Health Net, Inc. 21650 Oxnard Street Woodland Hills, CA 91367 818.676.6000 800.291.6911 www.healthnet.com

 

Investor Contact		Media Contact
Angie McCabe		Margita Thompson
818.676.8692		818.676.7912
angie.mccabe@healthnet.com		margita.thompson@healthnet.com

HEALTH NET REPORTS FOURTH QUARTER 2010 GAAP NET INCOME

OF $80.4 MILLION, OR $0.83 PER DILUTED SHARE

WESTERN REGION OPERATIONS AND GOVERNMENT CONTRACTS SEGMENTS PRODUCE

COMBINED EARNINGS OF $0.80 PER DILUTED SHARE IN FOURTH QUARTER 2010

LOS ANGELES, February 1, 2011 – Health Net, Inc. (NYSE: HNT) today announced 2010 fourth quarter GAAP net income of $80.4 million, or $0.83 per diluted share, compared with a GAAP net loss of $45.2 million, or $0.43 per share, for the fourth quarter of 2009.

The company’s Western Region Operations and Government Contracts segments produced combined net earnings of $0.80 per diluted share in the fourth quarter of 2010 and $0.79 per diluted share in the fourth quarter of 2009.

For the full year 2010, Health Net reported GAAP net income of $204.2 million, or $2.06 per diluted share, compared with a net loss of $49.0 million, or $0.47 per share, for the full year 2009.

The company’s Western Region Operations and Government Contracts segments produced combined net earnings of $2.60 per diluted share for the full year 2010 and $2.58 per diluted share for the full year 2009.

“Our solid fourth quarter and full year 2010 results affirm that our ongoing efforts to sharpen the focus of the company continue to drive improved performance,” said Jay Gellert, Health Net’s chief executive officer. “Membership in our efficient-network commercial products is growing. Our balance sheet strengthened throughout 2010, and we ended the year with a debt-to-total capital ratio of less than 20 percent. Our strong results produced cash flow that supported more than $230 million of share repurchases in 2010.

“With a successful 2010 behind us, our goal is to achieve further improvement in 2011. We believe we have had the best open enrollment commercial selling season in many years, and this supports our view that we will achieve commercial enrollment growth in 2011. In addition, the preliminary government enrollment data shows that our 2011 Medicare Advantage enrollment is better than we expected when we issued our 2011 guidance in December 2010,” Gellert added.

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The fourth quarter 2010 GAAP results include:

 

1.

a $24.9 million noncash benefit to health plan expenses related to a litigation reserve true-up; and

 

2.

$13.0 million of expenses primarily related to litigation expenses and the company’s overhead cost reduction efforts.

CONSOLIDATED RESULTS

Health Net’s total revenues decreased 11.2 percent in the fourth quarter of 2010 to $3.4 billion from $3.8 billion in the fourth quarter of 2009. Health plan services premium revenues decreased by 16.5 percent in the fourth quarter of 2010 to $2.5 billion from $3.0 billion in the fourth quarter of 2009. Health plan services expenses decreased by 17.9 percent in the fourth quarter of 2010 to $2.1 billion from $2.6 billion in the fourth quarter of 2009.

Investment income decreased to $15.2 million in the fourth quarter of 2010 compared with $33.5 million in the fourth quarter of 2009.

The decreases on these year-over-year comparisons are primarily the result of the company’s sale of its Northeast businesses in December 2009.

WESTERN REGION OPERATIONS SEGMENT

Health Plan Membership

Total health plan enrollment at December 31, 2010 was approximately 2.9 million members, a decrease of approximately 2.6 percent compared with enrollment at December 31, 2009. Total enrollment in the company’s California health plan was essentially flat with 2.2 million members at both December 31, 2009 and December 31, 2010.

“Enrollment growth in our small group and midsize markets continues, driven by our innovative efficient-network products. The rate of in-group losses is steadily slowing as the economy stabilizes, supporting our belief that we can achieve commercial enrollment growth in 2011,” said Jim Woys, Health Net’s chief operating officer.

As of December 31, 2010, efficient-network products accounted for 23.0 percent of the company’s Western Region commercial enrollment compared with 19.0 percent at December 31, 2009.

Commercial enrollment in the Western Region declined by 4.4 percent from December 31, 2009 to approximately 1.4 million members on December 31, 2010. The decline in commercial enrollment is consistent with overall weak employment levels in the company’s western markets.

Medicaid enrollment in California at December 31, 2010 was 901,000 members, an increase of 44,000 members, or 5.1 percent, from December 31, 2009.

Enrollment in the company’s Medicare Advantage plans in the Western Region at December 31, 2010 was 222,000 members, a decrease of 2.2 percent compared with December 31, 2009.

Membership in the company’s Medicare Part D plans was 427,000 at the end of the fourth quarter of 2010, a 7.2 percent decrease compared with the end of the fourth quarter of 2009, and in-line with the company’s expectations.

 

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Revenues

Total revenues for the Western Region in the fourth quarter of 2010 were flat at $2.5 billion compared with the fourth quarter of 2009.

Investment income for the Western Region was $15.1 million in the fourth quarter of 2010 compared with $24.2 million in the fourth quarter of 2009 and $19.2 million in the third quarter of 2010.

Health Plan Services Expenses

Health plan services expenses in the Western Region were flat at $2.1 billion in the fourth quarter of 2010 compared with the fourth quarter of 2009.

Commercial Premium Yield and Health Care Cost Trends

In the Western Region, commercial premiums per member per month (PMPM) increased by 6.8 percent to approximately $344 in the fourth quarter of 2010 compared with $322 in the fourth quarter of 2009.

Commercial health care costs PMPM in the Western Region increased by 5.7 percent to approximately $294 in the fourth quarter of 2010 compared with approximately $278 in the fourth quarter of 2009.

