HealthSpring third quarter net income increases 27.1% to $42.3 million

HealthSpring, Inc. (NYSE: HS) today announced its results for the third quarter ended September 30, 2010. Highlights for the 2010 third quarter included:

• Net income of $53.8 million, or $0.95 per diluted share, up 27.1% over $42.3 million, or $0.77 per diluted share, in the 2009 third quarter.
• Premium revenue of $712.7 million, up 9.7% over the 2009 third quarter.
• Medicare Advantage membership of 198,055, up 6.1% over the 2009 third quarter and 4.7% over 2009 year-end, and stand-alone PDP membership of 409,239, up 34.6% over the 2009 third quarter and 30.7% over 2009 year-end.

Commenting on 2010 third quarter results, Herb Fritch, Chairman and Chief Executive Officer, said, "We have completed another strong quarter, led by continued favorable trends in our Medicare Advantage medical expenses and better than expected Part D membership growth and pharmacy rebates. The announced Bravo Health transaction is proceeding in accordance with plans and is still expected to close on or before year end. We also have positive momentum as we begin enrolling members for 2011."

Operating Highlights

Revenue

• Medicare Advantage premiums (including the prescription drug component of HealthSpring's Medicare Advantage plans, or "MA-PD") were $618.9 million for the 2010 third quarter, reflecting an increase of 6.7% over the 2009 third quarter. The higher premium revenue in the 2010 third quarter was attributable to a 6.1% increase in membership compared with the 2009 third quarter.
• Medicare Advantage per member per month, or "PMPM," premiums were $1,042 in the 2010 third quarter and were level with PMPM premiums for the 2009 third quarter, as expected. PMPM premiums in the 2010 third quarter included increases in the PMPM premium for the drug component of our plans and increases related to member risk scores, which were offset by decreases in CMS-calculated base premium rates. On a year-to-date basis, PMPM premiums increased to $1,062 in 2010 compared with $1,055 in 2009.
• Stand-alone PDP premium revenue was $93.4 million for the 2010 third quarter, an increase of 35.4% compared with the 2009 third quarter. The increase in revenue was primarily the result of a 34.6% increase in membership. PDP premiums PMPM in the 2010 third quarter were $77 compared with $76 in the 2009 third quarter. On a year-to-date basis, PDP PMPM premiums were $95 in 2010 and unchanged compared with the 2009 period.
• Investment income in the 2010 third quarter increased $1.3 million compared with the 2009 third quarter as a result of increases in invested balances, as the Company has moved substantial amounts out of cash and cash equivalents into investments since the 2009 third quarter, and increases in the average duration and yield on invested assets in the portfolio.

Medical Expense

• Medicare Advantage medical loss ratio, or "MLR," was 78.5% for the 2010 third quarter compared with 79.7% for the 2009 third quarter. Changes in benefit design and decreases in inpatient utilization contributed to the decrease in the current period MLR. Moreover, improved results for the drug component of our Medicare Advantage plans contributed to the improved MLR. The improvement in the drug component of our Medicare Advantage MLR was attributable to both higher PMPM premiums and lower drug expenses as a result of increased pharmacy rebates. On a year-to-date basis, Medicare Advantage MLR was 78.2% for 2010 compared with 81.0% for 2009. Medicare Advantage PMPM medical expense decreased 1.6% in the 2010 third quarter compared with the 2009 third quarter and decreased 2.8% year-to-date compared with the first nine months of 2009.
• PDP MLR was 80.7% for the 2010 third quarter compared with 81.5% for the 2009 third quarter. Better than expected results in the 2010 third quarter PDP business were attributable primarily to higher membership and favorable levels of pharmacy rebates. On a year-to-date basis, PDP MLR was 91.1% for 2010 compared with 90.2% for 2009.

Selling, General & Administrative (SG&A) Expense

• SG&A expense as a percentage of total revenue in the 2010 third quarter decreased 70 basis points to 9.3% compared with 10.0% in the 2009 third quarter. The improvement in SG&A as a percentage of revenue resulted primarily from the increases in premium revenue. SG&A expense in the 2010 third quarter increased $1.8 million compared with the 2009 third quarter primarily as a result of increases in printing and advertising in the 2010 third quarter compared with the 2009 third quarter. On a year-to-date basis, SG&A as a percentage of total revenue was 9.3% for 2010 compared with 10.1% for 2009.

Interest Expense

• Interest expense in the 2010 third quarter decreased $0.6 million compared with the 2009 third quarter as a result of lower average debt amounts outstanding and lower interest rates. Interest expense in the 2010 third quarter includes approximately $1.0 million of fees associated with amending the existing credit facility. See "Bravo Health Transaction Update" below. The Company's interest expense on a year-to-date basis for 2010 includes debt extinguishment costs of $7.1 million in the 2010 first quarter resulting from the Company's entering into a new credit facility and terminating its prior credit facility.
• 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, 2010, was 3.2% compared with 4.7% for the three months ended September 30, 2009.

