Health Net Inc. (HNT)

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Health Net (HNT)

Q1 2013 Earnings Call

April 29, 2013 11:00 am ET

Executives

Angie McCabe - Vice President of Investor Relations

Jay M. Gellert - Chief Executive Officer, President and Director

Joseph C. Capezza - Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Scott J. Fidel - Deutsche Bank AG, Research Division

Carl R. McDonald - Citigroup Inc, Research Division

Ana Gupte - Dowling & Partners Securities, LLC

Christine Arnold - Cowen and Company, LLC, Research Division

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Ralph Giacobbe - Crédit Suisse AG, Research Division

David H. Windley - Jefferies & Company, Inc., Research Division

Justin Lake - JP Morgan Chase & Co, Research Division

Justin Lake - UBS Investment Bank, Research Division

Joshua R. Raskin - Barclays Capital, Research Division

Sarah James - Wedbush Securities Inc., Research Division

Presentation

Operator

Good morning, everyone, and welcome to the Health Net Incorporated First Quarter 2013 Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Angie McCabe, Vice President of Investor Relations. Please go ahead, ma'am.

Angie McCabe

Thank you, Ally. And thank you all for joining us for a discussion of Health Net's first quarter 2013 results.

During this call, we will make forward-looking statements that are subject to certain risks and uncertainties. Risk factors that may impact these statements and could cause actual future results to differ materially from currently expected results are described in our filings with the SEC as well as the cautionary statements in our press release issued in advance of the call.

In today's call, we will refer to adjusted days claims payable. This adjusted metric is not being presented in accordance with generally accepted accounting principles, or GAAP. Please refer to today's press release, which is available on the company's website, for a reconciliation of those non-GAAP financial measures with the most directly comparable GAAP measure, days claims payable.

I will now turn the call over to Jay Gellert, Health Net CEO. Jay?

Jay M. Gellert

Thank you, Angie, and good morning. Today, I want to focus my remarks in 2 areas. First I'll review our progress in responding to the challenges of 2012. Then I'll review our future opportunities as we look towards the historic changes in our industry in 2014 and beyond.

As we approach 2013, we knew we had to accomplish 3 things. First, we targeted a significant repositioning of our commercial large group business. Second, we were determined to achieve stability in our Medicaid business with a new state agreement and other plan changes. And third, we had to avoid any recurrence of adverse prior period development.

I'm pleased to say that our first quarter performance provides substantial proof of our progress on all 3 of these goals. Our earnings per diluted share in the first quarter of 2013 were $0.62, driven in large part by substantial improvements in our commercial and Medicaid businesses.

The first quarter '13 income statement was impacted by timing issues related to Medicaid retroactive rate adjustments, provider settlements and Medicare risk-adjusted accruals. The favorable impact from these timing issues to first quarter diluted earnings per share was approximately $0.16. Those timing issues did not influence our change in full year guidance as they were all included in our initial full year 2013 guidance. Our better-than-expected commercial performance is the driver of our increase in full year guidance. The commercial premium yield to health care cost spread was 620 basis points, 270 basis points higher than our initial full year guidance. The Medicaid MCR was 80%, helped by retroactive rate adjustments from the state of California that I just noted.

We had no adverse prior period reserve development in the first quarter of 2013. In fact, total reserves and claims for other settlements on the balance sheet climbed by $60 million sequentially and $140 million since March 31, 2012. This change caused days claims payable to rise by 2.6 days sequentially and 6.3 days quarter-over-quarter, while adjusted days claims payable increased 3.8 days sequentially and 9.1 days quarter-over-quarter.

With our solid first year results and improved commercial outlook, we are raising full year earnings guidance to a range of $2.20 to $2.30 per diluted share. As I indicated, the key factor in our guidance change is the better-than-expected performance of our commercial business. This was due to favorable mix changes and lower utilization. Last year, we took what we believe were the necessary steps in pricing and product design to improve the 3,000-plus segment. The MCR in that segment improved markedly in the first quarter as we achieved our target bid premium levels. In addition, approximately 40,000 members in high-cost [indiscernible] -- network products decided to leave.

Our tailored network products continue to do well. At the end of the first quarter, they represent more than 37% of total commercial enrollment. Thanks in part to the tailored network products, California small group and individual enrollment grew by approximately 7.6% in the first quarter of 2013 compared with the end of the first quarter of 2012.

Taken together, all these factors resulted in a higher-than-expected spread but a lower-than-expected premium yield. The mix shift from more costly full network large group products to lower premium small group and individual products and to more favorable geographies was more pronounced than our original expectations, as was the effect of tailored network products. We expect these trends to continue throughout the year.

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