Centene reports strong financial results for Q2 2015

Centene Corporation (NYSE: CNC) today announced its financial results for the quarter ended June 30, 2015. The following discussions, with the exception of cash flow information, are in the context of continuing operations.

Michael F. Neidorff, Centene's Chairman and Chief Executive Officer, stated, "Our strong second quarter results offer further evidence of Centene's positive financial and operating momentum. Our pending Health Net acquisition will enhance our long-term growth opportunities by adding greater product diversity and scale."

Second Quarter Highlights

• June 30, 2015 managed care membership of 4.6 million, an increase of 1.3 million members, or 38% compared to the second quarter of 2014.
• Premium and service revenues for the second quarter of $5.2 billion, representing 39% growth compared to the second quarter of 2014.
• Health Benefits Ratio of 89.1% for the second quarter of 2015, compared to 88.9% in the second quarter of 2014 and 89.8% in the first quarter of 2015.
• General and Administrative expense ratio of 8.5% for the second quarter of 2015, compared to 8.6% in the second quarter of 2014 and 8.5% in the first quarter of 2015.
• Operating cash flow of $350 million for the second quarter of 2015.
• Diluted EPS for the second quarter of 2015 of $0.72, including $0.01 of diluted EPS associated with Health Net, Inc. (Health Net) merger related expenses, compared to $0.39 in 2014.

Other Events

• In July 2015, Centene announced that the Company and two direct, newly formed subsidiaries of the Company had entered into a definitive merger agreement with Health Net under which Centene will acquire all of the issued and outstanding shares of Health Net. The transaction is valued at approximately $6.8 billion (based on the Centene closing stock price on July 1, 2015), including the assumption of debt. The transaction is expected to close in early 2016 and is subject to approval by Centene and Health Net shareholders and other customary closing conditions.
• In July 2015, Centurion began operating under a new contract with the Mississippi Department of Corrections to provide comprehensive correctional healthcare services.
• In July 2015, Centene's Mississippi subsidiary, Magnolia Health, began operating under a two-year CHIP contract with the State of Mississippi.
• In June 2015, the Company received regulatory approval of its previously announced acquisition of Agate Resources, Inc. The transaction is expected to close in the third quarter of 2015.
• In May 2015, the Company completed the acquisition of Fidelis SecureCare of Michigan, Inc. (Fidelis). Fidelis began operating under a new contract with the Michigan Department of Community Health and the Centers for Medicare and Medicaid Services to provide integrated healthcare services to members who are dually eligible for Medicare and Medicaid in Macomb and Wayne counties in May 2015. Passive enrollment began in July 2015.
• In May 2015, Centene's Florida subsidiary, Sunshine Health, was tentatively recommended for a statewide contract award by the Florida Healthy Kids Corporation to manage healthcare services for children ages five through 18 in all 11 regions of Florida. The two-year contract award is expected to commence in the fourth quarter of 2015.
• In the fourth quarter of 2015, Centene's Louisiana subsidiary, Louisiana Healthcare Connections, expects to begin operating under an expanded contract to include behavioral health benefits, and Magnolia Health anticipates operating under an expanded contract to include the inpatient benefit for Medicaid and ABD members.

Awards

• In June 2015, the Company was awarded the Corporate Anti-Bullying Hero Award at Auburn University's Anti-Bullying Summit.
• In June 2015, FORTUNE magazine announced Centene's position of #186 in its annual ranking of America's largest companies by revenue.
• In May 2015, at the Case In Point Platinum Awards, Centene and its subsidiaries were honored with awards in five categories: Women/Children Case Management, Disease Management/Population Health, Integrated Case Management and Embedded Case Management, Managed Care Case Management, and Nurse Call Center. Centene was also recognized for four titles in its member educational book series at the Hermes Creative Awards.

Membership

The following table sets forth the Company's membership by state for its managed care organizations:

At June 30, 2015, the Company served 368,900 Medicaid members in Medicaid expansion programs in California, Illinois, Massachusetts, New Hampshire, Ohio and Washington and Indiana HIP 2.0, included in the table above.

The following table sets forth our membership by line of business:

The following table identifies our dual-eligible membership by line of business. The membership tables above include these members.

• For the second quarter of 2015, Premium and Service Revenues increased 39% to $5.2 billion from $3.7 billion in the second quarter of 2014. The increase was primarily a result of the impact from expansions or new programs in many of our states, particularly Florida, Illinois, Louisiana, Mississippi, Ohio and Texas.
• Premium Tax and Health Insurer Fee Revenues were $322 million in the second quarter of 2015, compared to $283 million in the comparable period in 2014 and $370 million in the first quarter of 2015. The decrease of $48 million from the first quarter of 2015 was due to a lower amount of hospital assessments received in the second quarter of 2015.
• Consolidated HBR of 89.1% for the second quarter of 2015 represents an increase from 88.9% in the comparable period in 2014 and a decrease from 89.8% in the first quarter of 2015. The year over year HBR increase is primarily attributable to a higher HBR associated with new programs in two of our states. The sequential decrease is due to normal seasonality.
• The following table compares the results for new business and existing business for the quarters ended June 30:

• • The new business HBR decreased compared to last year as a result of a higher portion of new business associated with Medicaid, which operates at a lower HBR.
  • The existing business HBR increased compared to last year as a result of higher acuity business, including Florida LTC, being classified as existing business in the current year.
• Consolidated G&A expense ratio for the second quarter of 2015 was 8.5%, compared to 8.6% in the prior year. The year over year decrease in the G&A ratio reflects the leveraging of expenses over higher revenues in 2015.
• Diluted earnings per share of $0.72 in the second quarter of 2015, compared to $0.39 in 2014. Diluted earnings per share in 2014 was impacted by $0.08 of net cost associated with the health insurer fee.

Balance Sheet and Cash Flow

At June 30, 2015, the Company had cash, investments and restricted deposits of $3.7 billion, including $82 million held by its unregulated entities. Medical claims liabilities totaled $2.1 billion. The Company's days in claims payable was 45.5, consistent with the first quarter of 2015. Total debt was $1.1 billion, which includes $150 million of borrowings on the $500 million revolving credit facility at quarter end. Debt to capitalization was 35.7% at June 30, 2015, excluding the $69 million non-recourse mortgage note.

Cash flow from operations for the three months ended June 30, 2015, was $350 million, or 4.0 times net earnings.

Outlook

The table below depicts the Company's annual GAAP guidance for 2015.

The Company's guidance excludes merger related costs expected to be incurred in 2015 related to the Health Net transaction. These costs are estimated to be between $0.10 and $0.15 per diluted share for 2015. The transaction is expected to close in early 2016.

Consistent with our policy, the above table does not include acquisitions that have not yet closed.

Conference Call

As previously announced, the Company will host a conference call Tuesday, July 28, 2015, at 8:30 AM (Eastern Time) to review the financial results for the second quarter ended June 30, 2015, and to discuss its business outlook. Michael F. Neidorff and William N. Scheffel will host the conference call.