![]() Jay Gellert President & Chief Executive Officer March 10, 2010 Cowen and Company 30 th Annual Health Care Conference Exhibit 99.1 |
![]() 2 Cautionary Statement Cautionary Statement All statements in this presentation, 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, costs, fees and expenses related to the post-closing administrative services to be provided under the administrative services agreements entered into in connection with the sale of our Northeast business; potential termination of the administrative services agreements by the service recipients should we 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; potential termination of our TRICARE North operations; potential health care reform; rising health care costs; continued recessionary economic conditions or a further decline in the economy; negative prior period claims reserve developments; trends in medical care ratios; unexpected utilization patterns or unexpectedly severe or widespread illnesses; membership declines; rate cuts affecting our Medicare or Medicaid businesses; litigation costs; regulatory issues; 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 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 presentation. |
![]() 3 Non-GAAP Measures Non-GAAP Measures • This presentation includes quarterly income statement measurements that are not calculated and presented in accordance with Generally Accepted Accounting Principles. Audience participants should refer to the attached reconciliation table, which reconciles certain non-GAAP financial information to GAAP financial information. • Management believes that the non-GAAP financial information discussed in this presentation is useful as it provides the audience a basis to better understand the company’s results by excluding items that are not indicative of our core operating results for the periods presented. |
![]() 4 2009 Summary 2009 Summary • Improve Medicare performance • Solidify commercial base • Close Northeast transaction • Strengthen balance sheet • Strong TRICARE performance • Position for the future |
![]() 5 2010 Earnings Guidance 2010 Earnings Guidance Year-end Membership • Commercial: -1% to -2% • Medicaid: +5% to +6% • Medicare Advantage: -2% to -3% • PDP: +1% to +2% Consolidated Revenues $13 billion to $13.5 billion Commercial Premium Yields (b) ~ 8.3% to 8.8% (Western Region 2009: ~$316 PMPM) Commercial Health Care Cost Trends (b) ~ 20-40 bps < Premium Yields (Western Region 2009: ~$274 PMPM) Selling Cost Ratio ~ 2.4% Gov’t Contracts Ratio ~ 94.5% to 95% G&A Expense Ratio ~ 8.8% to 9% Tax Rate ~ 39% Weighted-average Fully Diluted Shares Outstanding 103 million – 104 million GAAP EPS Non-GAAP EPS (a) $1.92 to $2.02 $2.32 to $2.42 (a) Excludes approximately $69 million in pretax charges. These charges include approximately $53 million related to the wind-down of the company’s Northeast businesses and approximately $16 million related to the company’s operations strategy. (b) Commercial premium yields and commercial health care cost comparisons are on a same-store basis for the company’s Western health plans only for both 2009 and 2010. |
![]() Earnings Earnings Guidance Guidance Bridge Bridge 2009-2010 2009-2010 (a) (a) • Expect pretax margin to improve by ~60 basis points • G&A ratio to improve by 70 to 90 basis points • Health plan MCR to rise by ~20 basis points • Selling costs improve by ~30 basis points • Government contracts cost ratio flat • Net non-operating gains lower by ~30 basis points • Expect typical earnings seasonality – 40 percent in first half of 2010 and 60 percent in second half of 2010 6 (a) Excludes the impact of charges taken during 2009 and charges expected during 2010. Also excludes revenues and expenses associated with the run-out of the Northeast business. This information is non-GAAP financial information. A reconciliation of non-GAAP financial measures is attached as an Appendix to this presentation. |
![]() 7 Commercial Opportunities Commercial Opportunities • Product mix aligned with market changes • Lower-cost, narrow network products gaining traction – Interest in narrow networks resulting from economy – Key to small group and mid-market growth • Further margin expansion – Disciplined pricing and stable health care costs – Beneficial product and geographic mix changes • Positioned for growth resulting from ongoing environmental changes |
