Health Net Outshines Estimate - Analyst Blog

 (

) reported second quarter earnings per share (

) of 45 cents compared to earnings of 38 cents in the first quarter of 2009. The reported quarter included $24.9 million in charges arising from cost cuts and other expenses, partially offset by a net benefit of $3.2 million arising from various business operations. Excluding these items, the company’s operating EPS came in at 61 cents, modestly surpassing the Zacks Consensus Estimate of 55 cents.

Health Net reported a 14.2% year over year decline in revenues to $3.4 billion. The primary reason for the decline was a reduction in membership.

The company earns revenues in the form of health plan service premiums, government contracts, northeast administrative services fees, net investment income and administrative services, fees and other income. Health Net continues to serve members of the Northeast business under an agreement with

(

) , the income from which has been shown separately.

Health plan services premium, accounting for approximately 74% of total revenues during the quarter, declined 20.5% year over year to $2.5 billion. Revenues from government contracts increased 2.4% to $851.9 million during the reported quarter. At the end of the reported quarter, total health plan enrolment in Health Net’s Western health plans declined 3.9% to 3 million members.

Total commercial enrolment declined 9.3% to 1.4 million members. While enrolment in the Medicaid (877,000 members) recorded a year over year increase of 6.0%, enrolment in Medicare PDP plans (457,000 members) and Medicare Advantage plans (219,000 members) declined 5.2% and 1.8%, respectively.

Medical care ratio (

) for Health Net’s health plan services declined 6 basis points (bps) to 87.1% during the quarter compared to 86.5% in the year-ago period. In addition, the commercial MCR in the company’s Western health plans declined 2 bps to 86.3%.

At the end of June 30, 2010, Health Net recorded cash and investments of $1.9 billion, compared with $2.1 billion as on June 30, 2009. However, the company’s debt-to-total capital ratio declined to 23.4% at the end of the reported quarter, as compared with 26.2% as on December 31, 2009 and 25.2% as on June 30, 2009. This was primarily attributable to an early debt retirement in May 2010. Nevertheless, Health Net’s operating cash flow was recorded at a negative $16.3 million due to increase in premiums receivable and the sequential decline in reserves for claims and other settlements.

Share Repurchase Update

During the reported quarter, Health Net repurchased 2.9 million shares, at an average price of $24.35 per share, for approximately $70.1 million. At the end of June 30, 2010, the company had a balance of approximately $228.1 million, remaining under the current $300 million share repurchase program.

Health Net has raised its EPS guidance for 2010. The company has also provided a detailed break-up of its health plan enrolment expectations. While enrolment in the Commercial (down 1%-2%), PDP (down 6%-7%) and Medicare Advantage (down 2%-3%) plans are likely to decline, enrolment in Medicaid (up 5%-6%) plans are likely to go up.  Health Net expects revenues in the range of $13.0-$13.5 billion and adjusted EPS in the range of $2.50 - $2.55, up from the earlier guidance of $2.37 - $2.47. Estimates for GAAP EPS has also been raised to $2.07-$2.17 from $1.97-$2.07. Cash flow is projected in the range of $300-$325 million.

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