Health Net Reports Net Income of $77 Million or $.65 Per Diluted Share
Posted on: Thursday, 3 August 2006, 09:00 CDT
Health Net, Inc. (NYSE:HNT) today announced 2006 second quarter net income per diluted share of $.65 compared with net income per diluted share of $.47 in the second quarter of 2005, an increase of 38.3 percent. This comparison includes the effect of a $16,237,000 pretax charge, or $.08 per diluted share after tax, for one-time litigation and severance related expenses reported in the second quarter of 2005.
Excluding the second quarter 2005 after tax charge of $.08 per diluted share, earnings per diluted share for the second quarter of 2005 would have been $.55, resulting in a year-over-year increase in earnings per diluted share of approximately 18 percent compared to the $.65 earned in the second quarter of 2006. Management believes this comparison is a more accurate reflection of the change in the company's operating performance between the two periods.
Key highlights of Health Net's second quarter 2006 results included:
-- Total health plan enrollment at June 30, 2006 was
approximately 3.4 million, an increase of 22,000 compared with
the first quarter of 2006. This represents Health Net's first
sequential health plan enrollment increase in more than two
years. These results exclude the company's 288,000 Medicare
Part D prescription drug plan (PDP) members.
-- Medicare Part D PDP enrollment also grew in the second quarter
of 2006, increasing by 33,000 to 288,000 members at June 30,
2006.
-- Health Net's health plan medical care ratio (MCR) improved by
130 basis points, reaching 83.3 percent in the second quarter
of 2006 compared with 84.6 percent in the second quarter of
2005. This improvement was, in part, attributable to an
approximately 10 percent gain in the commercial gross margin
on a per member per month (PMPM) basis for the second quarter
of 2006 compared to the second quarter of 2005.
-- The company's pretax margin was 3.9 percent in the second
quarter of 2006, a 100 basis point improvement over the second
quarter of 2005.
-- Pretax income contribution from the Government contracts
segment increased by approximately 18 percent compared to the
second quarter of 2005.
-- At the end of the second quarter of 2006, Health Net began a
series of transactions related to the redemption of the
company's $400 million of Senior Notes due 2011. Health Net
expects to complete the redemption of the Senior Notes in the
third quarter of 2006. The company intends to record an $80
million pretax financing charge in its third quarter ending
September 30, 2006, related to the redemption.
"We are pleased to see that our progress continues with all parts of our diverse businesses showing strength. It is especially gratifying to report a turnaround in our health plan enrollment and we are on track to meet our full-year expectations," said Jay Gellert, president and chief executive officer of Health Net. "The year-over-year improvement in the health plan MCR shows that we have started to add commercial enrollment in certain markets while maintaining our pricing discipline.
"Our strength allows us to invest in our businesses, as we did in the second quarter and as we plan to do for the balance of the year. We see excellent potential in commercial, Medicare and other government programs, and in our behavioral health unit. We are poised to take advantage of all these opportunities to continue to build our company," Gellert added.
Revenues
Health Net's total revenues increased 8.2 percent in the second quarter of 2006 to $3,266,122,000 from $3,019,857,000 in the second quarter of 2005. Health plan revenues increased 9.7 percent to $2,622,848,000 in the second quarter of 2006 compared to $2,390,679,000 in the second quarter of 2005. In the second quarter of 2006, Health Net's Government contracts revenue rose less than 1 percent from the second quarter of 2005, increasing by $4,901,000 to $615,557,000.
"Health plan revenues reflect our ongoing pricing discipline, improved commercial enrollment trends and approximately $74 million of premiums from our Universal Care acquisition," said Buddy Piszel, executive vice president and chief financial officer of Health Net.
Commercial premium yields PMPM increased 7.5 percent in the second quarter of 2006 compared to the second quarter of 2005. "We continue to track to our full year target of an approximate 8 percent increase in commercial yields, including the impact of our Universal Care acquisition," noted Piszel.
