NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization and Operations
Centene Corporation, or the Company, is a diversified, multi-national healthcare enterprise operating in
two
segments: Managed Care and Specialty Services. The Managed Care segment provides Medicaid and Medicaid-related health plan coverage to individuals through the government subsidized programs, including Medicaid, the State Children's Health Insurance Program (CHIP), Long Term Care (LTC), Foster Care, dual-eligible individuals (Duals) in Medicare Special Needs Plans and the Supplemental Security Income Program, also known as the Aged, Blind or Disabled Program (ABD), Medicare, and the Health Insurance Marketplace. The Company also offers a variety of individual, small group, and large group commercial health care products, both to employers and directly to members in the Managed Care segment. The Specialty Services segment consists of our specialty companies offering auxiliary healthcare services and products to state programs, correctional facilities, healthcare organizations, employer groups and other commercial organizations, as well as to our own subsidiaries. The Specialty Service segment also includes the Government Contracts business which includes the Company's government-sponsored managed care support contract with the U.S. Department of Defense (DoD) under the TRICARE program in the North Region, the Military Family and Life Counseling (MFLC) contract with the DoD, and other health care related government contracts, including the Patient Centered Community Care (PC3) contract with the U.S. Department of Veterans Affairs (VA).
On March 24, 2016, the Company acquired all of the issued and outstanding shares of Health Net, Inc. (Health Net) a publicly traded managed care organization that delivers health care services through health plans and government-sponsored managed care plans. The transaction was valued at approximately
$5,990 million
, including the assumption of
$703 million
of outstanding debt. The acquisition allows the Company to offer a more comprehensive and scalable portfolio of solutions and provides opportunity for additional growth across the combined company's markets.
On February 2, 2015, the Board of Directors declared a two-for-one split of Centene's common stock in the form of a 100% stock dividend distributed February 19, 2015 to stockholders of record on February 12, 2015. All share and per share information presented in this Form 10-K has been adjusted for the two-for-one stock split.
2.
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Centene Corporation and all majority owned subsidiaries and subsidiaries over which the Company exercises the power and control to direct activities significantly impacting financial performance. All material intercompany balances and transactions have been eliminated. The assets, liabilities and results of operations of Kentucky Spirit Health Plan (Kentucky Spirit) are classified as discontinued operations for all periods presented.
Certain amounts in the consolidated financial statements and notes have been reclassified to conform to the
2016
presentation. These reclassifications have no effect on net earnings or stockholders' equity as previously reported.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States, or GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Future events and their effects cannot be predicted with certainty; accordingly, the accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as the operating environment changes. The Company evaluates and updates its assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluation, as considered necessary. Actual results could differ from those estimates.
Business Combinations
Business combinations are accounted for using the acquisition method of accounting. The Company allocates the fair value of purchase consideration to the assets acquired and liabilities assumed based on their fair values at the acquisition date. The excess of the fair value of consideration transferred over the fair value of the net assets acquired is recorded as goodwill. Goodwill is generally attributable to the value of the synergies between the combined companies and the value of the acquired assembled workforce, neither of which qualifies for recognition as an intangible asset.
The Company uses its best estimates and assumptions to value assets acquired and liabilities assumed at the acquisition date; however, these estimates are sometimes preliminary and in some instances, all information required to value the assets acquired and liabilities assumed may not be available or final as of the end of a reporting period subsequent to the business combination. If the accounting for the business combination is incomplete, provisional amounts are recorded. The provisional amounts are updated during the period determined, up to one year from the acquisition date. The Company includes the results of operations of acquired businesses in the Company's consolidated results prospectively from the date of acquisition.
Acquisition related expenses and post-acquisition restructuring costs are recognized separately from the business combination and are expensed as incurred.
Cash and Cash Equivalents
Investments with original maturities of three months or less are considered to be cash equivalents. Cash equivalents consist of money market funds and bank certificates of deposit and savings accounts.
The Company maintains amounts on deposit with various financial institutions, which may exceed federally insured limits. However, management periodically evaluates the credit-worthiness of those institutions, and the Company has not experienced any losses on such deposits.
Investments
Short term investments include securities with maturities greater than three months to one year. Long term investments include securities with maturities greater than one year.
Short term and long term investments are generally classified as available for sale and are carried at fair value. Certain equity investments are recorded using the cost or equity method. Unrealized gains and losses on investments available for sale are excluded from earnings and reported in accumulated other comprehensive income, a separate component of stockholders' equity, net of income tax effects. Premiums and discounts are amortized or accreted over the life of the related security using the effective interest method. The Company monitors the difference between the cost and fair value of investments. Investments that experience a decline in value that is judged to be other than temporary are written down to fair value and a realized loss is recorded in investment and other income. To calculate realized gains and losses on the sale of investments, the Company uses the specific amortized cost of each investment sold. Realized gains and losses are recorded in investment and other income.
The Company uses the equity method to account for its investments in entities that it does not control but has the ability to exercise significant influence over operating and financial policies. These investments are recorded at the lower of their cost or fair value adjusted for the Company's proportionate share of earnings or losses.
Restricted Deposits
Restricted deposits consist of investments required by various state statutes to be deposited or pledged to state agencies. These investments are classified as long term, regardless of the contractual maturity date, due to the nature of the states' requirements. The Company is required to annually adjust the amount of the deposit pledged to certain states.
Fair Value Measurements
In the normal course of business, the Company invests in various financial assets and incurs various financial liabilities. Fair values are disclosed for all financial instruments, whether or not such values are recognized in the Consolidated Balance Sheets. Management obtains quoted market prices and other observable inputs for these disclosures. The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents, premium and related receivables, medical claims liability, accounts payable and accrued expenses, unearned revenue, and certain other current assets and liabilities are carried at cost, which approximates fair value because of their short term nature.
The following methods and assumptions were used to estimate the fair value of each financial instrument:
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•
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Available for sale investments and restricted deposits: The carrying amount is stated at fair value, based on quoted market prices, where available. For securities not actively traded, fair values were estimated using values obtained from independent pricing services or quoted market prices of comparable instruments.
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•
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Senior unsecured notes: Estimated based on third-party quoted market prices for the same or similar issues.
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•
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Variable rate debt: The carrying amount of our floating rate debt approximates fair value since the interest rates adjust based on market rate adjustments.
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•
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Interest rate swap: Estimated based on third-party market prices based on the forward 3-month LIBOR curve.
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•
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Contingent consideration: Estimated based on expected achievement of metrics included in the acquisition agreement considering circumstances that exist as of the acquisition date.
|
Property, Software and Equipment
Property, software and equipment are stated at cost less accumulated depreciation. Capitalized software includes certain costs incurred in the development of internal-use software, including external direct costs of materials and services and payroll costs of employees devoted to specific software development. Depreciation is calculated principally by the straight-line method over estimated useful lives. Leasehold improvements are depreciated using the straight-line method over the shorter of the expected useful life or the remaining term of the lease. Property, software and equipment are depreciated over the following periods:
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Fixed Asset
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Depreciation Period
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Buildings and land improvements
|
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5 - 40 years
|
Computer hardware and software
|
|
2 - 7 years
|
Furniture and equipment
|
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3 - 10 years
|
Land improvements
|
|
3 - 20 years
|
Leasehold improvements
|
|
1 - 20 years
|
The carrying amounts of all long-lived assets are evaluated to determine if adjustment to the depreciation and amortization period or to the unamortized balance is warranted. Such evaluation is based principally on the expected utilization of the long-lived assets.
The Company retains fully depreciated assets in property and accumulated depreciation accounts until it removes them from service. In the case of sale, retirement, or disposal, the asset cost and related accumulated depreciation balance is removed from the respective account, and the resulting net amount, less any proceeds, is included as a component of earnings from operations in the Consolidated Statements of Operations.
Goodwill and
Intangible Assets
Intangible assets represent assets acquired in purchase transactions and consist primarily of purchased contract rights, provider contracts, customer relationships, trade names, developed technologies and goodwill. Intangible assets are amortized using the straight-line method over the following periods:
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Intangible Asset
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|
Amortization Period
|
Purchased contract rights
|
|
5 - 15 years
|
Provider contracts
|
|
4 - 15 years
|
Customer relationships
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3 - 15 years
|
Trade names
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1 - 20 years
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Developed technology
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5 years
|
The Company tests for impairment of intangible assets as well as long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset or asset group (hereinafter referred to as “asset group”) may not be recoverable by comparing the sum of the estimated undiscounted future cash flows expected to result from use of the asset group and its eventual disposition to the carrying value. Such factors include, but are not limited to, significant changes in membership, state funding, state contracts and provider networks and contracts. If the sum of the estimated undiscounted future cash flows is less than the carrying value, an impairment determination is required. The amount of impairment is calculated by subtracting the fair value of the asset group from the carrying value of the asset group. An impairment charge, if any, is recognized within earnings from operations.
The Company tests goodwill for impairment using a fair value approach. The Company is required to test for impairment at least annually, absent a triggering event, which could include a significant decline in operating performance that would require an impairment assessment. Absent any impairment indicators, the Company performs its goodwill impairment testing during the fourth quarter of each year. The Company recognizes an impairment charge for any amount by which the carrying amount of goodwill exceeds its implied fair value.
The Company first assesses qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The Company generally does not calculate the fair value of a reporting unit unless it determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. However, in certain circumstances, such as recent acquisitions, the Company may elect to perform a quantitative assessment without first assessing qualitative factors.
If the two-step quantitative test is deemed necessary, the Company determines an appropriate valuation technique to estimate a reporting unit's fair value as of the testing date. The Company utilizes either the income approach or the market approach, whichever is most appropriate for the respective reporting unit. The income approach is based on an internally developed discounted cash flow model that includes many assumptions related to future growth rates, discount factors, future tax rates, etc. The market approach is based on financial multiples of comparable companies derived from current market data. Changes in economic and operating conditions impacting assumptions used in our analyses could result in goodwill impairment in future periods.
Medical Claims Liability
Medical claims liability includes claims reported but not yet paid, or inventory, estimates for claims incurred but not reported, or IBNR, and estimates for the costs necessary to process unpaid claims at the end of each period. The Company estimates its medical claims liability using actuarial methods that are commonly used by health insurance actuaries and meet Actuarial Standards of Practice. These actuarial methods consider factors such as historical data for payment patterns, cost trends, product mix, seasonality, utilization of healthcare services and other relevant factors.
Actuarial Standards of Practice generally require that the medical claims liability estimates be adequate to cover obligations under moderately adverse conditions. Moderately adverse conditions are situations in which the actual claims are expected to be higher than the otherwise estimated value of such claims at the time of estimate. In many situations, the claims amounts ultimately settled will be different than the estimate that satisfies the Actuarial Standards of Practice. The Company includes in its IBNR an estimate for medical claims liability under moderately adverse conditions which represents the risk of adverse deviation of the estimates in its actuarial method of reserving.
The Company uses its judgment to determine the assumptions to be used in the calculation of the required estimates. The assumptions it considers when estimating IBNR include, without limitation, claims receipt and payment experience (and variations in that experience), changes in membership, provider billing practices, healthcare service utilization trends, cost trends, product mix, seasonality, prior authorization of medical services, benefit changes, known outbreaks of disease or increased incidence of illness such as influenza, provider contract changes, changes to fee schedules, and the incidence of high dollar or catastrophic claims.
The Company's development of the medical claims liability estimate is a continuous process which it monitors and refines on a monthly basis as additional claims receipts and payment information becomes available. As more complete claims information becomes available, the Company adjusts the amount of the estimates, and includes the changes in estimates in medical costs in the period in which the changes are identified. In every reporting period, the operating results include the effects of more completely developed medical claims liability estimates associated with previously reported periods. The Company consistently applies its reserving methodology from period to period. As additional information becomes known, it adjusts the actuarial model accordingly to establish medical claims liability estimates.
The Company periodically reviews actual and anticipated experience compared to the assumptions used to establish medical costs. The Company establishes premium deficiency reserves if actual and anticipated experience indicates that existing policy liabilities together with the present value of future gross premiums will not be sufficient to cover the present value of future benefits, settlement and maintenance costs.
Revenue Recognition
The Company's health plans generate revenues primarily from premiums received from the states in which it operates health plans. The Company generally receives a fixed premium per member per month pursuant to its state contracts and recognizes premium revenues during the period in which it is obligated to provide services to its members at the amount reasonably estimable. In some instances, the Company's base premiums are subject to an adjustment, or risk score, based on the acuity of its membership. Generally, the risk score is determined by the State analyzing submissions of processed claims data to determine the acuity of the Company's membership relative to the entire state's Medicaid membership. The Company estimates the amount of risk adjustment based upon the processed claims data submitted and expected to be submitted to Centers for Medicare and Medicaid Services (CMS) and records revenues on a risk adjusted basis. Some contracts allow for additional premiums related to certain supplemental services provided such as maternity deliveries.
