HealthSpring's first-quarter premium revenue up 18.1% to $749.4 million

HealthSpring, Inc. (NYSE:HS) today announced its results for the first quarter ended March 31, 2010. Highlights for the 2010 first quarter included:

• Net income of $33.8 million, or $0.59 per diluted share, compared with $20.6 million, or $0.38 per diluted share, in the 2009 first quarter.
• Premium revenue of $749.4 million, up 18.1% over the 2009 first quarter.
• Medicare Advantage membership of 195,365, up 11.5% over the 2009 first quarter and 3.2% over year-end 2009, and stand-alone PDP membership of 389,561, up 35.8% over the 2009 first quarter and 24.4% over year-end 2009.

Commenting on 2010 first quarter results, Herb Fritch, Chairman and Chief Executive Officer, said, "We are pleased to report that 2010 has started on a positive note as indicated by our strong results for the first three months of the year. Higher membership than expected as a result of higher gross sales and better member retention, coupled with favorable medical loss ratios in our Medicare Advantage plans, were the main drivers of our better than expected results. We are encouraged by the growth in membership and preservation of margins despite the quarter's tighter reimbursement environment. Based on our first quarter's results and because we believe the generally favorable trends in the quarter will continue over the balance of 2010, we are increasing our full year 2010 earnings per share guidance."

Operating Highlights

Revenue

• Medicare Advantage (including the prescription drug component of HealthSpring's Medicare Advantage plans, or "MA-PD") premiums were $619.4 million for the 2010 first quarter, reflecting an increase of 14.4% over the 2009 first quarter. The higher premiums in the 2010 first quarter were primarily attributable to an 11.5% increase in membership compared with the 2009 first quarter.
• Medicare Advantage per member per month, or "PMPM," premiums increased to $1,062 in the 2010 first quarter, compared with $1,047 in the 2009 first quarter. The PMPM premium increase in the 2010 first quarter resulted from increases related to member risk scores partially offset by decreases in CMS-calculated base premium rates.
• Stand-alone PDP premium revenue was $129.5 million for the 2010 first quarter, an increase of 40.0% compared with the 2009 first quarter. The increase in revenue was primarily the result of a 35.8% increase in membership. PDP premiums PMPM in the 2010 first quarter were $111, compared with $109 in the 2009 first quarter.

Medical Expense

• Medicare Advantage medical loss ratio, or "MLR," was 78.3% for the 2010 first quarter, compared with 81.3% for the 2009 first quarter. Changes in benefit design and decreases in inpatient utilization and outpatient procedure costs, combined with the premium revenue increases, resulted in a decrease in the current period MLR. Medicare Advantage PMPM medical expense decreased 2.5% in the 2010 first quarter compared with the 2009 first quarter.
• PDP MLR was 98.6% for the 2010 first quarter, compared with 95.8% for the 2009 first quarter. Higher costs in new PDP regions and increased transition prescription drug costs in the 2010 first quarter were the primary reasons for the increase in PDP MLR.

Selling, General & Administrative (SG&A) Expense

• SG&A expense as a percentage of total revenue in the 2010 first quarter decreased 110 basis points to 10.1%, compared with 11.2% in the 2009 first quarter. The improvement in SG&A as a percentage of revenue resulted primarily from revenue increases and operating cost management. The $4.3 million increase in SG&A expense for the 2010 first quarter compared with the 2009 first quarter was primarily the result of additional personnel costs, increases in sales commissions attributable to membership growth, and increases in advertising costs.

Interest Expense

• Interest expense in the 2010 first quarter increased $5.7 million compared with the 2009 first quarter. The Company's interest expense in the 2010 first quarter includes debt extinguishment costs of $7.1 million resulting from the Company's entering into a new credit facility and terminating its prior credit facility. Net of the extinguishment costs, interest expense decreased $1.4 million in the 2010 first quarter reflecting lower average debt amounts outstanding and lower interest rates compared with the 2009 first quarter.
• 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 March 31, 2010, was 3.9%, compared with 5.2% for the three months ended March 31, 2009.

Income Taxes

• The Company's effective income tax rate for the three months ended March 31, 2010, was 37.0%, compared with 36.5% for the three months ended March 31, 2009.

Balance Sheet Highlights

• At March 31, 2010, the Company's cash and cash equivalents were $294.1 million, $75.6 million of which was held by unregulated entities, compared with cash and cash equivalents of $439.4 million at December 31, 2009, $106.4 million of which was held by unregulated entities. The reduction in cash and cash equivalents during the three months ended March 31, 2010, was primarily caused by net purchases of $69.6 million of investment securities and by payments of $62.0 million of long-term debt.
• Total debt was $175.0 million at March 31, 2010, compared with $237.0 million at December 31, 2009, and $258.5 million at March 31, 2009. In the first quarter of 2010, the Company entered into a new $350 million senior secured credit facility. The new facility consists of $175.0 million in five-year term loans and a four-year, $175.0 million revolving credit facility. Borrowings under the facility and cash on hand were used to repay indebtedness outstanding under the Company's previous credit agreement. There were no borrowings outstanding under the Company's revolving credit facility at March 31, 2010.
• Days in claims payable totaled 29 at the end of the 2010 first quarter.

Outlook

• EPS: The Company is increasing its expectations for diluted earnings per share for 2010 to be in the range of $2.60 to $2.75, on weighted average shares outstanding of approximately 57.8 million.
• Membership: The Company increases its estimate for Medicare Advantage membership to a range of 198,000 to 200,000 at the end of 2010. The Company also refines its estimate for PDP membership from 410,000 to 420,000 to approximately 400,000 at the end of 2010.
• Revenue: The Company now estimates that 2010 total revenue will be between $2.90 billion and $2.95 billion.
• MLRs: The Company is modifying its estimate for Medicare Advantage MLR to a range of 80.0% to 81.0% for 2010. The Company now estimates stand-alone PDP MLR to be in the range of 86.5% to 87.5% for the year.
• SG&A: The Company now estimates that selling, general and administrative expense will be approximately 10.0% of total revenue for 2010.
• Income taxes: The Company estimates that its effective income tax rate for 2010 will be 36.5% to 37.0%.