Following the Louisiana Supreme Court order to pay for damages, Health Net, Inc (HNT) expects to cut its 2011 earnings outlook by $ 1.40 per share.
In July 2005, the court had accused Health Net and awarded approximately $ 117 million in damages, including $ 52.4 million in compensatory damages and $ 65 million in punitive damages.
The lawsuit arose in 1999 from the sale of three health plan subsidiaries of Health Net in Texas, Oklahoma and Louisiana to AmCareco, Inc., which owned and operated the plans since that date.
In 2002, the plans were placed under applicable state oversight and later that year placed into receiverships. The receivers subsequently filed suit against AmCareco, Health Net and other parties alleging fraud, negligence, conspiracy and breach of fiduciary duty among other claims.
The lawsuit claimed that Health Net was responsible for the misconduct of AmCareco as a controlling shareholder. The company said it is currently assessing its legal options after the court's decision.
Health Net is expected to pay $ 180 million in compensatory and punitive damages, calculated before tax, or $ 135 million, calculated on an after-tax basis, in connection with the sale of three failed health plans, according to the court. Subsequently, Health Net expects that its 2011 profits will be impacted by at least $ 1.40 per share.
Health Net expects to pay the damages from its cash reserves, expected operating cash flow or available revolving debt borrowings. In addition, Health Net believes that after the payment of damages, the company will be left with adequate cash reserves.
It will have adequate resources to fund existing obligations, repurchase shares under its stock repurchase program, introduce new products and services, and continue operating and developing health care-related businesses at least for the next 12 months.
As of December 31, 2010, Health Net recorded cash and investments of approximately $ 2.0 billion, compared with approximately $ 2.1 billion as of December 31, 2009. Further, Health Net’s operating cash flow was recorded at $ 214.6 million, as the company received approximately $ 64.3 million in Medicaid payments in January 2011, which was expected to be received in the fourth quarter 2010.
During the fourth quarter of 2010, Health Net repurchased 2.2 million shares, at an average price of $ 26.76, for approximately $ 54.5 million. At the end of the quarter, the company had a balance of approximately $ 149.8 million remaining under the current $ 300 million share repurchase program.
Currently, Health Net carries a Zacks #1 Rank, which translates into a short-term Hold recommendation, indicating no directional pressure on the shares over the near term.
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