Health Net Beats, Raises Outlook - Analyst Blog

Health Net Inc. (HNT) reported third-quarter earnings per share (EPS) of 64 cents compared to a loss of 66 cents in the prior-year quarter. The reported quarter included $8.6 million in expenses primarily related to severance costs. Excluding these items, the company's operating EPS came in at 72 cents, modestly surpassing the Zacks Consensus Estimate of 71 cents.

Health Net's Western Region Operations and Government Contracts segments produced combined net earnings of 74 cents in the reported quarter as opposed to 75 cents in the prior-year quarter.

Health Net reported a 14.5% year over year decline in total revenues to $3.4 billion. The primary reason for the decline was the sale of its Northeast businesses in December 2009 and a reduction in membership. Health Net's health plan services premium revenues also decreased by approximately 22.0% in the reported quarter to $2.5 billion.

Health plan services expenses plunged to $2.1 billion as against $2.7 billion in the prior-year quarter, while investment income plummeted to $19.5 million from $27.7 million in the prior-year quarter.

Segment Performance

Western Region:  The segment posted revenues of approximately $2.5 billion, flat with the year-ago quarter. Investment income for the segment declined 9% year over year to $19.2 million, while health plan services expenses were flat with the prior-year quarter at approximately $2.1 billion.

Total enrollment in the segment declined 1.7% to approximately 2.5 million members. Total commercial enrolment declined 6.4% to approximately 1.4 million members. While enrolment in the Medicaid business (896,000 members) recorded a year-over-year increase of 6.5%, enrolment in Medicare PDP plans (432,000 members) and Medicare Advantage plans (221,000 members) declined 7.3% and 1.8%, respectively.

Medical care ratio (MCR) for Health Net's health plan services in the segment declined 6 basis points (bps) to 86.3% during the quarter compared to 86.9% in the year-ago period. Commercial MCR declined 16 bps to 86.3%. While the Medicare Advantage MCR in the segment was 89.4% compared with 88.4% in the year-ago quarter, Medicare Part D MCR improved to 64.6% in the quarter compared with 65.9% in the prior-year quarter.

Government Contracts:  Revenues in the segment increased 13.5% in the quarter to $860.7 million from $758.5 million in the previous-year quarter. Year over year, cost ratio climbed slightly from 94.4% to 94.5%.

Northeast Operations:  Health Net continues to serve the members of the sold Northeast business to UnitedHealth Group Inc. (UNH) as per the agreement, the income from which has been shown separately. The revenues and expenses associated with the company's Northeast Operations in the quarter were $50.1 million and $57.8 million, respectively.

Financial Update

As of September 30, 2010, Health Net recorded cash and investments of $1.9 billion, compared with $1.8 billion as of September 30, 2009. However, the company's debt-to-total capital ratio declined to 22.7% at the end of the reported quarter as compared with 26.2% at the end of the prior-year quarter and 23.4% at the end of the previous quarter.

Nevertheless, Health Net's operating cash flow was recorded at a negative $54.3 million due to delays in the receipt of approximately $164 million in Medicaid payments in October 2010. Health Net's operating cash flow would have been approximately $109.7 million, had the payments been received during the third quarter of 2010.

Share Repurchase Update

During the reported quarter, Health Net repurchased 722,900 shares, at an average price of $26.82, for approximately $19.4 million. At the end of the quarter, the company had a balance of approximately $208.7 million remaining under the current $300 million share repurchase program.

Outlook

Health Net has provided its GAAP EPS guidance for 2010 at $2.07−$2.17, while the company has raised the EPS guidance to $2.55 to $2.58 per share ($2.50−$2.55 per share expected previously) for the combined Western Region Operations and Government Contracts segments for 2010.

The company has also provided guidance for year-end membership in the Western Region, with enrolment in the commercial business to be down 3%−4% (a fall of 1%−2% expected previously), PDP to be down 6%−7% and Medicare Advantage to be down 2%−3%, while enrolment in Medicaid is to be up 5%−6%.

Health Net also expects revenues for the combined Western Region and Government Contracts segments to be in the range of $13.0−$13.5 billion. Tax rate for Health Net is expected at 39.0% for 2010.

The company also expects selling cost ratio to be 2.4% in 2010, government contracts ratio to be in the range of 94.5%−95.0% and general and administrative expense ratio to be in the range of 8.8%−9.0% for 2010.

Management expects operating income for fiscal 2011 to be greater than in 2010, based on currently anticipated share repurchase activity in the fiscal.