The Company's contracts with states may require us to maintain a minimum health benefits ratio (HBR) or may require us to share profits excess of certain levels. In certain circumstances, our plans may be required to return premium to the state in the event profits exceed established levels. We estimate the effect of these programs and recognize reductions in revenue in the current period. Other states may require us to meet certain performance and quality metrics in order to receive additional or full contractual revenue. For performance-based contracts, we do not recognize revenue subject to refund until data is sufficient to measure performance.
Revenues are recorded based on membership and eligibility data provided by the states, which is adjusted on a monthly basis by the states for retroactive additions or deletions to membership data. These eligibility adjustments are estimated monthly and subsequent adjustments are made in the period known. The Company continuously reviews and updates those estimates as new information becomes available. It is possible that new information could require us to make additional adjustments, which could be significant, to these estimates.
The Company's Medicare Advantage contracts are with CMS. CMS deploys a risk adjustment model which apportions premiums paid to all health plans according to health severity and certain demographic factors. The CMS risk adjustment model pays more for members whose medical history would indicate that they are expected to have higher medical costs. Under this risk adjustment methodology, CMS calculates the risk adjusted premium payment using diagnosis data from hospital inpatient, hospital outpatient, physician treatment settings as well as prescription drug events. The Company and the health care providers collect, compile and submit the necessary and available diagnosis data to CMS within prescribed deadlines. The Company estimates risk adjustment revenues based upon the diagnosis data submitted and expected to be submitted to CMS and records revenues on a risk adjusted basis.
The Company's specialty services generate revenues under contracts with state and federal programs, healthcare organizations and other commercial organizations, as well as from our own subsidiaries. Revenues are recognized when the related services are provided or as ratably earned over the covered period of services. The Company recognizes revenue related to administrative services under the T-3 TRICARE government-sponsored managed care support contract in the North Region for the DoD's TRICARE program (T-3 contract) on a straight-line basis over the option period, when the fees become fixed and determinable. The T-3 contract includes various performance-based incentives and penalties. For each of the incentives or penalties, the Company adjusts revenue accordingly based on the amount that it has earned or incurred at each interim date and are legally entitled to in the event of a contract termination.
Some states enact premium taxes, similar assessments and provider pass-through payments, collectively premium taxes, and these taxes are recorded as a separate component of both revenues and operating expenses. Additionally, the Company's insurance subsidiaries are subject to the Affordable Care Act annual health insurer fee (HIF). If the Company is able to negotiate reimbursement of portions of these premium taxes or the HIF, it recognizes revenue associated with the HIF on a straight-line basis when we have binding agreements for such reimbursements, including the “gross-up” to reflect the HIFs non-tax deductible nature. Collectively, this revenue is recorded as premium tax and health insurer fee revenue in the Consolidated Statements of Operations.
Affordable Care Act
The Affordable Care Act (ACA) established risk spreading premium stabilization programs effective January 1, 2014. These programs, commonly referred to as the “three Rs”, include a permanent risk adjustment program, a transitional reinsurance program, and a temporary risk corridor program. Additionally, the ACA established a minimum annual medical loss ratio (MLR) and cost-sharing reductions. Each of the three R programs are taken into consideration to determine if the Company's estimated annual medical costs are less than the minimum loss ratio and require an adjustment to premium revenue to meet the minimum MLR.
During the second quarter of 2016, the Company recognized a
$70 million
net pre-tax benefit related to the reconciliation of 2015 risk adjustment and reinsurance programs. During the third quarter of 2016, the company received information from CMS, indicating that some of the participants in the Arizona risk adjustment program were unable to pay the amounts owed. As a result, the uncollected portion has been allocated pro-rata to other insurers in the market. Accordingly, the Company reduced the pre-tax earnings by
$19 million
during the third quarter.
The Company’s accounting policies for the programs are as follows:
Risk Adjustment
The permanent risk adjustment program established by the ACA transfers funds from qualified individual and small group insurance plans with below average risk scores to those plans with above average risk scores within each state. The Company estimates the receivable or payable under the risk adjustment program based on its estimated risk score compared to the state average risk score. The Company may record a receivable or payable as an adjustment to Premium revenue to reflect the year to date impact of the risk adjustment based on its best estimate. The Company expects to refine its estimate as new information becomes available. As of
December 31, 2016
and
2015
, the Company recorded a payable of
$425 million
and
$108 million
, respectively, associated with risk adjustment.
Reinsurance
The ACA established a transitional three-year reinsurance program whereby the Company’s claims costs incurred for qualified members will be reimbursed when they exceed a specific threshold. For the 2016 benefit year, qualified member claims that exceeded
$90,000 entitled the Company to reimbursement from the programs at 50%
coinsurance. The Company accounts for reinsurance recoveries as a reduction of Medical Costs based on each individual case that exceeds the reinsurance threshold established by the program. As of
December 31, 2016
and
2015
, the Company recorded a receivable of
$122 million
and
$24 million
, respectively, associated with reinsurance.
Risk Corridor
The temporary, three-year risk corridor program established by the ACA applies to qualified individual and small group health plans operating both inside and outside of the Health Insurance Marketplace. The risk corridor program limits the Company’s gains and losses in the Health Insurance Marketplace by comparing certain medical and administrative costs to a target amount and sharing the risk for allowable costs with the federal government. Allowable medical costs are adjusted for risk adjustment settlements, transitional reinsurance recoveries, and cost sharing reductions received from the federal government. The Company records a risk corridor receivable or payable as an adjustment to premium revenue on a year to date basis based on where its estimated annual costs fall within the risk corridor range. As of
December 31, 2016
and
2015
, the Company recorded a payable of
$3 million
and
$4 million
, respectively, associated with risk corridor.
Minimum Medical Loss Ratio
Additionally, the ACA established a minimum annual MLR for the Health Insurance Marketplace. Each of the three R programs described above are taken into consideration to determine if the Company’s estimated annual medical costs are less than the minimum loss ratio and require an adjustment to premium revenue to meet the minimum MLR. As of
December 31, 2016
and
2015
, the Company recorded a payable of
$18 million
and
$15 million
, respectively, associated with minimum MLR.
Cost-sharing Reductions (CSRs)
The ACA directs issuers to reduce the Company's members' cost sharing for essential health benefits for individuals with Federal Poverty Levels (FPLs) between 100% and 250% who are enrolled in a silver tier product; eliminate cost sharing for Indians/Alaska Natives with an FPL less than 300% and eliminate cost sharing for Indians/Alaska Natives regardless of FPL level when services are provided by an Indian Health Service. In order to compensate issuers for reduced cost sharing provided to enrollees, CMS pays an advance CSR payment to the Company each month based on the Company’s certification data provided at the time of the qualified health plan application. After the close of the benefit year, the Company is required to provide CMS with data on the value of the CSRs provided to enrollees based on either a ‘simplified’ or ‘standard’ approach. A reconciliation will occur in order to calculate the difference between the Company’s CSR advance payments received and the value of CSRs provided to enrollees. This reconciliation will produce either a payable or receivable to/from CMS. The Company has elected the standard methodology approach. As of
December 31, 2016
and
2015
, the Company recorded a payable of
$147 million
and
$40 million
, respectively, associated with CSRs.
Premium and Related Receivables and Unearned Revenue
Premium and service revenues collected in advance are recorded as unearned revenue. For performance-based contracts the Company does not recognize revenue subject to refund until data is sufficient to measure performance. Premiums and service revenues due to the Company are recorded as premium and related receivables and are recorded net of an allowance based on historical trends and management's judgment on the collectibility of these accounts. As the Company generally receives payments during the month in which services are provided, the allowance is typically not significant in comparison to total revenues and does not have a material impact on the presentation of the financial condition or results of operations. Amounts receivable under federal contracts are comprised primarily of contractually defined billings, accrued contract incentives under the terms of the contract and amounts related to change orders for services not originally specified in the contract.
Activity in the allowance for uncollectible accounts for the years ended December 31, is summarized below ($ in millions):
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2016
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2015
|
|
2014
|
Allowances, beginning of year
|
$
|
10
|
|
|
$
|
5
|
|
|
$
|
1
|
|
Amounts charged to expense
|
33
|
|
|
12
|
|
|
8
|
|
Write-offs of uncollectible receivables
|
(14
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)
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|
(7
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)
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|
(4
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)
|
Allowances, end of year
|
$
|
29
|
|
|
$
|
10
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|
|
$
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5
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|
Significant Customers
Centene receives the majority of its revenues under contracts or subcontracts with state Medicaid managed care programs. The current contracts expire on various dates between February 28, 2017 and December 31, 2022. Customers where the aggregate annual contract revenues exceeded 10% of total annual revenues included the state of California, where the percentage of the Company's total revenue was
21%
,
3%
and
2%
for the
years ended December 31, 2016, 2015 and 2014
, respectively; the state of Florida, where the percentage of the Company's total revenue was
14%
for the years ended December 31, 2015 and 2014; and the state of Texas, where the percentage of the Company's total revenue was
13%
,
22%
and
25%
for the
years ended December 31, 2016, 2015 and 2014
, respectively. The decrease in the revenue percentage for the state of Texas compared to prior periods is attributable to the overall growth in the Company's revenues as a result of the Health Net acquisition.
Other Income (Expense)
Other income (expense) consists principally of investment income, interest expense and equity method earnings from investments. Investment income is derived from the Company's cash, cash equivalents, restricted deposits and investments. Interest expense relates to borrowings under the senior notes, interest rate swap, credit facilities, interest on capital leases and credit facility fees.
Income Taxes
Deferred tax assets and liabilities are recorded for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax law or tax rates is recognized in income in the period that includes the enactment date.
Valuation allowances are provided when it is considered more likely than not that deferred tax assets will not be realized. In determining if a deductible temporary difference or net operating loss can be realized, the Company considers future reversals of existing taxable temporary differences, future taxable income, taxable income in prior carryback periods and tax planning strategies.
Contingencies
The Company accrues for loss contingencies associated with outstanding litigation, claims and assessments for which it has determined it is probable that a loss contingency exists and the amount of loss can be reasonably estimated. The Company expenses professional fees associated with litigation claims and assessments as incurred.
Stock Based Compensation
The fair value of the Company's employee share options and similar instruments are estimated using the Black-Scholes option-pricing model. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. Excess tax benefits related to stock compensation are presented as a cash inflow from financing activities for the years ended December 31, 2015 and 2014 and as a cash inflow from operating activities for the year ended December 31, 2016 due to the prospective adoption of employee share-based payment guidance in 2016. The Company accounts for forfeitures when they occur.
Foreign Currency Translation
The Company is exposed to foreign currency exchange risk through its equity method investment in Ribera Salud S.A. (Ribera Salud), a Spanish health management group whose functional currency is the Euro. The assets and liabilities of the Company's investment are translated into United States dollars at the balance sheet date. The Company translates its proportionate share of earnings using average rates during the year. The resulting foreign currency translation adjustments are recorded as a separate component of accumulated other comprehensive income.
Recently Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. Under the new guidance, an entity recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement. The ASU also allows an entity to elect as an accounting policy either to continue to estimate the total number of awards for which the requisite service period will not be rendered, as currently required, or to account for forfeitures when they occur. Finally, the ASU modifies the current exception to liability classification of an award when an employer uses a net-settlement feature to withhold shares to meet the employee's minimum statutory tax withholding requirement. The new standard is effective for annual periods beginning after December 15, 2016, including interim periods within those annual reporting periods. Early adoption is permitted. The Company elected to early adopt this guidance in the fourth quarter of 2016. The adoption of this ASU decreased the Company's income tax expense by
$14 million
in 2016 and increased diluted shares outstanding by approximately one million shares. Excess tax benefits related to stock compensation are now presented as cash flows from operating activities rather than as cash flows from financing activities, this aspect of the guidance has been adopted prospectively. In connection with the adoption, the Company has elected to account for forfeitures as they occur.
In May 2015, the FASB issued an ASU which expands the disclosure requirements for insurance companies that issue short-duration contracts. The new standard will increase the level of disclosure around the Company's Medical Claims Liability to include the following: claims development by year; claim frequency; a rollforward of the claims liability; and a description of methods and assumptions used for determining the liability. It is effective for annual periods beginning after December 15, 2015 and interim periods beginning after December 15, 2016. The Company has adopted this guidance in the current fiscal year.
