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Centene Corporation Financial Report - March 31, 2010
When purchasing health insurance, the financial stability of the insurance company is a valid concern. Consumers rely primarily on state insurance regulators, third party rating services (like A.M. Best Company) and reports from industry sources like the National Association of Insurance Commissioners (NAIC). Another source of information for a publicly owned insurance company is the company's financial reports, published quarterly, primarily intended for use by current and prospective shareholders.
Celtic Insurance Company is owned by Centene Corporation, now a Fortune 500 Company, with shares traded under the symbol CNC. On April 27, 2010, Centene Corporation announced its financial results for the quarter ended March 31, 2010. Following is an excerpt from the company's financial report that may be useful to consumers who wish to know more about the company. The full report is available on the company's website at www.centene.com, under the Investors section.
"The results of operations for our New Jersey health plan, University Health Plans, are classified as discontinued operations. The discussions below, with the exception of cash flow information, are in the context of continuing operations and all financial ratios exclude premium taxes.
First Quarter Highlights
Quarter-end managed care at-risk membership of 1,468,600, an increase of 221,300 members year over year.
Premium and Service Revenues of $1.022 billion, representing 12.5% year over year growth.
Health Benefits Ratio (HBR) of 84.0%.
General and Administrative (G&A) expense ratio of 13.3%.
Days in claims payable of 47.7, including pharmacy claims payable.
Diluted earnings per share from continuing operations of $0.41.
Other Events
During the first quarter of 2010, we completed the sale of 5.75 million shares of common stock, including the underwriters' overallotment option, for a public offering price of $19.25 per share. Net proceeds from the sale of the shares were $104.6 million.
In February 2010, we announced a definitive agreement to acquire certain Medicaid assets in South Carolina. The transaction is expected to close in the second quarter of 2010 and add revenues of approximately $60 million and diluted earnings per share of $0.02 to $0.03 for 2010.
In March 2010, we completed the previously announced sale of our New Jersey health plan, University Health Plans, and recorded a pre-tax gain on sale of $8.2 million, or $0.08 per diluted share, in discontinued operations during the first quarter of 2010.
In March 2010, we announced that our specialty company, Cenpatico Behavioral Health, retained its existing service area contract and was also awarded an expanded contract by the Arizona Department of Health Services to manage behavioral healthcare services for an additional four counties. The expanded contract is expected to take effect July 1, 2010, and add revenues of approximately $20 million for 2010.
In March 2010, Moody's Investors Service upgraded our senior unsecured debt rating and our corporate family rating to Ba2 from Ba3.
In April 2010, we announced that our Celtic Group subsidiary, CeltiCare Health Plan of Massachusetts, renewed its contract to serve Commonwealth Care members as the low cost provider in Massachusetts.
In April 2010, we announced that our Wisconsin subsidiary was not awarded the Southeast Wisconsin BadgerCare Plus Managed Care contract. The loss of the contract award will reduce revenues by approximately $25 million in 2010.
In April 2010, Fortune Magazine announced that Centene ranked #486 in the magazine's annual ranking of the world's largest companies by revenue, up from #609 last year. The ranking placed Centene in the Fortune 500 for the first time.
Michael F. Neidorff, Centene's Chairman and Chief Executive Officer, stated, "We are pleased to have maintained our positive operating momentum as 2010 begins and we are dedicated to maintaining our discipline and focus in the future."
The following table depicts membership in Centene's managed care organizations, by state, at March 31, 2010 and 2009:
March 31,
---------
2010 2009
---- ----
Arizona 19,000 15,500
Florida 105,900 29,100
Georgia 301,000 289,300
Indiana 211,400 179,100
Massachusetts 26,900 -
Ohio 156,000 137,000
South Carolina 53,900 48,500
Texas 459,600 421,100
Wisconsin 134,900 127,700
------- -------
Total at-risk membership 1,468,600 1,247,300
Non-risk membership 62,200 96,000
------ ------
Total 1,530,800 1,343,300
========= =========
The following table depicts membership in Centene's managed care organizations, by member category, at March 31, 2010 and 2009:
March 31,
---------
2010 2009
---- ----
Medicaid 1,088,300 921,100
CHIP & Foster Care 266,300 256,900
ABD & Medicare 87,100 69,300
Other State programs 26,900 -
------ ---
Total at-risk membership 1,468,600 1,247,300
Non-risk membership 62,200 96,000
------ ------
Total 1,530,800 1,343,300
========= =========
Statement of Operations
Premium and service revenues increased 12.5% in the three months ended March 31, 2010 over 2009 as a result of membership growth in all of our states. This increase was moderated by the removal of pharmacy services in two states beginning in 2010. These pharmacy carve outs had the effect of reducing 2010 revenue by approximately $35 million.