Total health plan enrollment increased by approximately 22,000 members in the second quarter of 2006 compared to the first quarter of 2006. Over the same period, Medicaid enrollment increased by approximately 15,000 members and Medicare Risk enrollment grew by nearly 7,000 members.
Commercial enrollment, including both at-risk and Administrative Services Only (ASO) membership, was unchanged in the second quarter of 2006 compared to the first quarter of 2006. California commercial enrollment climbed by 8,000 members over the same period.
"Our focus on broker relationships, renewed advertising and product innovations are having the intended effect," said Piszel. "In fact, new commercial members added by all health plans in the second quarter of 2006 were almost two and one-half times higher than in the second quarter of 2005," Piszel explained. "We are committed to making the necessary investments to support growth."
Health Care Costs
The health plan MCR improved to 83.3 percent in the second quarter of 2006 from 84.6 percent in the second quarter of 2005.
Commercial health care costs rose by 6.9 percent PMPM between the second quarters of 2005 and 2006.
"The trend a year ago was 9.3 percent and we continue to see commercial trends that are better than expected. We now believe the year-over-year trend will be at the low end of our previous expectations," Piszel stated.
The Government contracts cost ratio of 94.2 percent in the second quarter of 2006 represented a 90 basis point improvement compared with the second quarter of 2005.
"We are very proud of the work we do for TRICARE beneficiaries. This quarter, we saw the impact of our cost containment efforts and increasing stability in the program," Piszel added.
Administrative Expenses
In the second quarter of 2006, total general, administrative and depreciation expenses increased by $55,829,000 to $300,019,000 compared to $244,190,000 in the second quarter of 2005. The increase was due to spending for Medicare and other marketing activities, incremental costs associated with the Universal Care acquisition, new business bid costs at our behavioral health subsidiary, and the impact of expensing stock options. Total general, administrative and depreciation expenses increased by $4,438,000 in the second quarter of 2006 compared to the $295,581,000 recorded in the first quarter of 2006.
"In addition to approximately $2.2 million in one-time expenses to complete the Universal Care transition, and approximately $2.5 million in one-time costs for a substantial new government bid in our behavioral health unit, second quarter administrative expenses included approximately $10 million of new investments in advertising, market research, products and additional staff, among others," Piszel commented. "This led to higher administrative expenses that we expect to continue. Therefore, we expect the administrative expense ratio to stay above 11 percent for the balance of the year. We believe these investments will lead to continuing profitable future growth."
Debt Refinancing
On June 23, 2006, the company began a series of transactions related to the redemption of its $400 million of Senior Notes due 2011, including the execution of a bridge loan facility and a term loan credit facility. These facilities provided Health Net with an aggregate of $500 million of gross proceeds. Health Net used the net proceeds from the bridge loan and the term loan to purchase U.S. Treasury securities, which were pledged as collateral to secure the Senior Notes and will provide sufficient funds to make all of the remaining principal and interest payments on the Senior Notes. As a result of the company's pledge of the collateral to secure the Senior Notes, Moody's Investors Service and Standard & Poor's Ratings Services upgraded the company's Senior Notes to investment grade.
Balance Sheet Highlights
Cash and investments as of June 30, 2006 were $2,208,508,000 compared with $2,226,610,000 as of March 31, 2006.
Reserves for claims and other settlements decreased by $10,143,000 to $976,382,000 at June 30, 2006 from $986,525,000 at March 31, 2006.
Days claims payable (DCP) declined by 2.3 days to 40.9 days in the second quarter of 2006, from 43.2 days in the first quarter of 2006, and declined by 9.0 days compared with 49.9 days in the second quarter of 2005. These amounts include the effects of provider settlements, capitation payments and Medicare Part D.
DCP, excluding provider settlements, capitation payments and the impact of Medicare Part D expenses, declined by 7.5 days to 52.8 days in the second quarter of 2006, compared to 60.3 days in the second quarter of 2005. DCP declined by 5.3 days compared to the first quarter of 2006 (see note (b) to the company's Notes to Condensed Consolidated Statements of Operations in the attached tables). The company employs an average claims reserves methodology in calculating DCP.