Recent Accounting Guidance Not Yet Adopted
In January 2017, the FASB issued an ASU simplifying the test for goodwill impairment. The amendments in this ASU eliminate Step 2 from the goodwill impairment test. Thus, an entity will no longer be required to compare the implied fair value of a reporting unit’s goodwill to its carrying amount. Instead, under the new guidance, an entity should perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the fair value. The impairment charge should be limited to the total amount of goodwill allocated to that reporting unit. Under the new guidance, an entity still has the option to first perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new standard is effective for an entity’s annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the effect of the new goodwill impairment guidance.
In November 2016, the FASB issued an ASU clarifying the classification and presentation of changes in restricted cash on the statement of cash flows. The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash. Therefore, amounts generally described as restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new standard is effective for annual periods beginning after December 15, 2017, including interim periods within those annual reporting periods. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the effect of the new statement of cash flows guidance.
In August 2016, the FASB issued an ASU which clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The new guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The new standard is effective for annual periods beginning after December 15, 2017, including interim periods within those annual reporting periods. Early adoption is permitted. The Company is currently evaluating the effect of the new statement of cash flows guidance.
In February 2016, the FASB issued an ASU which introduces a lessee model that requires the majority of leases to be recognized on the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in Accounting Standards Codification 606, the FASB's new revenue recognition standard, and addresses other concerns related to the current lessee model. The standard also requires lessors to increase the transparency of their exposure to changes in value of their residual assets and how they manage that exposure. It is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the effect of the new lease guidance.
In May 2014, the FASB issued an ASU which supersedes existing revenue recognition standards with a single model unless those contracts are within the scope of other standards (e.g., an insurance entity's insurance contracts). Under the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The new effective date is for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the effect of the new revenue recognition guidance. The majority of the Company's revenues are derived from insurance contracts and are excluded from the new standard, therefore the new guidance is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.
The Company has determined that there are no other recently issued accounting pronouncements that will have a material impact on its consolidated financial position, results of operations or cash flows.
3.
Health Net
On
March 24, 2016
, the Company acquired all of the issued and outstanding shares of Health Net, a publicly traded managed care organization that delivers health care services through health plans and government-sponsored managed care plans. The transaction was valued at approximately
$5,990 million
, including the assumption of
$703 million
of outstanding debt. The acquisition allows the Company to offer a more comprehensive and scalable portfolio of solutions and provides opportunity for additional growth across the combined company's markets.
The total consideration for the acquisition was
$5,287 million
, consisting of Centene common shares valued at
$3,038 million
(based on Centene's stock price of
$62.70
),
$2,247 million
in cash, and
$2 million
related to the fair value adjustment to stock based compensation associated with pre-combination service. Each Health Net share was converted into
0.622
of a validly issued, fully paid, non-assessable share of Centene common stock and
$28.25
in cash. In total,
48,449,444
shares of Centene common stock were issued in connection with the transaction. The cash portion of the acquisition consideration was funded through the issuance of long-term debt as further discussed in Note
11
,
Debt
. For the
year ended December 31, 2016
, the Company also recognized acquisition related expenses of
$234 million
that were recorded in selling, general and administrative (SG&A) expense in the Consolidated Statements of Operations.
The acquisition of Health Net has been accounted for as a business combination using the acquisition method of accounting which requires assets acquired and liabilities assumed to be recognized at fair value as of the acquisition date. The valuation of all the assets acquired and liabilities assumed was finalized in the fourth quarter of 2016.
Since the initial allocation of purchase price, the Company made adjustments and reclassifications to the fair value of certain assets and liabilities acquired, including the premium and related receivables, medical claims liability, accrued liabilities, return of premium payable and deferred taxes, resulting in a net increase of
$258 million
to goodwill. The Company's allocation of the fair value of assets acquired and liabilities assumed as of the acquisition date of
March 24, 2016
, is as follows ($ in millions):
|
|
|
|
|
|
Assets Acquired and Liabilities Assumed
|
|
|
Cash and cash equivalents
|
|
$
|
956
|
|
Premium and related receivables
(a)
|
|
1,890
|
|
Short term investments
|
|
74
|
|
Other current assets
|
|
524
|
|
Long term investments
|
|
2,037
|
|
Restricted deposits
|
|
30
|
|
Property, software and equipment, net
|
|
41
|
|
Intangible assets
(b)
|
|
1,530
|
|
Other long term assets
|
|
136
|
|
Total assets acquired
|
|
7,218
|
|
|
|
|
Medical claims liability
(c)
|
|
1,482
|
|
Borrowings under revolving credit facility
|
|
285
|
|
Accounts payable and accrued expenses
(c) (d)
|
|
2,297
|
|
Return of premium payable
|
|
435
|
|
Unearned revenue
|
|
130
|
|
Long term deferred tax liabilities
(e)
|
|
311
|
|
Long term debt
(f)
|
|
418
|
|
Other long term liabilities
|
|
432
|
|
Total liabilities assumed
|
|
5,790
|
|
|
|
|
Total identifiable net assets
|
|
1,428
|
|
Goodwill
(g)
|
|
3,859
|
|
Total assets acquired and liabilities assumed
|
|
$
|
5,287
|
|
Significant fair value adjustments are noted as follows:
|
|
(a)
|
The fair value of premium and related receivables approximated their historical cost, with the exception of the risk corridor receivable associated with the Health Insurance Marketplace. The fair value of the risk corridor receivable was estimated at
$9 million
.
|
|
|
(b)
|
The identifiable intangible assets acquired are to be measured at fair value as of the completion of the acquisition. The fair value of intangible assets is determined primarily using variations of the "income approach," which is based on the present value of the future after tax cash flows attributable to each identified intangible asset. Other valuation methods, including the market approach and cost approach, were also utilized in estimating the fair value of certain intangible assets. The Company has finalized its fair value of intangibles to be
$1,530 million
with a weighted average life of
12
years. This final fair value of intangibles is approximately
$30 million
higher than the preliminary fair value of intangibles and the weighted average life increased by
two
years, which resulted in an immaterial true-up of intangible amortization recorded during the fourth quarter of 2016. The Company identified intangible assets including purchased contract rights, provider contracts, trade names and developed technology.
|
|
|
(c)
|
Medical claims liability and accounts payable and accrued expenses include
$160 million
of reserves associated with substance abuse rehabilitation claims primarily related to periods prior to the acquisition date.
|
|
|
(d)
|
Accounts payable and accrued expenses include approximately
$253 million
related to premium deficiency reserves based on cost trends existing prior to the acquisition date. The premium deficiency reserves are primarily associated with losses in the individual commercial business, largely in California, unfavorable performance in the Arizona commercial business as well as unfavorable performance in the Medicare business primarily in Oregon and Arizona.
|
|
|
(e)
|
The deferred tax liabilities are presented net of
$365 million
of deferred tax assets.
|
|
|
(f)
|
Debt is required to be measured at fair value under the acquisition method of accounting. The fair value of Health Net's
$400 million
Senior Notes assumed in the acquisition was
$418 million
. The
$18 million
increase will be amortized as a reduction to interest expense over the remaining life of the debt. In November 2016, this debt was redeemed as discussed in Note
11
,
Debt.
|
|
|
(g)
|
The acquisition resulted in
$3,859 million
of goodwill related primarily to buyer specific synergies expected from the acquisition and the assembled workforce of Health Net. This goodwill is not deductible for income tax purposes. The Company assigned
$3,317 million
of goodwill to the Managed Care segment and
$542 million
of goodwill to the Specialty Services segment.
|
The fair values and weighted average useful lives for identifiable intangible assets acquired are as follows:
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Weighted Average Useful Life (in years)
|
Purchased contract rights
|
|
$
|
1,095
|
|
|
13
|
Provider contracts
|
|
181
|
|
|
11
|
Trade names
|
|
150
|
|
|
10
|
Developed technology
|
|
104
|
|
|
5
|
Total intangible assets acquired
|
|
$
|
1,530
|
|
|
12
|
Statement of Operations
From the acquisition date through
December 31, 2016
, the Company's Consolidated Statements of Operations include total Health Net revenues of
$13,454 million
. It is impracticable to determine the effect on net income resulting from the Health Net acquisition for the
year ended December 31, 2016
, as the Company immediately integrated Health Net into its ongoing operations.
Unaudited Pro Forma Financial Information
The unaudited pro forma total revenues for the
year ended December 31, 2016
were
$44,280 million
. The following table presents supplemental pro forma information for the year ended December 31, 2015 ($ in millions, except per share data).
|
|
|
|
|
|
|
|
December 31, 2015
|
Total revenues
|
|
$
|
38,826
|
|
Net earnings attributable to Centene Corporation
|
|
$
|
245
|
|
Diluted earnings per share
|
|
$
|
1.43
|
|
The pro forma results do not reflect any anticipated synergies, efficiencies, or other cost savings of the acquisition. Accordingly, the unaudited pro forma financial information is not indicative of the results if the acquisition had been completed on January 1, 2015 and is not a projection of future results. It is impracticable for the Company to determine the pro forma earnings information for the
year ended December 31, 2016
due to the nature of obtaining that information as the Company immediately integrated Health Net into its ongoing operations.
The unaudited pro forma financial information reflects the historical results of Centene and Health Net adjusted as if the acquisition had occurred on January 1, 2015, primarily for the following:
|
|
•
|
Additional interest income associated with adjusting the amortized cost of Health Net's investment portfolio to fair value.
|
|
|
•
|
Elimination of historical Health Net intangible asset amortization expense and addition of amortization expense based on the current values of identifiable intangible assets.
|
|
|
•
|
Adjustments to premium revenue related to the risk corridor receivables associated with the Health Insurance Marketplace to align with Centene's accounting policies.
|
|
|
•
|
Interest expense associated with financing the acquisition and amortization of the fair value adjustment to Health Net's debt.
|
|
|
•
|
Additional stock compensation expense related to the amortization of the fair value increase to Health Net rollover stock awards.
|
|
|
•
|
Increased tax expense due to the assumption that Centene would be subject to the IRS Regulation 162(m)(6) beginning in 2015.
|
|
|
•
|
Elimination of acquisition related costs.
|
Restructuring Related Charges
In connection with the Health Net acquisition, the Company undertook a restructuring plan as a result of the integration of Health Net's operations into its business, resulting in a reduction in workforce beginning in 2016 and expected to continue through early 2017. The restructuring related costs are classified as SG&A expenses in the Consolidated Statements of Operations. Changes in the restructuring liability for the
year ended December 31, 2016
were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Employee Termination Costs
|
|
Stock Based Compensation
|
|
Total
|
Total accrued restructuring costs as of December 31, 2015
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Charges incurred
|
|
46
|
|
|
43
|
|
|
89
|
|
Paid/settled
|
|
(28
|
)
|
|
(43
|
)
|
|
(71
|
)
|
Total accrued restructuring costs as of December 31, 2016
|
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
18
|
|
For the
year ended December 31, 2016
, the Company recorded employee termination costs of
$46 million
and stock based compensation of
$43 million
in the Managed Care Segment. The Company expects to record a total of approximately
$51 million
of employee termination costs and
$45 million
of stock based compensation in connection with the acquisition, the majority of which was expensed in 2016. The remainder is to be incurred in early 2017.
Commitments
In connection with obtaining regulatory approval of the Health Net acquisition from the California Department of Insurance and th
e California Department of Managed Health Care, the Company committed to certain undertakings (the Undertakings). The Undertakings included, among other items, operational commitments around premiums, dividend restrictions, minimum Risk Based Capital (RBC) levels, local offices, growth, accreditation, HEDIS scores and other quality measures, network adequacy, certifications, investments and capital expenditures. Specifically, the Company agreed to, among other things:
|
|
•
|
invest an additional
$30 million
through the California Organized Investment Network over the
five
years following completion of the acquisition;
|
|
|
•
|
build a service center in an economically distressed community in California, investing
$200 million
over
10
years and employing at least
300
people;
|
|
|
•
|
contribute
$65 million
to improve enrollee health outcomes (
$10 million
over
10
years), support locally based consumer assistance programs (
$5 million
over
five
years) and strengthen the health care delivery system (
$50 million
over
five
years), (of which, the present value of
$61 million
was expensed in the
year ended December 31, 2016
, and classified as SG&A expenses in the Consolidated Statements of Operations); and
|
|
|
•
|
invest
$75 million
of its investment portfolio in vehicles supporting California’s health care infrastructure.
|
4.
Acquisitions and Noncontrolling Interest
Acquisitions
Health Net.