“We continued to see growth in the commercial gross margin PMPM in the fourth quarter of 2010, as it increased approximately 13.5 percent from the fourth quarter of 2009,” Woys noted.

Medical Care Ratios (MCR)

The health plan services MCR in the Western Region was 85.2 percent in the fourth quarter of 2010 compared with 85.8 percent in the fourth quarter of 2009. The full year 2010 health plan services MCR was 86.6 percent compared with 86.7 percent in 2009.

The Western Region commercial MCR was 85.5 percent in the fourth quarter of 2010 compared with 86.4 percent in the fourth quarter of 2009 and 86.3 percent in the third quarter of 2010. The full year 2010 commercial MCR was 86.1 percent compared with 86.8 percent for the full year 2009.

“The improvement in our commercial MCR is the result of continued pricing and underwriting discipline and less than expected health care cost increases,” Woys added.

The Medicare Advantage (MA) MCR in the Western Region was 89.4 percent in the fourth quarter of 2010 compared with 88.6 percent in the fourth quarter of 2009.

The full year 2010 MA MCR in the Western Region was 88.8 percent compared with 88.1 percent for the full year 2009.

The company’s Medicare Part D MCR was 53.1 percent in the fourth quarter of 2010 compared with 59.7 percent in the fourth quarter of 2009. The full year 2010 Part D MCR was 77.2 percent compared with 78.4 percent for the full year 2009.

 

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General & Administrative (G&A) and Selling Expense

G&A expense in the Western Region was $230.9 million in the fourth quarter of 2010 compared with $215.2 million in the fourth quarter of 2009. The G&A expense ratio was 9.3 percent in the fourth quarter of 2010, and increased 50 basis points from 8.8 percent in the fourth quarter of 2009 and 60 basis points sequentially from 8.7 percent in the third quarter of 2010.

“The G&A ratio for the full year 2010 was 8.9 percent, within our 2010 guidance range of 8.8 percent to 9.0 percent. Our cost reduction efforts will continue to focus on reducing overhead in 2011,” Woys added.

Selling expense in the Western Region was $63.9 million in the fourth quarter of 2010 compared with $58.9 million in the fourth quarter of 2009.

GOVERNMENT CONTRACTS SEGMENT

The company’s Government Contracts revenues increased 9.0 percent in the fourth quarter of 2010 to $822.4 million from $754.8 million in the fourth quarter of 2009.

The Government Contracts cost ratio increased from 93.2 percent in the fourth quarter of 2009 to 93.7 percent in the fourth quarter of 2010.

BALANCE SHEET

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

Reserves for claims and other settlements as of December 31, 2010 were $942.0 million compared with $951.7 million as of December 31, 2009 and $904.4 million as of September 30, 2010.

Days claims payable (DCP) for the fourth quarter of 2010 was 41.3 days compared with 34.2 days in the fourth quarter of 2009 and 39.0 days in the third quarter of 2010.

On an adjusted¹ basis, DCP in the fourth quarter of 2010 was 57.3 days compared with 56.8 days in the fourth quarter of 2009 and 53.6 days in the third quarter of 2010.

The company’s debt-to-total capital ratio was 19.0 percent as of December 31, 2010 compared with 26.2 percent as of December 31, 2009 and 22.7 percent as of September 30, 2010.

Interest expense was $8.1 million in the fourth quarter of 2010 compared with $9.5 million in the fourth quarter of 2009. This decline was due to the decrease in the company’s total outstanding debt.

 

1	See “Disclosures Regarding Non-GAAP Financial Information” attached to this press release for a reconciliation of this information to the comparable GAAP financial measure.

 

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CASH FLOW

Operating cash flow was $214.6 million in the fourth quarter of 2010. The company did not receive $64.3 million in expected Medicaid payments from the state of California in the fourth quarter of 2010. The company received these payments in January 2011.

“For 2010, operating cash flow exceeded net income plus depreciation and amortization underscoring both the quality of our earnings and the tangible results of our organizational focus on cash flow generation,” said Joseph Capezza, Health Net’s chief financial officer.

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 the second quarter of 2011. After that time, the company will continue to pay run-out claims pursuant to claims servicing agreements with UnitedHealthcare and its affiliates.

The revenues and expenses associated with the company’s Northeast Operations in the fourth quarter of 2010 were $49.7 million and $63.6 million, respectively, and they are shown separately in the accompanying Segment Information table.

SHARE REPURCHASE UPDATE

In the fourth quarter of 2010, Health Net repurchased 2.2 million shares for approximately $54.5 million at an average price of $26.76 per share. At December 31, 2010, approximately $149.8 million of authorization under the company’s existing $300 million share repurchase program remained.

“With our strong cash position supported by operating cash flow and additional proceeds from the sale of our Northeast health plans, in 2010 we repurchased 9.1 million shares, or approximately 9.0 percent of the shares outstanding as of the end of 2009,” said Capezza.

2011 GUIDANCE

Following is a table with specific 2011 guidance metrics. The company will provide more details of its 2011 expectations at its 2011 Investor Day, which is scheduled for February 17, 2011, in New York.

 

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Metric		2011 Guidance
Year-end Membership(a)		Commercial: +1% to +2% Medicaid: +6% to +7% Medicare Advantage(d): -15% to -17% Total Western Region Operations medical membership: +2% to +3% PDP (d): -14% to -16%
Consolidated Revenues(b) (d)		$12.0 billion to $12.5 billion
Commercial Yields(a)		~7.8% to 8.3%
Commercial Health Care Cost Trends(a)		~40 to 60 basis points < premium yields
Selling Cost Ratio(a) G&A Expense Ratio(a)		~2.3% to 2.4% ~8.7% to 8.9%
Tax Rate(b)		~39.2%
Weighted-average Fully Diluted Shares Outstanding(c)		96 million to 97 million
GAAP EPS(c) (d) Combined Western Region Operations and Government Contracts EPS(c) (d)		At least $2.05 At least $2.75

 

(a)	For the company’s Western Region Operations

(b)	For the combined Western Region Operations and Government Contracts segments

(c)	The company’s guidance does not include the impact of share repurchases other than to counter dilution.