Period-end adjusted reserves at the end of the second quarter of 2006 were essentially equal to the period-end adjusted reserves at the end of the first quarter of 2006. However, average adjusted reserves at the end of the second quarter of 2006 were approximately $31.8 million less than the average adjusted reserves at the end of the first quarter of 2006 due to the high level of paid claims in the first quarter of 2006. The majority of the DCP change, approximately 3 days, can be attributed to this fact.
The remaining DCP reduction is comprised of 1 day due to the impact of Universal Care membership, and approximately 1.5 days due to the annual second quarter shared risk settlement payment and other factors.
"We know that there are a number of important factors to consider on the issue of reserves generally," Piszel continued. "We have been paying claims faster. Our inventories have been getting progressively smaller and younger over the past several quarters, and our paid claims in the first half of this year were $145 million higher than in the second half of last year."
In the second quarter of 2006, the company announced that it would redeem its outstanding Senior Notes. Due to the nature of the redemption-related transactions, the company is carrying both the old debt and the new debt incurred in connection with the redemption on its June 30 balance sheet. By the end of the third quarter of 2006, only the new debt will remain and the company expects that its debt-to-total capital ratio will be approximately 20 percent. The debt-to-total capital ratio at June 30, 2006 was 33.0 percent.
Interest expense increased in the second quarter of 2006 by $2,906,000 compared with the second quarter of 2005 due to higher market interest rates.
Cash Flow
Operating cash flow was negative $6,933,000 in the second quarter of 2006 compared to negative operating cash flow of $10,720,000 in the second quarter of 2005. Operating cash flow was less than net income in the second quarter of 2006 due to a build-up of Medicare Part D and risk-adjuster receivables of approximately $50 million, payments to settle provider disputes of approximately $16 million, and other timing events of approximately $16 million, including Health Net's annual second quarter shared risk settlement payment.
"As we look to the balance of the year, we expect operating cash flow to be strong. We anticipate that cash flow for the full year will be approximately 1.1 times net income, excluding provider settlement payments and the payment made in conjunction with the MDL settlement," Piszel added.
Outlook
Health Net believes that its earnings per diluted share for the full year 2006 will be between $3.00 and $3.05. The company historically experiences earnings distribution of approximately 45 percent in the first half of the year and approximately 55 percent in the second half of the year. The company previously reported that it expects its 2006 earnings distribution to be more weighted to the second half of the year due to the anticipated impact of the Universal Care acquisition and the concentration of earnings from Medicare Part D expected to occur in the third and fourth quarters of 2006.
In the third quarter of 2006, the company expects to record an approximately $33 million tax benefit, which is expected to have a positive impact on 2006 earnings of approximately $.28 per diluted share. The tax benefit results from the realization of capital losses following the sale of several inactive subsidiaries. This benefit is not included in the guidance above.
The company intends to record an approximately $80 million pretax financing charge in the third quarter of 2006, related to redemption of its $400 million of Senior Notes due 2011. The impact of this charge also is not included in the guidance above.
Conference Call
As previously announced, Health Net will discuss the company's second quarter results during a conference call scheduled on Thursday, August 3, 2006, at approximately 11:00 a.m. Eastern Time. To listen to the call, please dial 888-569-5033, code 7700481. A live webcast and replay of the conference call also will be available at www.healthnet.com. The conference call webcast is open to all interested parties. A replay of the conference call will be available from August 3, 2006 through August 7, 2006, by dialing 888-203-1112, code 7700481. 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, 2005, quarterly report on Form 10-Q for the first quarter ended March 31, 2006, and other reports filed by the company from time to time with the Securities and Exchange Commission.
