News Column

Health Net Reports Second Quarter 2014 GAAP Net Income of $120.9 Million, or $1.49 Per Diluted Share

August 6, 2014

Western Region Operations and Government Contracts Segments Produce Combined Net Income of $0.62 Per Diluted Share in Second Quarter 2014

Year-over-Year, Health Plan Services Premium Revenues Grew 26.5 Percent

Health Plan Enrollment Climbs 17.4 Percent Year-over-Year, Driven by Continued Commercial Growth from Exchanges and Medicaid Growth from Expansion

Company Announces Letter of Intent for Comprehensive Services Agreement in Collaboration with Cognizant Technology Solutions: Health Net Expects $150 to $200 Million in Annual G&A and Depreciation Expense Savings by 2017



LOS ANGELES--(BUSINESS WIRE)-- Health Net, Inc. (NYSE: HNT) today announced 2014 second quarter GAAP net income of $120.9 million, or $1.49 per diluted share, compared with GAAP net income of $33.5 million, or $0.42 per diluted share, for the second quarter of 2013.

The company’s Western Region Operations (Western Region) and Government Contracts segments produced combined net income of $50.3 million, or $0.62 per diluted share, in the second quarter of 2014 compared with $41.4 million, or $0.52 per diluted share, in the second quarter of 2013.

The second quarter 2014 results include approximately $3.3 million in pretax expenses, primarily related to severance costs, and a $72.6 million income tax benefit resulting from a loss on the stock of our subsidiary, Health Net of the Northeast.

Highlights from the second quarter of 2014 include:

  1. Health Net’s total revenues climbed 24.9 percent in the second quarter of 2014 compared with the second quarter of 2013, and health plan services premiums revenues grew 26.5 percent over the same period;
  2. The company achieved 17.4 percent enrollment growth in its Western Region health plans in the second quarter of 2014 compared with the second quarter of 2013;
  3. Individual enrollment increased by 260,000 members, or 226.1 percent, in the second quarter of 2014 compared with the second quarter of 2013 and increased by 168,000 members, or 81.2 percent, compared with the first quarter of 2014. This sequential growth was primarily driven by the enrollment of new individual members through the Affordable Care Act (ACA) exchanges;
  4. Medicaid enrollment increased by 286,000 members, or 25.6 percent, in the second quarter of 2014 compared with the second quarter of 2013 and by more than 8 percent sequentially. This was primarily the result of new members added in Arizona and California from the expansion of Medicaid eligibility under the ACA; and
  5. The company’s Western Region commercial Medical Care Ratio (MCR) improved by 260 basis points year-over-year, as health care cost trends remained moderate, the product mix improved and the company’s premiums reflect the new Health Insurer Fee (HIF).


“We are very encouraged by our results so far in 2014. Our focused and deliberate strategic approaches to the new opportunities in the exchanges and Medicaid expansion are driving substantial enrollment and revenue growth and higher income,” said Jay Gellert, Health Net’s chief executive officer.

“We expect further growth in the second half of 2014 from the dual eligible demonstrations in Los Angeles and San Diego counties and continued enrollment growth from Medicaid expansion,” he added.

The company also announced it has signed a Letter of Intent with Cognizant Technology Solutions (Cognizant), a leading provider of information technology, consulting and business process services, as part of its commitment to address its scale issue. The company expects to execute a definitive services agreement with Cognizant before the end of the third quarter of 2014, which will be subject to required regulatory approval. The services agreement is currently expected to generate approximately $150 to $200 million in annual General and Administrative (G&A) and depreciation expense savings by 2017.

“Our decision to move forward with the services agreement was the result of many months of careful consideration. We believe that our expanded relationship with Cognizant will enhance our capabilities, enable greater innovation and ensure that we will maintain the high service levels our members and providers have come to expect from Health Net,” noted Gellert. “We will begin preparing for the transition immediately upon signing. We will then submit our plan for the required regulatory approval. We expect to receive approval in the first half of 2015.”

CONSOLIDATED RESULTS

Health Net’s total revenues increased 24.9 percent in the second quarter of 2014 to $3.4 billion from $2.7 billion in the second quarter of 2013.

Health plan services premium revenues of approximately $3.3 billion in the second quarter of 2014 increased by 26.5 percent compared with the second quarter of 2013.

Health plan services expenses of approximately $2.8 billion in the second quarter of 2014 increased by 26.1 percent compared with the second quarter of 2013.

WESTERN REGION OPERATIONS SEGMENT

Health Plan Membership

Total enrollment in the Western Region at June 30, 2014 was approximately 2.9 million members, an increase of 17.4 percent from enrollment at June 30, 2013.

Total enrollment in the company’s California health plans at June 30, 2014 was approximately 2.5 million members, an increase of 14.3 percent from enrollment at June 30, 2013.

