Health Net Reports Third Quarter 2014 GAAP Net Loss of $8.9 Million, or a Loss of $0.11 Per Share

Western Region Operations and Government Contracts Segments Produce Combined Net Income of $58.5 Million, or $0.72 Per Diluted Share

Health Plan Enrollment Climbs 24.7 Percent Year-over-Year, and Surpasses 3 Million Members, Driven by Continued Medicaid Growth from Expansion and Commercial Growth from Individual Exchanges

Company Enters into Master Services Agreement with Cognizant: Health Net Expects $150 to $200 Million in Annual G&A and Depreciation Expense Savings by 2017

LOS ANGELES--()--Health Net, Inc. (NYSE: HNT) today announced a 2014 third quarter GAAP net loss of $8.9 million, or a loss of $0.11 per share, compared with GAAP net income of $66.8 million, or $0.83 per diluted share, for the third quarter of 2013.

The company announced today in a separate press release that it has entered into a master services agreement with a wholly owned subsidiary of Cognizant Technology Solutions Corporation (NASDAQ: CTSH) (Cognizant), a leading provider of information technology, consulting and business process services.

Health Net previously announced on August 6, 2014, that it had signed a Letter of Intent with Cognizant as part of Health Net’s commitment to address Health Net’s scale issue and reduce administrative costs.

The GAAP net loss resulted from approximately $106 million of expenses incurred in the third quarter of 2014 related to the company’s new master services agreement with Cognizant. The $106 million is comprised of an approximately $85 million, non-cash, impairment of the company’s information technology assets that will be sold to Cognizant upon completion of the transaction and approximately $21 million in other transaction-related and other expenses.

“We believe the Cognizant transaction will help us address our scale issue and enhance Health Net’s product development and service capabilities. This in turn should strengthen our competitive position for the long term,” explained Jay Gellert, Health Net’s chief executive officer.

“The transaction-related costs incurred in the third quarter were consistent with our earlier guidance regarding the cash impact of such transaction expenses,” he added.

The company’s Western Region Operations (Western Region) and Government Contracts segments produced combined net income of $0.72 per diluted share in the third quarter of 2014 compared with $0.83 per diluted share in the third quarter of 2013. The company’s third quarter of 2013 benefited by approximately $32 million in pretax income, or approximately $0.25 per diluted share, from favorable California Medicaid rate adjustments primarily for seniors and persons with disabilities members related to prior periods.

Highlights from the third quarter of 2014 include:

  1. The company’s Western Region health plans enrollment grew by 24.7 percent, or approximately 609,000 members, at September 30, 2014 compared with enrollment at September 30, 2013, and grew by 5.3 percent, or approximately 156,000 members, at September 30, 2014 compared with enrollment at June 30, 2014;
  2. Medicaid enrollment grew 11.5 percent sequentially and 39.0 percent between September 30, 2013 and September 30, 2014. The expansion of Medicaid eligibility under the Affordable Care Act (ACA) continued to drive this growth in Arizona and California;
  3. The company’s commercial and Medicaid lines of business continued to benefit from favorable underlying health care cost trends. Commercial medical costs per member per month (PMPM) declined by 0.7 percent in the third quarter of 2014 compared with the third quarter of 2013;
  4. In the third quarter of 2014, operating cash flow was approximately $588 million as the company received a fourth monthly Medi-Cal payment of approximately $300 million and reserves for claims and other settlements increased by approximately $245 million;
  5. Reserves for claims and other settlements rose by 75.0 percent in the third quarter of 2014 compared with the third quarter of 2013, and by 16.5 percent when compared with the second quarter of 2014; and
  6. The company resumed its share repurchases in the third quarter. The company repurchased 3 million shares from September 10, 2014 through October 20, 2014, at a total cost of approximately $138 million.

“We are very pleased that our operating momentum continued in the third quarter, driven by improvements in several key areas,” said Gellert.

“Overall health plan enrollment topped 3 million members as Medicaid enrollment exceeded expectations with further growth from expansion lives and also from traditional Medicaid eligibles. The commercial MCR improved year-over-year, helped by a favorable mix and ongoing moderate cost trends,” he added.

