Healthspring fourth quarter revenues increase 29.4% to $50.9 million

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Feb 18 2011

HealthSpring, Inc. today announced its results for the fourth quarter and year ended December 31, 2010. HealthSpring's 2010 results include one month's contribution from the operations of Bravo Health, Inc., which was acquired by HealthSpring on November 30, 2010, and transaction expenses related to the acquisition. Highlights included:

Net income in the 2010 fourth quarter of $50.9 million, or $0.88 per diluted share, compared with $38.8 million, or $0.68 per diluted share, in the 2009 fourth quarter, an increase of 29.4% on a per diluted share basis.
Full year earnings per diluted share of $3.39, compared with $2.41 for 2009, an increase of 40.7%.
Premium revenue in the 2010 fourth quarter of $868.2 million, up 30.8% over the 2009 fourth quarter.
Premium revenue for the year of $3.1 billion, an increase of 17.8% over 2009.
Medicare Advantage membership of 304,604 and stand-alone PDP membership of 724,394 at December 31, 2010, an increase of 61.0% and 131.4%, respectively, over the 2009 year end.

Commenting on the 2010 results, Herb Fritch, Chairman and Chief Executive Officer, said, "We are pleased with our financial performance in 2010, including one month of contribution from Bravo Health. The improved utilization trends we experienced earlier in the year continued through the fourth quarter, and Part D operations also finished the year strong. For the 2011 membership enrollment period, we experienced substantial Medicare Advantage membership growth, despite the reduced sales and marketing period. In addition, our stand-alone PDP saw significant auto-assigned membership growth in January. Although our 2011 guidance contemplates a return to a more normalized healthcare trend in most of our products, we look forward to 2011 being another solid year for HealthSpring."

Bravo Health Transaction

On November 30, 2010, the Company completed its acquisition of all of the outstanding capital stock of Bravo Health for approximately $545.0 million in cash. Bravo Health is an operator of Medicare Advantage coordinated care plans in Pennsylvania, the Mid-Atlantic region, and Texas, and a Medicare Part D stand-alone prescription drug plan in 43 states and the District of Columbia. As of November 30, 2010, Bravo Health had Medicare Advantage membership of 105,455 and PDP membership of 300,969.

The purchase price is subject to a positive or negative adjustment based on, among other things, a calculation relating to the statutory net worth of Bravo Health's regulated subsidiaries as of the closing. Any such positive adjustment, which is expected to be paid by the Company in June 2011, will not exceed $10.0 million. Approximately $55.0 million of the purchase price was paid to an independent escrow agent, which amount is available to satisfy post-closing indemnification obligations of the former Bravo Health stockholders, including claims relating to regulatory audits of pre-closing activities.

The transaction was funded by the use of cash on hand and borrowings under an amended revolving credit and new term loan facility. Outstanding loans under the new credit facility bear interest at a spread over LIBOR (initially 375 basis points for term loan A and revolver indebtedness and 450 basis points for term loan B indebtedness), which spread changes depending on the Company's total leverage ratio. With respect to the term loan B indebtedness, the terms of the facility include a contractual minimum LIBOR of 1.5%.

For the quarter ended December 31, 2010, Bravo Health contributed $0.06 to the Company's earnings per diluted share, net of incremental interest expense and intangible asset amortization related to the acquisition. Bravo Health results include its Part D operations that are typically strongest at the end of the year as a result of benefit design. Not included in the earnings contribution from Bravo Health were one-time expenses for the quarter and year ended December 31, 2010, related to transaction costs, severance costs, and other integration activities, which reduced net income per diluted share by $0.13 and $0.14, respectively.

Fourth Quarter Operating Highlights

Revenue

Medicare Advantage premiums (including the prescription drug component of HealthSpring's Medicare Advantage plans, or "MA-PD") were $733.3 million for the 2010 fourth quarter, which represents an increase of 25.0% over the 2009 fourth quarter. The higher premium revenue in the 2010 fourth quarter was attributable to the inclusion of Bravo Health premium revenue for the month of December and to a 4.8% increase in membership in the HealthSpring health plans compared with the 2009 fourth quarter.
Medicare Advantage per member per month, or "PMPM," premiums were $1,046 in the 2010 fourth quarter, compared with $1,037 in the 2009 fourth quarter. The increase in PMPM premiums was the result of the inclusion of Bravo Health PMPM premiums, which were higher than HealthSpring's core PMPM premiums.
Stand-alone PDP premium revenue was $134.6 million for the 2010 fourth quarter, an increase of 76.0% compared with the 2009 fourth quarter. The increase in revenue was primarily the result of the inclusion of Bravo Health premium revenue for the month of December 2010 and increases in HealthSpring PDP membership. PDP premiums PMPM in the 2010 fourth quarter were $87, compared with $82 in the 2009 fourth quarter. The increase in PMPM premiums was the result of PMPM increases in HealthSpring's core PDP plan in 2010.
Investment income in the 2010 fourth quarter increased $1.7 million, compared with the 2009 fourth quarter primarily as a result of increases in invested balances and yield on the invested assets due to an increase in the average duration in the portfolio. The Company has moved substantial amounts out of cash and cash equivalents into investments since the 2009 fourth quarter.