The consolidated HBR for the three months ended March 31, 2010 of 84.0% was an increase of 0.5% over the comparable period in 2009. A reconciliation of the change in HBR from the prior year same period is presented below:
First Quarter 2009 83.5%
Improvements in existing markets (0.5)
New markets reserved at higher rates 1.0
---
First Quarter 2010 84.0%
====
The increase in the first quarter of 2010 over the comparable period in 2009 was primarily due to higher HBR in our new markets, partially offset by improvements in our existing markets.
Consolidated G&A expense as a percent of premium and service revenues was 13.3% in the first quarter of 2010, a decrease from 13.5% in the first quarter of 2009. The decrease reflects the leveraging of our expenses over higher revenues, partially offset by a $4.6 million increase in contributions to the Company's charitable foundation.
Other income for the quarter includes a $3.0 million gain on distributions received from the Reserve Primary Fund in excess of our adjusted basis. An offsetting $3.0 million contribution was made to the Company's charitable foundation and is included in G&A expense discussed above.
Earnings per diluted share from continuing operations were $0.41, compared to $0.43 in the first quarter of 2009, and reflect the approximate 10% increase in diluted shares outstanding resulting from the stock offering.
Balance Sheet and Cash Flow
At March 31, 2010, the Company had cash and investments of $969.2 million, including $917.9 million held by its regulated entities and $51.3 million held by its unregulated entities. Medical claims liabilities totaled $444.8 million, representing 47.7 days in claims payable, a decrease of 2.4 days from December 31, 2009. Total debt was $232.7 million and debt to capitalization was 23.7%. Year to date cash flow from operations was $(38.5) million, reflecting a $73.3 million decrease in unearned revenue from December 31, 2009 as a result of the prepayment of monthly premiums. In 2010, only two monthly premium payments were received during the quarter from Ohio and Florida.
A reconciliation of the Company's change in days in claims payable from the immediately preceding quarter-end is presented below:
Days in claims payable, December 31, 2009 50.1
Additional processing days at quarter end (1.5)
Pharmacy carve out (0.9)
Days in claims payable, March 31, 2010 47.7
====
Outlook
The table below depicts the Company's annual guidance from continuing operations for 2010:
Full Year 2010
--------------
Low High
--- ----
Premium and Service
revenues (in millions) $4,300 $4,400
Earnings per diluted share
(EPS) $1.73 $1.83
HBR % 84.0% 86.0%
G&A % 12.4% 12.9%
Diluted Shares Outstanding
(in thousands) 50,500
-------------------------- ------
The Company is increasing its earnings guidance by $0.03 to reflect the first quarter performance and results of the RFP's in Arizona and Wisconsin. The Company is adjusting its revenue guidance to reflect a shift in the start date of our Mississippi operations to October 1, 2010. Our current guidance excludes the previously announced South Carolina transaction, which is expected to add approximately $60 million of revenue and $0.02 to $0.03 diluted earnings per share in 2010, as the transaction has not yet closed.
About Centene Corporation
Centene Corporation, a Fortune 500 company, is a multi-line healthcare enterprise operating in two segments: Medicaid Managed Care and Specialty Services. Our Medicaid Managed Care segment provides Medicaid and Medicaid-related health plan coverage to individuals through government subsidized programs, including Medicaid, the State Children's Health Insurance Program, or CHIP, Foster Care, Medicare Special Needs Plans and the Supplemental Security Income Program, also known as the Aged, Blind or Disabled Program, or collectively ABD. Our Specialty Services segment offers products for behavioral health, health insurance exchanges, individual health insurance, life and health management, long-term care programs, managed vision, telehealth services, and pharmacy benefits management to state programs, healthcare organizations, employer groups and other commercial organizations, as well as to our own subsidiaries.
The information provided in this press release contains forward-looking statements that relate to future events and future financial performance of Centene. Subsequent events and developments may cause the Company's estimates to change. The Company disclaims any obligation to update this forward-looking financial information in the future. Readers are cautioned that matters subject to forward-looking statements involve known and unknown risks and uncertainties, including economic, regulatory, competitive and other factors that may cause Centene's or its industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Actual results may differ from projections or estimates due to a variety of important factors, including Centene's ability to accurately predict and effectively manage health benefits and other operating expenses, competition, changes in healthcare practices, changes in federal or state laws or regulations, inflation, provider contract changes, new technologies, reduction in provider payments by governmental payors, major epidemics, disasters and numerous other factors affecting the delivery and cost of healthcare. The expiration, cancellation or suspension of Centene's Medicaid Managed Care contracts by state governments would also negatively affect Centene.