“We continued to implement the duals eligible demonstration pilots in Los Angeles and San Diego counties. Enrollment growth has been somewhat slower than expected, similar to the early roll out of Medicaid expansion. We are confident the program will work well over time. We will remain conservative in our expectations but aggressive in our execution,” Gellert noted.

CONSOLIDATED RESULTS

Health Net’s total revenues increased 36.6 percent in the third quarter of 2014 to $3.8 billion from $2.8 billion in the third quarter of 2013.

Health plan services premium revenues of approximately $3.6 billion in the third quarter of 2014 increased by 39.3 percent compared with the third quarter of 2013.

Health plan services expenses increased by 41.3 percent to approximately $3.1 billion in the third quarter of 2014 compared with the third quarter of 2013.

WESTERN REGION OPERATIONS SEGMENT

Health Plan Membership

Total enrollment in the Western Region at September 30, 2014 was approximately 3.1 million members, an increase of 24.7 percent from enrollment at September 30, 2013.

Total enrollment in the company’s California health plans at September 30, 2014 was approximately 2.7 million members, an increase of 20.7 percent from enrollment at September 30, 2013.

Western Region commercial enrollment at September 30, 2014 was approximately 1.2 million, an increase of 11.7 percent compared with enrollment at September 30, 2013.

Membership in tailored network products represented 51.7 percent of the company’s Western Region commercial membership at September 30, 2014 compared with 36.8 percent at September 30, 2013.

“Health Net’s success with our tailored network strategy is a key factor driving our success in the exchanges,” said Jim Woys, Health Net’s chief financial and operating officer and interim treasurer. “We continue to expect tailored network enrollment to be greater than 50 percent at December 31, 2014.”

Enrollment in the company’s Medicare Advantage (MA) plans in the Western Region at September 30, 2014 was approximately 271,000 members, an increase of 13.4 percent compared with enrollment of approximately 239,000 members at September 30, 2013.

Medicaid enrollment in California increased 31.9 percent to approximately 1.5 million members at September 30, 2014 compared with approximately 1.1 million members at September 30, 2013.

Dual eligibles enrollment at September 30, 2014 was approximately 9,000, an increase of 350.0 percent compared with enrollment at June 30, 2014.

Revenues

Total revenues for the Western Region for the third quarter of 2014 were approximately $3.6 billion compared with approximately $2.6 billion in the third quarter of 2013.

Net investment income for the Western Region was approximately $11.0 million in the third quarter of 2014 compared with approximately $12.0 million in the second quarter of 2014 and $11.3 million in the third quarter of 2013.

Health Plan Services Expenses

Health plan services expenses in the Western Region were approximately $3.1 billion in the third quarter of 2014 compared with approximately $2.2 billion in the third quarter of 2013.

Commercial Premium Yield and Health Care Cost Trends

In the Western Region, commercial premiums PMPM decreased by 0.3 percent to approximately $386 in the third quarter of 2014 compared with approximately $387 in the third quarter of 2013.

Commercial health care costs PMPM in the Western Region decreased by 0.7 percent to approximately $323 in the third quarter of 2014 compared with approximately $326 in the third quarter of 2013.

“Health care cost trends remained moderate in the third quarter,” said Woys. “We also benefited from a significant and favorable shift in our commercial business mix as individual enrollment grew while large group business continued to decline, as intended.”

Medical Care Ratios (MCR)

The health plan services MCR in the Western Region was 85.5 percent in the third quarter of 2014 compared with 84.3 percent in the third quarter of 2013.

The Western Region commercial MCR was 83.9 percent in the third quarter of 2014 compared with 84.2 percent in the third quarter of 2013 and 82.3 percent in the second quarter of 2014.

The MA MCR in the Western Region was 90.8 percent in the third quarter of 2014 compared with 89.9 percent in the third quarter of 2013.

The Medicaid MCR was 84.2 percent in the third quarter of 2014 compared with 79.4 percent in the third quarter of 2013.