![]() 8 Medicare Strategy Medicare Strategy • Built on network-model MA plans • Exited Private Fee-for-Service in 2010 • “Staying the course” in Part D • Positioned for margin stability in the future |
![]() 9 Government & Specialty Services Government & Specialty Services • Stable financial performance • TRICARE update – DoD to follow GAO recommendations – will review unfair competitive advantage issue first; if necessary, will evaluate other flaws identified in GAO decision – No timeline for concluding review given – DoD has given formal intent to exercise Option Periods under current contract through March 31, 2011 • Growth opportunities – MHN (behavioral health subsidiary) – Veterans Affairs |
![]() 10 Repositioning G&A Repositioning G&A • G&A reductions an integral part of margin expansion • Made necessary investments over the past few years • Operations strategy nearly complete -- $125 million+ in run-rate savings achieved since 2007 • Eliminate $80 million to $100 million in run-rate G&A expenses in 2011 • Create leaner, more focused organization |
![]() 11 Strong Balance Sheet Strong Balance Sheet • As of December 31, 2009: – Total cash and investments of $2.1 billion with an average credit quality of AA+ – Investment portfolio with market value of $1.4 billion – Total debt of $602.5 million and debt-to-total capital ratio of 26.2 percent • Ended 2009 with approximately $450 million of cash at parent after increasing subsidiary capital by $100 million • Expect approximately $140 million to $260 million in additional net proceeds from the Northeast transaction during an estimated two-year transition period* • Resumed share repurchase program in December 2009 – Repurchased 2.7 million shares through January 29, 2010 *See Appendix for details |
![]() 12 Health Net: The Future Health Net: The Future • Positioned for value-driven demand in marketplace • Medicare strategy focused on margin stability and strong markets • G&A reductions aligned with repositioned business • Building strong cash position • Positioned for industry changes • Opportunities to improve performance |
![]() 13 Appendix Appendix • Northeast transaction currently valued at approximately $490 million to $610 million – Received $350 million in proceeds at closing ($290 million in tangible net equity* and $60 million membership-related payments) – Expect approximately $160 million to $280 million in additional proceeds during the transition period Remaining tangible net equity payments of approximately $160 million Additional membership payments of up to $120 million (this amount is dependent on a number of factors, including the number of commercial members that transition to UnitedHealthcare legacy products) – Net expense of $20 million from run-out, tax benefits, freed capital and other costs * Subject to subsequent true-up; the company is currently in discussions with UnitedHealthcare regarding the amount of the true-up. Note: Additional information regarding the terms of the Northeast transaction is available in Health Net’s Form 10-K and Form 8-Ks on file with the SEC. |
Health Net, Inc.
Reconciliation of Non-GAAP Financial Measures
Operating Results Excluding Charges
(Amounts in thousands, except per share, PMPM and ratio data)
This table presents the company’s consolidated operations for the periods presented below and the charges recorded in the consolidated statement of operations for such periods. Information for the quarter and year-ended December 31, 2009 also includes the financial impact from the December 11, 2009 sale of our Northeast health plans. Management believes that the presentation of certain financial information in the attached press release, excluding the charges that were recorded and excluding the impact from the divestiture of our Northeast health plans, all of which is non-GAAP financial information, is important to investors as it excludes special items that are not indicative of our core operating results. Non-GAAP financial information presented below should be considered in addition to, not as a substitute for, financial information prepared in accordance with GAAP.