About Health Net
Health Net, Inc. is among the nation's largest publicly traded managed health care companies. Its mission is to help people be healthy, secure and comfortable. The company's HMO, POS, insured PPO and government contracts subsidiaries provide health benefits to approximately 6.6 million individuals in 27 states and the District of Columbia through group, individual, Medicare, Medicaid and TRICARE and Veterans Affairs programs. Health Net's behavioral health subsidiary, MHN, provides mental health benefits to approximately 7.3 million individuals in all 50 states. 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 Web site at www.healthnet.com.
Cautionary Statements
This release contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, that involve a number of risks and uncertainties. All statements, other than statements of historical information provided herein, may be deemed to be forward-looking statements. 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, 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, rising health care costs, negative prior period claims reserve developments, trends in medical care ratios, issues relating to provider contracts, litigation costs, operational issues, health care reform and general business 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. Readers are cautioned not to place undue reliance on these forward-looking statements. The company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date of this release.
Health Net, Inc. Condensed Consolidated Statements of Operations (Amounts in thousands, except per share and ratio data) Second Third Fourth Quarter Quarter Quarter Ended Ended Ended June September December 30, 30, 31, REVENUES: 2005 2005 2005 ----------- ----------- ----------- Health plan services premiums $2,390,679 $2,398,100 $2,367,057 Government contracts 610,656 639,626 560,491 Net investment income 17,213 19,536 20,239 Other income 1,309 1,511 2,371 ----------- ----------- ----------- Total revenues 3,019,857 3,058,773 2,950,158 ----------- ----------- ----------- EXPENSES: Health plan services 2,023,174 2,000,661 1,952,309 Government contracts 580,685 614,794 535,800 General and administrative 233,723 241,847 266,043 Selling 56,082 55,000 53,200 Depreciation 10,467 4,007 4,220 Amortization 861 861 861 Interest 10,543 11,789 11,690 ----------- ----------- ----------- 2,915,535 2,928,959 2,824,123 Litigation and severance related costs 16,237 (a) - - ----------- ----------- ----------- Total expenses 2,931,772 2,928,959 2,824,123 ----------- ----------- ----------- Income from operations before income taxes 88,085 129,814 126,035 Income tax provision 34,522 51,609 49,366 ----------- ----------- ----------- Net income $53,563 $78,205 $76,669 =========== =========== =========== Basic earnings per share $0.48 $0.69 $0.67 Diluted earnings per share $0.47 $0.67 $0.65 Weighted average shares outstanding: Basic 112,451 113,371 114,276 Diluted 114,851 116,543 117,902 Pretax margin (Income from operations before income taxes / Total revenues) 2.9% 4.2% 4.3% Health plan services MCR 84.6% 83.4% 82.5% Government contracts cost ratio 95.1% 96.1% 95.6% Administrative ratio ((G&A+Dep) / (HP serv rev + Other income)) 10.2% 10.2% 11.4% Selling costs ratio (Selling costs / HP serv rev) 2.3% 2.3% 2.2% Days claims payable (b) 49.9 48.8 49.4 Days claims payable - adjusted (b) 60.3 61.1 63.5 Effective tax rate 39.2% 39.8% 39.2% Health plan services premiums PMPM $235.03 $240.10 $241.13 Health plan services costs PMPM $198.90 $200.31 $198.88 First Second Quarter Quarter Ended Ended March 31, June 30, REVENUES: 2006 2006 ----------- ----------- Health plan services premiums $2,546,130 $2,622,848 Government contracts 615,897 615,557 Net investment income 23,359 26,256 Other income 1,244 1,461 ----------- ----------- Total revenues 3,186,630 3,266,122 ----------- ----------- EXPENSES: Health plan services 2,108,712 2,185,641 Government contracts 587,980 580,052 General and administrative 290,823 295,064 Selling 56,611 59,630 Depreciation 4,758 4,955 Amortization 591 1,275 Interest 12,226 13,449 ----------- ----------- 3,061,701 3,140,066 Litigation and severance related costs - - ----------- ----------- Total expenses 3,061,701 3,140,066 ----------- ----------- Income from operations before income taxes 124,929 126,056 Income tax provision 48,336 49,023 ----------- ----------- Net income $76,593 $77,033 =========== =========== Basic earnings per share $0.67 $0.67 Diluted earnings per share $0.65 $0.65 Weighted average shares outstanding: Basic 114,594 115,213 Diluted 118,398 118,305 Pretax margin (Income from operations before income taxes / Total revenues) 3.9% 3.9% Health plan services MCR 82.8% 83.3% Government contracts cost ratio 95.5% 94.2% Administrative ratio ((G&A+Dep) / (HP serv rev + Other income)) 11.6% 11.4% Selling costs ratio (Selling costs / HP serv rev) 2.2% 2.3% Days claims payable (b) 43.2 40.9 Days claims payable - adjusted (b) 58.1 52.8 Effective tax rate 38.7% 38.9% Health plan services premiums PMPM $246.89 $243.96 Health plan services costs PMPM $204.48 $203.29 Health Net, Inc. Condensed Consolidated Balance Sheets (Amounts in thousands, except ratio data) June September December 30, 30, 31, 2005 2005 2005 ----------- ----------- ----------- ASSETS Current Assets Cash and cash equivalents $939,057 $1,027,848 $742,485 Investments - available for sale 1,060,936 1,150,738 1,363,818 Premiums receivable, net 119,776 127,020 132,019 Amounts receivable under government contracts 139,540 122,295 122,796 Incurred but not reported (IBNR) health care costs receivable under TRICARE North contract 184,214 263,329 265,517 Other receivables 89,437 85,873 79,572 Deferred taxes 100,277 110,445 93,899 Restricted assets for senior notes redemption - - - Other assets 118,904 107,618 111,512 ----------- ----------- ----------- Total current assets 2,752,141 2,995,166 2,911,618 Property and equipment, net 103,314 112,218 125,773 Goodwill, net 723,595 723,595 723,595 Other intangible assets, net 20,132 19,271 18,409 Deferred taxes 26,941 29,527 31,060 Other noncurrent assets 148,647 143,555 130,267 ----------- ----------- ----------- Total Assets $3,774,770 $4,023,332 $3,940,722 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Reserves for claims and other settlements $1,065,465 $1,057,848 $1,040,171 Health care and other costs payable under government contracts 131,909 62,778 62,536 IBNR health care costs payable under TRICARE North contract 184,214 263,329 265,517 Unearned premiums 97,038 218,527 106,586 Bridge loan - - - Senior notes payable - - - Accounts payable and other liabilities 385,995 404,362 364,266 ----------- ----------- ----------- Total current liabilities 1,864,621 2,006,844 1,839,076 Senior notes payable 400,659 391,106 387,954 Term loan - - - Other noncurrent liabilities 116,824 123,376 124,617 ----------- ----------- ----------- Total Liabilities 2,382,104 2,521,326 2,351,647 ----------- ----------- ----------- Stockholders' Equity Common stock and additional paid-in capital 861,595 899,400 911,672 Treasury common stock, at cost (632,926) (633,153) (633,375) Retained earnings 1,169,291 1,247,496 1,324,165 Accumulated other comprehensive loss (5,294) (11,737) (13,387) ----------- ----------- ----------- Total Stockholders' Equity 1,392,666 1,502,006 1,589,075 ----------- ----------- ----------- $3,774,770 $4,023,332 $3,940,722 =========== =========== =========== Debt-to-Total Capital Ratio 22.3% 20.7% 19.6% March 31, June 30, 2006 2006 ----------- ----------- ASSETS Current Assets Cash and cash equivalents $870,224 $825,925 Investments - available for sale 1,356,386 1,382,583 Premiums receivable, net 171,977 229,133 Amounts receivable under government contracts 143,625 