Health Net Inc. (HNT) reported third-quarter earnings per share (EPS) of 64 cents compared to a loss of 66 cents in the prior-year quarter. The reported quarter included $8.6 million in expenses primarily related to severance costs. Excluding these items, the company's operating EPS came in at 72 cents, modestly surpassing the Zacks Consensus Estimate of 71 cents.

Health Net's Western Region Operations and Government Contracts segments produced combined net earnings of 74 cents in the reported quarter as opposed to 75 cents in the prior-year quarter.

Health Net reported a 14.5% year over year decline in total revenues to $3.4 billion. The primary reason for the decline was the sale of its Northeast businesses in December 2009 and a reduction in membership. Health Net's health plan services premium revenues also decreased by approximately 22.0% in the reported quarter to $2.5 billion.

Health plan services expenses plunged to $2.1 billion as against $2.7 billion in the prior-year quarter, while investment income plummeted to $19.5 million from $27.7 million in the prior-year quarter.

Segment Performance

Western Region:  The segment posted revenues of approximately $2.5 billion, flat with the year-ago quarter.

Investment income for the segment declined 9% year over year to $19.2 million, while health plan services expenses were flat with the prior-year quarter at approximately $2.1 billion.

Total enrollment in the segment declined 1.7% to approximately 2.5 million members. Total commercial enrolment declined 6.4% to approximately 1.4 million members. While enrolment in the Medicaid business (896,000 members) recorded a year-over-year increase of 6.5%, enrolment in Medicare PDP plans (432,000 members) and Medicare Advantage plans (221,000 members) declined 7.3% and 1.8%, respectively.

Medical care ratio (MCR) for Health Net's health plan services in the segment declined 6 basis points (bps) to 86.3% during the quarter compared to 86.9% in the year-ago period. Commercial MCR declined 16 bps to 86.3%. While the Medicare Advantage MCR in the segment was 89.4% compared with 88.4% in the year-ago quarter, Medicare Part D MCR improved to 64.6% in the quarter compared with 65.9% in the prior-year quarter.

Government Contracts:  Revenues in the segment increased 13.5% in the quarter to $860.7 million from $758.5 million in the previous-year quarter. Year over year, cost ratio climbed slightly from 94.4% to 94.5%.

Northeast Operations:  Health Net continues to serve the members of the sold Northeast business to UnitedHealth Group Inc. (UNH) as per the agreement, the income from which has been shown separately. The revenues and expenses associated with the company's Northeast Operations in the quarter were $50.1 million and $57.8 million, respectively.

Financial Update

As of September 30, 2010, Health Net recorded cash and investments of $1.9 billion, compared with $1.8 billion as of September 30, 2009. However, the company's debt-to-total capital ratio declined to 22.7% at the end of the reported quarter as compared with 26.2% at the end of the prior-year quarter and 23.4% at the end of the previous quarter.

Nevertheless, Health Net's operating cash flow was recorded at a negative $54.3 million due to delays in the receipt of approximately $164 million in Medicaid payments in October 2010. Health Net's operating cash flow would have been approximately $109.7 million, had the payments been received during the third quarter of 2010.

Share Repurchase Update

During the reported quarter, Health Net repurchased 722,900 shares, at an average price of $26.82, for approximately $19.4 million. At the end of the quarter, the company had a balance of approximately $208.7 million remaining under the current $300 million share repurchase program.

Outlook

Health Net has provided its GAAP EPS guidance for 2010 at $2.07−$2.17, while the company has raised the EPS guidance to $2.55 to $2.58 per share ($2.50−$2.55 per share expected previously) for the combined Western Region Operations and Government Contracts segments for 2010.

The company has also provided guidance for year-end membership in the Western Region, with enrolment in the commercial business to be down 3%−4% (a fall of 1%−2% expected previously), PDP to be down 6%−7% and Medicare Advantage to be down 2%−3%, while enrolment in Medicaid is to be up 5%−6%.

Health Net also expects revenues for the combined Western Region and Government Contracts segments to be in the range of $13.0−$13.5 billion. Tax rate for Health Net is expected at 39.0% for 2010.

The company also expects selling cost ratio to be 2.4% in 2010, government contracts ratio to be in the range of 94.5%−95.0% and general and administrative expense ratio to be in the range of 8.8%−9.0% for 2010.

Management expects operating income for fiscal 2011 to be greater than in 2010, based on currently anticipated share repurchase activity in the fiscal.