(d)	Includes the expected impact of the CMS sanctions previously announced on November 19, 2010

 

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CONFERENCE CALL

As previously announced, Health Net will discuss the company’s fourth quarter and year-end 2010 results during a conference call on Tuesday, February 1, 2011, 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:

 

866.393.1637 (Domestic)		800.642.1687 (Replay – Domestic)
706.643.5711 (International)		706.645.9291 (Replay – International)

The access code for the live conference call and replay is 33605867. A replay of the conference call will be available through February 6, 2011. 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 will be presumed to have read Health Net’s Annual Report on Form 10-K for the year ended December 31, 2009 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2010, June 30, 2010 and September 30, 2010, 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. The company provides health benefits to approximately 6.0 million individuals across the country through group, individual, Medicare (including the Medicare prescription drug benefit commonly referred to as “Part D”), Medicaid, Department of Defense, including TRICARE, and Veterans Affairs programs. Health Net’s behavioral health services subsidiary, Managed Health Network, Inc., provides behavioral health, substance abuse and employee assistance programs to approximately 5.4 million individuals, including Health Net’s own health plan members. The company’s subsidiaries also offer managed health care products related to prescription drugs, and offer 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

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 subject to a number of risks and uncertainties. These statements are based on management’s analysis, judgment, belief and expectation only as of the date hereof, and are subject to uncertainty and changes in circumstances. Without limiting the foregoing, statements including the words “believes,” “anticipates,” “plans,” “expects,” “may,” “should,” “could,” “estimate,” “intend” and other similar expressions are intended to identify forward-looking statements. Actual results could differ materially due to, among other things, health care reform, including the ultimate impact of the Patient Protection and Affordable Care Act, which could materially adversely affect the company’s financial condition, results of operations and cash flows through, among other things, reduced revenues, new taxes, expanded liability, and increased costs (including medical, administrative, technology or other costs),

 

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or require changes to the ways in which the company does business; rising health care costs; continued slow economic growth or a further decline in the economy; negative prior period claims reserve developments; trends in medical care ratios; membership declines; unexpected utilization patterns or unexpectedly severe or widespread illnesses; rate cuts affecting the company’s Medicare or Medicaid businesses; costs, fees and expenses related to the post-closing administrative services provided under the administrative services agreements entered into in connection with the sale of the company’s Northeast business; potential termination of the administrative services agreements by the service recipients should Health Net breach such agreements or fail to perform all or a material part of the services required thereunder; any liabilities of the Northeast business that were incurred prior to the closing of its sale as well as those liabilities incurred through the winding-up and running-out period of the Northeast business; litigation costs; regulatory issues with agencies such as the California Department of Managed Health Care, the Centers for Medicare and Medicaid Services and state departments of insurance, including the continued suspension of the marketing of and enrollment into Health Net’s Medicare products for a significant period of time, which could have a material adverse impact on the company’s Medicare business; operational issues; 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 Reports on Form 10-Q filed with the Securities and Exchange Commission (“SEC”), and the risks discussed in the company’s other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements. The company undertakes no obligation to publicly revise any of its 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 Form 10-K for the year ended December 31, 2010.

Nine pages of tables follow.

# # #

 

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Health Net, Inc.

Enrollment Data - By State

(In thousands)

 

														Change from
														September 30, 2010								December 31, 2009
		Dec 31, 2010				Sept 30, 2010				Dec 31, 2009				Increase/ (Decrease)				% Change				Increase/ (Decrease)				% Change
California
Large Group			843				844				870				(1	)			(0.1	)%			(27	)			(3.1	)%
Small Group and Individual			348				351				357				(3	)			(0.9	)%			(9	)			(2.5	)%
Commercial Risk			1,191				1,195				1,227				(4	)			(0.3	)%			(36	)			(2.9	)%
ASO			0				0				5				0				0.0	%			(5	)			(100.0	)%
Total Commercial			1,191				1,195				1,232				(4	)			(0.3	)%			(41	)			(3.3	)%
Medicare Advantage			133				133				137				0				0.0	%			(4	)			(2.9	)%
Medi-Cal			901				896				857				5				0.6	%			44				5.1	%
Total California			2,225				2,224				2,226				1				0.0	%			(1	)			0.0	%
Arizona
Large Group			56				53				59				3				5.7	%			(3	)			(5.1	)%
Small Group and Individual			41				39				37				2				5.1	%			4				10.8	%
Commercial Risk			97				92				96				5				5.4	%			1				1.0	%
Medicare Advantage			49				49				65				0				0.0	%			(16	)			(24.6	)%
Total Arizona			146				141				161				5				3.5	%			(15	)			(9.3	)%
Oregon
Large Group			51				52				72				(1	)			(1.9	)%			(21	)			(29.2	)%
Small Group and Individual			44				46				46				(2	)			(4.3	)%			(2	)			(4.3	)%
Commercial Risk			95				98				118				(3	)			(3.1	)%			(23	)			(19.5	)%
Medicare Advantage			40				39				25				1				2.6	%			15				60.0	%
Total Oregon			135				137				143				(2	)			(1.5	)%			(8	)			(5.6	)%
Total Health Plan Enrollment
Large Group			950				949				1,001				1				0.1	%			(51	)			(5.1	)%
Small Group and Individual			433				436				440				(3	)			(0.7	)%			(7	)			(1.6	)%
Commercial Risk			1,383				1,385				1,441				(2	)			(0.1	)%			(58	)			(4.0	)%
ASO			0				0				5				0				0.0	%			(5	)			(100.0	)%
Total Commercial			1,383				1,385				1,446				(2	)			(0.1	)%			(63	)			(4.4	)%
Medicare Advantage			222				221				227				1				0.5	%			(5	)			(2.2	)%
Medi-Cal/Medicaid			901				896				857				5				0.6	%			44				5.1	%
Medicare PDP (stand-alone)			427				432				460				(5	)			(1.2	)%			(33	)			(7.2	)%
Western Region Operations			2,933				2,934				2,990				(1	)			0.0	%			(57	)			(1.9	)%
Northeast Operations			7				10				28				(3	)			(30.0	)%			(21	)			(75.0	)%
			2,940				2,944				3,018				(4	)			(0.1	)%			(78	)			(2.6	)%
TRICARE - North Contract Eligibles			3,090				3,077				3,067				13				0.4	%			23				0.7	%

