On October 27, 2020 Centene Corporation (NYSE: CNC) reported its financial results for the third quarter ended September 30, 2020, reporting diluted earnings per share (EPS) of $0.97 and Adjusted diluted EPS of $1.26, including the risk corridor, charitable contribution commitment to the Company’s foundation and tax benefit highlighted below (Press release, Centene , OCT 27, 2020, View Source [SID1234569174]).
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In summary, the 2020 third quarter results were as follows
The third quarter results include the following items, which had a net benefit to GAAP and Adjusted diluted EPS of $0.29:
a pre-tax net benefit related to the Affordable Care Act (ACA) risk corridor receivable settlement of $398 million (net of minimum medical loss ratio payback and related expenses), or $0.52 per diluted share;
a pre-tax expense of $275 million, or $0.35 per diluted share, related to a charitable contribution commitment to the Company’s foundation; and
a favorable tax settlement of $72 million, or $0.12 per diluted share.
The third quarter net benefit of $0.17 per diluted share associated with the ACA risk corridor benefit and charitable contribution commitment to our foundation will be invested in enhanced growth and profitability initiatives for our Medicare and Health Insurance Marketplace businesses during the fourth quarter.
"We reported strong third quarter results with revenues up 53% as a result of the WellCare acquisition as well as product and geographic expansions, new programs and growth in many of our states," said Michael F. Neidorff, Chairman, President and Chief Executive Officer of Centene.
"As we benefited from the one-time risk corridor settlement this quarter, we’ve made the decision to reinvest the proceeds in the growth of our business as well as the communities in which we serve and live. Looking ahead, we expect our underlying businesses to continue to perform well in an uncertain environment and remain focused on executing our growth strategy across our diversified healthcare enterprise."
Third Quarter Highlights
September 30, 2020 managed care membership of 25.2 million, an increase of 9.9 million members, or 65%, over September 30, 2019.
Total revenues of $29.1 billion for the third quarter of 2020, representing 53% growth compared to the third quarter of 2019.
Health benefits ratio (HBR) of 86.4% for the third quarter of 2020, compared to 88.2% in the third quarter of 2019.
Selling, general and administrative (SG&A) expense ratio of 9.1% for the third quarter of 2020, compared to 8.9% for the third quarter of 2019.
Adjusted SG&A expense ratio of 8.9% for the third quarter of 2020, compared to 8.8% for the third quarter of 2019.
Diluted EPS for the third quarter of 2020 of $0.97, compared to $0.23 for the third quarter of 2019.
Adjusted diluted EPS for the third quarter of 2020 of $1.26, compared to $0.96 for the third quarter of 2019.
Operating cash flow of $(952) million for the third quarter of 2020, reflecting the payment of the health insurer fee and the 2019 risk adjustment liability, as expected. Cash flow provided by operations for the nine months ended September 30, 2020, was $2.5 billion, or 1.4 times net earnings.
Other Events
In October 2020, Centene issued $2.2 billion of 3.00% Senior Notes due 2030. The Company used the net proceeds of the notes, together with cash on hand, to redeem all of its outstanding 4.75% Senior Notes due 2022 and all of its outstanding 5.25% Senior Notes due 2025, including all premiums, accrued interest and expenses related to the redemptions.
In October 2020, Centene announced the expansion of its Medicare Advantage offerings for 2021. The Company’s Medicare plans expect to operate in 1,249 counties across 33 states in 2021, a 30% increase in counties over 2020.
In September 2020, Centene announced that it is expanding its offering in the 2021 Health Insurance Marketplace. Centene is expanding its Marketplace product, branded Ambetter, in nearly 400 new counties across 13 existing states. In addition, Ambetter-branded Marketplace products will be offered in two new states, Michigan and New Mexico. This brings the total number of states with Centene’s Marketplace offerings to 22.
In September 2020, Centene’s Illinois subsidiary, Meridian Health Plan of Illinois, Inc., expanded its Foster Care services through the YouthCare program.
In September 2020, Centene announced three executive leadership appointments to support the Company’s continued growth. Jonathan Dinesman was appointed to Executive Vice President, Government Relations; Shannon Bagley was appointed to Executive Vice President, Human Resources; and H. Robert Sanders was appointed to Executive Vice President, Human Resources.
