Health Net Reports First Quarter 2011 GAAP Net Loss of $108.2 Million, or Loss of $1.16 Per Share

LOS ANGELES, May 04, 2011 - Health Net, Inc. (NYSE:HNT) today announced a 2011 first quarter GAAP net loss of $108.2 million, or a loss of $1.16 per share, compared with GAAP net income of $16.1 million, or $0.16 per diluted share, for the first quarter of 2010.

The 2011 first quarter GAAP results include:

  1. a $177.2 million pretax, or $157.9 million after tax, charge related to the AmCareco litigation1; and
  2. $11.0 million in pretax expenses related to the company's administrative cost reduction efforts.

For the first quarter of 2011, the company's Western Region Operations (Western Region) and Government Contracts segments produced combined earnings of $57.4 million, or $0.61 per diluted share, compared with $47.9 million, or $0.47 per diluted share for the first quarter of 2010.

"We are pleased that diluted earnings per share for our Western Region Operations and Government Contracts segments increased by 30 percent in the first quarter of 2011 compared with the first quarter of 2010," said Jay Gellert, Health Net's chief executive officer. "Our results, supported by strong commercial and Government Contracts performance, allowed us to repurchase more than five percent of our outstanding stock from January 1 through April 29, 2011.

"For the first time in several years, we achieved sequential commercial enrollment growth in the first quarter, and at the same time, the first quarter commercial medical care ratio improved year-over-year. Our results lead us to raise our annual earnings per diluted share guidance for the combined Western Region Operations and Government Contracts segments to a range of $2.90 to $3.00," Gellert added.

CONSOLIDATED RESULTS

Health Net's total revenues increased 3.2 percent in the first quarter of 2011 to $3.5 billion compared with $3.4 billion in the first quarter of 2010. Health plan services premium revenues increased by 3.4 percent to $2.6 billion in the first quarter of 2011 compared with $2.5 billion in the first quarter of 2010.

Investment income increased to $23.8 million in the first quarter of 2011 compared with $19.9 million in the first quarter of 2010.

WESTERN REGION OPERATIONS SEGMENT

Health Plan Membership

The company's total health plan enrollment was approximately 2.9 million at March 31, 2011, a decrease of 0.9 percent compared with enrollment at March 31, 2010. Total enrollment in the company's California health plan increased by 1.5 percent from March 31, 2010 to March 31, 2011.

Western Region commercial enrollment was approximately 1.4 million members at March 31, 2011, a decrease of 0.7 percent compared with enrollment at March 31, 2010, but up 0.4 percent from December 31, 2010.

"Our sequential commercial enrollment growth was driven by the growing popularity of our tailored network products, higher client retention and strong new sales in the first quarter of 2011," said Jim Woys, Health Net's chief operating officer.

As of March 31, 2011, tailored network products accounted for 30.0 percent of the company's Western Region commercial enrollment compared with 20.0 percent at March 31, 2010.

Medicaid enrollment increased 7.8 percent to 941,000 members at March 31, 2011 compared with March 31, 2010.

Enrollment in Health Net's Medicare Advantage plans in the Western Region was 209,000 members at March 31, 2011, which represents a 4.1 percent decrease compared with enrollment at March 31, 2010.

Membership in the company's Medicare Part D plans was 401,000 at March 31, 2011, a 12.3 percent decrease compared with enrollment at March 31, 2010.

Revenues

Total revenues for the Western Region increased 4.2 percent in the first quarter of 2011 to $2.6 billion from $2.5 billion in the first quarter of 2010.

Investment income for the Western Region was $23.8 million in the first quarter of 2011 compared with $19.6 million in the first quarter of 2010 and $15.1 million in the fourth quarter of 2010.

Health Plan Services Expenses

Health plan services expenses in the Western Region increased approximately 4.2 percent to $2.3 billion in the first quarter of 2011 compared with $2.2 billion in the first quarter of 2010.

Commercial Premium Yield and Health Care Cost Trends

In the Western Region, commercial premiums per member per month (PMPM) increased by 5.7 percent to approximately $356 in the first quarter of 2011 compared with approximately $336 in the first quarter of 2010.

Commercial health care costs PMPM in the Western Region increased 5.0 percent to approximately $305 in the first quarter of 2011 compared with approximately $290 in the first quarter of 2010.

"Our first quarter 2011 commercial yields in the Western Region were lower than our initial expectations due to faster than expected growth in tailored network products, more over-age adult dependents enrolled in our products than expected and greater than expected benefit buydowns," said Woys.

Due to these shifts, the company revised its 2011 guidance for commercial premium yield PMPM to between 6.0 percent and 6.5 percent and health care costs PMPM to be 100 to 120 basis points lower than premium yields.

Medical Care Ratios (MCR)

The health plan services MCR in the Western Region was 87.4 percent in the first quarter of 2011 compared with 87.5 percent in the first quarter of 2010. The Western Region commercial MCR was 85.7 percent in the first quarter of 2011 compared with 86.3 percent in the first quarter of 2010.

"The 60 basis point improvement in our commercial MCR is the result of continued pricing and underwriting discipline combined with moderate utilization and unit cost trends and slower growth in pharmacy costs," said Joseph Capezza, Health Net's chief financial officer.