General and Administrative (G&A) and Selling Expenses

G&A expenses in the Western Region were $353.4 million in the third quarter of 2014 compared with $267.1 million in the third quarter of 2013 and $342.0 million in the second quarter of 2014. The G&A expense ratio was 9.7 percent in the third quarter of 2014 compared with 10.2 percent in the third quarter of 2013 and 10.5 percent in the second quarter of 2014.

The G&A expense ratio in the Western Region also declined sequentially and year-over-year in the third quarter of 2014. “We remain focused on continued improvement in our administrative efficiency as we pursue the required regulatory approval of our Cognizant agreement,” stated Woys.

GOVERNMENT CONTRACTS SEGMENT

Government Contracts revenues in the third quarter of 2014 were $146.2 million compared with $149.3 million in the third quarter of 2013.

Government Contracts expenses in the third quarter of 2014 were $123.6 million compared with $125.8 million in the third quarter of 2013.

BALANCE SHEET

Cash and investments as of September 30, 2014 were approximately $2.8 billion compared with approximately $2.3 billion as of September 30, 2013.

Reserves for claims and other settlements as of September 30, 2014 were $1.7 billion compared with $990.2 million as of September 30, 2013 and $1.5 billion as of June 30, 2014. Approximately 61.8 percent of the sequential increase in reserves for claims and other settlements was the result of an increase in incurred but not reported (IBNR) reserves.

Days claims payable (DCP) for the third quarter of 2014 was 51.4 days compared with 41.5 days in the third quarter of 2013 and 49.0 days in the second quarter of 2014.

On an adjusted1 basis, DCP for the third quarter of 2014 was 65.3 days compared with 61.1 days in the third quarter of 2013 and 64.4 days in the second quarter of 2014.

The company’s debt-to-total capital ratio was 22.1 percent as of September 30, 2014 compared with 23.8 percent as of September 30, 2013 and 21.5 percent as of June 30, 2014.

CASH FLOW FROM OPERATIONS

Operating cash flow was approximately $588.0 million in the third quarter of 2014.

“Our strong operating cash flow was primarily the result of the receipt of a fourth Medi-Cal payment of approximately $300 million in the quarter and a $245 million increase in reserves for claims and other settlements,” said Woys.

The company noted that cash at the parent was approximately $271 million at September 30, 2014.

STOCK REPURCHASE UPDATE

During the third quarter of 2014, Health Net repurchased approximately 1.5 million shares of its common stock for approximately $69.0 million at an average price of $46.54 per share. At September 30, 2014, approximately $211.0 million of authorization under the company’s existing $400 million share repurchase program remained.

“We continue to believe that share repurchase is our best option at this time for capital deployment,” Gellert explained.

“We are updating our guidance for weighted-average fully diluted shares outstanding in 2014 to approximately 81 million shares from our prior guidance of 80 million shares,” he added.

2014 GUIDANCE

The company is revising GAAP earnings per diluted share to at least $1.95 from at least $3.00 for the full year 2014, due to the impact of incurred and expected costs related to the Cognizant transaction. The company also is raising the Western Region and Government Contracts earnings per share to at least $2.25 from at least $2.22 for the full year 2014.

The table included in this release provides specific 2014 guidance metrics, including updates to expectations for large group, small group, individual, Medicare Advantage, Medicaid, dual eligibles and total health plan membership; commercial, Medicare Advantage, state health plans, dual eligibles, total health plans and total consolidated revenues; the Medicaid MCR; tax rates; weighted-average fully diluted shares outstanding; GAAP earnings per diluted share (EPS); and Western Region and Government Contracts EPS.

CONFERENCE CALL

As previously announced, Health Net will discuss the company’s third quarter 2014 financial results during a conference call on Monday, November 3, 2014, beginning at approximately 11:00 a.m. Eastern time. The live conference call should be accessed at least 15 minutes prior to its start with the following numbers:

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

The access code for the live conference call and replay is 13591799. A replay of the conference call will be available through November 8, 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, and Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2014 and June 30, 2014, and other reports filed by Health Net 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 5.9 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. Through its subsidiaries, 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, including the guidance for future periods and the assumptions underlying such projections, 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, the guidance as to expected future period results and 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, including through our master services agreement with Cognizant; whether we receive required regulatory approvals for Cognizant’s provision of services to us and any conditions imposed in order to obtain such regulatory approvals; our ability to recognize the intended cost savings and other intended benefits of the Cognizant transaction; and the risk that Cognizant may not perform contracted functions and services in a timely, satisfactory and compliant manner; 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 Reports 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 of its guidance, the assessment of the underlying assumptions or 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 September 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 September 30, 2014, and Item 2.02 in the company’s Form 8-K filed with the Securities and Exchange Commission on November 3, 2014.