On March 24, 2016, the Company acquired all of the issued and outstanding shares of Health Net, a publicly traded managed care organization that delivers health care services through health plans and government-sponsored managed care plans. See Note 3,
Health Net,
for further discussion on the acquisition.
Agate Resources, Inc.
In September
2015, the Company completed the acquisition of Agate Resources, Inc. (Agate) for
$114 million
. Agate is a diversified holding company that offers primarily Medicaid and other healthcare products and services to Oregon residents. The fair value of consideration of
$114 million
consists of initial cash consideration of
$93 million
, the present value of future cash payments of
$12 million
to be paid out over a
three
year period, and the fair value of estimated contingent consideration of
$9 million
. A portion of the contingent consideration is based on the achievement of underwriting targets and is being paid in cash over a
three
year period; the remainder is based on the net proceeds of a retrospective rate adjustment, which was settled in 2016.
The Company's allocation of fair value resulted in goodwill of
$42 million
and other identifiable intangible assets of
$39 million
. The goodwill is not deductible for income tax purposes. The acquisition is recorded in the Managed Care segment.
Noncontrolling Interest
The Company has consolidated subsidiaries where it maintains less than 100% ownership. The Company’s ownership interest for each subsidiary as of December 31, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Celtic Insurance Company
|
|
100
|
%
|
|
75
|
%
|
|
100
|
%
|
Cenpatico Integrated Care
|
|
80
|
%
|
|
80
|
%
|
|
80
|
%
|
Centurion
|
|
51
|
%
|
|
51
|
%
|
|
51
|
%
|
Home State Health Plan
|
|
95
|
%
|
|
95
|
%
|
|
95
|
%
|
The Practice (Group) Limited (TPG)
(1)
|
|
75
|
%
|
|
49
|
%
|
|
49
|
%
|
U.S. Medical Management
|
|
68
|
%
|
|
68
|
%
|
|
68
|
%
|
(1) In 2016, the Company purchased a controlling interest in TPG for
$8 million
.
Net income attributable to Centene Corporation and transfers from (to) noncontrolling interest entities are as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Net earnings attributable to Centene Corporation
|
$
|
559
|
|
|
$
|
356
|
|
|
$
|
268
|
|
Transfers from (to) the noncontrolling interest:
|
|
|
|
|
|
Increase in equity for distributions from and consolidation of noncontrolling interest
|
2
|
|
|
11
|
|
|
—
|
|
Reclassification to redeemable noncontrolling interest
|
—
|
|
|
1
|
|
|
(9
|
)
|
Net transfers from (to) noncontrolling interest
|
2
|
|
|
12
|
|
|
(9
|
)
|
Changes from net earnings attributable to Centene Corporation and net transfers from (to) the noncontrolling interest
|
$
|
561
|
|
|
$
|
368
|
|
|
$
|
259
|
|
Redeemable Noncontrolling Interest
As a result of put option agreements, noncontrolling interest is considered redeemable and is classified in the Redeemable Noncontrolling Interest section of the Consolidated Balance Sheets. Noncontrolling interest is initially measured at fair value using the binomial lattice model as of the acquisition date. The Company has elected to accrete changes in the redemption value through additional paid-in capital over the period from the date of issuance to the earliest redemption date following the effective interest method.
A reconciliation of the changes in the Redeemable Noncontrolling Interest is as follows ($ in millions):
|
|
|
|
|
Balance, December 31, 2015
|
$
|
156
|
|
Noncontrolling interest related to TPG acquisition
|
3
|
|
Noncontrolling interest repurchased related to Celtic Insurance Company
|
(12
|
)
|
Net losses attributable to noncontrolling interest
|
(2
|
)
|
Balance, December 31, 2016
|
$
|
145
|
|
Pro forma disclosures related to the acquisitions other than Health Net (see Note 3,
Health Net
) have been excluded as they were deemed to be immaterial.
5.
Short term and Long term Investments, Restricted Deposits
Short term and long term investments and restricted deposits by investment type consist of the following ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized Losses
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized Losses
|
|
Fair
Value
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
$
|
364
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
363
|
|
|
$
|
431
|
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
429
|
|
Corporate securities
|
1,933
|
|
|
12
|
|
|
(13
|
)
|
|
1,932
|
|
|
859
|
|
|
2
|
|
|
(8
|
)
|
|
853
|
|
Restricted certificates of deposit
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
Restricted cash equivalents
|
6
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
78
|
|
|
—
|
|
|
—
|
|
|
78
|
|
Municipal securities
|
1,767
|
|
|
1
|
|
|
(35
|
)
|
|
1,733
|
|
|
496
|
|
|
2
|
|
|
(1
|
)
|
|
497
|
|
Asset backed securities
|
317
|
|
|
1
|
|
|
(1
|
)
|
|
317
|
|
|
163
|
|
|
—
|
|
|
(1
|
)
|
|
162
|
|
Residential mortgage backed securities
|
219
|
|
|
1
|
|
|
(5
|
)
|
|
215
|
|
|
66
|
|
|
1
|
|
|
—
|
|
|
67
|
|
Commercial mortgage backed securities
|
343
|
|
|
—
|
|
|
(5
|
)
|
|
338
|
|
|
40
|
|
|
—
|
|
|
—
|
|
|
40
|
|
Cost and equity method investments
|
163
|
|
|
—
|
|
|
—
|
|
|
163
|
|
|
71
|
|
|
—
|
|
|
—
|
|
|
71
|
|
Life insurance contracts
|
116
|
|
|
—
|
|
|
—
|
|
|
116
|
|
|
16
|
|
|
—
|
|
|
—
|
|
|
16
|
|
Total
|
$
|
5,233
|
|
|
$
|
15
|
|
|
$
|
(60
|
)
|
|
$
|
5,188
|
|
|
$
|
2,225
|
|
|
$
|
5
|
|
|
$
|
(12
|
)
|
|
$
|
2,218
|
|
The Company’s investments are classified as available-for-sale with the exception of life insurance contracts and certain cost and equity method investments. The Company’s investment policies are designed to provide liquidity, preserve capital and maximize total return on invested assets with the focus on high credit quality securities. The Company limits the size of investment in any single issuer other than U.S. treasury securities and obligations of U.S. government corporations and agencies. As of
December 31, 2016
,
95%
of the Company’s investments in rated securities carry an investment grade rating by S&P and Moody’s. At
December 31, 2016
, the Company held certificates of deposit, life insurance contracts and cost and equity method investments which did not carry a credit rating.
The Company's residential mortgage-backed securities are primarily issued by the Federal National Mortgage Association, Government National Mortgage Association or Federal Home Loan Mortgage Corporation, which carry implicit or explicit guarantees of the U.S. government. The Company's commercial mortgage-backed securities are primarily senior tranches with a weighted average rating of AA+ and a weighted average duration of
3.7
years at December 31, 2016.
In January 2016, the Company completed a
19%
investment in a data analytics business, and as a result, issued the selling stockholders
1.1 million
shares of Centene common stock, valued at
$68 million
. The investment is being accounted for using the equity method of accounting due to the Company's significant influence of the business.
The fair value of available-for-sale investments with gross unrealized losses by investment type and length of time that individual securities have been in a continuous unrealized loss position were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Unrealized Losses
|
|
Fair
Value
|
|
Unrealized Losses
|
|
Fair
Value
|
|
Unrealized Losses
|
|
Fair
Value
|
|
Unrealized Losses
|
|
Fair
Value
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
$
|
(1
|
)
|
|
$
|
215
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
(2
|
)
|
|
$
|
294
|
|
|
$
|
—
|
|
|
$
|
14
|
|
Corporate securities
|
(12
|
)
|
|
1,020
|
|
|
(1
|
)
|
|
39
|
|
|
(6
|
)
|
|
561
|
|
|
(2
|
)
|
|
41
|
|
Municipal securities
|
(35
|
)
|
|
1,423
|
|
|
—
|
|
|
30
|
|
|
(1
|
)
|
|
208
|
|
|
—
|
|
|
5
|
|
Asset backed securities
|
(1
|
)
|
|
101
|
|
|
—
|
|
|
18
|
|
|
(1
|
)
|
|
121
|
|
|
—
|
|
|
8
|
|
Residential mortgage backed securities
|
(5
|
)
|
|
188
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30
|
|
|
—
|
|
|
—
|
|
Commercial mortgage backed securities
|
(5
|
)
|
|
271
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
34
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
(59
|
)
|
|
$
|
3,218
|
|
|
$
|
(1
|
)
|
|
$
|
89
|
|
|
$
|
(10
|
)
|
|
$
|
1,248
|
|
|
$
|
(2
|
)
|
|
$
|
68
|
|
As of
December 31, 2016
, the gross unrealized losses were generated from
1,881
positions out of a total of
2,845
positions. The change in fair value of fixed income securities is primarily a result of movement in interest rates subsequent to the purchase of the security.
For each security in an unrealized loss position, the Company assesses whether it intends to sell the security or if it is more likely than not the Company will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes. If the security meets this criterion, the decline in fair value is other-than-temporary and is recorded in earnings. The Company does not intend to sell these securities prior to maturity and it is not likely that the Company will be required to sell these securities prior to maturity; therefore, there is no indication of other-than-temporary impairment for these securities.
During the years ended
December 31, 2016
, 2015 and 2014, the company recognized
$5 million
,
$8 million
and
$6 million
, respectively, of income from equity method investments.
The contractual maturities of short term and long term investments and restricted deposits are as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Investments
|
|
Restricted Deposits
|
|
Investments
|
|
Restricted Deposits
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
One year or less
|
$
|
500
|
|
|
$
|
500
|
|
|
$
|
91
|
|
|
$
|
91
|
|
|
$
|
176
|
|
|
$
|
176
|
|
|
$
|
93
|
|
|
$
|
93
|
|
One year through five years
|
1,982
|
|
|
1,974
|
|
|
47
|
|
|
47
|
|
|
1,662
|
|
|
1,654
|
|
|
22
|
|
|
22
|
|
Five years through ten years
|
1,101
|
|
|
1,089
|
|
|
—
|
|
|
—
|
|
|
267
|
|
|
268
|
|
|
—
|
|
|
—
|
|
Greater than ten years
|
633
|
|
|
617
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
5
|
|
|
—
|
|
|
—
|
|
Asset-backed securities
|
879
|
|
|
870
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
5,095
|
|
|
$
|
5,050
|
|
|
$
|
138
|
|
|
$
|
138
|
|
|
$
|
2,110
|
|
|
$
|
2,103
|
|
|
$
|
115
|
|
|
$
|
115
|
|
Actual maturities may differ from contractual maturities due to call or prepayment options. Cost and equity method investments and life insurance contracts are included in the five years through ten years category. The Company has an option to redeem at amortized cost substantially all of the securities included in the greater than ten years category listed above.
The Company continuously monitors investments for other-than-temporary impairment. Certain investments have experienced a decline in fair value due to changes in credit quality, market interest rates and/or general economic conditions. The Company recognizes an impairment loss for cost and equity method investments when evidence demonstrates that it is other-than-temporarily impaired. Evidence of a loss in value that is other-than-temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment.
6.
