Health Net Reports Fourth Quarter 2011 GAAP Net Income of $60.2 Million, or $0.71 Per Diluted Share

Health Net, Inc. (NYSE:HNT) today announced 2011 fourth quarter GAAP net income of $60.2 million, or $0.71 per diluted share, compared with GAAP net income of $80.4 million, or $0.83 per diluted share, for the fourth quarter of 2010.

The fourth quarter 2011 GAAP results include a $26.8 million pretax loss related to the run-out of the company’s remaining Northeast operations and $3.3 million in pretax expenses related to the company’s general and administrative (G&A) cost reduction efforts.

The company’s Western Region Operations (Western Region) and Government Contracts segments produced combined net earnings of $75.6 million, or $0.90 per diluted share, in the fourth quarter of 2011 compared with $77.6 million, or $0.80 per diluted share, in the fourth quarter of 2010.

For the full year 2011, Health Net reported GAAP net income of $72.1 million, or $0.80 per diluted share, compared with $204.2 million, or $2.06 per diluted share, for the full year 2010.

The company’s Western Region and Government Contracts segments produced combined net income of $278.4 million, or $3.09 per diluted share for the full year 2011, and net income of $258.4 million, or $2.60 per diluted share for the full year 2010.

“We are pleased with all we accomplished in 2011. The pretax margin in 2011 for the combined Western Region and Government Contracts segments increased to 3.8 percent, a 60 basis point improvement year-over-year. Our commercial strategy resulted in continued enrollment growth in tailored network products. In 2011, we also successfully transitioned to the new TRICARE contract and Medicaid membership rose,” said Jay Gellert, Health Net’s president and chief executive officer. “Our fourth quarter performance concluded a successful year for the company and positions us well going into 2012.

“We exceeded our annual goal for share repurchases in 2011. We repurchased 13.6 million shares of common stock for approximately $373.5 million. The 13.6 million shares represented more than 14 percent of the shares of common stock outstanding at the end of 2010. We believe that share repurchases currently represent the best use of our free cash flow,” Gellert added.

In the fourth quarter of 2011, Health Net repurchased approximately 2.7 million shares for approximately $70.7 million.

“With the momentum from our strong 2011 and our outlook for 2012, we are reiterating our 2012 guidance for GAAP earnings per diluted share of between $2.80 and $2.90 and, for our combined Western Region and Government Contracts segments of between $3.30 to $3.40,” Gellert noted.

CONSOLIDATED RESULTS

Health Net’s total revenues decreased 16.6 percent in the fourth quarter of 2011 to $2.8 billion from $3.4 billion in the fourth quarter of 2010, primarily as a result of a decline in the Government Contracts revenues to $194.6 million in the fourth quarter of 2011 compared with $822.4 million in the fourth quarter of 2010.

The revenue decline in Government Contracts is due to the T-3 TRICARE North contract that began on April 1, 2011. Unlike the prior TRICARE contract, the T-3 contract is a cost reimbursement plus fixed fee contract. Health Net now only records revenues and expenses associated with administrative services and related performance incentives and guarantees. These lower revenue and cost levels will continue over the term of the T-3 contract.

Health plan services premium revenues increased by 4.5 percent in the fourth quarter of 2011 to $2.6 billion compared with $2.5 billion in the fourth quarter of 2010. Health plan services expenses increased by 5.3 percent in the fourth quarter of 2011 to $2.2 billion compared with approximately $2.1 billion in the fourth quarter of 2010.

WESTERN REGION OPERATIONS SEGMENT

Health Plan Membership

Total health plan enrollment at December 31, 2011 was approximately 3.0 million members, or essentially flat, compared with 2.9 million members at December 31, 2010. Total enrollment in the company’s California health plan was approximately 2.3 million members at December 31, 2011 compared with 2.2 million members at December 31, 2010.

Western Region commercial enrollment at December 31, 2011 was 1.4 million members, a 1.2 percent decrease compared with enrollment at December 31, 2010.

“Membership in the company’s commercial tailored network products was approximately 428,000 at December 31, 2011, an increase of 35.1 percent from December 31, 2010. These popular products are designed to be cost-effective and meet customer needs for both affordability and robust benefits,” said Jim Woys, chief operating officer of Health Net.

Enrollment in the company’s Medicare Advantage plans in the Western Region at December 31, 2011 was 205,000 members, a decrease of 7.7 percent compared with December 31, 2010.

Membership in the company’s stand-alone Medicare Prescription Drug Plan (Medicare PDP) business was 382,000 at the end of the fourth quarter of 2011, a 10.5 percent decrease compared with the end of the fourth quarter of 2010.

On January 9, 2012, Health Net announced that it had entered into a definitive agreement to sell the Medicare PDP business to an affiliate of CVS Caremark Corporation. The transaction is expected to close in the second quarter of 2012, subject to the satisfaction or waiver of customary closing conditions, including regulatory approval.

Medicaid enrollment in California at December 31, 2011 was 1.0 million members, an increase of 108,000 members, or 12.0 percent, from December 31, 2010. The increase in the Medicaid membership was due to the company’s participation in California’s Seniors and Persons with Disabilities (SPD) program that began on June 1, 2011 and expansion into additional counties.

Revenues

Total revenues for the Western Region in the fourth quarter of 2011 were $2.6 billion compared with $2.5 billion in the fourth quarter of 2010.

Net investment income for the Western Region was $10.0 million in the fourth quarter of 2011 compared with $15.1 million in the fourth quarter of 2010 and approximately $15.2 million in the third quarter of 2011.

Health Plan Services Expenses

Health plan services expenses in the Western Region were $2.2 billion in the fourth quarter of 2011 compared with $2.1 billion in the fourth quarter of 2010.

Commercial Premium Yield and Health Care Cost Trends

In the Western Region, commercial premiums per member per month (PMPM) increased by 4.7 percent to $360 in the fourth quarter of 2011 compared with $344 in the fourth quarter of 2010.