Western Region commercial enrollment at June 30, 2014 was approximately 1.3 million members, an increase of 10.4 percent compared with enrollment at June 30, 2013.

Membership in tailored network products represented 52.5 percent of the company’s Western Region commercial membership at June 30, 2014 compared with 37.3 percent at June 30, 2013.

“Our historical success with tailored network products provided the basis for our product strategy in the exchanges where most of our enrollment is in tailored network products,” said Jim Woys, Health Net’s chief operating officer. “As a result of the exchange growth, we expect the percentage of commercial enrollment in tailored network products to remain at greater than 50 percent through 2014,” explained Woys.

Enrollment in the company’s Medicare Advantage (MA) plans was 262,000 members at June 30, 2014, which represents an 11.0 percent increase compared with enrollment of 236,000 members at June 30, 2013.

Medicaid enrollment increased 25.6 percent to 1.4 million members at June 30, 2014 compared with approximately 1.1 million members as of June 30, 2013, primarily due to Medicaid expansion under the ACA.

Dual eligibles enrollment was 2,000 members at June 30, 2014.

“We expect duals enrollment to accelerate in the second half of 2014, primarily due to the start of passive enrollment in Los Angeles County on July 1, 2014,” Woys added.

Revenues

Total revenues for the Western Region for the second quarter of 2014 were approximately $3.3 billion compared with approximately $2.6 billion in the second quarter of 2013.

Net investment income in the Western Region was $12.0 million in the second quarter of 2014 compared with $17.1 million in the second quarter of 2013 and $11.1 million in the first quarter of 2014.

Health Plan Services Expenses

Health plan services expenses in the Western Region were approximately $2.8 billion in the second quarter of 2014 compared with approximately $2.2 billion in the second quarter of 2013.

Commercial Premium Yields and Health Care Cost Trends

In the Western Region, commercial premiums per member per month (PMPM) decreased by 0.4 percent to approximately $379 in the second quarter of 2014 compared with approximately $380 in the second quarter of 2013.

Commercial health care costs PMPM in the Western Region decreased by 3.4 percent to approximately $312 in the second quarter of 2014 compared with approximately $323 in the second quarter of 2013.

“Health care cost trends remain moderate by historical standards for physician, inpatient and outpatient services,” said Woys. “We also benefit from the improving mix of our commercial business as large group enrollment has declined and individual enrollment, largely in our tailored network products, has increased significantly due to our success with the exchanges.”

Medical Care Ratios

The health plan services MCR in the Western Region was 84.7 percent in the second quarter of 2014 compared with 85.0 percent in the second quarter of 2013.

The Western Region commercial MCR was 82.3 percent in the second quarter of 2014 compared with 84.9 percent in the second quarter of 2013 due to continued moderation in cost trends, an improved product mix and premium increases to reflect the new HIF.

The MA MCR in the Western Region was 90.9 percent in the second quarter of 2014 compared with 89.9 percent in the second quarter of 2013.

The Medicaid MCR was 83.6 percent in the second quarter of 2014 compared with 79.5 percent in the second quarter of 2013. Retroactive reinstatement of premium taxes in the second quarter of 2013 benefited the Medicaid MCR in the second quarter of 2013 by 400 basis points.

G&A Expenses

G&A expenses in the Western Region were $342.0 million in the second quarter of 2014 compared with $284.1 million in the second quarter of 2013 and $357.9 million in the first quarter of 2014. The G&A expense ratio was 10.5 percent in the second quarter of 2014 compared with 11.0 percent in the second quarter of 2013 and 12.4 percent in the first quarter of 2014.

“The administrative expense ratio, which excludes premium taxes and ACA-related fees, also declined sequentially and year-over-year in the second quarter of 2014,” said Woys. “We are very focused on continued improvement in our administrative efficiency while preparing for the transition with Cognizant.”

GOVERNMENT CONTRACTS SEGMENT

Government Contracts revenues were $154.1 million in the second quarter of 2014 compared with $139.9 million in the second quarter of 2013.

Government Contracts expenses were $132.6 million in the second quarter of 2014 compared with $121.8 million in the second quarter of 2013.

BALANCE SHEET

Cash and investments as of June 30, 2014 were $2.3 billion compared with $1.9 billion as of June 30, 2013.

Reserves for claims and other settlements were $1.5 billion as of June 30, 2014 compared with $1.0 billion as of June 30, 2013 and $1.2 billion as of March 31, 2014.

Days claims payable (DCP) for the second quarter of 2014 was 49.0 days compared with 42.1 days in the second quarter of 2013 and 43.2 days in the first quarter of 2014.

On an adjusted1 basis, DCP for the second quarter of 2014 was 64.4 days compared with 58.4 days in the second quarter of 2013 and 63.1 days in the first quarter of 2014.