Fair Value Measurements
Assets and liabilities recorded at fair value in the Consolidated Balance Sheets are categorized based upon observable or unobservable inputs used to estimate fair value. Level inputs are as follows:
|
|
|
|
Level Input:
|
|
Input Definition:
|
Level I
|
|
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
|
|
|
|
Level II
|
|
Inputs other than quoted prices included in Level I that are observable for the asset or liability through corroboration with market data at the measurement date.
|
|
|
|
Level III
|
|
Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.
|
The following table summarizes fair value measurements by level at
December 31, 2016
, for assets and liabilities measured at fair value on a recurring basis ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
3,930
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,930
|
|
Investments available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
$
|
221
|
|
|
$
|
15
|
|
|
$
|
—
|
|
|
$
|
236
|
|
Corporate securities
|
—
|
|
|
1,932
|
|
|
—
|
|
|
1,932
|
|
Municipal securities
|
—
|
|
|
1,733
|
|
|
—
|
|
|
1,733
|
|
Asset backed securities
|
—
|
|
|
317
|
|
|
—
|
|
|
317
|
|
Residential mortgage backed securities
|
—
|
|
|
215
|
|
|
—
|
|
|
215
|
|
Commercial mortgage backed securities
|
—
|
|
|
338
|
|
|
—
|
|
|
338
|
|
Total investments
|
$
|
221
|
|
|
$
|
4,550
|
|
|
$
|
—
|
|
|
$
|
4,771
|
|
Restricted deposits available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6
|
|
Certificates of deposit
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
127
|
|
|
—
|
|
|
—
|
|
|
127
|
|
Total restricted deposits
|
$
|
138
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
138
|
|
Other long term assets:
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
4
|
|
Total assets at fair value
|
$
|
4,289
|
|
|
$
|
4,554
|
|
|
$
|
—
|
|
|
$
|
8,843
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Other long term liabilities:
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
$
|
—
|
|
|
$
|
62
|
|
|
$
|
—
|
|
|
$
|
62
|
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
62
|
|
|
$
|
—
|
|
|
$
|
62
|
|
The following table summarizes fair value measurements by level at
December 31, 2015
, for assets and liabilities measured at fair value on a recurring basis ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,760
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,760
|
|
Investments available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
$
|
325
|
|
|
$
|
72
|
|
|
$
|
—
|
|
|
$
|
397
|
|
Corporate securities
|
—
|
|
|
853
|
|
|
—
|
|
|
853
|
|
Municipal securities
|
—
|
|
|
497
|
|
|
—
|
|
|
497
|
|
Asset backed securities
|
—
|
|
|
162
|
|
|
—
|
|
|
162
|
|
Residential mortgage backed securities
|
—
|
|
|
67
|
|
|
—
|
|
|
67
|
|
Commercial mortgage backed securities
|
—
|
|
|
40
|
|
|
—
|
|
|
40
|
|
Total investments
|
$
|
325
|
|
|
$
|
1,691
|
|
|
$
|
—
|
|
|
$
|
2,016
|
|
Restricted deposits available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
78
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
78
|
|
Certificates of deposit
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
32
|
|
|
—
|
|
|
—
|
|
|
32
|
|
Total restricted deposits
|
$
|
115
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
115
|
|
Other long term assets:
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
11
|
|
Total assets at fair value
|
$
|
2,200
|
|
|
$
|
1,702
|
|
|
$
|
—
|
|
|
$
|
3,902
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Other long term liabilities:
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
The Company periodically transfers U.S. Treasury securities and obligations of U.S. government corporations and agencies between Level I and Level II fair value measurements dependent upon the level of trading activity for the specific securities at the measurement date. The Company’s policy regarding the timing of transfers between Level I and Level II is to measure and record the transfers at the end of the reporting period. At
December 31, 2016
, there were
$1 million
of transfers from Level I to Level II and
$45 million
of transfers from Level II to Level I. The Company utilizes matrix pricing services to estimate fair value for securities which are not actively traded on the measurement date. The Company designates these securities as Level II fair value measurements. The aggregate carrying amount of the Company’s life insurance contracts and other non-majority owned investments, which approximates fair value, was
$279 million
and
$87 million
as of
December 31, 2016
and
December 31, 2015
, respectively.
7.
Property, Software and Equipment
Property, software and equipment consist of the following as of December 31 ($ in millions):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Land
|
$
|
113
|
|
|
$
|
104
|
|
Building
|
271
|
|
|
223
|
|
Computer software
|
377
|
|
|
237
|
|
Computer hardware
|
179
|
|
|
105
|
|
Furniture and office equipment
|
126
|
|
|
92
|
|
Leasehold improvements
|
173
|
|
|
108
|
|
|
1,239
|
|
|
869
|
|
Less accumulated depreciation
|
(442
|
)
|
|
(351
|
)
|
Property, software and equipment, net
|
$
|
797
|
|
|
$
|
518
|
|
As of
December 31, 2016 and 2015
, the Company had assets acquired under capital leases included above of
$5 million
and
$6 million
, net of accumulated amortization of
$4 million
and
$4 million
, respectively. Amortization on assets under capital leases charged to expense is included in depreciation expense. Depreciation expense for the years ended
December 31, 2016, 2015 and 2014
was
$101 million
,
$78 million
and
$65 million
, respectively.
8.
Goodwill and Intangible Assets
The following table summarizes the changes in goodwill by operating segment ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Care
|
|
Specialty Services
|
|
Total
|
Balance as of December 31, 2014
|
$
|
276
|
|
|
$
|
478
|
|
|
$
|
754
|
|
Acquisitions and purchase accounting adjustments
|
103
|
|
|
3
|
|
|
106
|
|
Impairment
|
(18
|
)
|
|
—
|
|
|
(18
|
)
|
Balance as of December 31, 2015
|
361
|
|
|
481
|
|
|
842
|
|
Acquisitions and purchase accounting adjustments
|
3,331
|
|
|
542
|
|
|
3,873
|
|
Translation impact
|
(3
|
)
|
|
—
|
|
|
(3
|
)
|
Balance as of December 31, 2016
|
$
|
3,689
|
|
|
$
|
1,023
|
|
|
$
|
4,712
|
|
Goodwill was related to the acquisitions and finalization of fair value allocations discussed in Note
3
,
Health Net
and Note
4
,
Acquisitions and Noncontrolling Interest
.
Intangible assets at December 31, consist of the following ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Life in Years
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Purchased contract rights
|
$
|
1,171
|
|
|
$
|
71
|
|
|
12.6
|
|
8.8
|
Provider contracts
|
285
|
|
|
103
|
|
|
10.7
|
|
11.1
|
Customer relationships
|
22
|
|
|
26
|
|
|
8.2
|
|
8.1
|
Trade names
|
163
|
|
|
12
|
|
|
9.6
|
|
7.3
|
Developed technology
|
110
|
|
|
5
|
|
|
5.0
|
|
5.0
|
Intangible assets
|
1,751
|
|
|
217
|
|
|
11.5
|
|
9.8
|
Less accumulated amortization:
|
|
|
|
|
|
|
|
Purchased contract rights
|
(95
|
)
|
|
(21
|
)
|
|
|
|
|
Provider contracts
|
(55
|
)
|
|
(24
|
)
|
|
|
|
|
Customer relationships
|
(21
|
)
|
|
(14
|
)
|
|
|
|
|
Trade names
|
(17
|
)
|
|
(2
|
)
|
|
|
|
|
Developed technology
|
(18
|
)
|
|
(1
|
)
|
|
|
|
|
Total accumulated amortization
|
(206
|
)
|
|
(62
|
)
|
|
|
|
|
Intangible assets, net
|
$
|
1,545
|
|
|
$
|
155
|
|
|
|
|
|
Amortization expense was
$147 million
,
$24 million
and
$16 million
for the years ended
December 31, 2016, 2015 and 2014
, respectively. Estimated total amortization expense related to intangible assets for each of the five succeeding fiscal years is as follows ($ in millions):
|
|
|
|
|
|
Year
|
|
Expense
|
2017
|
|
$
|
155
|
|
2018
|
|
152
|
|
2019
|
|
152
|
|
2020
|
|
150
|
|
2021
|
|
133
|
|
9.
Medical Claims Liability
The following table summarizes the change in medical claims liability by operating segment ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Care
|
|
Specialty Services
|
|
Consolidated Total
|
Balance, January 1, 2014, net
|
$
|
1,101
|
|
|
$
|
11
|
|
|
$
|
1,112
|
|
Incurred related to:
|
|
|
|
|
|
Current year
|
12,468
|
|
|
352
|
|
|
12,820
|
|
Prior years
|
(141
|
)
|
|
(1
|
)
|
|
(142
|
)
|
Total incurred
|
12,327
|
|
|
351
|
|
|
12,678
|
|
Paid related to:
|
|
|
|
|
|
Current year
|
10,796
|
|
|
326
|
|
|
11,122
|
|
Prior years
|
936
|
|
|
9
|
|
|
945
|
|
Total paid
|
11,732
|
|
|
335
|
|
|
12,067
|
|
Balance, December 31, 2014, net
|
$
|
1,696
|
|
|
$
|
27
|
|
|
$
|
1,723
|
|
Acquisitions
|
79
|
|
|
—
|
|
|
79
|
|
Incurred related to:
|
|
|
|
|
|
Current year
|
16,974
|
|
|
497
|
|
|
17,471
|
|
Prior years
|
(223
|
)
|
|
(6
|
)
|
|
(229
|
)
|
Total incurred
|
16,751
|
|
|
491
|
|
|
17,242
|
|
Paid related to:
|
|
|
|
|
|
Current year
|
14,826
|
|
|
453
|
|
|
15,279
|
|
Prior years
|
1,448
|
|
|
19
|
|
|
1,467
|
|
Total paid
|
16,274
|
|
|
472
|
|
|
16,746
|
|
Balance at December 31, 2015, net
|
$
|
2,252
|
|
|
$
|
46
|
|
|
$
|
2,298
|
|
Acquisitions
|
1,482
|
|
|
—
|
|
|
1,482
|
|
Incurred related to:
|
|
|
|
|
|
Current year
|
30,073
|
|
|
873
|
|
|
30,946
|
|
Prior years
|
(303
|
)
|
|
(7
|
)
|
|
(310
|
)
|
Total incurred
|
29,770
|
|
|
866
|
|
|
30,636
|
|
Paid related to:
|
|
|
|
|
|
Current year
|
27,714
|
|
|
818
|
|
|
28,532
|
|
Prior years
|
1,921
|
|
|
39
|
|
|
1,960
|
|
Total paid
|
29,635
|
|
|
857
|
|
|
30,492
|
|
Balance at December 31, 2016, net
|
$
|
3,869
|
|
|
$
|
55
|
|
|
$
|
3,924
|
|
Reinsurance recoverable
|
5
|
|
|
—
|
|
|
5
|
|
Balance, December 31, 2016
|
$
|
3,874
|
|
|
$
|
55
|
|
|
$
|
3,929
|
|
Reinsurance recoverables related to medical claims are included in premium and related receivables. Changes in estimates of incurred claims for prior years are primarily attributable to reserving under moderately adverse conditions. Additionally, as a result of minimum HBR and other return of premium programs, approximately
$39 million
,
$47 million
, and
$26 million
of the “Incurred related to: Prior years” was recorded as a reduction to premium revenues in 2016, 2015 and 2014, respectively. Further, claims processing initiatives yielded increased claim payment recoveries and coordination of benefits related to prior year dates of service. Changes in medical utilization and cost trends and the effect of medical management initiatives may also contribute to changes in medical claim liability estimates. While the Company has evidence that medical management initiatives are effective on a case by case basis, medical management initiatives primarily focus on events and behaviors prior to the incurrence of the medical event and generation of a claim. Accordingly, any change in behavior, leveling of care, or coordination of treatment occurs prior to claim generation and as a result, the costs prior to the medical management initiative are not known by the Company. Additionally, certain medical management initiatives are focused on member and provider education with the intent of influencing behavior to appropriately align the medical services provided with the member's acuity. In these cases, determining whether the medical management initiative changed the behavior cannot be determined. Because of the complexity of its business, the number of states in which it operates, and the volume of claims that it processes, the Company is unable to practically quantify the impact of these initiatives on its changes in estimates of IBNR.
The Company periodically reviews actual and anticipated experience compared to the assumptions used to establish medical costs. The Company establishes premium deficiency reserves if actual and anticipated experience indicates that existing policy liabilities together with the present value of future gross premiums will not be sufficient to cover the present value of future benefits, settlement and maintenance costs.