Commercial health care costs PMPM in the Western Region increased by 3.9 percent to $306 in the fourth quarter of 2011 compared with $294 in the fourth quarter of 2010.

“The commercial gross margin PMPM in the Western Region increased 9.7 percent in the fourth quarter of 2011 compared with the fourth quarter of 2010.

“Since 2009, the full year commercial gross margin PMPM is up approximately 27 percent. This sustained performance is the result of our continued focus on pricing discipline as well as further growth in our tailored network products,” said Woys.

Medical Care Ratios (MCR)

The health plan services MCR in the Western Region was 85.2 percent in the fourth quarter of 2011 compared with 85.2 percent in the fourth quarter of 2010. The full year 2011 health plan services MCR was 86.4 percent compared with 86.6 percent for the full year 2010.

The Western Region commercial MCR was 84.8 percent in the fourth quarter of 2011 compared with 85.5 percent in the fourth quarter of 2010 and 84.8 percent in the third quarter of 2011. The full year 2011 commercial MCR was 85.3 percent compared with 86.1 percent for the full year 2010.

The Medicare Advantage (MA) MCR in the Western Region was 90.5 percent in the fourth quarter of 2011 compared with 89.4 percent in the fourth quarter of 2010. The full year 2011 MA MCR in the Western Region was 90.3 percent compared with 88.8 percent for the full year 2010.

“The higher MA MCR resulted from our inability to add new MA members in 2011 due to sanctions by the Centers for Medicare & Medicaid Services (CMS). The results of the 2012 annual enrollment period in the fourth quarter of 2011 indicate that MA enrollment growth will be strong this year,” Woys commented.

The company’s Medicare PDP MCR was 59.0 percent in the fourth quarter of 2011 compared with 53.1 percent in the fourth quarter of 2010. The full year 2011 Medicare PDP MCR was 84.1 percent compared with 77.2 percent for the full year 2010.

G&A Expense

G&A expense in the Western Region was $240.9 million in the fourth quarter of 2011 compared with $230.9 million in the fourth quarter of 2010. The G&A expense ratio was 9.2 percent in the fourth quarter of 2011 compared with 9.3 percent in the fourth quarter of 2010 and 8.9 percent in the third quarter of 2011.

GOVERNMENT CONTRACTS SEGMENT

As previously described, health care administrative services under the company’s T-3 TRICARE North contract began on April 1, 2011.

The company’s Government Contracts revenues were $194.6 million in the fourth quarter of 2011 and $822.4 million in the fourth quarter of 2010.

BALANCE SHEET

Cash and investments as of December 31, 2011 were approximately $1.8 billion compared with approximately $2.0 billion as of December 31, 2010.

Reserves for claims and other settlements as of December 31, 2011 were $912.1 million compared with $942.0 million as of December 31, 2010 and $873.0 million as of September 30, 2011.

Days claims payable (DCP) for the fourth quarter of 2011 was 37.9 days compared with 41.3 days in the fourth quarter of 2010 and 36.1 days in the third quarter of 2011.

On an adjusted1 basis, DCP in the fourth quarter of 2011 was 54.1 days compared with 57.3 days in the fourth quarter of 2010 and 51.7 days in the third quarter of 2011.

The company’s debt-to-total capital ratio was 26.2 percent as of December 31, 2011 compared with 19.0 percent as of December 31, 2010 and 27.4 percent as of September 30, 2011.

CASH FLOW

Operating cash flow was negative $119.8 million in the fourth quarter of 2011 due to the timing of payments from CMS. The company received two monthly CMS payments in the fourth quarter of 2011 after having received four monthly payments in the third quarter of 2011. The company’s monthly payments from CMS averaged approximately $300 million in 2011.

“For 2011, operating cash flow was approximately $103.4 million, consistent with company expectations and approximately equal to net income plus depreciation and amortization. This amount includes the $136 million after tax effect from the AmCareco judgment that was paid in the second quarter of 2011.

“We expect full year 2012 operating cash flow to again be equal to our expectations for net income plus depreciation and amortization,” said Joseph Capezza, Health Net’s chief financial officer. “Cash at the parent at December 31, 2011 was approximately $88.0 million.”

NORTHEAST OPERATIONS SEGMENT

The administrative services agreements that the company entered into with UnitedHealthcare (United) and its affiliates on the closing date of the Northeast transaction terminated on July 1, 2011. Health Net will continue to administer run-out claims for the Northeast business pursuant to claims servicing agreements in place with United and its affiliates.

The company did not have any revenues associated with its Northeast Operations in the fourth quarter of 2011. Expenses associated with the company’s Northeast Operations in the fourth quarter of 2011 were approximately $26.8 million. These items are shown separately in the accompanying Segment Information table.

As expected, the company received an $80.0 million tangible net equity payment from United in the fourth quarter of 2011. This payment is recorded in “Cash Flows from Investing Activities” in the company’s financial statements.

“With this last payment from United and the anticipated run-out expenses in 2012, we expect the final value of the transaction to be approximately $525 million, consistent with our initial expectations,” Capezza added.

SHARE REPURCHASE UPDATE

In the fourth quarter of 2011, Health Net repurchased approximately 2.7 million shares of its common stock for $70.7 million at an average price of $26.63 per share. At December 31, 2011, approximately $76.3 million of authorization under the company’s existing $300 million share repurchase program remained.

2012 GUIDANCE

Following is a table with specific 2012 guidance metrics that do not include the potential impact of the proposed divestiture of the company’s Medicare PDP business. Health Net will provide more details regarding its 2012 expectations at its 2012 Investor Day, which is scheduled for February 16, 2012, in New York.