Medical Expense

Medicare Advantage medical loss ratio, or "MLR," was 80.0% for the 2010 fourth quarter, compared with 81.1% for the 2009 fourth quarter. Changes in benefit design and decreases in inpatient utilization contributed to the decrease in the current period MLR. The improved MLR was also attributable to improvement in the drug component of our Medicare Advantage MLR as a result of both higher PMPM premiums and lower drug expenses, net of higher pharmacy rebates.
PDP MLR was 60.3% for the 2010 fourth quarter, compared with 60.7% for the 2009 fourth quarter. Better than expected results in the 2010 fourth quarter PDP business were attributable primarily to favorable levels of pharmacy rebates.

Selling, General & Administrative (SG&A) Expense

SG&A expense as a percentage of total revenue in the 2010 fourth quarter increased 120 basis points to 12.9%, compared with 11.7% in the 2009 fourth quarter. The increase in SG&A expense as a percentage of revenue resulted primarily from transaction and integration-related expenses incurred in connection with the Bravo Health acquisition, which expenses as a percentage of revenue were 1.1% in the 2010 fourth quarter. SG&A expense in the 2010 fourth quarter increased $34.4 million compared with the 2009 fourth quarter primarily as a result of increases in personnel and selling costs in the 2010 fourth quarter compared with the 2009 fourth quarter, the inclusion of transaction-related expenses, and the inclusion of Bravo Health SG&A expense for the month of December 2010.

Interest Expense

Interest expense in the 2010 fourth quarter increased $2.0 million compared with the 2009 fourth quarter as a result of the incurrence of $480.0 million of incremental debt by the Company in the fourth quarter of 2010 in connection with the acquisition of Bravo Health.
The Company's weighted average effective interest rate (exclusive of the amortization of deferred financing costs) for the three months ended December 31, 2010, was 4.3%, compared with 4.6% for the three months ended December 31, 2009. The effective interest rate for December 2010 (giving effect to the Company's credit facility as amended in connection with the Bravo Health acquisition) was 4.8%.

Income Taxes

The Company's effective income tax rate for the three months ended December 31, 2010, was 38.7%, compared with 39.7% for the three months ended December 31, 2009. The rate decrease in the 2010 fourth quarter compared with the 2009 fourth quarter was primarily the result of changes in the concentration of profits in 2010 between states impacting the effective state income tax rate. The annual effective income tax rate for 2010 was 37.2%.

Full Year 2010 Operating Highlights

Medicare Advantage premiums were $2.6 billion for 2010, reflecting an increase of 14.0% over the prior year.
Medicare Advantage MLR was 78.7% for 2010, compared with 81.0% for the prior year. The decrease in the MLR for the current year was primarily attributable to changes in benefit design and unusually low medical cost trends, including decreases in inpatient utilization, in 2010.
Stand-alone PDP premium revenue was $472.9 million for 2010, an increase of 45.3% compared with 2009. The increase in revenue is primarily the result of increases in membership.
The Company's PDP MLR was 82.3% for 2010, compared with 83.3% for 2009. The improvement in the current year is the result of the inclusion of Bravo Health's PDP results for the month of December 2010, which tends to be a PDP's best performing month as a result of the benefit design.
SG&A expense as a percentage of total revenue for 2010 decreased 20 basis points to 10.3%, compared with 10.5% for 2009. Expenses related to the Bravo Health acquisition represented 30 basis points as a percentage of revenue in 2010.
Investment income increased from 2009 by $2.7 million, or 63.9%, to $7.0 million for 2010 primarily as a result of increases in invested balances and yield on the invested assets due to an increase in the average duration in the portfolio.

Balance Sheet Highlights

At December 31, 2010, the Company's cash and investments were $771.8 million, $83.4 million of which was held by unregulated entities, compared with cash and investments of $530.7 million at December 31, 2009, $106.4 million of which was held by unregulated entities.
Total debt outstanding was $626.9 million at December 31, 2010, compared with $237.0 million at December 31, 2009. During the fourth quarter of 2010, the Company amended its revolving credit facility and entered into a new term loan facility in conjunction with the acquisition of Bravo Health. Incremental borrowings to fund the Bravo Health acquisition totaled $480.0 million, including $100.0 million under the Company's $175.0 million revolving credit facility.
The Company's balance sheet at December 31, 2010, reflects the allocation of the $555.0 million purchase price (inclusive of an assumed additional $10.0 million closing adjustment payment) for Bravo Health to the assets and liabilities acquired, including the allocation of $182.2 million and $214.5 million to identified intangible assets and goodwill, respectively.
For 2010, net cash provided by operating activities was $221.1 million, or 1.1x net income, compared with $170.0 million, or 1.3x net income, for 2009.
Days in claims payable totaled 35 at the end of 2010. Excluding the impact of the Bravo Health acquisition, days in claims payable totaled 32 at the end of 2010.

Outlook

The Company expects the following in regards to 2011:

Diluted EPS: In the range of $3.60 to $3.90, on weighted average shares outstanding of approximately 59.0 million.
Membership: Medicare Advantage membership to be at least 340,000 at the end of 2011. PDP membership to be in the range of 880,000 to 900,000 at the end of 2011.
Revenue: Total revenue will be at least $5.4 billion.
MLRs: Medicare Advantage (including MA-PD) full-year MLR will be in the range of 81.0% to 82.0%. Stand-alone PDP MLR to be in the range of 86.5% to 87.0% for the year.
SG&A: Selling, general and administrative expense will be at or below 10.3% of total revenue.
Income taxes: Effective income tax rate for 2011 will be 37.0% to 37.5%.