Information about incurred and paid claims development as of
December 31, 2016
is included in the table below and is inclusive of claims incurred and paid related to the Health Net business prior and subsequent to the acquisition date. The claims development information for all periods preceding the most recent reporting period is considered required supplementary information. Incurred and paid claims development as of
December 31, 2016
is as follows
($ in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
|
For the Years Ended December 31,
|
Claim Year
|
|
2014 (unaudited)
|
|
2015 (unaudited)
|
|
2016
|
Managed Care:
|
|
|
|
|
|
|
2014
|
|
$
|
23,790
|
|
|
$
|
23,472
|
|
|
$
|
23,468
|
|
2015
|
|
|
|
30,122
|
|
|
29,833
|
|
2016
|
|
|
|
|
|
33,782
|
|
|
|
Total incurred claims
|
|
|
$
|
87,083
|
|
|
|
|
|
|
|
|
Specialty Services:
|
|
|
|
|
|
|
2014
|
|
$
|
352
|
|
|
$
|
348
|
|
|
$
|
346
|
|
2015
|
|
|
|
497
|
|
|
492
|
|
2016
|
|
|
|
|
|
873
|
|
|
|
Total incurred claims
|
|
|
$
|
1,711
|
|
|
|
|
|
|
|
|
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
|
For the Years Ended December 31,
|
Claim Year
|
|
2014 (unaudited)
|
|
2015 (unaudited)
|
|
2016
|
Managed Care:
|
|
|
|
|
|
|
2014
|
|
$
|
20,415
|
|
|
$
|
22,895
|
|
|
$
|
23,450
|
|
2015
|
|
|
|
27,211
|
|
|
29,539
|
|
2016
|
|
|
|
|
|
30,225
|
|
|
|
Total payment of incurred claims
|
|
|
$
|
83,214
|
|
|
|
Managed Care medical claims liability
|
|
|
$
|
3,869
|
|
Specialty Services:
|
|
|
|
|
|
|
2014
|
|
$
|
326
|
|
|
$
|
346
|
|
|
$
|
346
|
|
2015
|
|
|
|
453
|
|
|
492
|
|
2016
|
|
|
|
|
|
818
|
|
|
|
Total payment of incurred claims
|
|
|
$
|
1,656
|
|
Specialty Services medical claims liability
|
|
|
$
|
55
|
|
|
|
|
|
|
|
|
|
|
Consolidated total, net of reinsurance
|
|
|
$
|
3,924
|
|
Incurred claims and allocated claim adjustment expenses, net of reinsurance, IBNR plus expected development on reported claims and cumulative claims data as of
December 31, 2016
are included in the following table and are inclusive of the acquired Health Net business. For claims frequency information summarized below, a claim is defined as the financial settlement of a single medical event in which remuneration was paid to the servicing provider. Total IBNR plus expected development on reported claims represents estimates for claims incurred but not reported, development on reported claims, and estimates for the costs necessary to process unpaid claims at the end of each period. We estimate our liability using actuarial methods that are commonly used by health insurance actuaries and meet Actuarial Standards of Practice. These actuarial methods consider factors such as historical data for payment patterns, cost trends, product mix, seasonality, utilization of healthcare services and other relevant factors. Information is summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
|
|
Total IBNR Plus Expected Development on Reported Claims
|
|
Cumulative Paid Claims
|
|
|
|
Managed Care:
|
|
|
|
|
|
2014
|
$
|
23,468
|
|
|
$
|
2
|
|
|
121.0
|
|
2015
|
29,833
|
|
|
52
|
|
|
153.4
|
|
2016
|
33,782
|
|
|
3,001
|
|
|
164.9
|
|
Specialty Services:
|
|
|
|
|
|
2014
|
$
|
346
|
|
|
$
|
—
|
|
|
2.7
|
|
2015
|
492
|
|
|
—
|
|
|
3.1
|
|
2016
|
873
|
|
|
49
|
|
|
6.3
|
|
10.
Affordable Care Act
The Affordable Care Act (ACA) established risk spreading premium stabilization programs effective January 1, 2014. These programs, commonly referred to as the “three Rs,” include a permanent risk adjustment program, a transitional reinsurance program, and a temporary risk corridor program. Additionally, the ACA established a minimum annual MLR and cost sharing reductions. Each of the three R programs are taken into consideration to determine if the Company’s estimated annual medical costs are less than the minimum loss ratio and require an adjustment to Premium revenue to meet the minimum MLR.
During 2016, the Company recognized a
$51 million
net pre-tax benefit related to the reconciliation of 2015 risk adjustment and reinsurance programs.
The Company's receivables (payables) for each of these programs are as follows at each year ended ($ in millions):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Risk adjustment
|
$
|
(425
|
)
|
|
$
|
(108
|
)
|
Reinsurance
|
122
|
|
|
24
|
|
Risk corridor
|
(3
|
)
|
|
(4
|
)
|
Minimum MLR
|
(18
|
)
|
|
(15
|
)
|
Cost sharing reductions
|
(147
|
)
|
|
(40
|
)
|
11
. Debt
Debt consists of the following ($ in millions):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
$425 million 5.75% Senior notes, due June 1, 2017
|
$
|
—
|
|
|
$
|
428
|
|
$1,400 million 5.625% Senior notes, due February 15, 2021
|
1,400
|
|
|
—
|
|
$1,000 million 4.75% Senior notes, due May 15, 2022
|
1,008
|
|
|
500
|
|
$1,000 million 6.125% Senior notes, due February 15, 2024
|
1,000
|
|
|
—
|
|
$1,200 million 4.75% Senior notes, due January 15, 2025
|
1,200
|
|
|
—
|
|
Fair value of interest rate swap agreements
|
(58
|
)
|
|
9
|
|
Senior notes
|
4,550
|
|
|
937
|
|
Revolving credit agreement
|
100
|
|
|
225
|
|
Mortgage notes payable
|
64
|
|
|
67
|
|
Capital leases and other
|
18
|
|
|
6
|
|
Debt issuance costs
|
(77
|
)
|
|
(14
|
)
|
Total debt
|
4,655
|
|
|
1,221
|
|
Less current portion
|
(4
|
)
|
|
(5
|
)
|
Long term debt
|
$
|
4,651
|
|
|
$
|
1,216
|
|
Senior Notes
In December 2016, the Company redeemed the outstanding principal balance on the
$400 million
6.375%
Senior Notes, due
June 1, 2017
, plus applicable premium for early redemption and accrued and unpaid interest to the redemption date, for cash totaling
$411 million
. The Company recognized a loss on extinguishment of debt of
$3 million
on the redemption of these notes.
In November 2016, the Company redeemed the outstanding principal balance on the
$425 million
5.75%
Senior Notes due
June 1, 2017
, plus applicable premium for early redemption and accrued and unpaid interest to the redemption date, for cash totaling
$447 million
. The Company recognized a loss on extinguishment of debt of
$10 million
on the redemption of these notes. The Company also recognized a gain of
$2 million
on the termination of the
$250 million
interest rate swap agreement associated with these notes.
In November 2016, the Company issued
$1,200 million
in aggregate principal amount of
4.75%
Senior Notes due
2025
(
$1,200 million
Notes). The Company used the net proceeds of the offering to redeem its
5.75%
Senior Notes due 2017 and Health Net Inc.'s
6.375%
Senior Notes due 2017, to repay amounts outstanding under its Revolving Credit Facility, to pay related fees and expenses and for general corporate purposes.
In June 2016, the Company issued an additional
$500 million
in aggregate principal amount of
4.75%
Senior Notes due 2022 (
$500
Million Add-on Notes) at a premium to yield of
4.41%
. The
$500
Million Add-on Notes were offered as additional debt securities under the indenture governing the $
500 million
in aggregate principal amount of
4.75%
Senior Notes issued in April 2014. The Company used the net proceeds of the offering to repay amounts outstanding under its Revolving Credit Facility and to pay offering related fees and expenses.
In February 2016, a wholly owned unrestricted subsidiary of the Company (Escrow Issuer) issued
$1,400
million in aggregate principal amount of
5.625%
Senior Notes (
$1,400
Million Notes) at par due
2021
and
$1,000
million in aggregate principal amount of
6.125%
Senior Notes (
$1,000
Million Notes) at par due 2024. In July 2016, the Company completed an exchange offer, whereby it offered to exchange all of the outstanding
$1,400
Million Notes and the
$1,000
Million Notes for identical securities that have been registered under the Securities Act of 1933. The Company used the net proceeds of the offering, together with borrowings under the Company's new
$1,000
million revolving credit facility and cash on hand, primarily to fund the cash consideration for the Health Net acquisition, and to pay acquisition and offering related fees and expenses.
In connection with the February 2016 issuance, the Company entered into interest rate swap agreements for notional amounts of
$600
million and
$1,000
million, at floating rates of interest based on the three month LIBOR plus
4.22%
and the three month LIBOR plus
4.44%
, respectively. Gains and losses due to changes in the fair value of the interest rate swaps completely offset changes in the fair value of the hedged portion of the underlying debt and are recorded as an adjustment to the
$1,400
Million Notes and
$1,000
Million Notes.
In connection with the closing of the Health Net acquisition, the Company assumed the
$400
million in aggregate principal amount of Health Net's
6.375%
Senior Notes due 2017, recorded at acquisition date fair value of
$418
million. These Senior Notes were redeemed in December 2016.
In January 2015, the Company issued an additional
$200
million of
4.75%
Senior Notes (
$200
Million Add-on Notes) at par. The
$200
Million Add-on Notes were offered as additional debt securities under the indenture governing the
$300 million
of
4.75%
Senior Notes issued in April 2014. In connection with the January 2015 issuance, the Company entered into interest rate swap agreements for a notional amount of
$200
million at a floating rate of interest based on the three month LIBOR plus
2.88%
. Gains and losses due to changes in the fair value of the interest rate swap completely offset changes in the fair value of the hedged portion of the underlying debt and are recorded as an adjustment to the
$200
Million Add-on Notes.
The indentures governing the
$1,400
Million Notes, the
$1,000
million of
4.75%
Senior Notes due 2022, the
$1,000
Million Notes and the
$1,200
Million Notes contain non-financial and financial covenants of Centene Corporation, including requirements of a minimum fixed charge coverage ratio. At
December 31, 2016
, the Company was in compliance with all covenants.
Interest Rate Swaps
The Company uses interest rate swap agreements to convert a portion of its interest rate exposure from fixed rates to floating rates to more closely align interest expense with interest income received on its cash equivalent and variable rate investment balances. The Company has
$2,100 million
of notional amount of interest rate swap agreements consisting of:
|
|
•
|
$600 million
expiring on February 15, 2021;
|
|
|
•
|
$500 million
expiring on May 15, 2022; and,
|
|
|
•
|
$1,000 million
expiring on February 15, 2024.
|
Under the Swap Agreements, the Company receives a fixed rate of interest and pays an average variable rate of the three month LIBOR plus
3.92%
adjusted quarterly. At December 31, 2016, the weighted average rate was
4.83%
.
The Swap Agreements are formally designated and qualify as fair value hedges and are recorded at fair value in the Consolidated Balance Sheets in other assets and/or other liabilities. Gains and losses due to changes in fair value of the interest rate swap agreements completely offset changes in the fair value of the hedged portion of the underlying debt. Therefore, no gain or loss has been recognized due to hedge ineffectiveness. Offsetting changes in fair value of both the interest rate swaps and the hedged portion of the underlying debt both were recognized in interest expense in the Consolidated Statement of Operations. The Company does not hold or issue any derivative instrument for trading or speculative purposes.
The fair values of the Swap Agreements as of December 31, 2016 were assets of
$4 million
and liabilities of
$62 million
, and are included in other long term assets and other long term liabilities, respectively in the Consolidated Balance Sheet. The fair value of the Swap Agreements as of December 31, 2015 were assets of
$11 million
and liabilities of
$2 million
, and are included in other long term assets and other long term liabilities, respectively in the Consolidated Balance Sheet. The fair value of the Swap Agreements excludes accrued interest and takes into consideration current interest rates and current likelihood of the swap counterparties' compliance with its contractual obligations.
Revolving Credit Agreement
In connection with the closing of the Health Net acquisition in March 2016, the Company's existing unsecured
$500 million
revolving credit facility was terminated and simultaneously replaced with a new
$1,000 million
unsecured revolving credit facility. Borrowings under the agreement bear interest based upon LIBOR rates, the Federal Funds Rate or the Prime Rate. The agreement has a maturity date of
March 24, 2021
. As of
December 31, 2016
, the Company had
$100 million
of borrowings outstanding under the agreement with a weighted average interest rate of
4.5%
, and the Company was in compliance with all covenants.
The revolving credit facility contains both non-financial and financial covenants, including requirements of minimum fixed charge coverage ratios and maximum debt-to-EBITDA ratios. The Company is required to not exceed a maximum debt-to-EBITDA ratio of
3.5
to 1.0 prior to December 31, 2016 and
3.0
to 1.0 on and subsequent to December 31, 2016. As of
December 31, 2016
, there were
no
limitations on the availability under the revolving credit agreement as a result of the debt-to-EBITDA ratio.
Also, upon the closing of the Health Net acquisition, the Company assumed, fully repaid
$285 million
in outstanding borrowings under, and terminated the existing Health Net revolving credit facility.
Mortgage Notes Payable
The Company has a non-recourse mortgage note of
$64 million
at December 31, 2016 collateralized by its corporate headquarters building. The mortgage note is due
January 1, 2021
and bears a
5.14%
interest rate. The collateralized property had a net book value of
$173 million
at
December 31, 2016
.
Letters of Credit & Surety Bonds
The Company had outstanding letters of credit of
$71 million
as of December 31, 2016, which were not part of the revolving credit facility. The Company also had letters of credit for
$45 million
(valued at December 31, 2016 conversion rate), or
€42 million
, representing its proportional share of the letters of credit issued to support Ribera Salud's outstanding debt, which are a part of the revolving credit facility. Collectively, the letters of credit bore interest at
1.42%
as of December 31, 2016. The Company had outstanding surety bonds of
$365 million
as of December 31, 2016.