Metric

2012 Guidance

Year-end membership(a)

Commercial: -3% to -5%

Medicaid: +3% to +5%

Medicare Advantage: +8% to +10%

Medicare PDP (stand-alone): +10% to +12%

Total health plan membership: flat to +1%

Consolidated revenues(b)

~$11.5 billion to $12.0 billion

Commercial premium yields PMPM(a)

~ +4.3% to +4.8%

Commercial health care costs PMPM(a)

~40 to 60 basis points < premium yields PMPM

Selling cost ratio(a)

G&A expense ratio(a)

~2.3% to 2.4%

~8.6% to 8.8%

Tax rate(b)

38.0% to 39.0%

Weighted-average fully
diluted shares outstanding(c)

~82.0 million to 83.0 million

GAAP EPS(c)

Combined Western Region
Operations and Government
Contracts EPS(c)

$2.80 to $2.90

$3.30 to $3.40

(a) For the company’s Western Region Operations segment

(b) For the combined Western Region Operations and Government Contracts segments

(c) The company’s guidance does not include the impact of share repurchases other than those to counter dilution.

CONFERENCE CALL

As previously announced, Health Net will discuss the company’s fourth quarter and year-end 2011 results during a conference call on Friday, February 3, 2012, beginning at approximately 11:00 a.m. Eastern time. The conference call should be accessed at least 15 minutes prior to its start with the following numbers:

866.393.1637 (Domestic) 855.859.2056 (Replay – Domestic)
706.643.5711 (International) 404.537.3406 (Replay – International)

The access code for the live conference call and replay is 35863543. A replay of the conference call will be available through February 8, 2012. A live webcast and replay of the conference call also will be available at www.healthnet.com under “Investor Relations.” The conference call webcast is open to all interested parties. 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, 2010 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2011, June 30, 2011 and September 30, 2011, and other reports filed by the company from time to time with the Securities and Exchange Commission.

ABOUT HEALTH NET

Health Net, Inc. is a publicly traded managed care organization that delivers managed health care services through health plans and government-sponsored managed care plans. Its mission is to help people be healthy, secure and comfortable. Health Net provides and administers health benefits to approximately 6.0 million individuals across the country through group, individual, Medicare (including the Medicare prescription drug benefit commonly referred to as “Part D”), Medicaid, Department of Defense, including TRICARE, and Veterans Affairs programs. Health Net’s behavioral health services subsidiary, Managed Health Network, Inc., provides behavioral health, substance abuse and employee assistance programs to approximately 5.0 million individuals, including Health Net’s own health plan members. Health Net’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 Health Net’s website at www.healthnet.com.

CAUTIONARY STATEMENTS

Health Net, Inc. and its representatives may from time to time make written and oral forward-looking statements within the meaning of the Private Securities Litigation Reform Act (“PSLRA”) of 1995, including statements in this and other press releases, in presentations, filings with the Securities and Exchange Commission (“SEC”), reports to stockholders and in meetings with investors and analysts. All statements in this press release, other than statements of historical information provided herein, including the guidance for future periods and the assumptions underlying such projections, may be deemed to be forward-looking statements and as such are intended to be covered by the safe harbor for “forward-looking statements” provided by PSLRA. These statements are based on management’s analysis, judgment, belief and expectation only as of the date hereof, and are subject to changes in circumstances and a number of risks and uncertainties. Without limiting the foregoing, the guidance as to expected future period results and statements including the words “believes,” “anticipates,” “plans,” “expects,” “may,” “should,” “could,” “estimate,” “intend,” “feels,” “will,” “projects” and other similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those expressed in, or implied or projected by the forward-looking information and statements due to, among other things, health care reform and other increased government participation in and regulation of health benefits and managed care operations, including the ultimate impact of the Affordable Care Act, which could materially adversely affect Health Net’s financial condition, results of operations and cash flows through, among other things, reduced revenues, new taxes, expanded liability, and increased costs (including medical, administrative, technology or other costs), or require changes to the ways in which Health Net does business; rising health care costs; continued slow economic growth or a further decline in the economy; negative prior period claims reserve developments; trends in medical care ratios; membership declines; unexpected utilization patterns or unexpectedly severe or widespread illnesses; rate cuts and other risks and uncertainties affecting Health Net’s Medicare or Medicaid businesses; litigation costs; regulatory issues with federal and state agencies including, but not limited to, the California Department of Managed Health Care, the Centers for Medicare & Medicaid Services, the Office of Civil Rights of the U.S. Department of Health and Human Services and state departments of insurance; operational issues; failure to effectively oversee our third party vendors; noncompliance by Health Net or Health Net’s business associates with any privacy laws or any security breach involving the misappropriation, loss or other unauthorized use or disclosure of confidential information; 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; Health Net’s ability to complete proposed dispositions on a timely basis or at all; 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 Health Net’s most recent Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q filed with the SEC and the risks discussed in Health Net’s other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements. Except as may be required by law, Health Net undertakes no obligation to address or publicly update its guidance, the assessment of the underlying assumptions or any of its forward-looking statements to reflect events or circumstances that arise after the date of this release.

The financial information presented in this press release is unaudited and is subject to change as a result of subsequent events or adjustments, if any, arising prior to the filing of the company’s Form 10-K for the year ended December 31, 2011.

1 See “Disclosures Regarding Non-GAAP Financial Information” attached to this press release for a reconciliation of this information to the comparable GAAP financial measure.