The company’s debt-to-total capital ratio was 21.5 percent as of June 30, 2014 compared with 22.9 percent as of March 31, 2014 and 25.6 percent as of June 30, 2013.

CASH FLOW FROM OPERATIONS

Operating cash flow was negative $13.8 million in the second quarter of 2014 because the company did not receive approximately $300 million of expected Medicaid payments in the second quarter.

“We received approximately $262 million in June Medi-Cal payments on July 28, 2014,” said Joseph Capezza, Health Net’s chief financial officer. “We now have received all June payments.”

The company noted that cash at the parent was approximately $200.4 million at June 30, 2014.

STOCK REPURCHASE UPDATE

Health Net did not repurchase any shares of its common stock in the second quarter of 2014 as it was evaluating its scale issues. At June 30, 2014, approximately $280 million of authorization under the company’s existing $400 million stock repurchase program remained.

“We intend to resume repurchases in the third quarter of 2014 through privately negotiated transactions, accelerated share repurchase programs, open market transactions, or by any combination of such methods,” Capezza explained.

“We are increasing our guidance for weighted-average fully diluted shares outstanding in 2014 to approximately 80 million shares from our prior guidance of 77 million shares,” he added.

2014 GUIDANCE

The company is maintaining GAAP earnings per diluted share of at least $3.00 for the full year 2014.

The table included in this release provides specific 2014 guidance metrics, including updates to expectations for Medicaid and total health plan membership, state health plans revenues, the Medicaid MCR, tax rates and weighted-average fully diluted shares outstanding.

“We are maintaining our diluted EPS guidance for the combined Western Region and Government Contracts segments of at least $2.22 despite the higher share count. In effect, we are increasing our pretax income guidance for the combined segments by approximately $12 million for the full year,” Capezza noted.

CONFERENCE CALL

As previously announced, Health Net will discuss the company’s second quarter 2014 financial results during a conference call on Wednesday, August 6, 2014, beginning at approximately 11:00 a.m. Eastern time. The conference call should be accessed at least 15 minutes prior to its start with the following numbers:

          (877) 407-4019 (Domestic)           (877) 660-6853 (Replay – Domestic)
(201) 689-8337 (International) (201) 612-7415 (Replay – International)


An access code is not required for the live conference call on August 6, 2014. The access code for the replay is 13585376. The replay of the conference call will be available through August 11, 2014. A live webcast and replay of the conference call also will be available at www.healthnet.com under “Investor Relations.” The conference call webcast is open to all interested parties. Anyone listening to the company’s conference call or webcast will be presumed to have read Health Net’s Annual Report on Form 10-K for the year ended December 31, 2013, Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, and other reports filed by the company from time to time with the Securities and Exchange Commission.

ABOUT HEALTH NET

Health Net, Inc. is a publicly traded managed care organization that delivers managed health care services through health plans and government-sponsored managed care plans. Its mission is to help people be healthy, secure and comfortable. Health Net provides and administers health benefits to approximately 5.8 million individuals across the country through group, individual, Medicare (including the Medicare prescription drug benefit commonly referred to as “Part D”), Medicaid, U.S. Department of Defense, including TRICARE, and Veterans Affairs programs. Health Net also offers behavioral health, substance abuse and employee assistance programs, managed health care products related to prescription drugs, managed health care product coordination for multi-region employers, and administrative services for medical groups and self-funded benefits programs.

For more information on Health Net, Inc., please visit the company’s website at www.healthnet.com.

