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TheStreet Open House

HealthSpring, Inc. Reports 2011 Third Quarter Results

HealthSpring, Inc. (NYSE:HS) today announced its results for the third quarter ended September 30, 2011, which include the results of Bravo Health, Inc. (“Bravo Health”), acquired by the Company in November 2010. Highlights for the 2011 third quarter included:

  • Net income of $79.0 million, or $1.16 per diluted share, compared with $53.8 million, or $0.95 per diluted share, in the 2010 third quarter.
  • Premium revenue of $1.3 billion, up 84.6% over the 2010 third quarter.
  • Medicare Advantage membership of 342,126 at quarter end, up 72.7% over the 2010 third quarter and 12.3% over 2010 year-end. Stand-alone PDP membership of 844,458 at quarter end, up 106.3% over the 2010 third quarter and 16.6% over 2010 year-end.
  • Cash held by unregulated entities of $248.2 million, an increase of $76.7 million from the 2011 second quarter and $167.3 million year-to-date.

Commenting on 2011 third quarter results, Herb Fritch, Chairman and Chief Executive Officer, said, “We are pleased to report a strong third quarter. The continuation of favorable inpatient utilization trends in our highly engaged Medicare Advantage health plans and margins in our stand-alone prescription drug plans contributed to better than expected results for the period.”

Third Quarter Results

($ in thousands, except per share amounts)

   

Three Months Ended

   

September 30,

Percent

2011

   

2010

Change

Premium revenue $ 1,315,577 $ 712,658 84.6 %
Total revenue 1,331,300 725,222 83.6
Medical expense 1,049,869 561,823 86.9
Net income 78,991 53,780 46.9

Net income per common share – diluted (1)

1.16 0.95 22.1
 

(1) Weighted average shares outstanding used in the calculation of net income per commonshare – diluted for the three months ended September 30, 2011 and 2010, were 68,186,547 and 56,577,063, respectively. Weighted average shares for the three months ended September 30, 2011, include 8,625,000 common shares issued in an underwritten public offering in March 2011.

Operating Highlights

Revenue

  • Medicare Advantage premiums (including the prescription drug component of HealthSpring's Medicare Advantage plans, or "MA-PD") were $1.1 billion for the 2011 third quarter, reflecting an increase of 79.6% over the 2010 third quarter. The higher premium revenue in the 2011 third quarter was primarily attributable to the inclusion of Bravo Health membership and to a 9.0% increase in membership in the HealthSpring health plans compared with the 2010 third quarter.
  • Medicare Advantage premiums per member per month, or “PMPM,” increased 4.5% to $1,089 in the 2011 third quarter compared with $1,042 in the 2010 third quarter. The PMPM premium increase in the 2011 third quarter was primarily the result of including PMPM premiums in the Pennsylvania market and increased risk adjustment payments. On a year-to-date basis, PMPM premiums increased 4.0% to $1,104 in 2011 compared with $1,062 in 2010.
  • Stand-alone PDP premium revenue was $201.7 million for the 2011 third quarter, an increase of 115.9% compared with the 2010 third quarter. The increase in revenue was primarily the result of the inclusion of Bravo Health Part D membership and premium revenue for the 2011 third quarter.

Medical Expense

  • Medicare Advantage medical loss ratio, or "MLR," was 79.6% for the 2011 third quarter compared with 78.5% for the 2010 third quarter. The increase in the 2011 third quarter MLR, which was expected, is primarily the result of including Bravo Health, which has historically experienced higher MLRs than other HealthSpring plans. The increase in MLR was partially offset by lower MLRs in certain markets, resulting from lower than expected inpatient utilization in the current quarter. On a year-to-date basis, Medicare Advantage MLR was 79.8% for 2011 compared with 78.2% for 2010. Medicare Advantage PMPM medical expense increased 5.9% to $867 in the 2011 third quarter compared with the 2010 third quarter and increased 6.1% to $881 year-to-date compared with the first nine months of 2010.
  • PDP MLR was 79.7% for the 2011 third quarter compared with 80.7% for the 2010 third quarter. The improvement in MLR in the 2011 third quarter was primarily the result of PMPM premium increases and increased drug rebates in the current quarter. On a year-to-date basis, PDP MLR improved to 90.7% for 2011 compared with 91.1% for 2010.