Health Net, Inc.
Enrollment Data - By State
(In thousands)
Change from
September 30, 2011December 31, 2010
Dec 31,Sept 30,Dec 31,Increase/%Increase/%
201120112010(Decrease)Change(Decrease)Change
California
Large Group 826 837 843 (11 ) (1.3 )% (17 ) (2.0 )%
Small Group and Individual 308 318 348 (10 ) (3.1 )% (40 ) (11.5 )%
Commercial Risk 1,134 1,155 1,191 (21 ) (1.8 )% (57 ) (4.8 )%
Medicare Advantage 125 124 133 1 0.8 % (8 ) (6.0 )%
Medi-Cal 1,009 988 901 21 2.1 % 108 12.0 %
Total California 2,268 2,267 2,225 1 0.0 % 43 1.9 %
Arizona
Large Group 77 76 56 1 1.3 % 21 37.5 %
Small Group and Individual 63 61 41 2 3.3 % 22 53.7 %
Commercial Risk 140 137 97 3 2.2 % 43 44.3 %
Medicare Advantage 41 40 49 1 2.5 % (8 ) (16.3 )%
Total Arizona 181 177 146 4 2.3 % 35 24.0 %
Oregon
Large Group 50 50 51 0 0.0 % (1 ) (2.0 )%
Small Group and Individual 42 41 44 1 2.4 % (2 ) (4.5 )%
Commercial Risk 92 91 95 1 1.1 % (3 ) (3.2 )%
Medicare Advantage 39 39 40 0 0.0 % (1 ) (2.5 )%
Total Oregon 131 130 135 1 0.8 % (4 ) (3.0 )%
Total Health Plan Enrollment
Large Group 953 963 950 (10 ) (1.0 )% 3 0.3 %
Small Group and Individual 413 420 433 (7 ) (1.7 )% (20 ) (4.6 )%
Commercial Risk 1,366 1,383 1,383 (17 ) (1.2 )% (17 ) (1.2 )%
Medicare Advantage 205 203 222 2 1.0 % (17 ) (7.7 )%
Medi-Cal/Medicaid 1,009 988 901 21 2.1 % 108 12.0 %
Medicare PDP (stand-alone) 382 381 427 1 0.3 % (45 ) (10.5 )%
Western Region Operations 2,962 2,955 2,933 7 0.2 % 29 1.0 %
Northeast Operations 0 0 7 0 0.0 % (7 ) (100.0 )%
2,962 2,955 2,940 7 0.2 % 22 0.7 %
TRICARE - North Contract Eligibles 3,004 3,010 3,090 (6 ) (0.2 )% (86 ) (2.8 )%
Health Net, Inc.
Enrollment Data - Line of Business
(In thousands)
Change from
September 30, 2011December 31, 2010
Dec 31,Sept 30,Dec 31,Increase/%Increase/%
201120112010(Decrease)Change(Decrease)Change
Large Group
California 826 837 843 (11 ) (1.3 )% (17 ) (2.0 )%
Arizona 77 76 56 1 1.3 % 21 37.5 %
Oregon 50 50 51 0 0.0 % (1 ) (2.0 )%
953 963 950 (10 ) (1.0 )% 3 0.3 %
Small Group and Individual
California 308 318 348 (10 ) (3.1 )% (40 ) (11.5 )%
Arizona 63 61 41 2 3.3 % 22 53.7 %
Oregon 42 41 44 1 2.4 % (2 ) (4.5 )%
413 420 433 (7 ) (1.7 )% (20 ) (4.6 )%
Commercial Risk
California 1,134 1,155 1,191 (21 ) (1.8 )% (57 ) (4.8 )%
Arizona 140 137 97 3 2.2 % 43 44.3 %
Oregon 92 91 95 1 1.1 % (3 ) (3.2 )%
1,366 1,383 1,383 (17 ) (1.2 )% (17 ) (1.2 )%
Medicare Advantage
California 125 124 133 1 0.8 % (8 ) (6.0 )%
Arizona 41 40 49 1 2.5 % (8 ) (16.3 )%
Oregon 39 39 40 0 0.0 % (1 ) (2.5 )%
205 203 222 2 1.0 % (17 ) (7.7 )%
Medi-Cal/Medicaid
California 1,009 988 901 21 2.1 % 108 12.0 %
Total Health Plan Enrollment
Large Group 953 963 950 (10 ) (1.0 )% 3 0.3 %
Small Group and Individual 413 420 433 (7 ) (1.7 )% (20 ) (4.6 )%
Commercial Risk 1,366 1,383 1,383 (17 ) (1.2 )% (17 ) (1.2 )%
Medicare Advantage 205 203 222 2 1.0 % (17 ) (7.7 )%
Medi-Cal/Medicaid 1,009 988 901 21 2.1 % 108 12.0 %
Medicare PDP (stand-alone) 382 381 427 1 0.3 % (45 ) (10.5 )%
Western Region Operations 2,962 2,955 2,933 7 0.2 % 29 1.0 %
Northeast Operations 0 0 7 0 0.0 % (7 ) (100.0 )%
2,962 2,955 2,940 7 0.2 % 22 0.7 %
TRICARE - North Contract Eligibles 3,004 3,010 3,090 (6 ) (0.2 )% (86 ) (2.8 )%
Health Net, Inc.
Consolidated Statements of Operations
($ in thousands, except per share data)
Quarter Ended Quarter Ended Quarter Ended Year Ended Year Ended
December 31, September 30, December 31, December 31, December 31,
REVENUES: 2011 2011 2010 2011 2010
Health plan services premiums $ 2,602,790 $ 2,582,385 $ 2,491,124 $ 10,364,278 $ 9,996,888
Government contracts 194,632 175,845 822,388 1,416,619 3,344,483
Net investment income 10,047 15,188 15,226 74,161 71,181
Administrative services fees and other income 4,553 2,174 4,953 11,532 21,133
Northeast administrative services fees and other - 10,976 39,643 34,446 186,167
Total revenues 2,812,022 2,786,568 3,373,334 11,901,036 13,619,852
EXPENSES:
Health plan services 2,211,266 2,223,471 2,099,969 8,948,349 8,609,117
Government contracts 157,020 127,884 770,487 1,237,884 3,168,160
General and administrative 249,163 233,632 245,861 1,128,185 956,264
Selling 61,827 58,110 64,333 238,199 238,759
Depreciation and amortization 7,274 7,154 9,012 32,209 34,800
Interest 8,507 7,783 8,085 32,148 34,880
Northeast administrative and claims services expenses 26,756 29,043 63,727 145,879 279,434
Adjustment to loss on sale of Northeast subsidiaries 7 315 (12,331 ) (40,815 ) (41,959 )
Asset impairments 6,000
Early debt extinguishment 3,532
Total expenses 2,721,820 2,687,392 3,249,143 11,722,038 13,288,987
Income from operations before income taxes 90,202 99,176 124,191 178,998 330,865
Income tax provision 29,999 37,364 43,787 106,878 126,622
Net income $ 60,203 $ 61,812 $ 80,404 $ 72,120 $ 204,243
Basic earnings per share $ 0.73 $ 0.71 $ 0.84 $ 0.81 $ 2.08
Diluted earnings per share $ 0.71 $ 0.70 $ 0.83 $ 0.80 $ 2.06
Weighted average shares outstanding:
Basic 82,721 87,675 95,697 88,524 98,232
Diluted 84,247 88,874 96,885 89,970 99,232