CAUTIONARY STATEMENTS

The company and its representatives may from time to time make written and oral forward-looking statements within the meaning of the Private Securities Litigation Reform Act (“PSLRA”) of 1995, including statements in this and other press releases, in presentations, filings with the Securities and Exchange Commission (“SEC”), reports to stockholders and in meetings with investors and analysts. All statements in this press release, other than statements of historical information provided herein, may be deemed to be forward-looking statements and as such are intended to be covered by the safe harbor for “forward-looking statements” provided by PSLRA. These statements are based on management’s analysis, judgment, belief and expectation only as of the date hereof, and are subject to changes in circumstances and a number of risks and uncertainties. Without limiting the foregoing, statements including the words “believes,” “anticipates,” “plans,” “expects,” “may,” “should,” “could,” “estimate,” “intend,” “feels,” “will,” “projects” and other similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those expressed in, or implied or projected by the forward-looking information and statements due to, among other things, health care reform and other increased government participation in and taxation or regulation of health benefits and managed care operations, including but not limited to the implementation of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the "ACA") and related fees, assessments and taxes; the company’s ability to successfully participate in California’s Coordinated Care Initiative, which is subject to a number of risks inherent in untested health care initiatives and requires the company to adequately predict the costs of providing benefits to individuals that are generally among the most chronically ill within each of Medicare and Medi-Cal and implement delivery systems for benefits with which the company has limited operating experience; the company’s ability to successfully participate in the federal and state health insurance exchanges under the ACA, which have experienced technical challenges in implementation and which involve uncertainties related to the mix and volume of business that could negatively impact the adequacy of our premium rates and may not be sufficiently offset by the risk apportionment provisions of the ACA; increasing health care costs, including but not limited to costs associated with the introduction of new treatments or therapies; our ability to reduce administrative expenses while maintaining targeted levels of service and operating performance which could be significantly impacted if we are unable to reach a final agreement with Cognizant or do not receive applicable regulatory approval of any final services agreement; negative prior period claims reserve developments; rate cuts and other risks and uncertainties affecting the company’s Medicare or Medicaid businesses; the company’s ability to successfully participate in Arizona’s Medicaid program; trends in medical care ratios; membership declines or negative changes in our health care product mix; unexpected utilization patterns or unexpectedly severe or widespread illnesses; the timing of collections on amounts receivable from state and federal governments and agencies, including collections of amounts owed under the T-3 contract; litigation costs; regulatory issues with federal and state agencies including, but not limited to, the California Department of Managed Health Care, the Centers for Medicare & Medicaid Services, the Office of Civil Rights of the U.S. Department of Health and Human Services and state departments of insurance; operational issues; changes in economic or market conditions; failure to effectively oversee our third-party vendors; noncompliance by the company or the company’s business associates with any privacy laws or any security breach involving the misappropriation, loss or other unauthorized use or disclosure of confidential information; impairment of the company’s goodwill or other intangible assets; investment portfolio impairment charges; volatility in the financial markets; and general business and market conditions. Additional factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, the risks discussed in the “Risk Factors” section included within the company’s most recent Annual Report on Form 10-K and subsequent Quarterly Report on Form 10-Q filed with the SEC and the other risks discussed in the company’s filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements. Except as may be required by law, the company undertakes no obligation to address or publicly update any forward-looking statements to reflect events or circumstances that arise after the date of this release.

The financial information presented in this press release is unaudited and is subject to change as a result of subsequent events or adjustments, if any, arising prior to the filing of the company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014.

1 For a reconciliation of adjusted days claims payable to the comparable GAAP financial measure, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Days Claims Payable” in the company’s Form 10-Q for the quarter ended June 30, 2014, and Item 2.02 in the company’s Form 8-K filed with the Securities and Exchange Commission on August 6, 2014.

Health Net, Inc.  
2014 GAAP Guidance (1)
   
           
 
MEMBERSHIPCurrentPrevious
      (updated 8/6/14)   (as of 5/7/14)
 
EnrollmentEnrollment
at 12/31/2014   at 12/31/2014

Commercial

Large Group 560,000 560,000
Small Group 280,000 280,000
Individual 380,000 380,000
 
Total Commercial 1,220,000 1,220,000
 

Medicare Advantage

260,000 260,000
 

Medicaid

1,585,000 1,535,000
 

Dual Eligibles

38,000 38,000
 

Total Health Plan Membership

3,103,000 3,053,000
           
           
 

Premium Revenues

FY2014

 

FY2014

 
Commercial $5.6 billion$5.6 billion
Medicare Advantage$3.0 billion$3.0 billion
State Health Plans

$4.5 billion

$4.4 billion
Dual Eligibles $342 million$342 million
Total Health Plans

$13.4 billion

$13.3 billion
 
 
Total Consolidated Revenues$14.0 billion$14.0 billion
 
 
Medical Care Ratios (MCR)FY2014   FY2014
 
Commercial 83.0% 83.0%
Medicare Advantage 90.9% 90.9%
Medicaid 83.6% 83.9%
Dual Eligibles 86.5% 86.5%
 
 
G&A Expense Ratio 10.8% 10.8%
 
 
Tax Rate(2) 31.1% 34.6%
 
Western Region and

Government Contracts Tax Rate(3)

51.5% 52.2%
 
 
Weighted-average fully
diluted shares outstanding 80 million 77 million
 
 
GAAP Earnings per Diluted Share (EPS)(2)

At least $3.00

At least $3.00

 
Western Region and

Government Contracts EPS(3)

At least $2.22 At least $2.22
           
 
(1) All guidance metrics are approximations
(2) Includes a $72.6 million tax benefit
(3) Excludes the $72.6 million tax benefit
 
Health Net, Inc.              
Enrollment Data - By State
(In thousands)
    Change from
March 31, 2014June 30, 2013
June 30,March 31,June 30,Increase/%Increase/%
2014   2014   2013     (Decrease)   Change   (Decrease)   Change
California
Large Group 492 499 608 (7) (1.4)% (116) (19.1)%
Small Group 240 239 241 1 0.4% (1) (0.4)%
Individual 272   158   98     114   72.2%   174   177.6%
Commercial Risk 1,004 896 947 108 12.1% 57 6.0%
Medicare Advantage 162 156 146 6 3.8% 16 11.0%
Medi-Cal 1,359 1,279 1,118 80 6.3% 241 21.6%
Dual Eligibles   2             2  