(Tables Follow)
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
March 31, December 31,
2010 2009
---- ----
ASSETS
Current assets:
Cash and cash equivalents of
continuing operations, including
$5,918 and $8,667, respectively,
from consolidated variable
interest entities $350,075 $400,951
Cash and cash equivalents of
discontinued operations 14 2,801
--- -----
Total cash and cash equivalents 350,089 403,752
Premium and related receivables,
net of allowance for
uncollectible accounts of $1,338
and $1,338, respectively,
including $6,565 and $11,313,
respectively, from consolidated
variable interest entities 110,120 103,456
Short-term investments, at fair
value (amortized cost $39,953
and $39,230, respectively) 40,220 39,554
Other current assets, including
$5,023 and $4,507, respectively,
from consolidated variable
interest entities 69,136 64,866
Current assets of discontinued
operations other than cash 2,337 4,506
----- -----
Total current assets 571,902 616,134
Long-term investments, at fair
value (amortized cost $547,148
and $514,256, respectively) 558,270 525,497
Restricted deposits, at fair
value (amortized cost $20,532
and $20,048, respectively) 20,618 20,132
Property, software and equipment,
net of accumulated depreciation
of $111,938 and $103,883,
respectively, including $110,764
and $89,219, respectively, from
consolidated variable interest
entities 269,492 230,421
Goodwill 229,512 224,587
Intangible assets, net 22,008 22,479
Other long-term assets 35,416 36,829
Long-term assets of discontinued
operations 23,453 26,285
------ ------
Total assets $1,730,671 $1,702,364
========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Medical claims liability $444,826 $470,932
Accounts payable and accrued
expenses, including $23,122 and
$14,020, respectively, from
consolidated variable interest
entities 200,615 132,001
Unearned revenue 18,362 91,644
Current portion of long-term
debt 660 646
Current liabilities of
discontinued operations 20,650 20,685
------ ------
Total current liabilities 685,113 715,908
Long-term debt 232,064 307,085
Other long-term liabilities 63,575 59,561
Long-term liabilities of
discontinued operations 385 383
--- ---
Total liabilities 981,137 1,082,937
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value;
authorized 100,000,000 shares;
51,490,256 issued and 49,049,990
outstanding at March 31, 2010,
and 45,593,383 shares issued and
43,179,373 shares outstanding at
December 31, 2009 51 46
Additional paid-in capital 390,878 281,806
Accumulated other comprehensive
income:
Unrealized gain on investments,
net of tax 7,203 7,348
Retained earnings 382,909 358,907
Treasury stock, at cost
(2,440,266 and 2,414,010 shares,
respectively) (47,742) (47,262)
------- -------
Total Centene stockholders'
equity 733,299 600,845
Noncontrolling interest 16,235 18,582
------ ------
Total stockholders' equity 749,534 619,427
------- -------
Total liabilities and
stockholders' equity $1,730,671 $1,702,364
========== ==========
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
Three Months
Ended
March 31,
---------
2010 2009
---- ----
Revenues:
Premium $999,315 $885,006
Service 22,907 23,849
------ ------
Premium and service revenues 1,022,222 908,855
Premium tax 46,499 23,580
Total revenues 1,068,721 932,435
--------- -------
Expenses:
Medical costs 839,708 739,340
Cost of services 17,152 15,962
General and administrative
expenses 135,507 122,279
Premium tax 46,743 23,942
Total operating expenses 1,039,110 901,523
--------- -------
Earnings from operations 29,611 30,912
Other income (expense):
Investment and other income 7,057 3,613
Interest expense (3,813) (3,986)
------ ------
Earnings from continuing
operations, before income
tax expense 32,855 30,539
Income tax expense 12,525 10,845
------ ------
Earnings from continuing
operations, net of income
tax expense 20,330 19,694
Discontinued operations, net
of income tax expense
(benefit) of $4,440 and
$(160), respectively 3,920 (449)
----- ----
Net earnings 24,250 19,245
Noncontrolling interest 248 787
--- ---
Net earnings attributable
to Centene Corporation $24,002 $18,458