Health Net, Inc.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except ratio data)

December 31, September 30, December 31,
2011 2011 2010
ASSETS
Current Assets
Cash and cash equivalents $ 230,253 $ 376,336 $ 350,138
Investments - available for sale 1,557,997 1,656,895 1,663,218
Premiums receivable, net 251,911 276,995 298,892
Amounts receivable under government contracts 234,740 206,113 266,456

Incurred but not reported (IBNR) health care costs receivable under TRICARE North contract

284,247
Other receivables 225,004 169,438 136,323
Deferred taxes 46,659 54,850 45,769
Other assets 117,876 212,747 182,252
Total current assets 2,664,440 2,953,374 3,227,295
Property and equipment, net 145,302 125,833 123,137
Goodwill, net 605,886 605,886 605,886
Other intangible assets, net 20,699 21,556 24,217
Deferred taxes 49,685 51,277 50,648
Investments - available for sale- noncurrent 2,147 2,614 8,756
Other noncurrent assets 119,510 111,238 91,754
Total Assets $ 3,607,669 $ 3,871,778 $ 4,131,693
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Reserves for claims and other settlements $ 912,126 $ 873,037 $ 942,024
Health care and other costs payable under government contracts 88,440 47,546 113,865
IBNR health care costs payable under TRICARE North contract 284,247
Unearned premiums 176,733 442,164 158,493
Accounts payable and other liabilities 240,281 308,961 402,024
Total current liabilities 1,417,580 1,671,708 1,900,653
Senior notes payable 398,890 398,839 398,685
Borrowings under revolving credit facility 112,500 145,000 -
Other noncurrent liabilities 235,553 217,827 137,939
Total Liabilities 2,164,523 2,433,374 2,437,277
Stockholders' Equity
Common stock 147 147 145
Additional paid-in capital 1,278,037 1,270,968 1,221,301
Treasury common stock, at cost (2,023,129 ) (1,952,068 ) (1,626,856 )
Retained earnings 2,171,459 2,111,256 2,099,339
Accumulated other comprehensive income 16,632 8,101 487
Total Stockholders' Equity 1,443,146 1,438,404 1,694,416
Total Liabilities and Stockholders' Equity $ 3,607,669 $ 3,871,778 $ 4,131,693
Debt-to-Total Capital Ratio 26.2 % 27.4 % 19.0 %

Health Net, Inc.

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

Quarter Ended Quarter Ended Quarter Ended Year Ended Year Ended
December 31, September 30, December 31, December 31, December 31,
2011 2011 2010 2011 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 60,203 $ 61,812 $ 80,404 $ 72,120 $ 204,243

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

Amortization and depreciation 7,274 7,154 9,012 32,209 34,800
Share-based compensation expense 6,257 6,050 5,135 27,602 33,112
Deferred income taxes 22,171 (51,206 ) 38,661 7,771 37,164
Excess tax benefits from share-based compensation (70 ) (2 ) (98 ) (1,349 ) (571 )
Adjustment to loss on sale of business 7 315 (12,331 ) (40,815 ) (41,959 )
Asset impairment 6,000
Net realized (gain) on sale on investments (709 ) (5,369 ) (4,396 ) (33,029 ) (23,019 )
Other changes 10,675 4,029 (5,091 ) 21,485 (21,413 )
Changes in assets and liabilities:
Premiums receivable and unearned premiums (240,347 ) 353,123 113,529 65,221 12,548
Other current assets, receivables and noncurrent assets 16,437 (22,535 ) 32,798 (54,031 ) 27,590
Amounts receivable/payable under government contracts 6,301 89,741 1,781 32,754 27,404
Reserves for claims and other settlements 39,089 (27,687 ) 37,647 (29,898 ) (9,631 )
Accounts payable and other liabilities (47,105 ) 105,283 (9,528 ) 3,340 21,770
Net cash (used in) provided by operating activities (119,817 ) 520,708 287,523 103,380 308,038
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments 128,299 434,236 210,533 1,760,336 1,118,957
Maturities of investments 40,941 30,299 43,224 189,137 199,425
Purchases of investments (71,782 ) (532,032 ) (543,696 ) (1,814,431 ) (1,582,851 )
Proceeds from sale of property and equipment 19
Purchases of property and equipment (32,124 ) (11,124 ) (9,793 ) (64,260 ) (34,791 )
Purchase price adjustment on sale of Northeast Health Plans 80,000 41,065 80,000 162,101 76,126
Sales and purchases of restricted investments and other (1,009 ) 2,620 15,491 (10,656 ) 22,522
Net cash provided by (used in) investing activities 144,325 (34,936 ) (204,241 ) 222,227 (200,593 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases 1,047 513 2,030 13,356 3,644
Repurchases of common stock (76,410 ) (123,551 ) (54,528 ) (389,850 ) (236,847 )
Excess tax benefits from share-based compensation 70 2 98 1,349 571
Borrowings under financing arrangements 281,000 230,000 - 978,500 100,000
Repayment of borrowings under financing arrangements (319,712 ) (270,000 ) (100,000 ) (872,212 ) (316,771 )
Net (decrease) increase in checks outstanding, net of deposits (5,901 ) (31,960 ) 45,909 (46,718 ) 45,909
Customer funds administered (50,685 ) (80,943 ) (72,954 ) (129,917 ) (36,616 )
Net cash (used in) financing activities (170,591 ) (275,939 ) (179,445 ) (445,492 ) (440,110 )
Net (decrease) increase in cash and cash equivalents (146,083 ) 209,833 (96,163 ) (119,885 ) (332,665 )
Cash and cash equivalents, beginning of period 376,336 166,503 446,301 350,138 682,803
Cash and cash equivalents, end of period $ 230,253 $ 376,336 $ 350,138 $ 230,253 $ 350,138
Health Net, Inc.
SEGMENT INFORMATION (page 1)
($ in thousands, except per share and PMPM data)
The following table presents Health Net's operating segment information.
Quarter Ended December 31, 2011 Quarter Ended September 30, 2011 Quarter Ended December 31, 2010
Western Region Government Northeast Corporate/ Western Region Government Northeast Corporate/ Western Region Government Northeast Corporate/
Operations1 Contracts7 Operations3