 

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Health Net, Inc.

Enrollment Data - Line of Business

(In thousands)

 

														Change from
														September 30, 2010								December 31, 2009
		Dec 31, 2010				Sept 30, 2010				Dec 31, 2009				Increase/ (Decrease)				% Change				Increase/ (Decrease)				% Change
Large Group
California			843				844				870				(1	)			(0.1	)%			(27	)			(3.1	)%
Arizona			56				53				59				3				5.7	%			(3	)			(5.1	)%
Oregon			51				52				72				(1	)			(1.9	)%			(21	)			(29.2	)%
			950				949				1,001				1				0.1	%			(51	)			(5.1	)%
Small Group and Individual
California			348				351				357				(3	)			(0.9	)%			(9	)			(2.5	)%
Arizona			41				39				37				2				5.1	%			4				10.8	%
Oregon			44				46				46				(2	)			(4.3	)%			(2	)			(4.3	)%
			433				436				440				(3	)			(0.7	)%			(7	)			(1.6	)%
Commercial Risk
California			1,191				1,195				1,227				(4	)			(0.3	)%			(36	)			(2.9	)%
Arizona			97				92				96				5				5.4	%			1				1.0	%
Oregon			95				98				118				(3	)			(3.1	)%			(23	)			(19.5	)%
			1,383				1,385				1,441				(2	)			(0.1	)%			(58	)			(4.0	)%
ASO			0				0				5				0				0.0	%			(5	)			(100.0	)%
Total Commercial
California			1,191				1,195				1,232				(4	)			(0.3	)%			(41	)			(3.3	)%
Arizona			97				92				96				5				5.4	%			1				1.0	%
Oregon			95				98				118				(3	)			(3.1	)%			(23	)			(19.5	)%
			1,383				1,385				1,446				(2	)			(0.1	)%			(63	)			(4.4	)%
Medicare Advantage
California			133				133				137				0				0.0	%			(4	)			(2.9	)%
Arizona			49				49				65				0				0.0	%			(16	)			(24.6	)%
Oregon			40				39				25				1				2.6	%			15				60.0	%
			222				221				227				1				0.5	%			(5	)			(2.2	)%
Medi-Cal/Medicaid
California			901				896				857				5				0.6	%			44				5.1	%
Total Health Plan Enrollment
Large Group			950				949				1,001				1				0.1	%			(51	)			(5.1	)%
Small Group and Individual			433				436				440				(3	)			(0.7	)%			(7	)			(1.6	)%
Commercial Risk			1,383				1,385				1,441				(2	)			(0.1	)%			(58	)			(4.0	)%
ASO			0				0				5				0				0.0	%			(5	)			(100.0	)%
Total Commercial			1,383				1,385				1,446				(2	)			(0.1	)%			(63	)			(4.4	)%
Medicare Advantage			222				221				227				1				0.5	%			(5	)			(2.2	)%
Medi-Cal/Medicaid			901				896				857				5				0.6	%			44				5.1	%
Medicare PDP (stand-alone)			427				432				460				(5	)			(1.2	)%			(33	)			(7.2	)%
Western Region Operations			2,933				2,934				2,990				(1	)			0.0	%			(57	)			(1.9	)%
Northeast Operations			7				10				28				(3	)			(30.0	)%			(21	)			(75.0	)%
			2,940				2,944				3,018				(4	)			(0.1	)%			(78	)			(2.6	)%
TRICARE - North Contract Eligibles			3,090				3,077				3,067				13				0.4	%			23				0.7	%

 

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Health Net, Inc.

Consolidated Statements of Operations

($ in thousands, except per share data)

 

		Quarter Ended December 31, 2010				Quarter Ended September 30, 2010				Quarter Ended December 31, 2009				Year Ended December 31, 2010				Year Ended December 31, 2009
REVENUES:
Health plan services premiums		$	2,491,124			$	2,470,939			$	2,981,678			$	9,996,888			$	12,440,589
Government contracts			822,388				860,697				754,766				3,344,483				3,104,700
Net investment income			15,226				19,466				33,486				71,181				105,930
Administrative services fees and other income			4,953				5,487				28,165				21,133				62,022
Northeast administrative services fees and other			39,643				36,863				—				186,167				—
			3,373,334				3,393,452				3,798,095				13,619,852				15,713,241
EXPENSES:
Health plan services			2,099,969				2,134,701				2,557,149				8,609,117				10,731,951
Government contracts			770,487				814,385				707,353				3,168,160				2,939,722
General and administrative			245,861				225,929				355,407				956,264				1,361,956
Selling			64,333				59,021				84,068				238,759				330,112
Depreciation and amortization			9,012				8,659				8,605				34,800				53,042
Interest			8,085				8,150				9,538				34,880				40,887
Northeast administrative services expenses			63,727				61,878				—				279,434				—
Adjustment to loss on sale of Northeast subsidiaries			(12,331	)			(21,457	)			105,931				(41,959	)			105,931
Asset impairments			—				—				4,309				6,000				174,879
Early debt extinguishment			—				—				—				3,532				—
			3,249,143				3,291,266				3,832,360				13,288,987				15,738,480
Income (loss) from operations before income taxes			124,191				102,186				(34,265	)			330,865				(25,239	)
Income tax provision (benefit)			43,787				39,503				10,892				126,622				23,765
Net income (loss)		$	80,404			$	62,683			$	(45,157	)		$	204,243			$	(49,004	)
Basic earnings (loss) per share		$	0.84			$	0.64			$	(0.43	)		$	2.08			$	(0.47	)
Diluted earnings (loss) per share		$	0.83			$	0.64			$	(0.43	)		$	2.06			$	(0.47	)
Weighted average shares outstanding:
Basic			95,697				97,349				103,902				98,232				103,849
Diluted			96,885				98,304				103,902				99,232				103,849