 

Health Net, Inc.

2014 GAAP Guidance (1)
 
 
           
MEMBERSHIP Current Previous
        (updated 11/3/14)       (as of 8/6/14)
 
Enrollment Enrollment
at 12/31/2014       at 12/31/2014

Commercial

Large Group 551,000 560,000
Small Group 298,000 280,000
Individual 364,000 380,000
 
Total Commercial 1,213,000 1,220,000
 
Medicare Advantage

278,000

260,000
 
Medicaid 1,726,000 1,585,000
 
Dual Eligibles

20,000

38,000
 
Total Health Plan Membership 3,233,000 3,103,000
                 
                 
 
Premium Revenues       FY2014       FY2014
 
Commercial $5.5 billion $5.6 billion
Medicare Advantage $3.1 billion $3.0 billion
State Health Plans $4.9 billion $4.5 billion
Dual Eligibles

$130 million

$342 million
Total Health Plans $13.6 billion $13.4 billion
 
Total Consolidated Revenues $14.2 billion $14.0 billion
 
Medical Care Ratios (MCR)       FY2014       FY2014
 
Commercial 83.0% 83.0%
Medicare Advantage 90.9% 90.9%
Medicaid 82.9% 83.6%
Dual Eligibles 86.5% 86.5%
 
 
G&A Expense Ratio 10.8% 10.8%
 
 
Tax Rate(2) 28.0% 31.1%
 

Western Region and Government Contracts Tax Rate(3)

51.1% 51.5%
 

Weighted-average fully diluted shares outstanding

80.8 million 80 million
 
GAAP Earnings per Diluted Share (EPS)(2) At least $1.95 At least $3.00
 

Western Region and

Government Contracts EPS(3)

At least $2.25 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  
June 30, 2014     September 30, 2013  
September 30, June 30, September 30, Increase/     %     Increase/     %
      2014     2014     2013     (Decrease)     Change     (Decrease)     Change  
California
Large Group 477 492 576 (15 ) (3.0 )% (99 ) (17.2 )%
Small Group 243 240 241 3 1.3 % 2 0.8 %
Individual 269     272     105     (3 )     (1.1 )%     164       156.2 %
Commercial Risk 989 1,004 922 (15 ) (1.5 )% 67 7.3 %
Medicare Advantage 169 162 149 7 4.3 % 20 13.4 %
Medi-Cal 1,485 1,359 1,126 126 9.3 % 359 31.9 %
Dual Eligibles     9     2     0     7       350.0 %     9      

0.0

%

Total California     2,652     2,527     2,197     125       4.9 %     455       20.7 %
 
Arizona
Large Group 45 48 59 (3 ) (6.3 )% (14 ) (23.7 )%
Small Group 44 43 40 1 2.3 % 4 10.0 %
Individual 97     99     14     (2 )     (2.0 )%     83       592.9 %
Commercial Risk 186 190 113 (4 ) (2.1 )% 73 64.6 %
Medicare Advantage 46 46 43 0 0.0 % 3 7.0 %
Medicaid     80     45     0     35       77.8 %     80      

0.0

%

Total Arizona     312     281     156     31       11.0 %     156       100.0 %
 
Northwest
Large Group 28 28 24 0 0.0 % 4 16.7 %
Small Group 23 25 39 (2 ) (8.0 )% (16 ) (41.0 )%
Individual 4     4     3     0       0.0 %     1       33.3 %
Commercial Risk 55 57 66 (2 ) (3.5 )% (11 ) (16.7 )%
Medicare Advantage     56     54     47     2       3.7 %     9       19.1 %
Total Northwest     111     111     113     0       0.0 %     (2 )     (1.8 )%
 