Income Taxes

• The Company's effective income tax rate for the three months ended September 30, 2010, was 36.8% compared with 32.7% for the three months ended September 30, 2009. The lower tax rate in the 2009 third quarter was attributable primarily to the favorable tax impact related to business combination accounting. The Company's effective income tax rate for the nine months ended September 30, 2010, was 36.6%.

Balance Sheet Highlights

• At September 30, 2010, the Company's cash and investments were $567.6 million, $158.4 million of which was held by unregulated entities, compared with cash and investments of $530.7 million at December 31, 2009, $106.4 million of which was held by unregulated entities. The increase in unregulated entity cash and investments during the current nine-month period was net of $70.7 million of payments on long-term debt.
• For the first nine months of 2010, net cash generated in operating activities was $155.8 million compared with $116.2 million generated in the same period of 2009. Operating cash flows on a year-to-date basis for 2010 included the receipt of approximately $50.2 million of prior-year CMS risk premium settlements compared with similar settlements of $31.8 million received in the first nine months of 2009.
• Days in claims payable totaled 29 at the end of the 2010 third quarter compared with 32 at the end of the 2010 second quarter and 35 at the end of the 2009 third quarter. The current quarter decrease in days in claims payable was primarily driven by the timing of payments to providers related to final settlement of risk premiums in the 2010 third quarter. See "Supplemental Information" below and the accompanying schedule of Medical Claims Liabilities.

Bravo Health Transaction Update

The Company's previously announced proposal to acquire all of the outstanding capital stock of Bravo Health, Inc. ("Bravo Health"), is proceeding in accordance with the Company's plans. The Company has received notice of early termination of the Hart-Scott-Rodino waiting period. In addition, the Company has agreed with its existing lenders and certain additional lenders to amend its existing credit facility to provide for, among other things, the term loan acquisition financing. As amended, the facility will provide for the following:

• $355 million in term loan A indebtedness maturing in February 2015 comprised of:
  • $175 million of term loan A indebtedness ($166 million of which is currently outstanding)
  • $180 million of new term loan A indebtedness to be funded at the closing of the acquisition
• $175 million revolving credit facility (currently undrawn and maturing in February 2014)
• $200 million of new six-year term loan B indebtedness to be funded at the closing of the acquisition

The new term loan indebtedness, availability under the $175 million revolving credit facility, and cash on hand will be sufficient to fund the acquisition of Bravo Health. The Company currently expects that outstanding loans under the new credit facility will bear interest at a spread over LIBOR (initially 375 basis points for term loan A indebtedness and 450 basis points for term loan B indebtedness), and will step down depending on the Company's total leverage ratio. With respect to the term loan B indebtedness, the terms of the facility include a contractual minimum LIBOR of 1.5%.

The remaining material conditions to the closing of the Bravo Health acquisition primarily relate to approvals by various state regulatory authorities.

The Company continues to expect the transaction to add $0.45 to $0.55 to its 2011 earnings per share. Other than fees accounted for as interest expense, Bravo Health-related transaction expenses were insignificant for the 2010 third quarter. Assuming the transaction closes in 2010, the Company now expects to incur approximately $8.5 million, or $0.11 per share of transaction expenses in 2010. The Company is revising its previously announced estimate of transaction expenses after concluding that amounts originally believed to be expensed in the current period will now be accounted for as deferred financing fees and amortized over the term of the amended credit facility.

Outlook

The Company has not included projected financial or operating results of Bravo Health for 2010 or the impact of the amended credit facility, except for an estimated $0.11 impact on 2010 earnings per share for expenses expected in the transaction.

• EPS: The Company is increasing its expectations for diluted earnings per share for 2010 to be in the range of $3.20 to $3.30 on weighted average shares outstanding of approximately 57.3 million.
• Membership: The Company maintains its estimate for Medicare Advantage membership at a range of 198,000 to 200,000 at the end of 2010. The Company is increasing its estimate for PDP membership to approximately 420,000 at the end of 2010.
• Revenue: The Company maintains its estimate that 2010 total revenue will be between $2.95 billion and $3.00 billion.
• MLRs: The Company now estimates its Medicare Advantage MLR to be at or below 79% for 2010. The Company now estimates its stand-alone PDP MLR to be in the range of 85.0% to 85.5% for the year.
• SG&A: The Company maintains its estimate that selling, general and administrative expense will be approximately 10.0% of total revenue for 2010 (before taking into account any acquisition-related transaction expenses).
• Income taxes: The Company maintains its estimate that its effective income tax rate for 2010 will approximate 36.5%.