135,433 Incurred but not reported (IBNR) health care costs receivable under TRICARE North contract 295,800 318,827 Other receivables 84,414 116,258 Deferred taxes 99,866 57,141 Restricted assets for senior notes redemption - 499,557 Other assets 147,600 159,662 ----------- ----------- Total current assets 3,169,892 3,724,519 Property and equipment, net 136,727 144,436 Goodwill, net 751,949 751,949 Other intangible assets, net 47,062 45,532 Deferred taxes 46,560 48,574 Other noncurrent assets 137,645 132,186 ----------- ----------- Total Assets $4,289,835 $4,847,196 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Reserves for claims and other settlements $986,525 $976,382 Health care and other costs payable under government contracts 62,529 60,325 IBNR health care costs payable under TRICARE North contract 295,800 318,827 Unearned premiums 324,063 338,611 Bridge loan - 200,000 Senior notes payable - 376,052 Accounts payable and other liabilities 434,605 389,130 ----------- ----------- Total current liabilities 2,103,522 2,659,327 Senior notes payable 379,983 - Term loan - 300,000 Other noncurrent liabilities 129,507 108,222 ----------- ----------- Total Liabilities 2,613,012 3,067,549 ----------- ----------- Stockholders' Equity Common stock and additional paid-in capital 932,254 967,265 Treasury common stock, at cost (636,252) (640,623) Retained earnings 1,400,758 1,477,791 Accumulated other comprehensive loss (19,937) (24,786) ----------- ----------- Total Stockholders' Equity 1,676,823 1,779,647 ----------- ----------- $4,289,835 $4,847,196 =========== =========== Debt-to-Total Capital Ratio 18.5% 33.0% Health Net, Inc. Condensed Consolidated Statements of Cash Flows (Amounts in thousands) Second Third Fourth Quarter Quarter Quarter Ended Ended Ended June September December 30, 30, 31, 2005 2005 2005 -------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $53,563 $78,205 $76,669 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization and depreciation 11,328 4,868 5,081 Share-based compensation expense - - - Other changes 3,100 3,229 3,032 Changes in assets and liabilities, net of the effects of dispositions: Premiums receivable and unearned premiums (14,556) 114,245 (116,940) Other receivables, deferred taxes and other assets (14,336) 4,901 18,476 Amounts receivable/payable under government contracts (1,754) (51,886) (743) Reserves for claims and other settlements (89,826) (7,617) (17,677) Accounts payable and other liabilities 41,761 28,826 (35,706) -------------------------------- Net cash provided by (used in) operating activities (10,720) 174,771 (67,808) -------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Sales of investments 184,483 13,283 179,102 Maturities of investments 38,653 20,215 41,037 Purchases of investments (143,776) (126,917) (437,250) Proceeds from sale of property and equipment 79,395 417 - Purchases of property and equipment (7,441) (13,242) (17,738) Cash received from sale (paid for acquisition) of businesses - - - Sales and purchases of restricted investments and other 13,460 (8,840) 9,093 -------------------------------- Net cash (used in) provided by investing activities 164,774 (115,084) (225,756) -------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options and employee stock purchases 19,161 29,331 8,423 Repurchases of common stock - (227) (222) Excess tax benefits from share-based compensation - - - Borrowings under term and bridge loan agreements Net Medicare Part D deposits (payments) - - - -------------------------------- Net cash provided by financing activities 19,161 29,104 8,201 -------------------------------- Net increase (decrease) in cash and cash equivalents 173,215 88,791 (285,363) Cash and cash equivalents, beginning of period 765,842 939,057 1,027,848 -------------------------------- Cash and cash equivalents, end of period $939,057 $1,027,848 $742,485 ================================ First Second Quarter Quarter Ended Ended March 31, June 30, 2006 2006 ---------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $76,593 $77,033 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization and depreciation 5,349 6,230 Share-based compensation expense 4,435 5,195 Other changes 4,344 4,002 Changes in assets and liabilities, net of the effects of dispositions: Premiums receivable and unearned premiums 177,519 (42,608) Other receivables, deferred taxes and other assets (41,899) (107) Amounts receivable/payable under government contracts (20,836) 5,988 Reserves for claims and other settlements (53,647) (10,143) Accounts payable and other liabilities 34,046 (52,523) ---------------------- Net cash provided by (used in) operating activities 185,904 (6,933) ---------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Sales of investments 228,995 44,374 Maturities of investments 15,770 30,248 Purchases of investments (252,973) (110,683) Proceeds from sale of property and equipment - - Purchases of property and equipment (15,730) (12,679) Cash received from sale (paid for acquisition) of businesses (73,100) (494) Sales and purchases of restricted investments and other (9,027) (496,943) ---------------------- Net cash (used in) provided by investing activities (106,065) (546,177) ---------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options and employee stock purchases 10,380 20,895 Repurchases of common stock (1,724) (1,107) Excess tax benefits from share-based compensation 3,099 2,221 Borrowings under term and bridge loan agreements 497,334 Net Medicare Part D deposits (payments) 36,145 (10,532) ---------------------- Net cash provided by financing activities 47,900 508,811 ---------------------- Net increase (decrease) in cash and cash equivalents 127,739 (44,299) Cash and cash equivalents, beginning of period 742,485 870,224 ---------------------- Cash and cash equivalents, end of period $870,224 $825,925 ====================== Health Net, Inc. Notes to Condensed Consolidated Statements of Operations Notes: (a) Pretax $15.9 million charge representing total estimated legal defense costs associated with the AmCareco case, and $0.3 million for severance and related benefit costs related to our workforce reduction announced in May 2004. (b) Management believes that days claims payable (excluding capitation, provider settlements and Medicare Part D), a non-GAAP financial measure, provides useful information to investors because, in excluding those health care costs for which no or minimal reserves are maintained, it is a more accurate reflection of days claims payable calculated from claims-based reserves than is days claims payable, which does not exclude 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 days claims payable (excluding capitation, provider settlements and Medicare Part D) and days claims payable, the most directly comparable financial measure calculated and presented in accordance with GAAP: Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006 --------------------------------------------- (Dollars in millions) Reserve for Claims and Other Settlements $1,065.5 $1,057.8 $1,040.2 $986.5 $976.4 Less: Capitation Payable, Provider Settlements and Medicare Part D ($132.8) ($105.2) ($95.4) ($120.5) ($110.3) --------------------------------------------- Adjusted Reserve for Claims and Other Settlements $932.7 $952.6 $944.8 $866.0 $866.1 (1)Average Reserve for Claims and Other Settlements $1,110.4 $1,061.7 $1,049.0 $1,013.3 $981.5 (2)Average Adjusted Reserve for Claims and Other Settlements $959.1 $942.7 $948.7 $905.4 $866.1 (3)Health Plan Services Cost $2,023.2 $2,000.7 $1,952.3 $2,108.7 $2,185.6 Less: Capitation Payments, Provider Settlements and Medicare Part D ($576.4) ($580.8) ($578.5) ($705.9) ($692.6) --------------------------------------------- (4)Adjusted