 

Page 11

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Health Net, Inc.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except ratio data)

 

		December 31, 2010				September 30, 2010				December 31, 2009
ASSETS
Current Assets
Cash and cash equivalents		$	304,229			$	446,301			$	682,803
Investments - available for sale			1,663,218				1,420,124				1,376,142
Premiums receivable, net			298,892				407,467				288,719
Amounts receivable under government contracts			266,456				213,000				270,810
Incurred but not reported (IBNR) health care costs receivable
under TRICARE North contract			284,247				348,249				281,140
Other receivables			136,323				107,156				111,608
Deferred taxes			45,769				63,573				46,527
Other assets			182,252				207,545				187,086
Total current assets			3,181,386				3,213,415				3,244,835
Property and equipment, net			123,137				125,039				131,480
Goodwill, net			605,886				605,886				611,886
Other intangible assets, net			24,217				25,164				28,108
Deferred taxes			50,648				56,987				89,479
Investments - available for sale- noncurrent			8,756				—				20,870
Other noncurrent assets			91,754				165,922				155,993
Total Assets		$	4,085,784			$	4,192,413			$	4,282,651
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Reserves for claims and other settlements		$	942,024			$	904,377			$	951,655
Health care and other costs payable under government contracts			113,865				58,628				90,815
IBNR health care costs payable under TRICARE North contract			284,247				348,249				281,140
Unearned premiums			158,493				153,539				135,772
Borrowings under amortizing financing facility			—				—				104,007
Accounts payable and other liabilities			356,115				379,414				366,125
Total current liabilities			1,854,744				1,844,207				1,929,514
Senior notes payable			398,685				398,634				398,480
Borrowings under revolving credit facility			—				100,000				100,000
Other noncurrent liabilities			137,939				156,098				158,874
Total Liabilities			2,391,368				2,498,939				2,586,868
Stockholders’ Equity
Common stock			145				145				154
Additional paid-in capital			1,221,301				1,214,253				1,190,203
Treasury common stock, at cost			(1,626,856	)			(1,567,603	)			(1,389,722	)
Retained earnings			2,099,339				2,018,935				1,895,096
Accumulated other comprehensive income			487				27,744				52
Total Stockholders’ Equity			1,694,416				1,693,474				1,695,783
Total Liabilities and Stockholders’ Equity		$	4,085,784			$	4,192,413			$	4,282,651
Debt-to-Total Capital Ratio			19.0	%			22.7	%			26.2	%

 

Page 12

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Health Net, Inc.

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

 

		Fourth Quarter Ended December 31, 2010				Third Quarter Ended September 30, 2010				Fourth Quarter Ended December 31, 2009				Year Ended December 31, 2010				Year Ended December 31, 2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss)		$	80,404			$	62,683			$	(45,157	)		$	204,243			$	(49,004	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization and depreciation			9,012				8,659				8,605				34,800				53,042
Debt refinancing charge							—
Share-based compensation			5,135				4,856				4,914				33,112				11,714
Deferred income taxes			38,661				(4,875	)			22,060				37,164				(1,913	)
Excess tax benefits from share-based compensation			(98	)			—				(23	)			(571	)			(23	)
Loss on sale of business			—				—				105,931				—				105,931
Asset and investment impairment charges			—				—				4,309				6,000				187,263
Net realized (gain) loss on sale on investments			(4,396	)			(7,742	)			(17,619	)			(23,019	)			(45,319	)
Other changes			(5,091	)			(6,554	)			5,931				(21,413	)			26,690
Changes in assets and liabilities, net of the effects of dispositions:
Premiums receivable and unearned premiums			113,529				(47,565	)			27,352				12,548				(26,644	)
Other current assets, receivables and noncurrent assets			(14,906	)			(34,674	)			120,941				(48,316	)			164,740
Amounts receivable/payable under government contracts			1,781				31,163				(16,537	)			27,404				(8,602	)
Reserves for claims and other settlements			37,647				(30,502	)			(19,533	)			(9,631	)			(162,735	)
Accounts payable and other liabilities			(47,109	)			(29,740	)			(48,002	)			19,101				(7,607	)
Net cash provided by (used in) operating activities			214,569				(54,291	)			153,172				271,422				247,533
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments			210,533				248,354				680,676				1,118,957				1,785,741
Maturities of investments			43,224				47,243				48,194				199,425				191,597
Purchases of investments			(543,696	)			(203,530	)			(689,740	)			(1,582,851	)			(1,923,692	)
Proceeds from sale of property and equipment			—				—				—				19				3,847
Purchases of property and equipment			(9,793	)			(15,989	)			(7,461	)			(34,791	)			(25,342	)
Net cash paid for acquisition and sale of businesses			80,000				4,541				(173,422	)			76,126				(173,422	)
Sales and purchases of restricted investments and other			15,491				2,567				(924	)			22,522				6,097
Net cash (used in) provided by investing activities			(204,241	)			83,186				(142,677	)			(200,593	)			(135,174	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases			2,030				568				869				3,644				1,354
Repurchases of common stock			(54,528	)			(8,825	)			(12,615	)			(236,847	)			(14,150	)
Excess tax benefits from share-based compensation			98				—				23				571				23
Borrowings under financing arrangements			—				—				55,000				100,000				80,000
Repayment of borrowings under financing arrangements			(100,000	)			—				(72,540	)			(316,771	)			(164,984	)
Net cash used in financing activities			(152,400	)			(8,257	)			(29,263	)			(449,403	)			(97,757	)
Net (decrease) increase in cash and cash equivalents			(142,072	)			20,638				(18,768	)			(378,574	)			14,602
Net change in cash and cash equivalents classified as assets held for sale			—				—				238,260				—				—
Cash and cash equivalents, beginning of period			446,301				425,663				463,311				682,803				668,201
Cash and cash equivalents, end of period		$	304,229			$	446,301			$	682,803			$	304,229			$	682,803