Other4, 5, 6

Consolidated Operations1 Contracts7 Operations3 Other4, 5, 6 Consolidated Operations1 Contracts2 Operations3 Other4, 5, 6 Consolidated
Health plan services premiums $ 2,602,790 $ 2,602,790 $ 2,582,372 $ 13 $ 2,582,385 $ 2,481,121 $ 10,003 $ 2,491,124
Government contracts 194,632 194,632 175,845 175,845 822,388 822,388
Net investment income 10,047 10,047 15,188 15,188 15,138 88 15,226
Administrative services fees and other income 4,553 4,553 2,174 2,174 4,953 - 4,953
Northeast administrative services fees and other 0 - 10,976 10,976 - 39,643 39,643
Total revenues 2,617,390 194,632 - - 2,812,022 2,599,734 175,845 10,989 - 2,786,568 2,501,212 822,388 49,734 - 3,373,334
Health plan services 2,217,616 (25 ) (6,325 ) 2,211,266 2,223,430 213 (172 ) 2,223,471 2,115,099 9,746 (24,876 ) 2,099,969
Government contracts 155,580 1,440 157,020 127,707 177 127,884 770,321 166 770,487
G&A excluding insurance, taxes and fees 220,110 (450 ) 8,231 227,891 209,463 (429 ) 4,563 213,597 211,894 1,576 13,015 226,485
Insurance, taxes and fees 20,815 457 - 21,272 19,618 417 - 20,035 19,003 373 - 19,376
G&A including insurance, taxes and fees 240,925 7 8,231 249,163 229,081 (12 ) 4,563 233,632 230,897 1,949 13,015 245,861
Selling 61,821 6 61,827 58,085 25 58,110 63,866 467 64,333
Depreciation and amortization 7,274 7,274 7,154 7,154 8,980 32 9,012
Interest 8,507 8,507 7,783 7,783 8,085 - 8,085
Early debt extinguishment - - - -
Asset impairments - - - - -
Northeast administrative and claims services expenses 26,756 26,756 29,043 29,043 63,727 63,727
Adjustment to loss on sale of Northeast health plans 7 7 315 315 (12,331 ) (12,331 )
Total expenses 2,536,143 155,580 26,751 3,346 2,721,820 2,525,533 127,707 29,584 4,568 2,687,392 2,426,927 770,321 63,590 (11,695 ) 3,249,143
Income (loss) from operations before income taxes 81,247 39,052 (26,751 ) (3,346 ) 90,202 74,201 48,138 (18,595 ) (4,568 ) 99,176 74,285 52,067 (13,856 ) 11,695 124,191
Income tax provision (benefit) 28,819 15,853 (11,968 ) (2,705 ) 29,999 27,004 19,509 (7,236 ) (1,913 ) 37,364 27,389 21,320 (9,830 ) 4,908 43,787
Net income (loss) $ 52,428 $ 23,199 $ (14,783 ) $ (641 ) $ 60,203 $ 47,197 $ 28,629 $ (11,359 ) $ (2,655 ) $ 61,812 $ 46,896 $ 30,747 $ (4,026 ) $ 6,787 $ 80,404
Basic earnings (loss) per share $ 0.63 $ 0.28 $ (0.18 ) $ (0.01 ) $ 0.73 $ 0.54 $ 0.33 $ (0.13 ) $ (0.03 ) $ 0.71 $ 0.49 $ 0.32 $ (0.04 ) $ 0.07 $ 0.84
Diluted earnings (loss) per share $ 0.62 $ 0.28 $ (0.18 ) $ (0.01 ) $ 0.71 $ 0.53 $ 0.32 $ (0.13 ) $ (0.03 ) $ 0.70 $ 0.48 $ 0.32 $ (0.04 ) $ 0.07 $ 0.83
Basic weighted average shares outstanding 82,721 82,721 82,721 82,721 82,721 87,675 87,675 87,675 87,675 87,675 95,697 95,697 95,697 95,697 95,697
Diluted weighted average shares outstanding 84,247 84,247 82,721 82,721 84,247 88,874 88,874 87,675 87,675 88,874 96,885 96,885 95,697 96,885 96,885
Pretax margin 3.1 % 2.9 % 3.0 %
Commercial premium yield 4.7 % 5.1 % 6.8 %
Commercial premium PMPM $ 360.12 $ 359.96 $ 343.85
Commercial health care cost trend 3.9 % 3.2 % 5.7 %
Commercial health care cost PMPM $ 305.52 $ 305.08 $ 294.08
Commercial MCR 84.8 % 84.8 % 85.5 %
Medicare Advantage MCR 90.5 % 90.7 % 89.4 %
Medicare PDP (stand-alone) MCR 59.0 % 78.4 % 53.1 %
Medicaid MCR 85.5 % 86.0 % 87.4 %
Health plan services MCR 85.2 % 86.1 % 85.2 %
G&A expense ratio 9.2 % 8.9 % 9.3 %
Selling costs ratio 2.4 % 2.2 % 2.6 %
1