Selling, General & Administrative (SG&A) Expense

  • SG&A expense as a percentage of total revenue in the 2011 third quarter increased 70 basis points to 10.0% compared with 9.3% in the 2010 third quarter. SG&A expense in the 2011 third quarter increased $65.9 million compared with the 2010 third quarter, primarily as a result of the inclusion of Bravo Health in the 2011 third quarter. The increase in SG&A expense as a percentage of revenue in the 2011 third quarter resulted primarily from increases in selling costs as a result of new membership and accelerated printing and advertising costs in the 2011 third quarter to accommodate an earlier selling season in 2011. In addition, the Company incurred incremental administrative costs in the 2011 third quarter related to its expansion into new Medicare Advantage markets for 2012 and for merger related advisory expenses. On a year-to-date basis, SG&A as a percentage of total revenue was 9.5% for 2011 compared with 9.3% for 2010.

Depreciation and Amortization Expense

  • Depreciation and amortization expense in the 2011 third quarter increased $7.7 million over the 2010 third quarter, the majority of which increase relates to the amortization of identifiable intangible assets acquired as part of the Bravo Health transaction.

Interest Expense

  • Interest expense in the 2011 third quarter increased $2.6 million compared with the 2010 third quarter, reflecting higher average debt amounts outstanding related to borrowings made to finance the Bravo Health acquisition.
  • The Company's weighted average effective interest rate on the Company’s borrowings (exclusive of the amortization of deferred financing costs and other credit facility fees) for the three months ended September 30, 2011, was 4.4% compared with 3.2% for the three months ended September 30, 2010.

Income Taxes

  • The Company's effective income tax rate for the three months ended September 30, 2011, was 37.7% compared with 36.8% for the three months ended September 30, 2010. The Company's effective income tax rate for the nine months ended September 30, 2011, was 37.0% compared with 36.6% for the nine months ended September 30, 2010.

Balance Sheet Highlights

  • At September 30, 2011, the Company’s cash and investments were $1.7 billion, $248.2 million of which was held by unregulated entities, compared with cash and investments of $771.8 million at December 31, 2010, $80.9 million of which was held by unregulated entities. The Company’s regulated cash and cash equivalents at September 30, 2011, includes $620.2 million for the early receipt of the October 2011 CMS premium and member subsidies. Related amounts for the early receipt of cash from CMS are included on the Company’s balance sheet at September 30, 2011, in deferred revenue and funds held for the benefit of members.
  • For the first nine months of 2011, net cash generated by operating activities (adjusted for the early premium payment from CMS) was $265.1 million compared with $155.8 million generated in the same period of 2010. Operating cash flows on a year-to-date basis for 2011 included the receipt of approximately $73.0 million of prior-year CMS risk premium settlements compared with similar settlements of $50.2 million received in the first nine months of 2010.
  • Days in claims payable totaled 36 at the end of the 2011 third quarter compared with 36 at the end of the 2011 second quarter and 29 at the end of the 2010 third quarter.
  • Total debt outstanding was $335.4 million at September 30, 2011, compared with $626.9 million at December 31, 2010. The Company used $263.4 million of the net proceeds from a public offering of its common stock for the repayment of indebtedness during the 2011 first quarter. There were no borrowings outstanding under the Company’s revolving credit facility at September 30, 2011.

Proposed Merger

The Company announced on October 24, 2011, the execution of an Agreement and Plan of Merger by and among the Company, Cigna Corporation (“Cigna”) and Cigna Magnolia Corp., an indirect wholly owned subsidiary of Cigna, pursuant to which the Company’s stockholders will receive, subject to the satisfaction or waiver of certain conditions, $55.00 per share in cash for each share of the Company common stock that they hold. The transaction is subject to customary closing conditions, including, among others, the approval by the Company’s stockholders, the absence of certain legal impediments to the consummation of the merger, and the receipt of specified governmental consents and approvals. The transaction is expected to close in the first half of 2012.

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