======= =======
Amounts attributable to
Centene Corporation common
shareholders:
Earnings from continuing
operations, net of income
tax expense $20,082 $18,907
Discontinued operations, net
of income tax expense
(benefit) 3,920 (449)
----- ----
Net earnings $24,002 $18,458
======= =======
Net earnings (loss) per
share attributable to
Centene Corporation:
Basic:
Continuing operations $0.43 $0.44
Discontinued operations 0.08 (0.01)
---- -----
Earnings per common share $0.51 $0.43
===== =====
Diluted:
Continuing operations $0.41 $0.43
Discontinued operations 0.08 (0.01)
---- -----
Earnings per common share $0.49 $0.42
===== =====
Weighted average number of
shares outstanding:
Basic 47,260,714 43,067,992
Diluted 48,761,528 44,238,863
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
------------------
2010 2009
---- ----
Cash flows from operating activities:
Net earnings $24,250 $19,245
Adjustments to reconcile net earnings to
net cash provided by operating
activities
Depreciation and amortization 12,527 10,233
Stock compensation expense 3,460 3,789
(Gain) loss on sale of investments, net (3,547) 439
(Gain) on sale of UHP (8,201) -
Deferred income taxes 950 2,282
Changes in assets and liabilities
Premium and related receivables (4,457) (39,396)
Other current assets (1,375) (1,397)
Other assets 1,937 (497)
Medical claims liabilities (33,129) 2,165
Unearned revenue (73,282) 44,507
Accounts payable and accrued expenses 40,433 (18,674)
Other operating activities 1,934 722
----- ---
Net cash (used in) provided by operating
activities (38,500) 23,418
------- ------
Cash flows from investing activities:
Capital expenditures (23,099) (11,157)
Purchases of investments (146,935) (292,964)
Proceeds from asset sales 13,420 -
Sales and maturities of investments 117,469 224,312
Investments in acquisitions, net of cash
acquired (2,019) (5,191)
------ ------
Net cash used in investing activities (41,164) (85,000)
------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options 519 890
Proceeds from borrowings 22,030 108,000
Proceeds from stock offering 104,557 -
Payment of long-term debt (97,136) (82,573)
Distributions to noncontrolling interest (3,585) (1,181)
Excess tax benefits from stock
compensation 96 (17)
Common stock repurchases (480) (407)
Net cash provided by financing
activities 26,001) 24,712
------ ------
Net decrease in cash and cash
equivalents (53,663) (36,870)
------- -------
Cash and cash equivalents, beginning of
period 403,752 379,099
------- -------
Cash and cash equivalents, end of
period $350,089 $342,229
======== ========
Supplemental disclosures of cash flow
information:
Interest paid $345 $724
Income taxes paid $8,272 $18,602
Supplemental disclosure of non-cash
investing and financing activities:
Contribution from noncontrolling
interest $306 $ -
CENTENE CORPORATION
CONTINUING OPERATIONS SUPPLEMENTAL FINANCIAL DATA
Q1 Q4 Q3
2010 2009 2009
---- ---- ----
MEMBERSHIP
Managed
Care:
Arizona 19,000 18,100 17,400
Florida 105,900 102,600 84,400
Georgia 301,000 309,700 303,400
Indiana 211,400 208,100 200,700
Massachusetts 26,900 27,800 500
Ohio 156,000 150,800 151,200
South
Carolina 53,900 48,600 46,100
Texas 459,600 455,100 450,200
Wisconsin 134,900 134,800 132,500
------- ------- -------
Total at-
risk
membership 1,468,600 1,455,600 1,386,400
--------- --------- ---------
Non-risk
membership 62,200 63,700 63,200
------ ------ ------
TOTAL 1,530,800 1,519,300 1,449,600
========= ========= =========
Medicaid 1,088,300 1,081,400 1,040,000
CHIP &
Foster Care 266,300 263,600 263,400
ABD &
Medicare 87,100 82,800 82,500
Other State
programs 26,900 27,800 500
------ ------ ---
Total at-
risk
membership 1,468,600 1,455,600 1,386,400
--------- --------- ---------
Non-risk
membership 62,200 63,700 63,200
------ ------ ------
TOTAL 1,530,800 1,519,300 1,449,600
========= ========= =========
Specialty
Services(a):
Cenpatico
Behavioral
Health
Arizona 119,300 120,100 117,300
Kansas 39,800 41,400 41,000
Bridgeway
Health
Solutions
Long-term
Care 2,700 2,600 2,500
TOTAL 161,800 164,100 160,800
======= ======= =======
(a) Includes
external
membership
only.