Quarter Ended December 31, 2008 | Year Ended December 31, 2008 | Quarter Ended September 30, 2009 | ||||||||||||||||||||||||||||||||||
As Reported | Impact of Charge1 | Excluding Impact of Charge1 (Non- GAAP) | As Reported | Impact of Charges2 | Excluding Impact of Charges2 (Non- GAAP) | As Reported | Impact of Charge3 | Excluding Impact of Charge3 (Non- GAAP) | ||||||||||||||||||||||||||||
REVENUES: | ||||||||||||||||||||||||||||||||||||
Health plan services premiums | $ | 3,082,133 | $ | 3,082,133 | $ | 12,392,006 | $ | 12,392,006 | $ | 3,166,877 | $ | 3,166,877 | ||||||||||||||||||||||||
Government contracts | 751,604 | 751,604 | 2,835,261 | 2,835,261 | 758,507 | 758,507 | ||||||||||||||||||||||||||||||
Net investment income | 24,536 | 24,536 | 91,042 | (14,642 | ) | 105,684 | 27,691 | 27,691 | ||||||||||||||||||||||||||||
Administrative services fees and other income | 11,209 | 11,209 | 48,280 | (3,400 | ) | 51,680 | 15,578 | 15,578 | ||||||||||||||||||||||||||||
3,869,482 | — | 3,869,482 | 15,366,589 | (18,042 | ) | 15,384,631 | 3,968,653 | — | 3,968,653 | |||||||||||||||||||||||||||
EXPENSES: | ||||||||||||||||||||||||||||||||||||
Health plan services | 2,629,398 | (5,700 | ) | 2,635,098 | 10,762,657 | 37,496 | 10,725,161 | 2,734,984 | (571 | ) | 2,735,555 | |||||||||||||||||||||||||
Government contracts | 718,893 | 718,893 | 2,702,573 | 2,702,573 | 716,323 | 716,323 | ||||||||||||||||||||||||||||||
General and administrative | 347,128 | 53,535 | 293,593 | 1,291,059 | 119,540 | 1,171,519 | 319,451 | 19,495 | 299,956 | |||||||||||||||||||||||||||
Selling | 92,314 | 92,314 | 360,381 | 360,381 | 83,275 | 83,275 | ||||||||||||||||||||||||||||||
Depreciation and amortization | 17,271 | 17,271 | 59,878 | 59,878 | 12,689 | 12,689 | ||||||||||||||||||||||||||||||
Interest | 10,523 | 10,523 | 42,909 | 42,909 | 10,264 | 10,264 | ||||||||||||||||||||||||||||||
Asset impairments | — | — | — | — | 170,570 | 170,570 | — | |||||||||||||||||||||||||||||
Loss on sale of businesses | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
3,815,527 | 47,835 | 3,767,692 | 15,219,457 | 157,036 | 15,062,421 | 4,047,556 | 189,494 | 3,858,062 | ||||||||||||||||||||||||||||
Income (loss) from operations before income taxes | 53,955 | (47,835 | ) | 101,790 | 147,132 | (175,078 | ) | 322,210 | (78,903 | ) | (189,494 | ) | 110,591 | |||||||||||||||||||||||
Income tax provision (benefit) | 18,420 | (20,227 | ) | 38,647 | 52,129 | (70,951 | ) | 123,080 | (12,881 | ) | (53,890 | ) | 41,009 | |||||||||||||||||||||||
Net income (loss) | $ | 35,535 | $ | (27,608 | ) | $ | 63,143 | $ | 95,003 | $ | (104,127 | ) | $ | 199,130 | $ | (66,022 | ) | $ | (135,604 | ) | $ | 69,582 | ||||||||||||||
Basic earnings (loss) per share | $ | 0.34 | $ | 0.61 | $ | 0.89 | $ | 1.87 | $ | (0.64 | ) | $ | 0.67 | |||||||||||||||||||||||
Diluted earnings (loss) per share | $ | 0.34 | $ | 0.61 | $ | 0.88 | $ | 1.85 | $ | (0.64 | ) | $ | 0.67 | |||||||||||||||||||||||
Weighted average shares outstanding: | ||||||||||||||||||||||||||||||||||||
Basic | 103,694 | 103,694 | 106,532 | 106,532 | 103,873 | 103,873 | ||||||||||||||||||||||||||||||
Diluted | 104,063 | 104,063 | 107,610 | 107,610 | 103,873 | 104,432 | ||||||||||||||||||||||||||||||
Pretax margin | 1.4 | % | 2.6 | % | 1.0 | % | 2.1 | % | -2.0 | % | 2.8 | % | ||||||||||||||||||||||||