Includes the operations of the company's commercial, Medicare and Medicaid health plans in California, Arizona, Oregon and Washington, as well as the operations of the company's health and life insurance companies, primarily in Arizona, California, Oregon and Washington, and the operations of the company's behavioral health and pharmaceutical services subsidiaries in several states including California, Arizona and Oregon.

2 Includes the operations of government-sponsored managed care plans through the TRICARE program and other health care-related Department of Defense and Veterans Affairs government contracts.
3 Includes the operations of the company's businesses that provided administrative services through June 30, 2011 pursuant to administrative services agreements (ASA) entered into with UnitedHealthcare (United) and its affiliates, as well as the operations of the company's health and life insurance companies in Connecticut, New Jersey and New York. The ASA terminated on July 1, 2011, and the company began performing under the claims servicing agreements (CSA) with United and its affiliates. On and after July 1, 2011, includes the operations of the company's businesses that provide claims run-out services pursuant to the CSA.
4 Includes a litigation reserve true-up related to a previous accrual for a class action lawsuit.
5 Includes expenses primarily related to litigation.
6 Includes costs related to the company’s G&A cost reduction efforts and/or operations strategy.
7 Includes administrative services provided under the new T-3 Managed Care Support Contract for the TRICARE North Region and other health care-related Department of Defense and Veterans Affairs government contracts. Also includes amounts related to the operations of government-sponsored managed care plans through our prior TRICARE contract and amounts related to the completion of the prior TRICARE contract.
Health Net, Inc.
SEGMENT INFORMATION (page 2)
($ in thousands, except per share and PMPM data)
The following table presents Health Net's operating segment information.
Year Ended December 31, 2011 Year Ended December 31, 2010
Western Region Government Northeast Corporate/ Western Region Government Northeast Corporate/
Operations1 Contracts7 Operations3 Other4, 5, 6 Consolidated Operations1 Contracts2 Operations3 Other4, 5, 6 Consolidated
Health plan services premiums $ 10,361,934 $ 2,344 $ 10,364,278 $ 9,925,738 $ 71,150 $ 9,996,888
Government contracts 1,416,619 1,416,619 3,344,483 3,344,483
Net investment income 74,092 69 74,161 70,279 902 71,181
Administrative services fees and other income 11,532 11,532 26,547 46 (5,460 ) 21,133
Northeast administrative services fees and other 34,446 34,446 186,167 186,167
Total revenues 10,447,558 1,416,619 36,859 - 11,901,036 10,022,564 3,344,483 258,265 (5,460 ) 13,619,852
Health plan services 8,954,218 930 (6,799 ) 8,948,349 8,591,161 64,465 (46,509 ) 8,609,117
Government contracts 1,231,388 6,496 1,237,884 3,165,747 2,413 3,168,160
G&A excluding insurance, taxes and fees 842,966 559 199,732 1,043,257 807,450 14,886 58,840 881,176
Insurance, taxes and fees 83,773 1,155 84,928 74,309 779 - 75,088
G&A including insurance, taxes and fees 926,739 1,714 199,732 1,128,185 881,759 15,665 58,840 956,264
Selling 237,997 202 238,199 235,608 3,151 238,759
Depreciation and amortization 32,197 12 32,209 34,634 166 34,800
Interest 31,963 185 32,148 34,880 - 34,880
Early debt extinguishment - 3,532 3,532
Asset impairments - 6,000 6,000
Northeast administrative and claims services expenses 145,879 145,879 279,434 279,434
Adjustment to loss on sale of Northeast health plans (40,815 ) (40,815 ) (41,959 ) (41,959 )
Total expenses 10,183,114 1,231,388 108,107 199,429 11,722,038 9,778,042 3,165,747 326,922 18,276 13,288,987
Income (loss) from operations before income taxes 264,444 185,231 (71,248 ) (199,429 ) 178,998 244,522 178,736 (68,657 ) (23,736 ) 330,865
Income tax provision (benefit) 96,169 75,092 (34,444 ) (29,939 ) 106,878 91,709 73,197 (29,256 ) (9,028 ) 126,622
Net income (loss) $ 168,275 $ 110,139 $ (36,804 ) $ (169,490 ) $ 72,120 $ 152,813 $ 105,539 $ (39,401 ) $ (14,708 ) $ 204,243
Basic earnings (loss) per share $ 1.90 $ 1.24 $ (0.42 ) $ (1.91 ) $ 0.81 $ 1.56 $ 1.07 $ (0.40 ) $ (0.15 ) $ 2.08
Diluted earnings (loss) per share $ 1.87 $ 1.22 $ (0.42 ) $ (1.91 ) $ 0.80 $ 1.54 $ 1.06 $ (0.40 ) $ (0.15 ) $ 2.06
Basic weighted average shares outstanding 88,524 88,524 88,524 88,524 88,524 98,232 98,232 98,232 98,232 98,232
Diluted weighted average shares outstanding 89,970 89,970 88,524 88,524 89,970 99,232 99,232 98,232 98,232 99,232
Pretax margin 2.5 % 2.4 %
Commercial premium yield 5.1 % 7.9 %
Commercial premium PMPM $ 358.04 $ 340.81
Commercial health care cost trend 4.0 % 7.1 %
Commercial health care cost PMPM $ 305.27 $ 293.51
Commercial MCR 85.3 % 86.1 %
Medicare Advantage MCR 90.3 % 88.8 %
Medicare PDP (stand-alone) MCR 84.1 % 77.2 %
Medicaid MCR 85.5 % 87.7 %
Health plan services MCR 86.4 % 86.6 %
G&A expense ratio 8.9 % 8.9 %
Selling costs ratio 2.3 % 2.4 %
1

Includes the operations of the company's commercial, Medicare and Medicaid health plans in California, Arizona, Oregon and Washington, as well as the operations of the company's health and life insurance companies, primarily in Arizona, California, Oregon and Washington, and the operations of the company's behavioral health and pharmaceutical services subsidiaries in several states including California, Arizona and Oregon.