The Medicare Advantage (MA) MCR in the Western Region was 89.0 percent in the first quarter of 2011 compared with 88.2 percent in the first quarter of 2010. The company's Medicare Part D (PDP) MCR was 101.1 percent in the first quarter of 2011 compared with 96.9 percent in the first quarter of 2010. The increases in both the MA and PDP MCRs were due to the adverse effect of limited new member growth. The impact of this is more pronounced in the first quarter.

General & Administrative (G&A) and Selling Expenses

G&A expense in the Western Region was approximately $242.0 million in the first quarter of 2011 compared with approximately $223.9 million in the first quarter of 2010. The G&A expense ratio was 9.3 percent in the first quarter of 2011 compared with 8.9 percent in the first quarter of 2010.

"The G&A expense ratio increased 40 basis points quarter-over-quarter due to costs in the first quarter of 2011 associated with CMS compliance remediation as well as costs relating to the previously announced unaccounted-for disk drives in our data center," said Woys. "For the full year 2011, we continue to expect our G&A ratio to be in the range of 8.7 percent to 8.9 percent."

Selling expense in the Western Region was $60.6 million in the first quarter of 2011 compared with $57.7 million in the first quarter of 2010 due to strong new sales in the first quarter.

GOVERNMENT CONTRACTS SEGMENT

The company's Government Contracts revenues increased 8.1 percent in the first quarter of 2011 to $875.1 million compared with $809.5 million in the first quarter of 2010.

The Government Contracts cost ratio decreased to 93.4 percent in the first quarter of 2011 from 95.3 percent in the first quarter of 2010.

"Health care delivery under the company's new TRICARE North Region contract began April 1, 2011, and the transition to the new contract went smoothly," said Woys.

BALANCE SHEET

Cash and investments as of March 31, 2011 were approximately $1.8 billion compared with approximately $2.0 billion at March 31, 2010.

Reserves for claims and other settlements as of March 31, 2011 were $889.9 million compared with $995.6 million at March 31, 2010 and $942.0 million at December 31, 2010. The company noted that the sequential decline in reserves is primarily the result of paid claims being approximately $100 million higher in the first quarter of 2011 compared with the fourth quarter of 2010.

Days claims payable (DCP) for the first quarter of 2011 was 35.1 days compared with 40.5 days for the first quarter of 2010 and 41.3 days for the fourth quarter of 2010.

On an adjusted2 basis, DCP for the first quarter of 2011 was 51.8 days compared with 55.8 days for the first quarter of 2010 and 57.3 days for the fourth quarter of 2010.

The company noted that, as adjusted in the attached reconciliation table2, the reserve for claims and other settlements (a component of DCP) at the end of the first quarter of 2011 was approximately equal to the amounts for the same metric at the end of the second and third quarters of 2010. The sequential decrease in this metric from the fourth quarter of 2010 was due to a reduction in claims inventories in the first quarter of 2011 as a year-end buildup in claims backlog due to holiday closures was paid down in the first quarter of this year. The decrease in this metric from the first quarter of 2010 compared with the first quarter of 2011 reflects faster claims turnaround as a result of more efficient processing due to simplified tailored network product contracts with providers.

The company's debt-to-total capital ratio was 21.1 percent as of March 31, 2011 compared with 23.5 percent as of March 31, 2010 and 19.0 percent as of December 31, 2010.

Interest expense was $7.6 million in the first quarter of 2011 compared with $9.9 million in the first quarter of 2010. This decline was due to the decrease in the company's total outstanding debt.

CASH FLOW

Operating cash flow was negative approximately $150 million in the first quarter of 2011 due primarily to the following:

  1. A sequential increase in premiums receivable and unearned premiums of approximately $106 million primarily related to Medicaid, MA and PDP.
  2. A $35 million increase in the net receivable related to the company's TRICARE North Region contract.
  3. An approximate $52 million sequential decrease in reserves for claims and other settlements.
  4. A quarterly payment related to the sale of the company's Northeast operations of approximately $35 million. This amount was offset by approximately $41 million in membership-related payments that were recorded in "Cash Flow from Investing Activities."

"By year-end 2011, we expect the Medicaid receivable to decline by approximately $80 million and the TRICARE receivable to decline by approximately $150 million," added Capezza.

"For 2011, we continue to expect operating cash flow to exceed net income plus depreciation and amortization. We expect that any payments related to the judgment in the AmCareco litigation will be funded through our revolving credit agreement," said Capezza. "Therefore, excluding any further share repurchases this year, we expect cash at the parent company at December 31, 2011 to be approximately $300 million."

NORTHEAST OPERATIONS SEGMENT

Health Net continues to serve the members of the Northeast companies previously sold to UnitedHealthcare under administrative services agreements (ASAs) that were entered into 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 the second quarter of 2011. After that time, the company will continue to administer run-out claims pursuant to claims servicing agreements with UnitedHealthcare and its affiliates.

The revenues associated with the company's Northeast Operations in the first quarter of 2011 were $14.5 million and expenses were $19.4 million. Each item is shown separately in the Segment Information table accompanying this press release.

SHARE REPURCHASE UPDATE

From January 1 through April 29, 2011, Health Net repurchased 4.9 million shares of its common stock for aggregate consideration of approximately $149.8 million at an average price of $30.49 per share under its $300 million stock repurchase program. The company also announced today in a separate press release that its board of directors has authorized a new $300 million share repurchase program.