Health plan services MCR | 85.3 | % | 85.5 | % | 86.9 | % | 86.5 | % | 86.4 | % | 86.4 | % | ||||||||||||||||||||||||
Government contracts cost ratio | 95.6 | % | 95.6 | % | 95.3 | % | 95.3 | % | 94.4 | % | 94.4 | % | ||||||||||||||||||||||||
G&A expense ratio | 11.2 | % | 9.5 | % | 10.4 | % | 9.4 | % | 10.0 | % | 9.4 | % | ||||||||||||||||||||||||
Selling costs ratio | 3.0 | % | 3.0 | % | 2.9 | % | 2.9 | % | 2.6 | % | 2.6 | % | ||||||||||||||||||||||||
Effective tax rate | 34.1 | % | 38.0 | % | 35.4 | % | 38.2 | % | 16.3 | % | 37.1 | % |
1 | Includes a $5.7 million pretax benefit for a litigation reserve true-up included in health plan services expenses and a $53.5 million pretax charge primarily for severance and other expenses related to the company’s operations strategy and included in G&A. |
2 | Includes a $175.1 million pretax charge in total of which: |
(a) $119.6 million was primarily related to severance and other expenses associated with the company’s operations strategy and included in G&A expenses
(b) $37.5 million was included in health plan services expenses for estimated litigation liability and regulatory actions for the company’s rescission practices in Arizona and California and for the execution of the settlement agreement for the McCoy,et al., lawsuits
(c) $14.6 million investment impairment charge taken in the third quarter of 2008 and included in net investment income
(d) $3.4 million pretax charge related to the estimated loss on the sale of the assets of a subsidiary taken in the first quarter of 2008 and included in other income
3 | Includes a $0.6 million pretax benefit for a litigation reserve true-up included in health care costs, a $19.5 million pretax charge primarily for IT systems and other expenses related to the company’s operations strategy and included in G&A expenses and a $170.6 million pretax asset impairment charge for goodwill, intangible and IT-related assets related to the sale of our Northeast health plans. |
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Health Net, Inc.
Reconciliation of Non-GAAP Financial Measures
Operating Results Excluding Charges
(Amounts in thousands, except per share, PMPM and ratio data)
Quarter Ended December 31, 2009 | Year Ended December 31, 2009 | |||||||||||||||||||||||||||||||
As Reported | Impact of Charges4 | Divested Operations5 | Excluding Impact of Charges and Divestiture4,5 (Non- GAAP) | As Reported | Impact of Charge6 | Divested Operations5 | Excluding Impact of Charge and Divestiture5,6 (Non- GAAP) | |||||||||||||||||||||||||
REVENUES: | ||||||||||||||||||||||||||||||||
Health plan services premiums | $ | 2,981,678 | $ | 5,483 | $ | 2,976,195 | $ | 12,440,589 | $ | 5,483 | $ | 12,435,106 | ||||||||||||||||||||
Government contracts | 754,766 | 754,766 | 3,104,700 | 3,104,700 | ||||||||||||||||||||||||||||
Net investment income | 33,486 | 1,126 | 32,360 | 105,930 | 1,126 | 104,804 | ||||||||||||||||||||||||||
Administrative services fees and other income | 28,165 | 15,113 | 13,052 | 62,022 | 15,113 | 46,909 | ||||||||||||||||||||||||||
3,798,095 | — | 21,722 | 3,776,373 | 15,713,241 | — | 21,722 | 15,691,519 | |||||||||||||||||||||||||
EXPENSES: | ||||||||||||||||||||||||||||||||