 

Page 13

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Health Net, Inc.

SEGMENT INFORMATION (page 1)

($ in thousands, except per share and PMPM data)

The following table presents Health Net’s operating segment information.

 

		Quarter Ended December 31, 2010																				Quarter Ended September 30, 2010																				Quarter Ended December 31, 2009
		Western Region Opera- tions1				Govern- ment Contracts2				Northeast Opera- tions3				Cor- porate/ Other4, 5A				Consoli- dated				Western Region Opera- tions1				Govern- ment Contracts2				Northeast Opera- tions3				Cor- porate/ Other4, 5				Consoli- dated				Western Region Opera- tions1				Govern- ment Contracts2				Northeast Opera- tions3, 6				Cor- porate/ Other4, 5				Consoli- dated
Health plan services premiums		$	2,481,121							$	10,003							$	2,491,124			$	2,457,977							$	12,962							$	2,470,939			$	2,435,709							$	545,969							$	2,981,678
Government contracts							822,388												822,388								860,697												860,697								754,766												754,766
Net investment income			15,138								88								15,226				19,240								226								19,466				24,234								9,252								33,486
Administrative services fees and other income			4,953								—								4,953				5,487								—								5,487				11,528								16,637								28,165
Northeast administrative services fees and other			—								39,643								39,643				—								36,863								36,863																				—
Total revenues			2,501,212				822,388				49,734				—				3,373,334				2,482,704				860,697				50,051				—				3,393,452				2,471,471				754,766				571,858				—				3,798,095
Health plan services			2,115,099								9,746				(24,876	)			2,099,969				2,122,005								12,696								2,134,701				2,089,248								467,901				—				2,557,149
Government contracts							770,321								166				770,487								813,524								861				814,385								703,721								3,632				707,353
G&A excluding insurance, taxes and fees			211,894								1,576				13,015				226,485				196,014								3,466				7,771				207,251				195,391								101,507				38,723				335,621
Insurance, taxes and fees			19,003								373				—				19,376				18,272								406				—				18,678				19,786								—				—				19,786
G&A including insurance, taxes and fees			230,897								1,949				13,015				245,861				214,286								3,872				7,771				225,929				215,177								101,507				38,723				355,407
Selling			63,866								467								64,333				58,267								754								59,021				58,877								25,191								84,068
Depreciation and amortization			8,980								32								9,012				8,585								74								8,659				7,905								700								8,605
Interest			8,085								—								8,085				8,150																8,150				10,225								(687	)							9,538
Early debt extinguishment																			—																				—
Asset impairments											—								—												—								—																4,309				4,309
Northeast administrative services expenses											63,727								63,727												61,878								61,878																				—
Adjustment to loss on sale of Northeast health plans											(12,331	)							(12,331	)											(21,457	)							(21,457	)											105,931								105,931
Total expenses			2,426,927				770,321				63,590				(11,695	)			3,249,143				2,411,293				813,524				57,817				8,632				3,291,266				2,381,432				703,721				700,543				46,664				3,832,360
Income (loss) from operations before income taxes			74,285				52,067				(13,856	)			11,695				124,191				71,411				47,173				(7,766	)			(8,632	)			102,186				90,039				51,045				(128,685	)			(46,664	)			(34,265	)
Income tax provision (benefit)			27,389				21,320				(9,830	)			4,908				43,787				26,974				19,332				(3,090	)			(3,713	)			39,503				38,073				20,660				(29,408	)			(18,433	)			10,892
Net income (loss)		$	46,896			$	30,747			$	(4,026	)		$	6,787			$	80,404			$	44,437			$	27,841			$	(4,676	)		$	(4,919	)		$	62,683			$	51,966			$	30,385			$	(99,277	)		$	(28,231	)		$	(45,157	)
Basic earnings (loss) per share		$	0.49			$	0.32			$	(0.04	)		$	0.07			$	0.84			$	0.46			$	0.29			$	(0.05	)		$	(0.05	)		$	0.64			$	0.50			$	0.29			$	(0.96	)		$	(0.27	)		$	(0.43	)
Diluted earnings (loss) per share		$	0.48			$	0.32			$	(0.04	)		$	0.07			$	0.83			$	0.45			$	0.29			$	(0.05	)		$	(0.05	)		$	0.64			$	0.50			$	0.29			$	(0.96	)		$	(0.27	)		$	(0.43	)
Basic weighted average shares outstanding			95,697				95,697				95,697				95,697				95,697				97,349				97,349				97,349				97,349				97,349				103,902				103,902				103,902				103,902				103,902
Diluted weighted average shares outstanding			96,885				96,885				95,697				96,885				96,885				98,304				98,304				97,349				97,349				98,304				104,626				104,626				103,902				103,902				103,902
Pretax margin			3.0	%			6.3	%															2.9	%			5.5	%															3.6	%			6.8	%
Commercial premium yield			6.8	%																			7.2	%																			8.7	%
Commercial premium PMPM		$	343.85																			$	342.63																			$	322.00
Commercial health care cost trend			5.7	%																			5.2	%																			9.7	%
Commercial health care cost PMPM		$	294.08																			$	295.73																			$	278.14
Commercial MCR			85.5	%																			86.3	%																			86.4	%
Medicare Advantage MCR			89.4	%																			89.4	%																			88.6	%
Medicare Part D MCR			53.1	%																			64.6	%																			59.7	%
Medicaid MCR			87.4	%																			87.9	%																			85.9	%
Health plan services MCR			85.2	%																			86.3	%																			85.8	%
Government contracts cost ratio							93.7	%																			94.5	%																			93.2	%
G&A expense ratio			9.3	%																			8.7	%																			8.8	%
Selling costs ratio			2.6	%																			2.4	%																			2.4	%
Effective tax rate			36.9	%			40.9	%															37.8	%			41.0	%															42.3	%			40.5	%