In September 2020, Centene’s Oregon subsidiary, Trillium Community Health Plan, began operating under an expanded contract in three new counties, including the metro Portland area, and now serves as a coordinated care organization for six counties in the state.
In August 2020, Centene announced that its Indiana subsidiary, Managed Health Services, has been selected by the Indiana Department of Administration to continue serving Hoosier Care Connect members with Medicaid managed care and care coordination services.
Accreditations & Awards
In October 2020, Centene was named a 2020 Leading Disability Employer by the National Organization on Disability. This award recognizes companies that demonstrate exemplary employment practices for people with disabilities.
In September 2020, FORTUNE recognized Centene in its sixth-annual "Change the World" list of companies that have made an important social or environmental impact. Companies are recognized for innovative strategies that positively impact the world.
In August 2020, FORTUNE announced Centene’s position of #127 in its annual ranking of the world’s largest companies based on 2019 revenue, rising from #168 in the previous year’s annual ranking.
COVID-19 Pandemic
Beginning in March 2020, Centene announced a series of actions in support of various populations impacted by the COVID-19 pandemic. A detailed list of specific actions taken by the Company in response to the pandemic is shown on page 16 of this release.
Membership
The following table sets forth our membership by line of business:
Revenues
The following table sets forth supplemental revenue information ($ in millions):
Statement of Operations: Three Months Ended September 30, 2020
For the third quarter of 2020, total revenues increased 53% to $29.1 billion from $19.0 billion in the comparable period in 2019. The increase over the prior year was due to the acquisition of WellCare, growth in the Health Insurance Marketplace business, expansions, new programs and growth in many of our states, the reinstatement of the health insurer fee in 2020, and the ACA risk corridor receivable settlement, partially offset by the divestiture of our Illinois health plan.
HBR of 86.4% for the third quarter of 2020 represents a decrease from 88.2% in the comparable period in 2019. The decrease was attributable to the ACA risk corridor receivable settlement and the effect of the COVID-19 pandemic, partially offset by retroactive state premium rate adjustments and risk sharing mechanisms. The effect of the COVID-19 pandemic includes lower traditional medical utilization, partially offset by higher testing and treatment costs associated with COVID-19.
The SG&A expense ratio was 9.1% for the third quarter of 2020, compared to 8.9% in the third quarter of 2019. The Adjusted SG&A expense ratio was 8.9% for the third quarter of 2020, compared to 8.8% in the third quarter of 2019. The year-over-year increases to the ratios were due to the $275 million charitable contribution commitment to our foundation, partially offset by the addition of the WellCare business, which operates at a lower SG&A ratio, and the leveraging of expenses over higher revenues.
The effective tax rate was 26.8% for the third quarter of 2020, compared to 45.1% in the third quarter of 2019. The effective tax rate for the third quarter of 2020 reflects a favorable tax settlement, offset by the reinstatement of the health insurer fee in 2020. The effective tax rate for the third quarter of 2019 reflects the non-deductibility of a portion of our non-cash goodwill and intangible impairment, offset by the health insurer fee moratorium. For the third quarter of 2020, our effective tax rate on adjusted earnings was 26.1%.
Balance Sheet
At September 30, 2020, the Company had cash, investments and restricted deposits of $24.6 billion and maintained $1.1 billion of cash and cash equivalents held by unregulated entities. Medical claims liabilities totaled $12.9 billion. The Company’s days in claims payable was 52 days, which is an increase of one day over the second quarter of 2020. Total debt was $16.8 billion, which included $93 million of borrowings on our $2.0 billion revolving credit facility at quarter end. The debt to capitalization ratio was 39.1% at September 30, 2020, excluding $228 million of non-recourse debt. Our debt to capital ratio would have been 37.4% at September 30, 2020, when netting unregulated cash and cash equivalents with debt, and excluding non-recourse debt.
