4th Annual Investor Conference
May 16, 2001
“DYNAMIC MARKETS, COMPELLING OPPORTUNITIES”
2
Cautionary Statement
The matters discussed in this release contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, that involve risks and uncertainties. All statements other than statements of historical information provided herein may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements. 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” and “Cautionary Statements” sections included within the Company's most recent Annual Report on Form 10-K filed with the SEC and the risks discussed in the Company's other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof.
4th Annual Investor Conference
May 16, 2001
FINANCE
Steven P. Erwin
EVP and Chief Financial Officer
4
Looking Back to 2000
Q1 2001 Highlights
Expectations for 2001
2002 Operating Performance Goals
Hot Topics
5
Looking Back to 2000
Q1 2001 Highlights
Expectations for 2001
2002 Operating Performance Goals
Hot Topics
6
Improved Health Plan Operations– Health Plan Enrollment Up 8.7%
– Commercial Revenue PMPMs Up Over 10%
– MCR Stable
Efficient Operating Cost Management– SG&A Ratio Declined 90 Basis Points to 14.5%
– Expense Increases Focused on Infrastructure-Related
Initiatives and Membership Growth
Q1 2001 - Positioned for Growth
7
Resolution of the Government Receivable
– Collected $284 Million Net; Receivable Down to $65 Million
From $334 Million at Year-End 2000
Stronger Balance Sheet– Debt to Total Capital At 36.8% in Q1 2001
– Investment Grade Ratings From S&P and Moody’s
– Issued $400 Million of 10-Year Notes on April 12, 2001
Q1 2001 - Positioned for Growth
8
Looking Back to 2000
Q1 2001 Highlights
Expectations for 2001
2002 Operating Performance Goals
Hot Topics
9
EPS Between $1.55 - $1.58 (17% - 19% Growth Over 2000)
Enrollment Growth
Stable Health Plan MCR
Improving SG&A Ratio
Strengthening Capital Structure
Record Cash Flow From Operations
Capital Expenditure Spending Focused on Efficiency Initiatives
Expectations for 2001
10
EPS Growth - New GAAP
$1.09
$0.20
$1.33
$0.20
$1.55 - 1.58
$0.19
$0.75
$0.95
$1.15
$1.35
$1.55
$1.75
$1.95
1999 2000 2001E
+ 22%
+ 17% - 19%
* Excluding One-Time Charges/Gains– Shaded Area: Impact of Goodwill Amortization
*
$1.29
$1.53
$1.74 - $1.77
11
Same Store Health Plan Enrollment Growth
3,935
4,040
3,7183,744
3,700
3,800
3,900
4,000
4,100
4,200
1999 Q1 2000 2000 Q1 2001 2001Projection
Membership Growth Will Slow as Increases in California and Northeast Will Offset Expected Decreases in Arizona
4,0XX
12
Stable Total Health Plan MCR Expected to Continue in 2001
85.2% 85.2%
84.9% 84.8%
82.0%
83.0%
84.0%
85.0%
86.0%
Q1 2000 Q1 2001 2000 2001Projection
13
SG&A % Decline to Continue in 2001
17.5%
16.0%
15.2%
14.5% 14.X%
14%
15%
16%
17%
18%
1998 1999 2000 Q1 2001 2001Projection
14
Issued $400 Million on April 12– Bullet Maturity Due in April 2011
Offering Upsized From $300 MillionCoupon Rate of 8.375% (All-in Cost of 8.54%)100% of Proceeds Reduced Revolver
OutstandingsInvestment Grade Rating From Moody’s (Baa3)
and from S&P (BBB-)
New 10-Year Notes
15
New $700 Million Facility Being Negotiated One Year Ahead of Maturity
Down From Current $1.356 Billion Facility SizeNew Maturity: May 2006 (Expected)Pricing at Libor + 112.5 bps (vs. Current 125 bps)Purpose:
– Funding General Corporate Activities (Working Capital, etc.)