 

1	Includes the operations of the company’s commercial, Medicare (including Part D) and Medicaid health plans in California, Arizona and Oregon.

2	Includes the operations of government-sponsored managed care plans through the TRICARE program and other health care-related Department of Defense and Veterans Affairs government contracts.

3

Includes the operations of the company’s Northeast health plans that were sold on December 11, 2009 and the operations of the company’s health and life insurance companies in Connecticut, New Jersey and New York. Subsequent to the sale, it also includes the operations of the administrative services provided to the buyer.

4	Includes a litigation reserve true-up related to a previously accrued for class action lawsuit.

5	Includes costs related to the company’s operations strategy and corporate overhead cost reduction efforts resulting from the sale of the Northeast health plans.

5A	Includes expenses primarily related to litigation and the company’s overhead cost reduction efforts.

6	Includes loss on sale of Northeast health plans in 2009.

7	Includes asset impairments recorded in 2009.

 

Page 14

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Health Net, Inc.

SEGMENT INFORMATION (page 2)

($ in thousands, except per share and PMPM data)

The following table presents Health Net’s operating segment information.

 

		Year Ended December 31, 2010																				Year Ended December 31, 2009
		Western Region Operations1				Government Contracts2				Northeast Operations3				Corporate/ Other4,  5, 5A				Consolidated				Western Region Operations1				Government Contracts2				Northeast Operations3,  6				Corporate/ Other4,  5, 7				Consolidated
Health plan services premiums		$	9,925,738							$	71,150							$	9,996,888			$	9,850,783							$	2,589,806							$	12,440,589
Government contracts							3,344,483												3,344,483								3,104,700												3,104,700
Net investment income			70,279								902								71,181				67,568								38,362								105,930
Administrative services fees and other income			26,547								46				(5,460	)			21,133				38,737								23,285								62,022
Northeast administrative services fees and other											186,167								186,167																				—
Total revenues			10,022,564				3,344,483				258,265				(5,460	)			13,619,852				9,957,088				3,104,700				2,651,453				—				15,713,241
Health plan services			8,591,161								64,465				(46,509	)			8,609,117				8,542,361								2,194,389				(4,799	)			10,731,951
Government contracts							3,165,747								2,413				3,168,160								2,936,090								3,632				2,939,722
G&A excluding insurance, taxes and fees			807,450								14,886				58,840				881,176				762,510								401,811				124,797				1,289,118
Insurance, taxes and fees			74,309								779				—				75,088				70,966								1,872				—				72,838
G&A including insurance, taxes and fees			881,759								15,665				58,840				956,264				833,476								403,683				124,797				1,361,956
Selling			235,608								3,151								238,759				233,278								96,834								330,112
Depreciation and amortization			34,634								166								34,800				36,745								16,297								53,042
Interest			34,880								—								34,880				41,015								(128	)							40,887
Early debt extinguishment															3,532				3,532
Asset impairments											6,000								6,000																174,879				174,879
Northeast administrative services expenses											279,434								279,434																				—
Adjustment to loss on sale of Northeast health plans											(41,959	)							(41,959	)											105,931								105,931
Total expenses			9,778,042				3,165,747				326,922				18,276				13,288,987				9,686,875				2,936,090				2,817,006				298,509				15,738,480
Income (loss) from operations before income taxes			244,522				178,736				(68,657	)			(23,736	)			330,865				270,213				168,610				(165,553	)			(298,509	)			(25,239	)
Income tax provision (benefit)			91,709				73,197				(29,256	)			(9,028	)			126,622				100,842				69,102				(42,361	)			(103,818	)			23,765
Net income (loss)		$	152,813			$	105,539			$	(39,401	)		$	(14,708	)		$	204,243			$	169,371			$	99,508			$	(123,192	)		$	(194,691	)		$	(49,004	)
Basic earnings (loss) per share		$	1.56			$	1.07			$	(0.40	)		$	(0.15	)		$	2.08			$	1.63			$	0.96			$	(1.19	)		$	(1.87	)		$	(0.47	)
Diluted earnings (loss) per share		$	1.54			$	1.06			$	(0.40	)		$	(0.15	)		$	2.06			$	1.62			$	0.95			$	(1.19	)		$	(1.87	)		$	(0.47	)
Basic weighted average shares outstanding			98,232				98,232				98,232				98,232				98,232				103,849				103,849				103,849				103,849				103,849
Diluted weighted average shares outstanding			99,232				99,232				98,232				98,232				99,232				104,412				104,412				103,849				103,849				103,849
Pretax margin			2.4	%			5.3	%															2.7	%			5.4	%
Commercial premium yield			7.9	%																			9.4	%
Commercial premium PMPM		$	340.81																			$	315.73
Commercial health care cost trend			7.1	%																			9.6	%
Commercial health care cost PMPM		$	293.51																			$	274.05
Commercial MCR			86.1	%																			86.8	%
Medicare Advantage MCR			88.8	%																			88.1	%
Medicare Part D MCR			77.2	%																			78.4	%
Medicaid MCR			87.7	%																			86.6	%
Health plan services MCR			86.6	%																			86.7	%
Government contracts cost ratio							94.7	%																			94.6	%
G&A expense ratio			8.9	%																			8.4	%
Selling costs ratio			2.4	%																			2.4	%
Effective tax rate			37.5	%			41.0	%															37.3	%			41.0	%

 

1	Includes the operations of the company’s commercial, Medicare (including Part D) and Medicaid health plans in California, Arizona and Oregon.