Health Plan Services Cost $1,446.8 $1,419.9 $1,373.8 $1,402.8 $1,493.0 (5)Number of Days in Period 91 92 92 90 91 = (1) / (3) x (5) Days Claims Payable 49.9 48.8 49.4 43.2 40.9 = (2) / (4) x (5) Days Claims Payable (Excl. Capitation, Provider Settlements and Medicare Part D) 60.3 61.1 63.5 58.1 52.8 HEALTH NET, INC. Medical Covered Lives at June 30, 2006 (in Thousands) Commercial - Large Commercial - Commercial Risk Group(a) Small Group & Subtotal Individual -------------------- ----------------- ------------------- 6/06 3/06 6/05 6/06 3/06 6/05 6/06 3/06 6/05 ------ ------ ------ ----- ----- ----- ------ ------ ----- Arizona 72 71 66 47 47 52 119 118 119 California 1,063 1,055 1,104 422 421 413 1,485 1,477 1,517 Connecticut 156 161 181 31 28 35 187 189 216 New Jersey 47 47 67 58 64 90 105 110 157 New York 120 117 121 96 98 104 216 215 224 Oregon 99 101 102 37 37 35 136 138 138 ------ ------ ------ ----- ----- ----- ------ ------ ----- Total 1,557 1,552 1,642 691 694 729 2,248 2,247 2,371 ====== ====== ====== ===== ===== ===== ====== ====== ===== Year over Year (5)% (5)% (5)% Sequential 0% (0)% 0% ------ ------ ------ ----- ----- ----- ------ ------ ----- ASO Commercial Subtotal ----- ----- ----- -------------------- 6/06 3/06 6/05 6/06 3/06 6/05 ----- ----- ----- ------ ------ ------ Arizona - - - 119 118 119 California 5 6 7 1,490 1,482 1,524 Connecticut 69 70 69 256 259 285 New Jersey 20 20 18 125 130 176 New York 17 17 21 233 232 245 Oregon - - 1 136 138 138 ----- ----- ----- ------ ------ ------ Total 111 113 116 2,359 2,360 2,487 ===== ===== ===== ====== ====== ====== Year over Year (4)% (5)% Sequential (2)% (0)% ----- ----- ----- ------ ------ ------ Medicare Risk Medicaid Health Plan Total -------------------- ----------------- ------------------- 6/06 3/06 6/05 6/06 3/06 6/05 6/06 3/06 6/05 ------ ------ ------ ----- ----- ----- ------ ------ ----- Arizona 35 33 31 - - - 154 151 150 California 104 103 93 726 713 700 2,320 2,298 2,316 Connecticut 32 29 27 87 87 94 375 375 406 New Jersey - - - 47 45 42 172 175 217 New York 7 7 6 - - - 240 239 251 Oregon 19 18 14 - - - 155 157 153 ------ ------ ------ ----- ----- ----- ------ ------ ----- Total 197 190 171 860 845 836 3,416 3,394 3,493 ====== ====== ====== ===== ===== ===== ====== ====== ===== Year over Year 15% 3% (2)% Sequential 4% 2% 1% ------ ------ ------ ----- ----- ----- ------ ------ ----- ------ ------ ------ 6/06 3/06 6/05 ------ ------ ------ Medicare PDP (Stand- Alone) 288 255 - ------ ------ ------ 6/06 3/06 6/05 ------ ------ ------ TRICARE North Contract(b) 2,932 2,941 2,946 (a) Commercial Large Group includes Medicare Supplement (b) Includes Tricare eligible for which we have health care risk, and those for which we provide Administrative Services Only (ASO), primarily active duty Health Net, Inc. Reconciliation of Reserves for Claims and Other Settlements (In millions) Health Plan Services -------------------------------- YTD 6/2006 Year 2005 Year 2004 ---------- ---------- ---------- Reserve for claims (a), beginning of period $768.7 $794.6 $777.1 Incurred claims related to: Current Year 2,601.3 5,130.4 5,048.3 Prior Years (c) (75.7) (114.5) 8.7 ---------- ---------- ---------- Total Incurred (b) 2,525.6 5,015.9 5,057.0 Paid claims related to: Current Year 1,959.0 4,401.3 4,286.9 Prior Years 642.5 640.5 752.6 ---------- ---------- ---------- Total Paid (b) 2,601.5 5,041.8 5,039.5 Reserve for claims (a), end of period 692.8 768.7 794.6 Add: Claims Payable 178.1 177.2 288.3 Other (d) 105.5 94.3 86.4 ---------- ---------- ---------- Reserves for claims and other settlements, end of period $976.4 $1,040.2 $1,169.3 ========== ========== ========== (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 accrued capitation, shared risk settlements, provider incentives and other reserve items.Source: Business Wire
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