 

  2  

 

Total California   2,527   2,331   2,211     196   8.4%   316   14.3%
 
Arizona
Large Group 48 50 64 (2) (4.0)% (16) (25.0)%
Small Group 43 40 42 3 7.5% 1 2.4%
Individual 99   47   14     52   110.6%   85   607.1%
Commercial Risk 190 137 120 53 38.7% 70 58.3%
Medicare Advantage 46 46 43 0 0.0% 3 7.0%
Medicaid   45   18         27   150.0%   45  

 

Total Arizona   281   201   163     80   39.8%   118   72.4%
 
Northwest
Large Group 28 29 23 (1) (3.4)% 5 21.7%
Small Group 25 27 40 (2) (7.4)% (15) (37.5)%
Individual 4   2   3     2   100.0%   1   33.3%
Commercial Risk 57 58 66 (1) (1.7)% (9) (13.6)%
Medicare Advantage   54   53   47     1   1.9%   7   14.9%
Total Northwest   111   111   113     0   0.0%   (2)   (1.8)%
 
                                   
Total Health Plan Enrollment
Large Group 568 578 695 (10) (1.7)% (127) (18.3)%
Small Group 308 306 323 2 0.7% (15) (4.6)%
Individual 375   207   115     168   81.2%   260   226.1%
Commercial Risk 1,251 1,091 1,133 160 14.7% 118 10.4%
Medicare Advantage 262 255 236 7 2.7% 26 11.0%
Medi-Cal/Medicaid 1,404 1,297 1,118 107 8.2% 286 25.6%
Dual Eligibles 2  

 

 

 

    2  

 

  2  

 

Western Region Operations   2,919   2,643   2,487     276   10.4%   432   17.4%
 

 

TRICARE - North Contract Eligibles 2,849   2,851   2,865     (2)   (0.1)%   (16)   (0.6)%
Health Net, Inc.              
Enrollment Data - Line of Business
(In thousands)
    Change from
March 31, 2014June 30, 2013
June 30,March 31,June 30,Increase/%Increase/%
2014   2014   2013     (Decrease)   Change   (Decrease)   Change
 
Large Group
California 492 499 608 (7) (1.4)% (116) (19.1)%
Arizona 48 50 64 (2) (4.0)% (16) (25.0)%
Northwest 28   29   23     (1)   (3.4)%   5   21.7%
568   578   695     (10)   (1.7)%   (127)   (18.3)%
 
Small Group
California 240 239 241 1 0.4% (1) (0.4)%
Arizona 43 40 42 3 7.5% 1 2.4%
Northwest 25   27   40     (2)   (7.4)%   (15)   (37.5)%
308   306   323     2   0.7%   (15)   (4.6)%
 
Individual
California 272 158 98 114 72.2% 174 177.6%
Arizona 99 47 14 52 110.6% 85 607.1%
Northwest 4   2   3     2   100.0%   1   33.3%
375   207   115     168   81.2%   260   226.1%
 
Commercial Risk
California 1,004 896 947 108 12.1% 57 6.0%
Arizona 190 137 120 53 38.7% 70 58.3%
Northwest 57   58   66     (1)   (1.7)%   (9)   (13.6)%
1,251   1,091   1,133     160   14.7%   118   10.4%
 
Medicare Advantage
California 162 156 146 6 3.8% 16 11.0%
Arizona 46 46 43 0 0.0% 3 7.0%
Northwest 54   53   47     1   1.9%   7   14.9%
262   255   236     7   2.7%   26   11.0%
 
Medi-Cal/Medicaid
California 1,359 1,279 1,118 80 6.3% 241 21.6%
Arizona 45   18  

 

    27   150.0%   45  

 

1,404   1,297   1,118     107   8.2%   286   25.6%
 
Dual Eligibles                            
California 2  

 

 

 

    2  

 

  2  

 

                                   

Total Health Plan Enrollment

Large Group 568 578 695 (10) (1.7)% (127) (18.3)%
Small Group 308 306 323 2 0.7% (15) (4.6)%
Individual 375   207   115     168   81.2%   260   226.1%
Commercial Risk 1,251 1,091 1,133 160 14.7% 118 10.4%
Medicare Advantage 262 255 236 7 2.7% 26 11.0%
Medi-Cal/Medicaid 1,404 1,297 1,118 107 8.2% 286 25.6%
Dual Eligibles 2  

 

 

 

    2  

 

  2  

 

Western Region Operations   2,919   2,643   2,487     276   10.4%   432   17.4%
 
 
TRICARE - North Contract Eligibles 2,849   2,851   2,865     (2)   (0.1)%   (16)   (0.6)%
           

Health Net, Inc.