2	Includes the operations of government-sponsored managed care plans through the TRICARE program and other health care-related Department of Defense and Veterans Affairs government contracts.

3

Includes the operations of the company’s Northeast health plans that were sold on December 11, 2009 and the operations of the company’s health and life insurance companies in Connecticut, New Jersey and New York. Subsequent to the sale, it also includes the operations of the administrative services provided to the buyer.

4	Includes a litigation reserve true-up related to a previously accrued for class action lawsuit.

5	Includes costs related to the company’s operations strategy and corporate overhead cost reduction efforts resulting from the sale of the Northeast health plans.

5A	Includes expenses primarily related to litigation and the company’s overhead cost reduction efforts.

6	Includes loss on sale of Northeast health plans in 2009.

7	Includes asset impairments recorded in 2009.

 

Page 15

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Health Net, Inc.

Disclosures Regarding Non-GAAP Financial Information

($ in millions)

Management believes that adjusted days claims payable (adjusted for divested businesses, capitation, provider and other claim settlements and Medicare Part D), a non-GAAP financial measure, provides useful information to investors because the adjusted days claims payable calculation excludes amounts related to divested businesses and health care costs for which no or minimal reserves are maintained. Therefore, management believes that adjusted days claims payable may present a more accurate reflection of days claims payable calculated from claims-based reserves than does GAAP days claims payable, which includes such costs. This non-GAAP financial information should be considered in addition to, not as a substitute for, financial information prepared in accordance with GAAP. The following table provides a reconciliation of the differences between adjusted days claims payable and days claims payable, the most directly comparable GAAP financial measure. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating the adjusted amounts, you should be aware that we have incurred expenses that are the same as or similar to some of the adjustments in the current presentation and we may incur them again in the future.

Our presentation of the adjusted amounts should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

 

				Q4 2010				Q3 2010				Q4 2009				FY 2010				FY 2009
Reconciliation of Days Claims Payable:
(1)		Reserve for Claims and Other Settlements		$	942.0			$	904.4			$	951.7			$	942.0			$	951.7
		Less: Reserve for Claims and Other Settlements for Divested Businesses			—				—				—				—				—
		Less: Capitation Payable, Provider and Other Claim Settlements and Medicare Part D			(108.7	)			(130.0	)			(162.8	)			(108.7	)			(162.8	)
(2)		Reserve for Claims and Other Settlements - Adjusted		$	833.3			$	774.4			$	788.9			$	833.3			$	788.9
(3)		Health Plan Services Cost		$	2,100.0			$	2,134.7			$	2,557.1			$	8,609.1			$	10,732.0
		Less: Health Plan Services Cost for Divested Businesses			—				—				(460.7	)			—				(2,123.0	)
		Less: Capitation Payable, Provider and Other Claim Settlements and Medicare Part D			(762.6	)			(804.4	)			(818.4	)			(3,291.1	)			(3,296.0	)
(4)		Health Plan Services Cost - Adjusted		$	1,337.4			$	1,330.3			$	1,278.0			$	5,318.0			$	5,313.0
(5)		Number of Days in Period			92				92				92				365				365
= (1) / (3) * (5) Days Claims Payable - (using end of period reserve amount)					41.3				39.0				34.2				39.9				32.4
= (2) / (4) * (5) Days Claims Payable - Adjusted (using end of period reserve amount)					57.3				53.6				56.8				57.2				54.2

 

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Health Net, Inc.

Reconciliation of Reserves for Claims and Other Settlements

($ in millions)

 

		Health Plan Services
		FY 2010				FY 2009				FY 2008
Reserve for claims (a), beginning of period		$	692.2			$	957.1			$	838.7
Incurred claims related to:
Current Year			4,644.2				6,422.8				6,372.2
Prior Years (c)			(70.0	)			(80.0	)			(8.3	)
Total Incurred (b)			4,574.2				6,342.8				6,363.9
Paid claims related to:
Current Year			3,929.3				5,572.2				5,443.2
Prior Years			609.6				857.8				802.3
Total Paid (b)			4,538.9				6,430.0				6,245.5
Less: Divested businesses			—				(177.7	)			—
Reserve for claims (a), end of period			727.5				692.2				957.1
Add:
Claims Payable (d)			123.6				165.6				284.8
Other (e)			90.9				93.9				96.2
Reserves for claims and other settlements, end of period		$	942.0			$	951.7			$	1,338.1

 

(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. In developing the revised estimate, there have been no changes in the approach used to determine the key actuarial assumptions, which are the completion factor and medical cost trend. Claims liabilities are estimated under actuarial standards of practice and generally accepted accounting principles. The majority of the reserve balance held at each quarter-end is associated with the most recent months’ incurred services because these are the services for which the fewest claims have been paid. The majority of the adjustments to reserves relate to variables and uncertainties associated with actuarial assumptions. The degree of uncertainty in the estimates of incurred claims is greater for the most recent months’ incurred services. Revised estimates for prior years are determined in each quarter based on the most recent updates of paid claims for prior years.

(d)	Includes amount accrued for litigation and regulatory-related expenses.

(e)	Includes accrued capitation, shared risk settlements, provider incentives and other reserve items.

 

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