Aggregate maturities for the Company's debt are as follows ($ in millions):
|
|
|
|
|
|
2017
|
|
$
|
4
|
|
2018
|
|
4
|
|
2019
|
|
16
|
|
2020
|
|
4
|
|
2021
|
|
1,404
|
|
Thereafter
|
|
3,350
|
|
Total
|
|
$
|
4,782
|
|
The fair value of outstanding debt was approximately
$4,676 million
and
$1,239 million
at
December 31, 2016 and 2015
, respectively.
12.
Stockholders' Equity
The Company has
10,000,000
authorized shares of preferred stock at
$.001
par value. At
December 31, 2016
, there were
no
preferred shares outstanding.
The Company's Board of Directors has authorized a stock repurchase program for up to
8,000,000
shares of the Company's common stock from time to time on the open market or through privately negotiated transactions. No duration has been placed on the repurchase program. The Company has
3,335,448
available shares remaining under the program for repurchases as of
December 31, 2016
. The Company reserves the right to discontinue the repurchase program at any time. During the year ended
December 31, 2016
, the Company did not repurchase any shares through this publicly announced program.
As a component of the employee stock compensation plan, employees can use shares of stock which have vested to satisfy statutory tax withholding obligations. As part of this plan, the Company repurchased
1,078,335
shares at an aggregate cost of
$63 million
in 2016 and
918,628
shares at an aggregate cost of
$53 million
in 2015. These shares are included in the Company's treasury stock.
In March 2016, the Company issued
48,449,444
shares of Centene stock, with a fair value of approximately
$3,038 million
.
In January 2016, the Company completed a
19%
investment in a data analytics business and issued
1,144,462
shares of Centene common stock to the selling stockholders. The investment is being accounted for using the equity method of accounting, due to the Company's significant influence on the business.
13.
Statutory Capital Requirements and Dividend Restrictions
Various state laws require Centene's regulated subsidiaries to maintain minimum capital levels specified by each state and restrict the amount of dividends that may be paid without prior regulatory approval. At
December 31, 2016 and 2015
, Centene's subsidiaries, including Kentucky Spirit, had aggregate statutory capital and surplus of
$4,529 million
and
$2,284 million
, respectively, compared with the required minimum aggregate statutory capital and surplus of
$2,259 million
and
$1,195 million
, respectively. As of December 31, 2016, the amount of capital and surplus or net worth that was unavailable for the payment of dividends or return of capital to the Company was
$2,259 million
in the aggregate.
14.
Income Taxes
The consolidated income tax expense consists of the following for the years ended December 31 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Current provision
|
|
|
|
|
|
Federal
|
$
|
485
|
|
|
$
|
332
|
|
|
$
|
225
|
|
State and local
|
22
|
|
|
26
|
|
|
13
|
|
Total current provision
|
507
|
|
|
358
|
|
|
238
|
|
Deferred provision
|
92
|
|
|
(19
|
)
|
|
(42
|
)
|
Total income tax expense
|
$
|
599
|
|
|
$
|
339
|
|
|
$
|
196
|
|
The reconciliation of the tax provision at the U.S. federal statutory rate to income tax expense for the years ended December 31 is as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Earnings from continuing operations, before income tax expense
|
$
|
1,157
|
|
|
$
|
697
|
|
|
$
|
457
|
|
(Earnings) loss attributable to flow through noncontrolling interest
|
(8
|
)
|
|
1
|
|
|
4
|
|
Earnings from continuing operations, less noncontrolling interest, before income tax expense
|
1,149
|
|
|
698
|
|
|
461
|
|
|
|
|
|
|
|
|
Tax provision at the U.S. federal statutory rate
|
402
|
|
|
244
|
|
|
162
|
|
State income taxes, net of federal income tax benefit
|
10
|
|
|
15
|
|
|
6
|
|
Nondeductible compensation
|
23
|
|
|
2
|
|
|
(13
|
)
|
ACA Health Insurer Fee
|
162
|
|
|
75
|
|
|
44
|
|
Other, net
|
2
|
|
|
3
|
|
|
(3
|
)
|
Income tax expense
|
$
|
599
|
|
|
$
|
339
|
|
|
$
|
196
|
|
The tax effects of temporary differences which give rise to deferred tax assets and liabilities are presented below for the years ended December 31 ($ in millions):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
Medical claims liability
|
$
|
66
|
|
|
$
|
27
|
|
Nondeductible liabilities
|
39
|
|
|
14
|
|
Net operating loss and tax credit carryforwards
|
101
|
|
|
22
|
|
Compensation accruals
|
156
|
|
|
73
|
|
Acquisition costs
|
—
|
|
|
10
|
|
Premium and related receivables
|
79
|
|
|
36
|
|
Other
|
14
|
|
|
9
|
|
Deferred tax assets
|
455
|
|
|
191
|
|
Valuation allowance
|
(86
|
)
|
|
(11
|
)
|
Net deferred tax assets
|
$
|
369
|
|
|
$
|
180
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Intangible assets
|
$
|
577
|
|
|
$
|
46
|
|
Prepaid assets
|
17
|
|
|
8
|
|
Fixed assets and intangibles
|
65
|
|
|
31
|
|
Investments in joint ventures
|
11
|
|
|
6
|
|
Other
|
2
|
|
|
2
|
|
Deferred tax liabilities
|
672
|
|
|
93
|
|
Net deferred tax assets (liabilities)
|
$
|
(303
|
)
|
|
$
|
87
|
|
Valuation allowances are provided when it is considered more likely than not that deferred tax assets will not be realized. The valuation allowances primarily relate to future tax benefits on certain federal, state and foreign net operating loss and tax credit carryforwards. The
$75 million
increase in valuation allowance primarily relate
s
to acquired federal and state net operating loss carryforwards from the Health Net transaction.
Federal net operating loss carryforwards of
$59 million
expire beginning in
2020
through
2036
; state net operating loss and tax credit carryforwards of
$37 million
expire beginning in
2017
through
2036
. Substantially all of the non-U.S. tax loss carryforwards have indefinite carryforward periods.
The Company maintains a reserve for uncertain tax positions that may be challenged by a tax authority. A rollforward of the beginning and ending amount of uncertain tax positions, exclusive of related interest and penalties, is as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
Gross unrecognized tax benefits, beginning of period
|
$
|
5
|
|
|
$
|
4
|
|
Gross increases:
|
|
|
|
Current year tax positions
|
6
|
|
|
1
|
|
Acquired reserves
|
93
|
|
|
—
|
|
Gross decreases:
|
|
|
|
Prior year tax positions
|
(1
|
)
|
|
—
|
|
Statute of limitation lapses
|
(1
|
)
|
|
—
|
|
Gross unrecognized tax benefits, end of period
|
$
|
102
|
|
|
$
|
5
|
|
Uncertain tax positions increased
$93 million
due to the acquisition of Health Net. As of December 31, 2016,
$87 million
of unrecognized tax benefits could impact our effective tax rate in future periods, if recognized. The Company believes it is reasonably possible that its liability for unrecognized tax benefits will decrease in the next twelve months by
$5 million
as a result of audit settlements and the expiration of statutes of limitations in certain major jurisdictions.
The table above excludes interest, net of related tax benefits, which is treated as income tax expense (benefit) under our accounting policy. For the year ended December 31, 2016, the Company recognized net interest expense and penalties related
to uncertain positions of
$1 million
. The Company had
$5 million
and
$1 million
of accrued interest and penalties for uncertain tax positions as of December 31, 2016 and 2015, respectively.
The company files tax returns for federal as well as numerous state tax jurisdictions. As of December 31, 2016, Health Net is under federal examination for tax years 2011 through 2013. Additionally, tax years subject to federal examination for both Centene and Health Net are 2014 through 2016.
In September 2014, the Internal Revenue Service issued final regulations related to the compensation deduction limitation applicable to certain health insurance issuers. The new regulations provided additional information regarding the definition of a health insurance issuer. As a result of this change in regulation, tax benefits of
$14 million
related to 2013 were recorded during the 2014 period. The Company finalized the 2013 federal audit in the third quarter of 2016 and sustained its compensation deduction limitation position.
As of
December 31, 2016
and 2015, the Company had
$12 million
and
$8 million
, respectively, of undistributed earnings from non-U.S. subsidiaries that are intended to be reinvested in non-U.S. operations. Because these earnings are considered permanently reinvested, no U.S. tax provision has been accrued related to the repatriation of these earnings. The amount of U.S. tax that would be payable on the eventual remittance of such earnings is not material to the Company’s financial statements.
15.
Stock Incentive Plans
The Company's stock incentive plans allow for the granting of restricted stock or restricted stock unit awards and options to purchase common stock. Both incentive stock options and nonqualified stock options can be awarded under the plans. No option will be exercisable for longer than
ten
years after the date of grant. The plans have
6,224,268
shares available for future awards. However,
5,376,101
are legacy Health Net shares and based on the terms of the Health Net acquisition, these shares are only available for awards to legacy Health Net employees and new Centene employees. Compensation expense for stock options and restricted stock unit awards is recognized on a straight-line basis over the vesting period, generally
three
to
five
years for stock options and
one
to
10
years for restricted stock or restricted stock unit awards. Certain restricted stock unit awards contain performance-based as well as service-based provisions. Certain awards provide for accelerated vesting if there is a change in control as defined in the plans. In addition, the Company incorporated retirement provisions in our stock-based compensation agreements beginning in 2016. The total compensation cost that has been charged against income for the stock incentive plans was
$148 million
,
$71 million
and
$48 million
for the years ended
December 31, 2016, 2015 and 2014
, respectively. The Company adopted ASU 2016-09 during the fourth quarter of 2016, effective prospectively as of the beginning of the 2016 fiscal year. As a result, excess tax benefits are now recorded in income tax expense in the period in which the exercise or vesting occurs. The total income tax benefit recognized in the income statement for stock-based compensation arrangements was
$67 million
,
$24 million
and
$17 million
for the years ended
December 31, 2016, 2015 and 2014
, respectively. In connection with the adoption of the new standard, we have also elected to recognize forfeitures as they occur.
Option activity for the year ended
December 31, 2016
is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
Aggregate Intrinsic Value
($ in millions)
|
|
Weighted Average Remaining Contractual Term
|
Outstanding as of December 31, 2015
|
677,408
|
|
|
$
|
11.88
|
|
|
|
|
|
Granted
|
40,000
|
|
|
59.94
|
|
|
|
|
|
Exercised
|
(397,040
|
)
|
|
12.25
|
|
|
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
320,368
|
|
|
$
|
17.44
|
|
|
$
|
13
|
|
|
2.9
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2016
|
280,368
|
|
|
$
|
11.37
|
|
|
$
|
13
|
|
|
1.9
|
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
(1)
|
|
2014
(1)
|
Expected life (in years)
|
4.8
|
|
—
|
|
—
|
Risk-free interest rate
|
1.6%
|
|
—
|
|
—
|
Expected volatility
|
39.0%
|
|
—
|
|
—
|
Expected dividend yield
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
(1) No options were awarded in the years ended December 31, 2015 and 2014.
|
For options granted in the year ended December 31, 2016, the Company used a projected expected life for each award granted based on historical experience of employees' exercise behavior. The expected volatility is primarily based on historical volatility levels. The risk-free interest rates are based on the implied yield currently available on U.S. Treasury instruments with a remaining term equal to the expected life.
Other information pertaining to option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
(1)
|
|
2014
(1)
|
Weighted-average fair value of options granted
|
$
|
59.94
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total intrinsic value of stock options exercised ($ in millions)
|
$
|
19
|
|
|
$
|
28
|
|
|
$
|
17
|
|
|
|
|
|
|
|
(1) No options were awarded in the years ended December 31, 2015 and 2014.
|
A summary of the Company's non-vested restricted stock and restricted stock unit shares as of
December 31, 2016
, and changes during the year ended
December 31, 2016
, is presented below:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
Non-vested balance as of December 31, 2015
|
4,122,003
|
|
|
$
|
48.65
|
|
Granted
|
2,120,101
|
|
|
57.71
|
|
Converted
(1)
|
1,285,674
|
|
|
62.70
|
|
Vested
|
(2,546,543
|
)
|
|
50.00
|
|
Forfeited
|
(190,894
|
)
|
|
47.65
|
|
Non-vested balance as of December 31, 2016
|
4,790,341
|
|
|
$
|
55.75
|
|
|
|
|
|
(1)
Health Net awards converted in connection with the acquisition.
|
The total fair value of restricted stock and restricted stock units vested during the
years ended December 31, 2016, 2015 and 2014
, was
$147 million
,
$112 million
and
$82 million
, respectively.