Consolidated Statements of Operations

($ in thousands, except per share data)

 
 
 
Quarter Ended Quarter Ended Quarter Ended
June 30, March 31, June 30,
REVENUES:   2014     2014   2013
Health plan services premiums $ 3,261,878 $ 2,881,345 $ 2,578,874
Government contracts 154,083 144,090 139,942
Net investment income 12,043 11,102 17,143
Administrative services fees and other income   (6,612 )   2,398   2,472
Total revenues   3,421,392     3,038,935   2,738,431
 
EXPENSES:
Health plan services 2,763,179 2,402,342 2,191,918
Government contracts 133,208 131,974 127,400
General and administrative 344,734 361,023 291,437
Selling 64,002 64,152 57,769
Depreciation and amortization 9,641 9,663 9,514
Interest   7,826     7,821   8,365
Total expenses   3,322,590     2,976,975   2,686,403
Income from operations before income taxes 98,802 61,960 52,028
Income tax (benefit) provision   (22,065 )   33,173   18,545
Net income $ 120,867   $ 28,787 $ 33,483
 
Net income per share:
Basic $ 1.51 $ 0.36 $ 0.42
Diluted $ 1.49 $ 0.36 $ 0.42
 
Weighted average shares outstanding:
Basic 80,250 79,802 79,367
Diluted 81,218 80,922 80,085
       

Health Net, Inc.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except ratio data)

 
 
 
June 30, March 31, June 30,
  2014     2014     2013  
ASSETS
Current Assets
Cash and cash equivalents $ 603,097 $ 737,024 $ 279,618
Investments - available for sale 1,668,943 1,685,009 1,632,466
Premiums receivable, net 849,089 450,224 579,206
Amounts receivable under government contracts 193,043 188,843 205,168
Other receivables 183,795 54,251 52,283
Deferred taxes 81,293 75,321 80,382
Other assets   259,878     254,702     119,015  
Total current assets 3,839,138 3,445,374 2,948,138
Property and equipment, net 209,385 206,410 190,394
Goodwill 565,886 565,886 565,886
Other intangible assets, net 13,229 13,949 15,556
Deferred taxes 9,530 4,195 5,503
Investments - available for sale - noncurrent 652 4,255 18,332
Other noncurrent assets   139,205     190,550     137,644  
Total Assets $ 4,777,025   $ 4,430,619   $ 3,881,453  
 

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
Reserves for claims and other settlements $ 1,488,322 $ 1,151,958 $ 1,013,086
Health care and other costs payable under government contracts 94,195 80,232 76,231
Unearned premiums 130,905 127,593 124,205
Accounts payable and other liabilities   496,349     669,406     392,647  
Total current liabilities 2,209,771 2,029,189 1,606,169
Senior notes payable 399,402 399,351 399,197
Deferred taxes 22,376 18,057 -
Borrowings under revolving credit facility 100,000 100,000 125,000
Other noncurrent liabilities   223,595     205,521     226,863  
Total Liabilities   2,955,144     2,752,118     2,357,229  
 
Stockholders' Equity
Common stock 152 152 150
Additional paid-in capital 1,406,768 1,397,962 1,360,749
Treasury common stock, at cost (2,197,890 ) (2,197,538 ) (2,178,121 )
Retained earnings 2,613,302 2,492,435 2,377,055
Accumulated other comprehensive (loss) income   (451 )   (14,510 )   (35,609 )
Total Stockholders' Equity   1,821,881     1,678,501     1,524,224  
Total Liabilities and Stockholders' Equity $ 4,777,025   $ 4,430,619   $ 3,881,453  
 
Debt-to-Total Capital Ratio 21.5 % 22.9 % 25.6 %
         

Health Net, Inc.

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

 
Quarter Ended Quarter Ended Quarter Ended
June 30, March 31, June 30,
  2014     2014     2013  

 

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 120,867 $ 28,787 $ 33,483
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Amortization and depreciation 9,641 9,663 9,514
Share-based compensation expense 6,536 9,164 6,942
Deferred income taxes (14,653 ) 18,129 9,169
Excess tax benefits from share-based compensation (357 ) (997 ) (36 )
Net realized gain on sale on investments (1,928 ) (308 ) (5,647 )
Other changes 6,364 9,562 6,845
Changes in assets and liabilities:
Premiums receivable and unearned premiums (395,553 ) (16,588 ) (75,298 )
Other current assets, receivables and noncurrent assets (69,421 ) (147,387 ) 20,054
Amounts receivable/payable under government contracts (492 ) 34,089 3,160
Reserves for claims and other settlements 336,364 167,883 (84,658 )
Accounts payable and other liabilities   (11,118 )   199,461     (29,813 )
Net cash (used in) provided by operating activities   (13,750 )   311,458     (106,285 )
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments 125,751 66,499 218,593
Maturities of investments 19,210 24,469 21,346
Purchases of investments (102,873 ) (125,564 ) (194,361 )
Purchases of property and equipment (12,519 ) (17,437 ) (13,075 )
Sales and purchases of restricted investments and other   (2,777 )   3,537     (1,418 )
Net cash provided by (used in) investing activities   26,792     (48,496 )   31,085  
 