– Provides Liquidity Cushion of $400 - $500 Million
Bank Revolver
16
Total Debt Level Below $600 Million by Year End 2001
Long-Term Debt to Capital Ratio Expected to Be In The Low 30% Range by Year-end; at or Below 30% in 2002 and Beyond
New 10-Year Notes Provide Stable Funding Source
Bank Revolver Expected to Be Renewed One Year Ahead of Maturity
Strengthening Capital Structure in 2001
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63.0%
36.8%
Total Debt Has Decreased Over $610 Million, or Nearly 50%, and Debt to Capital Ratio Has Dropped from 63.0% in Q4 1998 to 36.8% in Q1 2000
$1,256
$625
$725
$825
$925
$1,025
$1,125
$1,225
$1,325
Q4 98 Q4 99 Q4 00 Q1 01
35.0%
40.0%
45.0%
50.0%
55.0%
60.0%
65.0%
Total Debt Debt to Capital
Debt to Total Capital
(In Thousands)
18
2001 Will Nearly Equal 1999 And 2000 Combined
($126)
$101
$297 $366
$575 to $600
($150)
($50)
$50
$150
$250
$350
1997 1998 1999 2000 2001Projection
$(25)
$663
(in millions)
Cash Flow from Operations
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Capital Expenditure Process
Capital Expenditure Process Review Rigor Implemented in 1999
– Business Cases Developed and Submitted for Review
– Includes Internal Rates of Return on Cash Flow Analysis
– Screening Process at Division Management Level
– All Cases Greater than $500K Submitted to Executive Management Committee for Review and Approval
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Capital Expenditure Spending
$132$148
$49
$70
$10
$100
$0
$20
$40
$60
$80
$100
$120
$140
$160
1997 1998 1999 2000 Q1 2001 2001Projected
Targeted CapEx Spending Will Increase in 2001 for Information Technology and New Ventures Group Initiatives
($ M
illi
on
s)
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Looking Back to 2000
Q1 2001 Highlights
Expectations for 2001
2002 Operating Performance Goals
Hot Topics
22
$1.80-$1.85 EPS in 2002; New GAAP of $1.99 - $2.04 in 2002 (Consensus Average is $1.83; $2.02 Under New GAAP)
Revenue Growth With Focus on Improving Margins
Stable MCR
Declining SG&A Ratio
2002 Operating Performance Goals
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Profitable Enrollment Growth Based on Optimum
Price / Product Profile
Stable MCR and Efficient SG&A Management
Increasing Positive Cash Flow from Operations
Continued Debt Reductions
Ongoing Performance Expectations
24
Looking Back to 2000
Q1 2001 Highlights
Expectations for 2001
2002 Operating Performance Goals
Hot Topics
25
“Excess” Cash and Cash Flow
Days Claims Payable
Share Repurchase Viewpoint
ROE Growth
Hot Topics
26
“Excess” Cash Determinants– Excess Cash: Cash Above Required Statutory Capital
Levels and Cash at Non-Regulated Entities
– Risk-Based Capital: National Association of Insurance Commissioners (NAIC) Approved Model for Assessing the Appropriate Capital Levels for Regulated Entities and is Based on Business Risk and Other Risk Factors
• 150% - 200% of RBC = Prompts Regulatory Action; Health Plan Required to Submit Corrective Action Plan
• 200% of RBC = Required Company RBC Statutory Surplus• 300% of RBC = Health Net Target Operating Levels That Includes a Margin
Hot Topics
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Cash - Where Is It?
Distribution of Cash & Equivalents and Securities Available for Sale
($ in Millions)
At 3/31/01
Cash & Equivalents
Securities Available for
Sale Total
Health Net of California 505$ 160$ 664$ Health Net of the Northeast 379 190 568 Health Net of Arizona 101 48 149 Florida 106 19 125 Life Companies 14 34 48 Health Net of Oregon 14 23 38 Regulated Subs 1,119 473 1,592
Unregulated Subs 15 5 21
Corporate 107 5 112 TOTAL 1,242$ 484$ 1,726$
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Excess Cash
At 12/31/00, Health Net Has Approximately $160 Million of Surplus in Excess of Statutory Requirements
Health Net Typically Carries Additional $100 Million of Cash in the Non-Regulated Entities
Therefore, Total “Excess” Cash is Approximately $260 Million
Impact of Strong Surplus on "Excess" Cash
($ in Millions)
At 12/31/00
State Defined Surplus as
BookedState Required
Surplus
% of Required Surplus
Health Net of California $ 168 $ 81 207%Health Net of Arizona 61 53 115%Health Net of Oregon 16 14 114%Health Net of the Northeast 169 145 117%Life Companies 55 16 344%Total $ 469 $ 309 152%
Total Risk-Based Capital $ 616 $ 203 304%
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Enterprise Free Cash Flow is Consolidated Cash Flow From Operations Less CapEx Spending
Parent Company Free Cash Flow is Dividend-Based and Includes Other Sources and Uses
Cash Flow - Where Does It Go?
Formulaic Example 2001
Expected Consolidated Cash Flow From Operations 575$ Less: Non-recurring Government Payment (284) Recurring Cash Flow From Operations 291
Estimated 50% Dividend Payout to Parent 150 Plus: Other Parent Sources 100 Less: Parent Uses (50)
Net Cash Available for Corporate Activities 200$
30
Claims Payable Has Three Key Components– Medical Claims Inventory or Backlog
– Incurred But Not Reported (IBNR) Reserves
– Adjudicated But Unpaid ClaimsBusiness Reasons for a Decline in Days Claims
Payable (DCP)– Paydown of Medical Claims Backlog– Change in Product, Geographical or Provider Mix– Timing of Medical Payments (Quarterly, Monthly,
Weekly)
Claims Payable Review
31
ROE Growth
14.7%
15.0%
15.6%
16.0%
16.4%
17.1%
18.1%
17.4%
17.8%
16.3%
16.9%
14.6%
15.1%
15.6%
16.1%
16.6%
17.1%
17.6%
18.1%
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Full Year
1999 2000 2001
Consistent Improvement In ROE From Profitable Top Line Growth, Stable MCR, Improving SG&A Ratio, and Debt Paydowns
Qu
art
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E