                                             
Total Health Plan Enrollment
Large Group 550 568 659 (18 ) (3.2 )% (109 ) (16.5 )%
Small Group 310 308 320 2 0.6 % (10 ) (3.1 )%
Individual 370     375     122     (5 )     (1.3 )%     248       203.3 %
Commercial Risk 1,230 1,251 1,101 (21 ) (1.7 )% 129 11.7 %
Medicare Advantage 271 262 239 9 3.4 % 32 13.4 %
Medi-Cal/Medicaid 1,565 1,404 1,126 161 11.5 % 439 39.0 %
Dual Eligibles 9     2     0     7       350.0 %     9      

0.0

%

Western Region Operations     3,075     2,919     2,466     156       5.3 %     609       24.7 %
 
 
TRICARE - North Contract Eligibles     2,849     2,849     2,865     0       0.0 %     (16 )     (0.6 )%
 
 
Health Net, Inc.
Enrollment Data - Line of Business
(In thousands)
                Change from  
June 30, 2014     September 30, 2013  
September 30, June 30, September 30, Increase/     %     Increase/     %
      2014     2014     2013     (Decrease)     Change     (Decrease)     Change  
 
Large Group
California 477 492 576 (15 ) (3.0 )% (99 ) (17.2 )%
Arizona 45 48 59 (3 ) (6.3 )% (14 ) (23.7 )%
Northwest 28     28     24     0       0.0 %     4       16.7 %
550     568     659     (18 )     (3.2 )%     (109 )     (16.5 )%
 
Small Group
California 243 240 241 3 1.3 % 2 0.8 %
Arizona 44 43 40 1 2.3 % 4 10.0 %
Northwest 23     25     39     (2 )     (8.0 )%     (16 )     (41.0 )%
310     308     320     2       0.6 %     (10 )     (3.1 )%
 
Individual
California 269 272 105 (3 ) (1.1 )% 164 156.2 %
Arizona 97 99 14 (2 ) (2.0 )% 83 592.9 %
Northwest 4     4     3     0       0.0 %     1       33.3 %
370     375     122     (5 )     (1.3 )%     248       203.3 %
 
Commercial Risk
California 989 1,004 922 (15 ) (1.5 )% 67 7.3 %
Arizona 186 190 113 (4 ) (2.1 )% 73 64.6 %
Northwest 55     57     66     (2 )     (3.5 )%     (11 )     (16.7 )%
1,230     1,251     1,101     (21 )     (1.7 )%     129       11.7 %
 
Medicare Advantage
California 169 162 149 7 4.3 % 20 13.4 %
Arizona 46 46 43 0 0.0 % 3 7.0 %
Northwest 56     54     47     2       3.7 %     9       19.1 %
271     262     239     9       3.4 %     32       13.4 %
 
Medi-Cal/Medicaid
California 1,485 1,359 1,126 126 9.3 % 359 31.9 %
Arizona 80     45     0     35       77.8 %     80      

0.0

%

1,565     1,404     1,126     161       11.5 %     439       39.0 %
 
Dual Eligibles                                        
California 9     2     0     7       350.0 %     9      

0.0

%

                                             
Total Health Plan Enrollment
Large Group 550 568 659 (18 ) (3.2 )% (109 ) (16.5 )%
Small Group 310 308 320 2 0.6 % (10 ) (3.1 )%
Individual 370     375     122     (5 )     (1.3 )%     248       203.3 %
Commercial Risk 1,230 1,251 1,101 (21 ) (1.7 )% 129 11.7 %
Medicare Advantage 271 262 239 9 3.4 % 32 13.4 %
Medi-Cal/Medicaid 1,565 1,404 1,126 161 11.5 % 439 39.0 %
Dual Eligibles 9     2     0     7       350.0 %     9      

0.0

%

Western Region Operations     3,075     2,919     2,466     156       5.3 %     609       24.7 %
 
 
TRICARE - North Contract Eligibles     2,849     2,849     2,865     0       0.0 %     (16 )     (0.6 )%
 
 

Health Net, Inc.