2 Includes the operations of government-sponsored managed care plans through the TRICARE program and other health care-related Department of Defense and Veterans Affairs government contracts.
3 Includes the operations of the company's businesses that provided administrative services through June 30, 2011 pursuant to administrative services agreements (ASA) entered into with UnitedHealthcare (United) and its affiliates, as well as the operations of the company's health and life insurance companies in Connecticut, New Jersey and New York. The ASA terminated on July 1, 2011, and the company began performing under the claims servicing agreements (CSA) with United and its affiliates. On and after July 1, 2011, includes the operations of the company's businesses that provide claims run-out services pursuant to the CSA.
4 Includes a litigation reserve true-up related to a previous accrual for a class action lawsuit.
5 Includes expenses primarily related to litigation.
6 Includes costs related to the company’s G&A cost reduction efforts and/or operations strategy.
7 Includes administrative services provided under the new T-3 Managed Care Support Contract for the TRICARE North Region and other health care-related Department of Defense and Veterans Affairs government contracts. Also includes amounts related to the operations of government-sponsored managed care plans through our prior TRICARE contract and amounts related to the completion of the prior TRICARE contract.
Health Net, Inc.
Disclosures Regarding Non-GAAP Financial Information
($ in millions)
Set forth below is a reconciliation of adjusted days claims payable (DCP), a non-GAAP financial measure, to the comparable GAAP financial measure, DCP. DCP is calculated by dividing the amount of reserve for claims and other settlements (claims reserve) by health plan services cost (health plan costs) during the quarter and multiplying that amount by the number of days in the quarter. In this press release, management presents an adjusted DCP metric which subtracts capitation, provider and other claims settlements and Medicare Advantage-Prescription Drug (MAPD) and stand-alone Prescription Drug Plans (PDP) payables/costs from the claims reserve and health plan costs.
Management believes that adjusted DCP provides useful information to investors because the adjusted DCP calculation excludes from both claims reserve and health plan costs amounts related to health care costs for which no or minimal reserves are maintained. Therefore, management believes that adjusted DCP may present a more accurate reflection of DCP calculated from claims-based reserves than does GAAP DCP, which includes 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.
You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating the adjusted amounts, you should be aware that we have incurred expenses that are the same as or similar to some of the adjustments in the current presentation and we may incur them again in the future.
Our presentation of the adjusted amounts should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.
Reconciliation of Days Claims Payable: Q4 2011 Q3 2011 Q4 2010 FY 2011 FY 2010
(1) Reserve for Claims and Other Settlements $ 912.1 $ 873.0 $ 942.0 $ 912.1 $ 942.0
Less: Capitation, Provider and Other Claim Settlements, and MAPD and PDP Payables (90.7 ) (92.2 ) (108.7 ) (90.7 ) (108.7 )
(2) Reserve for Claims and Other Settlements - Adjusted $ 821.4 $ 780.8 $ 833.3 $ 821.4 $ 833.3
(3) Health Plan Services Cost $ 2,211.3 $ 2,223.5 $ 2,100.0 $ 8,948.3 $ 8,609.1
Less: Capitation, Provider and Other Claim Settlements, and MAPD and PDP Costs (815.3 ) (833.7 ) (762.6 ) (3,450.2 ) (3,291.1 )
(4) Health Plan Services Cost - Adjusted $ 1,396.0 $ 1,389.8 $ 1,337.4 $ 5,498.1 $ 5,318.0
(5) Number of Days in Period 92 92 92 365 365
= (1) / (3) * (5) Days Claims Payable - (using end of period reserve amount) 37.9 36.1 41.3 37.2 39.9
= (2) / (4) * (5) Days Claims payable - Adjusted (using end of period reserve amount) 54.1 51.7 57.3 54.5 57.2
Health Net, Inc.
Reconciliation of Reserves for Claims and Other Settlements
($ in millions)
Health Plan Services
FY 2011 FY 2010 FY 2009
Reserve for claims (a), beginning of period $ 727.5 $ 692.2 $ 957.1
Incurred claims related to:
Current Year 4,733.0 4,644.2 6,422.8
Prior Years (c) (96.5 ) (70.0 ) (80.0 )
Total Incurred (b) 4,636.5 4,574.2 6,342.8
Paid claims related to:
Current Year 4,024.4 3,929.3 5,572.2
Prior Years 618.8 609.6 857.8
Total Paid (b) 4,643.2 4,538.9 6,430.0
Less: Divested businesses - - (177.7 )
Reserve for claims (a), end of period 720.8 727.5 692.2
Add:
Claims Payable (d) 111.0 123.6 165.6
Other (e) 80.3 90.9 93.9
Reserves for claims and other settlements, end of period $ 912.1 $ 942.0 $ 951.7
(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 period-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 amount accrued for litigation and regulatory-related expenses.
(e) Includes accrued capitation, shared risk settlements, provider incentives and other reserve items.

Contacts:

Health Net, Inc.
Investor Contact
Angie McCabe
818-676-8692
angie.mccabe@healthnet.com
or
Media Contact
Margita Thompson
818-676-7912
margita.thompson@healthnet.com

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