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases 2,726 3,746 1,216
Repurchases of common stock (1,226 ) (11,292 ) (70 )
Excess tax benefits from share-based compensation 357 997 36
Borrowings under financing arrangements - - 233,000
Repayment of borrowings under financing arrangements - - (208,000 )
Net increase (decrease) in checks outstanding, net of deposits (713 ) 713 99,368
Customer funds administered   (148,113 )   46,743     (1,067 )
Net cash (used in) provided by financing activities   (146,969 )   40,907     124,483  
 
Net (decrease) increase in cash and cash equivalents (133,927 ) 303,869 49,283
Cash and cash equivalents, beginning of period   737,024     433,155     230,335  
Cash and cash equivalents, end of period $ 603,097   $ 737,024   $ 279,618  
 
Health Net, Inc.
SEGMENT INFORMATION
($ in thousands, except per share and PMPM data)
                           
The following table presents Health Net's operating segment information.
 
    Quarter Ended June 30, 2014         Quarter Ended March 31, 2014     Quarter Ended June 30, 2013
 
Western Region

Operations1
Government

Contracts2

Corporate/

Other5

Western Region

Operations1
Government

Contracts2
Corporate/

Other3


Consolidated
Western Region

Operations1
Government

Contracts2
Corporate/

Other4


Consolidated
      Consolidated            
 
Commercial premiums $ 1,377,460 $ 1,377,460 $ 1,264,177 $ 1,264,177 $ 1,298,569 $ 1,298,569
Medicare premiums 757,194 757,194 755,158 755,158 688,579 688,579
Medicaid premiums 1,121,912 1,121,912 862,010 862,010 591,726 591,726
Dual Eligibles premiums   5,312               5,312       0               0     0               0
Health plan services premiums 3,261,878 3,261,878 2,881,345 2,881,345 2,578,874 2,578,874
Government contracts 154,083 154,083 144,090 144,090 139,942 139,942
Net investment income 12,043 12,043 11,102 11,102 17,143 17,143
Administrative services fees and other income   (6,612 )             (6,612 )     2,398               2,398     2,472               2,472
Total revenues 3,267,309 154,083 3,421,392 2,894,845 144,090 3,038,935 2,598,489 139,942 2,738,431
Health plan services 2,763,179 2,763,179 2,402,342 2,402,342 2,191,918 2,191,918
Government contracts 132,634 574 133,208 131,070 904 131,974 121,826 5,574 127,400
Premium tax 31,930 31,930 42,458 42,458 51,167 51,167
Health insurer fee 37,844 37,844 36,293 36,293 - -
Other ACA fees 22,546 22,546 22,527 22,527 569 569
Administrative expenses   249,665           2,749       252,414       256,594           3,151       259,745     232,377           7,324       239,701
Total general and administrative 341,985 2,749 344,734 357,872 3,151 361,023 284,113 7,324 291,437
Selling 64,002 64,002 64,152 64,152 57,769 57,769
Depreciation and amortization 9,641 9,641 9,663 9,663 9,514 9,514
Interest   7,826               7,826       7,821               7,821     8,365               8,365
Total expenses   3,186,633       132,634     3,323       3,322,590       2,841,850       131,070     4,055       2,976,975     2,551,679       121,826     12,898       2,686,403
Income (loss) from continuing operations before income taxes 80,676 21,449 (3,323 ) 98,802 52,995 13,020 (4,055 ) 61,960 46,810 18,116 (12,898 ) 52,028
Income tax provision (benefit)   42,874       8,942     (73,881 )     (22,065 )     29,371       5,386     (1,584 )     33,173     16,023       7,537     (5,015 )     18,545
Income (loss) from continuing operations $ 37,802     $ 12,507   $ 70,558     $ 120,867     $ 23,624     $ 7,634   $ (2,471 )   $ 28,787   $ 30,787     $ 10,579   $ (7,883 )   $ 33,483
 
