Administrative (SG&A) Expense

SG&A expense as a percentage of total revenue in the 2010 second quarter decreased 50 basis points to 8.6% compared with 9.1% in the 2009 second quarter. The improvement in SG&A as a percentage of revenue resulted primarily from the increases in premium revenue. SG&A expense in the 2010 second quarter increased $3.9 million compared with the 2009 second quarter. On a year-to-date basis, SG&A as a percentage of total revenue was 9.3% for 2010 compared with 10.1% for 2009.

Interest Expense

Interest expense in the 2010 second quarter decreased $1.7 million compared with the 2009 second quarter as a result of lower average debt amounts outstanding and lower interest rates. The Company's interest expense on a year-to-date basis for 2010 includes debt extinguishment costs of $7.1 million in the 2010 first quarter resulting from the Company's entering into a new credit facility and terminating its prior credit facility.
The Company's weighted average effective interest rate on the Company's borrowings (exclusive of the amortization of deferred financing costs and other credit facility fees) for the three months ended June 30, 2010, was 3.4% compared with 4.9% for the three months ended June 30, 2009.

Income Taxes

The Company's effective income tax rate for the three months ended June 30, 2010, was 36.3% compared with 36.5% for the three months ended June 30, 2009. The Company's effective income tax rate for the six months ended June 30, 2010, was 36.6%.

Balance Sheet Highlights

At June 30, 2010, the Company's cash and cash equivalents were $103.7 million, $56.3 million of which was held by unregulated entities, compared with cash and cash equivalents of $439.4 million at December 31, 2009, $106.4 million of which was held by unregulated entities. The reduction in cash and cash equivalents during the six months ended June 30, 2010, is primarily attributable to net purchases of $230.0 million of investment securities and to net payments of $66.4 million of long-term debt.
At June 30, 2010, the Company's accounts receivable were $213.7 million compared with accounts receivable of $92.4 million at December 31, 2009. The increase in accounts receivable during the six months ended June 30, 2010, was primarily the result of an increase in risk premium payments due from CMS and rebates due from drug companies. The Company will receive risk premium settlement payments from CMS of approximately $119.7 million in the 2010 third quarter.
For the first six months of 2010, net cash used in operating activities was $40.8 million compared with $7.9 million used in the same period of 2009. As a result of the increase in accruals for risk adjustment payments and the timing of receipt of such payments from CMS, cash flow from operations significantly lags net income in the first half of the year.
Days in claims payable totaled 32 at the end of the 2010 second quarter compared with 29 at the end of the 2010 first quarter and 36 at the end of the 2009 second quarter.
In May 2010, the Company's Board of Directors authorized a stock repurchase program to buy back up to $100.0 million of the Company's common stock. During the 2010 second quarter, the Company repurchased approximately 838,000 shares for $14.3 million, or an average cost of $17.10 per share, under the stock repurchase program. All repurchases were made utilizing unrestricted cash on hand.

Outlook

EPS: The Company is increasing its expectations for diluted earnings per share for 2010 to be in the range of $3.15 to $3.25 on weighted average shares outstanding of approximately 57.0 million.
Membership: The Company maintains its estimate for Medicare Advantage membership at a range of 198,000 to 200,000 at the end of 2010. The Company now estimates PDP membership of approximately 410,000 at the end of 2010.
Revenue: The Company now estimates that 2010 total revenue will be between $2.95 billion and $3.00 billion.
MLRs: The Company is modifying its estimate for Medicare Advantage MLR to be approximately 79% for 2010. The Company now estimates stand-alone PDP MLR to be in the range of 86.5% to 87.0% for the year.
SG&A: The Company maintains its estimate that selling, general and administrative expense will be approximately 10.0% of total revenue for 2010.
Income taxes: The Company now estimates that its effective income tax rate for 2010 will approximate 36.5%.