REVENUE PER
MEMBER PER
MONTH(b) $215.95 (c) $226.42 $222.77
CLAIMS(b)
Period-end
inventory 341,400 423,400 414,900
Average
inventory 283,900 279,000 227,100
Period-end
inventory
per member 0.23 0.29 0.30
Q2 Q1
2009 2009
---- ----
MEMBERSHIP
Managed
Care:
Arizona 16,200 15,500
Florida 22,300 29,100
Georgia 292,800 289,300
Indiana 196,100 179,100
Massachusetts - -
Ohio 141,200 137,000
South
Carolina 46,000 48,500
Texas 443,200 421,100
Wisconsin 131,200 127,700
------- -------
Total at-
risk
membership 1,289,000 1,247,300
--------- ---------
Non-risk
membership 114,000 96,000
------- ------
TOTAL 1,403,000 1,343,300
========= =========
Medicaid 958,600 921,100
CHIP &
Foster Care 261,400 256,900
ABD &
Medicare 69,000 69,300
Other State
programs - -
--- ---
Total at-
risk
membership 1,289,000 1,247,300
--------- ---------
Non-risk
membership 114,000 96,000
------- ------
TOTAL 1,403,000 1,343,300
========= =========
Specialty
Services(a):
Cenpatico
Behavioral
Health
Arizona 110,500 104,700
Kansas 41,100 40,600
Bridgeway
Health
Solutions
Long-term
Care 2,400 2,300
TOTAL 154,000 147,600
======= =======
(a) Includes
external
membership
only.
REVENUE PER
MEMBER PER
MONTH(b) $219.75 $220.29
CLAIMS(b)
Period-end
inventory 362,200 325,000
Average
inventory 234,500 267,600
Period-end
inventory
per member 0.28 0.26
(b) Revenue per member and claims information are presented for the
Managed Care at-risk members.
(c) Reduction in revenue per member per month is a result of the
pharmacy carve-outs in 2010.
Q1 Q4 Q3 Q2 Q1
2010 2009 2009 2009 2009
---- ---- ---- ---- ----
DAYS IN CLAIMS
PAYABLE
Medical 46.6 48.1 47.1 47.5 45.3
Pharmacy 1.1 2.0 1.8 1.5 1.8
--- --- --- --- ---
TOTAL 47.7 50.1 48.9 49.0 47.1
Days in Claims Payable is a calculation
of Medical Claims Liabilities at the end
of the period divided by average claims
expense per calendar day for such
period.
CASH AND INVESTMENTS (in millions)
Regulated $917.9 $949.9 $911.4 $825.8 $816.8
Unregulated 51.3 36.2 27.6 27.0 28.9
---- ---- ---- ---- ----
TOTAL $969.2 $986.1 $939.0 $852.8 $845.7
====== ====== ====== ====== ======
DEBT TO
CAPITALIZATION 23.7% 33.2% 31.9% 33.0% 34.6%
Debt to Capitalization is calculated as
follows: total debt divided by (total
debt + total equity).
Operating Ratios:
Three Months Ended
March 31,
------------------
2010 2009
---- ----
Health Benefits Ratios:
Medicaid and CHIP 85.6% 84.8%
ABD and Medicare 80.3 81.4
Specialty Services 80.6 78.3
Total 84.0 83.5
General & Administrative Expense
Ratios 13.3 13.5
MEDICAL CLAIMS LIABILITY (In thousands)
The changes in medical claims liability are summarized as follows:
Balance, March 31, 2009 $387,242
Incurred related to:
Current period 3,313,053
Prior period (49,162)
-------
Total incurred 3,263,891
========
Paid related to:
Current period 2,874,916
Prior period 331,391
------
Total paid 3,206,307
--------
Balance, March 31, 2010 $444,826
========
Centene's claims reserving process utilizes a consistent actuarial methodology to estimate Centene's ultimate liability. Any reduction in the "Incurred related to: Prior period" amount may be offset as Centene actuarially determines "Incurred related to: Current period." As such, only in the absence of a consistent reserving methodology would favorable development of prior period claims liability estimates reduce medical costs. Centene believes it has consistently applied its claims reserving methodology in each of the periods presented.
The amount of the "Incurred related to: Prior period" above includes the effects of reserving under moderately adverse conditions, new markets where we use a conservative approach in setting reserves during the initial periods of operations, increased receipts from other third party payors related to coordination of benefits and lower medical utilization and cost trends for dates of service prior to March 31, 2009".