Consolidated Statements of Operations

($ in thousands, except per share data)

 
      Quarter Ended       Quarter Ended       Quarter Ended
September 30, June 30, September 30,
REVENUES: 2014 2014 2013
Health plan services premiums $ 3,631,617 $ 3,261,878 $ 2,606,754
Government contracts 146,183 154,083 149,342
Net investment income 10,964 12,043 11,276
Administrative services fees and other income   1,106     (6,612 )   7,659
Total revenues   3,789,870     3,421,392     2,775,031
 
EXPENSES:
Health plan services 3,104,010 2,763,179 2,196,561
Government contracts 124,403 133,208 125,334
General and administrative 373,623 344,734 267,683
Selling 66,111 64,002 59,498
Depreciation and amortization 6,500 9,641 9,402
Interest 7,810 7,826 7,973
Asset impairment   84,690  

-

-

Total expenses   3,767,147     3,322,590     2,666,451
Income from operations before income taxes 22,723 98,802 108,580
Income tax provision (benefit)   31,662     (22,065 )   41,740
Net (loss) income $ (8,939 ) $ 120,867   $ 66,840
 
Net (loss) income per share:
Basic $ (0.11 ) $ 1.51 $ 0.84
Diluted $ (0.11 ) $ 1.49 $ 0.83
 
Weighted average shares outstanding:
Basic 80,235 80,250 79,432
Diluted 80,235 81,218 80,441
 
 

Health Net, Inc.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except ratio data)

 
      September 30,       June 30,       September 30,
2014 2014 2013
ASSETS
Current Assets
Cash and cash equivalents $ 1,114,558 $ 603,097 $ 686,139
Investments - available for sale 1,664,830 1,668,943 1,580,032
Premiums receivable, net 579,515 849,089 343,502
Amounts receivable under government contracts 143,662 193,043 194,820
Other receivables 307,369 183,795 69,885
Deferred taxes 71,434 81,293 78,257
Assets held for sale 50,000 - -
Other assets   157,066     259,878     103,685  
Total current assets 4,088,434 3,839,138 3,056,320
Property and equipment, net 92,193 209,385 195,954
Goodwill 558,886 565,886 565,886
Other intangible assets, net 12,526 13,229 14,699
Deferred taxes 34,580 9,530 3,394
Investments - available for sale - noncurrent 3,055 652 52,637
Other noncurrent assets   173,230     139,205     152,611  
Total Assets $ 4,962,904   $ 4,777,025   $ 4,041,501  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Reserves for claims and other settlements $ 1,733,307 $ 1,488,322 $ 990,195
Health care and other costs payable under government contracts 62,796 94,195 55,532
Unearned premiums 125,363 130,905 129,081
Accounts payable and other liabilities   540,968     496,349     544,704  
Total current liabilities 2,462,434 2,209,771 1,719,512
Senior notes payable 399,453 399,402 399,248
Deferred taxes - 22,376 1,746
Borrowings under revolving credit facility 100,000 100,000 100,000
Other noncurrent liabilities   235,393     223,595     220,404  
Total Liabilities   3,197,280     2,955,144     2,440,910  
 
Stockholders' Equity
Common stock 152 152 150
Additional paid-in capital 1,432,513 1,406,768 1,370,744
Treasury common stock, at cost (2,272,180 ) (2,197,890 ) (2,179,503 )
Retained earnings 2,604,363 2,613,302 2,443,895
Accumulated other comprehensive income (loss)   776     (451 )   (34,695 )
Total Stockholders' Equity   1,765,624     1,821,881     1,600,591  
Total Liabilities and Stockholders' Equity $ 4,962,904   $ 4,777,025   $ 4,041,501  
 
Debt-to-Total Capital Ratio 22.1 % 21.5 % 23.8 %
 
 

Health Net, Inc.