Health plan services | 2,557,149 | 5,508 | 2,551,641 | 10,731,951 | (4,805 | ) | 5,508 | 10,731,248 | ||||||||||||||||||||||||
Government contracts | 707,353 | 3,632 | 703,721 | 2,939,722 | 3,632 | 2,936,090 | ||||||||||||||||||||||||||
General and administrative | 355,407 | 38,723 | 20,588 | 296,096 | 1,361,956 | 124,799 | 20,588 | 1,216,569 | ||||||||||||||||||||||||
Selling | 84,068 | 249 | 83,819 | 330,112 | 249 | 329,863 | ||||||||||||||||||||||||||
Depreciation and amortization | 8,605 | 589 | 8,016 | 53,042 | 589 | 52,453 | ||||||||||||||||||||||||||
Interest | 9,538 | 9,538 | 40,887 | 40,887 | ||||||||||||||||||||||||||||
Asset impairments | 4,309 | 4,309 | — | 174,879 | 174,879 | — | ||||||||||||||||||||||||||
Loss on sale of businesses | 105,931 | 105,931 | — | 105,931 | 105,931 | — | ||||||||||||||||||||||||||
3,832,360 | 152,595 | 26,934 | 3,652,831 | 15,738,480 | 404,436 | 26,934 | 15,307,110 | |||||||||||||||||||||||||
Income (loss) from operations before income taxes | (34,265 | ) | (152,595 | ) | (5,212 | ) | 123,542 | (25,239 | ) | (404,436 | ) | (5,212 | ) | 384,409 | ||||||||||||||||||
Income tax provision (benefit) | 10,892 | (38,149 | ) | (2,059 | ) | 51,100 | 23,765 | (123,533 | ) | (2,059 | ) | 149,357 | ||||||||||||||||||||
Net income (loss) | $ | (45,157 | ) | $ | (114,446 | ) | $ | (3,153 | ) | $ | 72,442 | $ | (49,004 | ) | $ | (280,903 | ) | $ | (3,153 | ) | $ | 235,052 | ||||||||||
Basic earnings (loss) per share | $ | (0.43 | ) | $ | 0.70 | $ | (0.47 | ) | $ | 2.26 | ||||||||||||||||||||||
Diluted earnings (loss) per share | $ | (0.43 | ) | $ | 0.69 | $ | (0.47 | ) | $ | 2.25 | ||||||||||||||||||||||
Weighted average shares outstanding: | ||||||||||||||||||||||||||||||||
Basic | 103,902 | 103,902 | 103,849 | 103,849 | ||||||||||||||||||||||||||||
Diluted | 103,902 | 104,626 | 103,849 | 104,412 | ||||||||||||||||||||||||||||
Pretax margin | -0.9 | % | 3.3 | % | -0.2 | % | 2.4 | % | ||||||||||||||||||||||||
Health plan services MCR | 85.8 | % | 85.7 | % | 86.3 | % | 86.3 | % | ||||||||||||||||||||||||
Government contracts cost ratio | 93.2 | % | 92.8 | % | 94.6 | % | 94.5 | % | ||||||||||||||||||||||||
G&A expense ratio | 11.9 | % | 10.0 | % | 10.9 | % | 9.8 | % | ||||||||||||||||||||||||
Selling costs ratio | 2.8 | % | 2.8 | % | 2.7 | % | 2.7 | % | ||||||||||||||||||||||||
Effective tax rate | -31.8 | % | 41.4 | % | -94.2 | % | 38.9 | % |
4 | Includes a $3.6 million charge for TRICARE contract procurement costs included in government contracts expenses and a $38.7 million operations strategy charge and Northeast divestiture related expenses, each of which are included in G&A expenses, and an asset impairment and loss on the sale of Northeast health plans recorded in 2009. |
5 | Represents revenues and expenses related to the run-off of the Northeast health plans divested on December 11, 2009. |
6 | Includes a $4.8 million pretax benefit for a litigation reserve true-up included in health care costs, $3.6 million charge for TRICARE contract procurement costs included in government contracts expenses, and $124.8 million of operations strategy and Northeast sale related expenses included in G&A expenses, and an asset impairment and loss on the sale of Northeast health plans recorded in 2009. |
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