Basic earnings (loss) per share from continuing operations $ 0.47 $ 0.16 $ 0.88 $ 1.51 $ 0.30 $ 0.10 $ (0.03 ) $ 0.36 $ 0.39 $ 0.13 $ (0.10 ) $ 0.42
Diluted earnings (loss) per share from continuing operations $ 0.47 $ 0.15 $ 0.87 $ 1.49 $ 0.29 $ 0.10 $ (0.03 ) $ 0.36 $ 0.39 $ 0.13 $ (0.10 ) $ 0.42
 
Basic weighted average shares outstanding 80,250 80,250 80,250 80,250 79,802 79,802 79,802 79,802 79,367 79,367 79,367 79,367
Diluted weighted average shares outstanding 81,218 81,218 81,218 81,218 80,922 80,922 79,802 80,922 80,085 80,085 79,367 80,085
 
 
Pretax margin 2.5 % 1.8 % 1.8 %
Commercial premium yield -0.4 % 3.9 % 2.0 %
Commercial premium PMPM $ 378.91 $ 400.34 $ 380.30
Commercial health care cost trend -3.4 % -2.2 % -2.3 %
Commercial health care cost PMPM $ 311.85 $ 323.92 $ 322.98
Commercial MCR 82.3 % 80.9 % 84.9 %
Medicare Advantage MCR 90.9 % 91.8 % 89.9 %
Medicaid MCR 83.6 % 79.8 % 79.5 %
Dual Eligibles MCR 60.0 % - -
Health plan services MCR 84.7 % 83.4 % 85.0 %
Administrative expense ratio 7.7 % 8.9 % 9.0 %
Total G&A expense ratio 10.5 % 12.4 % 11.0 %
Selling costs ratio 2.0 % 2.2 % 2.2 %
 
1

Includes the operations of the company's commercial, Medicare and Medicaid health plans in California, Arizona, Oregon and Washington, as well as the operations of the company's health and life insurance companies, primarily in Arizona, California, Oregon and Washington, and the operations of the company's behavioral health and pharmaceutical services subsidiaries in several states including California, Arizona and Oregon.

 
2 Includes administrative services provided under the T-3 Managed Care Support Contract for the TRICARE North Region and other health care-related Department of Defense and Veterans Affairs government contracts.
 
3 Includes litigation reserve true-up related to previous accrual for lawsuit and related legal expenses. Also includes severance expense.
 
4 Primarily severance expense.
 
5

Includes $72.6 million income tax benefit. Also includes severance expense.

Health Net, Inc.
Reconciliation of Reserves for Claims and Other Settlements
($ in millions)
 
Health Plan Services
YTD 6/2014 FY 2013 FY 2012
 
Reserve for claims (a), beginning of period $ 807.4 $ 808.7 $ 720.8
Incurred claims related to:
Current Year (f) 2,627.3 4,666.0 4,950.9
Prior Years (c)   (26.6 )   (56.2 )   34.5
Total Incurred (b) 2,600.7 4,609.8 4,985.4
 
Paid claims related to:
Current Year 1,665.3 3,872.5 4,156.6
Prior Years   731.6     738.6     740.9
Total Paid (b)   2,396.9     4,611.1     4,897.5
 
 
Reserve for claims (a), end of period 1,011.2 807.4 808.7
Add:
Claims Payable (d) 116.6 67.0 91.6
Other (e) 360.5 109.7 137.7
     
 
Reserves for claims and other settlements, end of period $ 1,488.3   $ 984.1   $ 1,038.0
 
 
 
(a) Consists of incurred but not reported claims and received but unprocessed claims and reserves for loss adjustment expenses.
 
(b) Includes medical claims only. Capitation, pharmacy and other payments including provider settlements are not included.
 
(c) This line represents the change in reserves attributable to the difference between the original estimate of incurred claims for prior years and the revised estimate. Negative amounts in this line represent favorable development in estimated prior years' health care costs. Positive amounts in this line represent unfavorable development in estimated prior years' health care costs. For a detailed description of reserve development for the six months ended June 30, 2014, see Note 2 to the Consolidated Financial Statements in the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014. For a detailed description of reserve development for fiscal years 2013 and 2012, see Note 2 to the Consolidated Financial Statements in the company's Annual Report on Form 10-K for the year ended December 31, 2013.
 
(d) Includes amount accrued for litigation and regulatory-related expenses.
 
(e) Includes accrued capitation, shared risk settlements, provider incentives and other reserve items.
 
(f) Our IBNR estimate also includes a provision for adverse deviation, which is an estimate for known environmental factors that are reasonably likely to affect the required level of IBNR reserves. Such amounts were $67 million, $53 million and $53 million as of June 30, 2014, December 31, 2013, and December 31, 2012, respectively.
 





Investor Contact:

The Abernathy MacGregor Group

David Olson

818-917-1469

dwo@abmac.com

or

Media Contact:

Health Net, Inc.

Brad Kieffer

818-676-6833

brad.kieffer@healthnet.com


Source: Health Net, Inc.


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