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

 
      Quarter Ended       Quarter Ended       Quarter Ended
September 30, June 30, September 30,
2014 2014 2013
 
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (8,939 ) $ 120,867 $ 66,840

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:

Amortization and depreciation 6,500 9,641 9,402
Share-based compensation expense 6,109 6,536 6,511
Deferred income taxes (38,231 ) (14,653 ) 5,573
Excess tax benefits from share-based compensation (241 ) (357 ) (21 )
Asset impairment 84,690 - -
Net realized gain on sale on investments (346 ) (1,928 ) (370 )
Other changes 7,264 6,364 8,040
Changes in assets and liabilities:
Premiums receivable and unearned premiums 264,032 (395,553 ) 240,580
Other current assets, receivables and noncurrent assets (34,671 ) (69,421 ) (1,528 )
Amounts receivable/payable under government contracts 12,369 (492 ) 2,013
Reserves for claims and other settlements 244,985 336,364 (22,891 )
Accounts payable and other liabilities   44,434     (11,118 )   (11,954 )
Net cash provided by (used in) operating activities   587,955     (13,750 )   302,195  
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments 104,628 125,751 80,380
Maturities of investments 21,064 19,210 21,396
Purchases of investments (133,014 ) (102,873 ) (92,602 )
Purchases of property and equipment (18,439 ) (12,519 ) (15,831 )
Sales and purchases of restricted investments and other   2,002     (2,777 )   (2,108 )
Net cash (used in) provided by investing activities   (23,759 )   26,792     (8,765 )
 
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases 14,945 2,726 2,469
Repurchases of common stock (57,168 ) (1,226 ) (105 )
Excess tax benefits from share-based compensation 241 357 21
Borrowings under financing arrangements - - -
Repayment of borrowings under financing arrangements - - (25,000 )
Net increase (decrease) in checks outstanding, net of deposits - (713 ) (99,394 )
Customer funds administered   (10,753 )   (148,113 )   235,100  
Net cash (used in) provided by financing activities   (52,735 )   (146,969 )   113,091  
 
Net increase (decrease) in cash and cash equivalents 511,461 (133,927 ) 406,521
Cash and cash equivalents, beginning of period   603,097     737,024     279,618  
Cash and cash equivalents, end of period $ 1,114,558   $ 603,097   $ 686,139  
 
 
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 September 30, 2014

   

Quarter Ended June 30, 2014

   

Quarter Ended September 30, 2013

 
Western Region   Government   Corporate/ Western Region   Government  

Corporate/

Western Region   Government   Corporate/  
Operations1   Contracts2   Other4   Consolidated Operations1   Contracts2   Other5   Consolidated Operations1   Contracts2   Other3   Consolidated
   
Commercial premiums $ 1,430,769 $ 1,430,769 $ 1,377,460 $ 1,377,460 $ 1,279,834 $ 1,279,834
Medicare premiums 763,327 763,327 757,194 757,194 685,340 685,340
Medicaid premiums 1,397,732 1,397,732 1,121,912 1,121,912 641,580 641,580
Dual Eligibles premiums   39,789               39,789     5,312               5,312     0               0
Health plan services premiums 3,631,617 3,631,617 3,261,878 3,261,878 2,606,754 2,606,754
Government contracts 146,183 146,183 154,083 154,083 149,342 149,342
Net investment income 10,964 10,964 12,043 12,043 11,276 11,276
Administrative services fees and other income   1,106               1,106     (6,612 )             (6,612 )   7,659               7,659
Total revenues 3,643,687 146,183 3,789,870 3,267,309 154,083 3,421,392 2,625,689 149,342 2,775,031
Health plan services 3,104,010 3,104,010 2,763,179 2,763,179 2,196,561 2,196,561
Government contracts 123,571 832 124,403 132,634 574 133,208 125,841 (507 ) 125,334
Premium tax 53,417 53,417 31,930 31,930 33,399 33,399
Health insurer fee 31,947 31,947 37,844 37,844 - -
Other ACA fees 26,643 26,643 22,546 22,546 552 552
Administrative expenses   241,352           20,264       261,616     249,665           2,749       252,414     233,135           597       233,732
Total general and administrative 353,359 20,264 373,623 341,985 2,749 344,734 267,086 597 267,683
Selling 66,111 66,111 64,002 64,002 59,498 59,498
Depreciation and amortization 6,500 6,500 9,641 9,641 9,402 9,402
Interest 7,810 7,810 7,826 7,826 7,973 7,973
Asset impairment           84,690       84,690                              
Total expenses   3,537,790       123,571     105,786       3,767,147     3,186,633       132,634     3,323       3,322,590     2,540,520       125,841     90       2,666,451
Income (loss) from operations before income taxes 105,897 22,612 (105,786 ) 22,723 80,676 21,449 (3,323 ) 98,802 85,169 23,501 (90 ) 108,580
Income tax provision (benefit)   61,085       8,918     (38,341 )     31,662     42,874       8,942     (73,881 )     (22,065 )   32,184       9,591     (35 )     41,740
Income (loss) from operations $ 44,812     $ 13,694   $ (67,445 )   $ (8,939 ) $ 37,802     $ 12,507   $ 70,558     $ 120,867   $ 52,985     $ 13,910   $ (55 )   $ 66,840
 