A reconciliation of the Company’s change in days in claims payable from the immediately preceding quarter-end is presented below:
Outlook
The Company’s annual adjusted diluted EPS guidance has been increased by $0.12 to reflect the favorable tax settlement recorded in the third quarter. The Company’s annual adjusted diluted EPS guidance reflects the third quarter net benefit of $0.17 per diluted share for the risk corridor and charitable contribution commitment to the Company’s foundation, offset by $0.17 per diluted share for growth and profitability initiative expenses associated with our Medicare and Marketplace businesses to be recorded in the fourth quarter.
Conference Call
As previously announced, the Company will host a conference call Tuesday, October 27, 2020, at approximately 8:30 AM (Eastern Time) to review the financial results for the third quarter ended September 30, 2020. Michael Neidorff and Jeffrey Schwaneke will host the conference call.
Investors and other interested parties are invited to listen to the conference call by dialing 1-877-883-0383 in the U.S. and Canada; +1-412-902-6506 from abroad, including the following Elite Entry Number: 0677783 to expedite caller registration; or via a live, audio webcast on the Company’s website at www.centene.com, under the Investors section.
A webcast replay will be available for on-demand listening shortly after the completion of the call for the next twelve months or until 11:59 PM (Eastern Time) on Tuesday, October 26, 2021, at the aforementioned URL. In addition, a digital audio playback will be available until 9:00 AM (Eastern Time) on Tuesday, November 3, 2020, by dialing 1-877-344-7529 in the U.S. and Canada, or +1-412-317-0088 from abroad, and entering access code 10147833.
Non-GAAP Financial Presentation
The Company is providing certain non-GAAP financial measures in this release as the Company believes that these figures are helpful in allowing investors to more accurately assess the ongoing nature of the Company’s operations and measure the Company’s performance more consistently across periods. The Company uses the presented non-GAAP financial measures internally to allow management to focus on period-to-period changes in the Company’s core business operations. Therefore, the Company believes that this information is meaningful in addition to the information contained in the GAAP presentation of financial information. The presentation of this additional non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.
Specifically, the Company believes the presentation of non-GAAP financial information that excludes amortization of acquired intangible assets and acquisition related expenses, as well as other items, allows investors to develop a more meaningful understanding of the Company’s performance over time. The tables below provide reconciliations of non-GAAP items ($ in millions, except per share data):
To provide clarity on the way management defines certain key metrics and ratios, the Company is providing a description of how the metric or ratio is calculated as follows:
Health Benefits Ratio (HBR) (GAAP) = Medical costs divided by premium revenues.
SG&A Expense Ratio (GAAP) = Selling, general and administrative expenses divided by premium and service revenues.
Adjusted SG&A Expenses (non-GAAP) = Selling, general and administrative expenses, less acquisition related expenses.
Adjusted SG&A Expense Ratio (non-GAAP) = Adjusted selling, general and administrative expenses divided by premium and service revenues.
Adjusted Net Earnings (non-GAAP) = Net earnings less amortization of acquired intangible assets, less acquisition related expenses, as well as adjustments for other items, net of the income tax effect of the adjustments.
Adjusted Diluted EPS (non-GAAP) = Adjusted net earnings divided by weighted average common shares outstanding on a fully diluted basis.
Debt to Capitalization Ratio (GAAP) = Total debt, divided by total debt plus total stockholder’s equity.
Debt to Capitalization Ratio Excluding Non-Recourse Debt (non-GAAP) = Total debt less non-recourse debt, divided by total debt less non-recourse debt plus total stockholder’s equity.
Average Medical Claims Expense (GAAP) = Medical costs for the period, divided by number of days in such period. Average Medical Claims Expense is most often calculated for the quarterly reporting period.
Days in Claims Payable (GAAP) = Medical claims liabilities, divided by average medical claims expense. Days in Claims Payable is most often calculated for the quarterly reporting period.
In addition, the following terms are defined as follows:
State Directed Payments: Payments directed by a state that have minimal risk, but are administered as a premium adjustment. These payments are recorded as premium revenue and medical costs at close to a 100% HBR. The Company has little visibility to the timing of these payments until they are paid by a state.
Pass Through Payments: Non-risk supplemental payments from a state that the Company is required to pass through to designated contracted providers. These payments are recorded as premium tax revenue and premium tax expense.