HealthSpring reports net income of $44.2 million for first quarter 2011

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Apr 29 2011

HealthSpring, Inc. (NYSE:HS) today announced its results for the first quarter ended March 31, 2011, which include the results of Bravo Health, Inc. ("Bravo Health"), acquired by the Company in November 2010. Highlights for the 2011 first quarter included:

Net income of $44.2 million, or $0.75 per diluted share, compared with $33.8 million, or $0.59 per diluted share, in the 2010 first quarter.
Premium revenue of $1.4 billion, up 85.0% over the 2010 first quarter.
Medicare Advantage membership of 331,609, up 69.7% over the 2010 first quarter and 8.9% over 2010 year-end, and stand-alone PDP membership of 834,642, up 114.3% over the 2010 first quarter and 15.2% over 2010 year-end.
Completion of an underwritten public offering of 8,625,000 shares of common stock in March and the receipt of net proceeds of $301.5 million.

Commenting on the 2011 first quarter results, Herb Fritch, Chairman and Chief Executive Officer, said, "We are pleased to begin 2011 on a positive note as indicated by our strong results for the first three months of the year. The main drivers of these favorable results were higher membership than expected, resulting from higher gross sales and member retention, continued favorable inpatient utilization in most of our Medicare Advantage plans, and increased operating leverage at the SG&A line. Somewhat offsetting these favorable results were higher Medicare Advantage MLRs in our newly acquired Pennsylvania and Mid-Atlantic plans, some of which were expected, and higher than anticipated PDP expenses in certain markets, particularly California. On balance, we believe the results for the quarter bode well for a strong 2011 and are raising our earnings per share guidance."

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 first quarter, which represents an increase of 77.7% over the 2010 first quarter. The higher premium revenue in the 2011 first quarter was primarily attributable to the inclusion of Bravo Health and to a 9.1% increase in membership in the legacy HealthSpring health plans compared with the 2010 first quarter.
Medicare Advantage premiums per member per month, or "PMPM," were $1,111 in the 2011 first quarter, compared with $1,062 in the 2010 first quarter. The increase in PMPM premiums was primarily the result of the inclusion of higher PMPM premiums from the Pennsylvania market and increased risk adjustment payments.
Stand-alone PDP premium revenue was $285.0 million for the 2011 first quarter, an increase of 120.1% compared with the 2010 first quarter. The increase in revenue was primarily the result of the inclusion of Bravo Health premium revenue for the first quarter 2011.
Investment income in the 2011 first quarter increased $2.4 million compared with the 2010 first quarter. The increase in investment income was primarily as a result of increases in invested balances.

Medical Expense

Medicare Advantage medical loss ratio, or "MLR," was 80.5% for the 2011 first quarter, compared with 78.3% for the 2010 first quarter. The increase in the 2011 first quarter MLR, much of which was expected, is primarily due to the inclusion of Bravo Health, which has historically run higher MLRs than other HealthSpring plans, and as a result of increases in member benefits for 2011. The increase in MLR was partially offset by lower MLRs in many of our markets resulting from more favorable inpatient utilization in the current quarter.
PDP MLR was 99.6% for the 2011 first quarter, compared with 98.6% for the 2010 first quarter. The 100 basis points increase in PDP MLR during the current quarter was primarily the result of the higher cost trends from new members in certain PDP regions, particularly California.

Selling, General & Administrative (SG&A) Expense

SG&A expense as a percentage of total revenue in the 2011 first quarter decreased 40 basis points to 9.7%, compared with 10.1% in the 2010 first quarter. The decrease in SG&A expense as a percentage of revenue resulted primarily from revenue increases and lower marketing expenses due to the shortened enrollment period for 2011. SG&A expense in the 2011 first quarter increased $59.7 million compared with the 2010 first quarter, primarily as a result of the inclusion of Bravo Health in the 2011 first quarter.

Depreciation and Amortization Expense

Depreciation and amortization expense in the 2011 first quarter increased $7.0 million over the 2010 first 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 first quarter increased $0.3 million compared with the 2010 first quarter. The Company's interest expense in the 2010 first quarter included debt extinguishment costs of $7.1 million resulting from the Company entering into a new credit facility. Net of the extinguishment costs, interest expense increased $7.4 million in the 2011 first quarter, reflecting higher average debt amounts outstanding related to borrowings made to finance the Bravo Health acquisition.
The 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 March 31, 2011, was 4.6%, compared with 3.9% for the three months ended March 31, 2010.

Income Taxes

The Company's effective income tax rate for the three months ended March 31, 2011, was 37.1%, compared with 37.0% for the three months ended March 31, 2010.

Balance Sheet Highlights

At March 31, 2011, the Company's cash and investments were $893.7 million, $172.3 million of which was held by unregulated entities, compared with cash and investments of $771.8 million at December 31, 2010, $83.4 million of which was held by unregulated entities.
Days in claims payable totaled 33 at the end of the 2011 first quarter, compared with 29 at the end of the 2010 first quarter and 35 at the end of the 2010 fourth quarter.
On March 29, 2011, the Company completed an underwritten public offering of 8,625,000 shares of its common stock. The net proceeds from the offering, after offering expenses and underwriting discounts, were $301.5 million. The Company used $263.4 million of the net proceeds for the repayment of indebtedness during the 2011 first quarter.
Total debt outstanding was $354.1 million at March 31, 2011, compared with $626.9 million at December 31, 2010. There were no borrowings outstanding under the Company's revolving credit facility at March 31, 2011.

Outlook

The Company expects the following in regards to 2011:

Diluted EPS: The Company revises its estimate for diluted earnings per share to a range of $3.40 to $3.70, on weighted average shares outstanding of approximately 66.0 million. In connection with the equity offering completed in March 2011, the Company had previously revised earnings per share guidance to a range of $3.30 to $3.60.
Membership: The Company maintains its estimate for Medicare Advantage membership to be at least 340,000 at the end of 2011. The Company now estimates its PDP membership to be in the range of 860,000 to 880,000 at the end of 2011.
Revenue: The Company maintains its estimate that total revenue will be at least $5.4 billion.
MLRs: The Company revises its estimate for Medicare Advantage (including MA-PD) full-year MLR to a range of 81.0% to 81.5%. The Company now estimates its stand-alone PDP MLR to be in the range of 87.0% to 88.0% for the year.
SG&A: The Company revises its estimate for selling, general and administrative expense to be approximately 10.0% of total revenue for the year.
Income taxes: The Company maintains its estimate that its effective income tax rate for 2011 will be 37.0% to 37.5%.