Basic earnings (loss) per share $ 0.56 $ 0.17 $ (0.84 ) $ (0.11 ) $ 0.47 $ 0.16 $ 0.88 $ 1.51 $ 0.67 $ 0.18 $ - $ 0.84
Diluted earnings (loss) per share $ 0.55 $ 0.17 $ (0.84 ) $ (0.11 ) $ 0.47 $ 0.15 $ 0.87 $ 1.49 $ 0.66 $ 0.17 $ - $ 0.83
 
Basic weighted average shares outstanding 80,235 80,235 80,235 80,235 80,250 80,250 80,250 80,250 79,432 79,432 79,432 79,432
Diluted weighted average shares outstanding 81,513 81,513 80,235 80,235 81,218 81,218 81,218 81,218 80,441 80,441 79,432 80,441
 
 
Pretax margin 2.9 % 2.5 % 3.2 %
Commercial premium yield -0.3 % -0.4 % 2.6 %
Commercial premium PMPM $ 385.67 $ 378.91 $ 386.69
Commercial health care cost trend -0.7 % -3.4 % -0.3 %
Commercial health care cost PMPM $ 323.43 $ 311.85 $ 325.62
Commercial MCR 83.9 % 82.3 % 84.2 %
Medicare Advantage MCR 90.8 % 90.9 % 89.9 %
Medicaid MCR 84.2 % 83.6 % 79.4 %
Dual Eligibles MCR 87.4 % 60.0 % -
Health plan services MCR 85.5 % 84.7 % 84.3 %
Administrative expense ratio 6.6 % 7.7 % 8.9 %
Total G&A expense ratio 9.7 % 10.5 % 10.2 %
Selling costs ratio 1.8 % 2.0 % 2.3 %
 
 
1

Includes the operations of the company's commercial, Medicare, Medicaid and Dual Eligibles 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 reserve true-up related to previous accrual for severance expenses.
 
4 Includes primarily costs related to the company's entrance into a master services agreement and related asset purchase agreement with Cognizant and asset impairment of $84.7 million.
 
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 9/2014       FY 2013       FY 2012
 
Reserve for claims (a), beginning of period $ 807.4 $ 808.7 $ 720.8
Incurred claims related to:
Current Year (f) 4,121.1 4,666.0 4,950.9
Prior Years (c)   (16.9 )   (56.2 )   34.5
Total Incurred (b) 4,104.2 4,609.8 4,985.4
 
Paid claims related to:
Current Year 2,988.9 3,872.5 4,156.6
Prior Years   760.0     738.6     740.9
Total Paid (b)   3,748.9     4,611.1     4,897.5
 
 
Reserve for claims (a), end of period 1,162.7 807.4 808.7
Add:
Claims Payable (d) 129.4 67.0 91.6
Other (e) 441.2 109.7 137.7
     
 
Reserves for claims and other settlements, end of period $ 1,733.3   $ 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 nine months ended September 30, 2014, see Note 2 to the Consolidated Financial Statements in the company's Quarterly Report on Form 10-Q for the quarter ended September 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 $77 million, $53 million and $53 million as of September 30, 2014, December 31, 2013, and December 31, 2012, respectively.
 

Contacts

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

Contacts

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