As of
December 31, 2016
, there was
$233 million
of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans; that cost is expected to be recognized over a weighted-average period of
2.4
years.
The Company maintains an employee stock purchase plan and issued
118,293
shares,
86,819
shares, and
76,088
shares in
2016, 2015 and 2014
, respectively.
16.
Retirement Plan
Centene has a defined contribution plan which covers substantially all employees who are at least twenty-one years of age. Under the plan, eligible employees may contribute a percentage of their base salary, subject to certain limitations. Centene may elect to match a portion of the employee's contribution. Company expense related to matching contributions to the plan was
$37 million
,
$19 million
and
$12 million
during the years ended
December 31, 2016, 2015 and 2014
, respectively.
17.
Commitments
Centene and its subsidiaries lease office facilities and various equipment under non-cancelable operating leases which may contain escalation provisions. The rental expense related to these leases is recorded on a straight-line basis over the lease term, including rent holidays. Tenant improvement allowances are recorded as a liability and amortized against rent expense over the term of the lease. Rent expense was
$137 million
,
$64 million
and
$46 million
for the years ended
December 31, 2016, 2015 and 2014
, respectively. Annual non-cancelable minimum lease payments over the next five years and thereafter are as follows ($ in millions):
|
|
|
|
|
2017
|
$
|
128
|
|
2018
|
117
|
|
2019
|
105
|
|
2020
|
92
|
|
2021
|
75
|
|
Thereafter
|
114
|
|
|
$
|
631
|
|
In connection with obtaining regulatory approval of the Health Net acquisition from the California Department of Insurance and the California Department of Managed Health Care, the Company committed to certain undertakings. See Note 3,
Health Net
for further details.
18.
Contingencies
Overview
The Company records reserves and accrues costs for certain legal proceedings and regulatory matters to the extent that it determines an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. While such reserves and accrued costs reflect the Company's best estimate of the probable loss for such matters, the recorded amounts may differ materially from the actual amount of any such losses. In some cases, no estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made because of the inherently unpredictable nature of legal and regulatory proceedings, which may be exacerbated by various factors, including but not limited to, they may involve indeterminate claims for monetary damages or may involve fines, penalties or punitive damages; present novel legal theories or legal uncertainties; involve disputed facts; represent a shift in regulatory policy; involve a large number of parties, claimants or regulatory bodies; are in the early stages of the proceedings; involve a number of separate proceedings and/or a wide range of potential outcomes; or result in a change of business practices.
As of the date of this report, amounts accrued for legal proceedings and regulatory matters were not material. However, it is possible that in a particular quarter or annual period the Company’s financial condition, results of operations, cash flow and/or liquidity could be materially adversely affected by an ultimate unfavorable resolution of or development in legal and/or regulatory proceedings, including as described below. Except for the proceedings discussed below, the Company believes that the ultimate outcome of any of the regulatory and legal proceedings that are currently pending against it should not have a material adverse effect on financial condition, results of operations, cash flow or liquidity.
Kentucky
On July 5, 2013, the Company's subsidiary, Kentucky Spirit, terminated its contract with the Commonwealth of Kentucky (the Commonwealth). Kentucky Spirit believed it had a contractual right to terminate the contract and filed a lawsuit in Franklin Circuit Court seeking a declaration of this right. In response, the Commonwealth alleged that Kentucky Spirit's exit constituted a material breach of contract. The Commonwealth sought to recover substantial damages and to enforce its rights under Kentucky Spirit's
$25 million
performance bond. The Commonwealth asserted that the Commonwealth's expenditures due to Kentucky Spirit's departure range from
$28 million
to
$40 million
plus interest, and that the associated CMS expenditures range from
$92 million
to
$134 million
. Kentucky Spirit disputed the Commonwealth's alleged damages on several grounds. Prior to terminating the contract, Kentucky Spirit filed a legal complaint in April 2013, amended in October 2014, in Franklin Circuit Court seeking damages against the Commonwealth for losses sustained due to the Commonwealth's alleged breaches.
On May 26, 2015, the Commonwealth issued a demand for indemnification to its actuarial firm, for "all defense costs, and any resultant monetary awards in favor of Kentucky Spirit, arising from or related to Kentucky Spirit's claims which are predicated upon the alleged omissions and errors in the Data Book and the certified actuarially sound rates." The actuarial firm moved to intervene in the litigation and the Franklin Circuit Court granted that motion on September 8, 2015. Also, on August 19, 2015, the actuarial firm filed a petition seeking a declaratory judgment that it is not liable to the Commonwealth for indemnification related to the claims asserted by Kentucky Spirit against the Commonwealth. On October 5, 2015, the Commonwealth filed an answer to the actuarial firm's petition and asserted counterclaims/cross-claims against the firm.
On November 3, 2016, all parties entered into a settlement agreement with respect to all lawsuits and complaints associated with the aforementioned contract termination. Under the terms of the settlement agreement, Kentucky Spirit received an immaterial cash payment from the Commonwealth's actuarial firm and each party dismissed all claims related to the litigation with prejudice. In addition, the Commonwealth and Kentucky Spirit have agreed that neither party acted in bad faith; that the parties took reasonable positions in light of the applicable contractual language; and that the parties acted in good faith in attempting to address a difficult situation.
California
The Company's California subsidiary, Health Net of California, Inc. (Health Net California), has been named as a defendant in a California taxpayer action filed in Los Angeles County Superior Court, captioned as Michael D. Myers v. State Board of Equalization, et al., Los Angeles Superior Court Case No. BS158655. This action is brought under a California statute that permits an individual taxpayer to sue a governmental agency when the taxpayer believes the agency has failed to enforce governing law. Plaintiff contends that Health Net California, a California licensed Health Care Service Plan (HCSP), is an “insurer” for purposes of taxation despite acknowledging it is not an “insurer” under regulatory law. Under California law, “insurers” must pay a gross premiums tax (GPT), calculated as
2.35%
on gross premiums. As a licensed HCSP, Health Net California has paid the California Corporate Franchise Tax (CFT), the tax generally paid by California businesses. Plaintiff contends that Health Net California must pay the GPT rather than the CFT. Plaintiff seeks a writ of mandate directing the California taxing agencies to collect the GPT, and seeks an order requiring Health Net California to pay GPT, interest and penalties for a period dating to eight years prior to the October 20, 2015 filing of the complaint. This lawsuit is being coordinated with similar lawsuits filed against other entities. The Company expects an initial status conference shortly. The Company intends to vigorously defend itself against these claims; however, this matter is subject to many uncertainties, and an adverse outcome in this matter could potentially have a materially adverse impact on our financial position and results of operations.
Federal Securities Class Action
On November 14, 2016, a putative federal securities class action was filed against the Company and certain of its executives in the U.S. District Court for the Central District of California. The plaintiffs in the lawsuit allege that the Company's accounting and related disclosures for certain liabilities acquired in the acquisition of Health Net violated federal securities laws. The Company denies any wrongdoing and is vigorously defending itself against these claims. Nevertheless, this matter is subject to many uncertainties and the Company cannot predict how long this litigation will last or what the ultimate outcome will be, and an adverse outcome in this matter could potentially have a materially adverse impact on our financial position and results of operations.
Civil Investigative Demand
On December 15, 2016, a Civil Investigative Demand (CID) was issued to Health Net by the United States Department of Justice regarding Health Net’s submission of risk adjustment claims to the CMS under Parts C and D of Medicare. The CID may be related to a federal qui tam lawsuit filed under seal in 2011 naming more than a dozen health insurers including Health Net. The lawsuit was recently unsealed when the Department of Justice intervened in the case with respect to one of the insurers (not Health Net). The Company is complying with the CID and will vigorously defend any lawsuits. At this point, it is not possible to determine what level of liability, if any, the Company may face as a result of this matter.
Miscellaneous Proceedings
Excluding the matters discussed above, the Company is also routinely subjected to legal and regulatory proceedings in the normal course of business. These matters can include, without limitation:
|
|
•
|
periodic compliance and other reviews and investigations by various federal and state regulatory agencies with respect to requirements applicable to the Company's business, including, without limitation, those related to payment of out-of-network claims, submissions to CMS for risk adjustment payments or the False Claims Act, pre-authorization penalties, timely review of grievances and appeals, timely and accurate payment of claims, and the Health Insurance Portability and Accountability Act of 1996;
|
|
|
•
|
litigation arising out of general business activities, such as tax matters, disputes related to health care benefits coverage or reimbursement, putative securities class actions and medical malpractice, privacy, real estate, intellectual property and employment-related claims;
|
|
|
•
|
disputes regarding reinsurance arrangements, claims arising out of the acquisition or divestiture of various assets, class actions and claims relating to the performance of contractual and non-contractual obligations to providers, members, employer groups and others, including, but not limited to, the alleged failure to properly pay claims and challenges to the manner in which the Company processes claims, and claims alleging that the Company has engaged in unfair business practices.
|
Among other things, these matters may result in awards of damages, fines or penalties, which could be substantial, and/or could require changes to the Company’s business. The Company intends to vigorously defend itself against the miscellaneous legal and regulatory proceedings to which it is currently a party; however, these proceedings are subject to many uncertainties. In some of the cases pending against the Company, substantial non-economic or punitive damages are being sought.
19.
Earnings Per Share
The following table sets forth the calculation of basic and diluted net earnings per common share for the years ended December 31 ($ in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Earnings (loss) attributable to Centene Corporation:
|
|
|
|
|
|
Earnings from continuing operations, net of tax
|
$
|
559
|
|
|
$
|
356
|
|
|
$
|
268
|
|
Discontinued operations, net of tax
|
3
|
|
|
(1
|
)
|
|
3
|
|
Net earnings
|
$
|
562
|
|
|
$
|
355
|
|
|
$
|
271
|
|
|
|
|
|
|
|
Shares used in computing per share amounts:
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
159,567,607
|
|
|
119,100,744
|
|
|
116,345,764
|
|
Common stock equivalents (as determined by applying the treasury stock method)
|
4,407,800
|
|
|
3,965,626
|
|
|
4,014,448
|
|
Weighted average number of common shares and potential dilutive common shares outstanding
|
163,975,407
|
|
|
123,066,370
|
|
|
120,360,212
|
|
|
|
|
|
|
|
Net earnings (loss) per common share attributable to Centene Corporation:
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
Continuing operations
|
$
|
3.50
|
|
|
$
|
2.99
|
|
|
$
|
2.30
|
|
Discontinued operations
|
0.02
|
|
|
(0.01
|
)
|
|
0.03
|
|
Basic earnings per common share
|
$
|
3.52
|
|
|
$
|
2.98
|
|
|
$
|
2.33
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
Continuing operations
|
$
|
3.41
|
|
|
$
|
2.89
|
|
|
$
|
2.23
|
|
Discontinued operations
|
0.02
|
|
|
(0.01
|
)
|
|
0.02
|
|
Diluted earnings per common share
|
$
|
3.43
|
|
|
$
|
2.88
|
|
|
$
|
2.25
|
|
The calculation of diluted earnings (loss) per common share for
2016, 2015 and 2014
excludes the impact of
126,212
shares,
7,247
shares and
207,980
shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units.
20.
Segment Information
Centene operates in
two
segments: Managed Care and Specialty Services.
The Managed Care segment consists of Centene’s health plans including all of the functions needed to operate them. The Managed Care segment also includes the operations previously included in Health Net's Western Region Operations Segment, with the exception of certain operations of its pharmaceutical services and behavioral health subsidiaries. The portions of Health Net's Western Region Operations segment included in the Managed Care segment consist of the following Health Net operations: commercial, Medicare, Medicaid and dual eligible health plans, primarily in Arizona, California, Oregon and Washington.
The Specialty Services segment consists of Centene’s specialty companies offering auxiliary healthcare services and products. The Specialty Services segment also includes the operations previously included in the Government Contracts segment of Health Net as well as certain operations of its pharmaceutical services and behavioral health subsidiaries, the latter of which Health Net previously included in its Western Region Operations segment. The Government Contracts business includes the Company's government-sponsored managed care support contract with the DoD under the TRICARE program in the North Region, the MFLC contract with the DoD, and other health care related government contracts, including PC3/Choice with the VA.
Segment information as of and for the year ended
December 31, 2016
, follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Care
|
|
Specialty
Services
|
|
Eliminations
|
|
Consolidated
Total
|
Total revenues from external customers
|
$
|
37,523
|
|
|
$
|
3,084
|
|
|
$
|
—
|
|
|
$
|
40,607
|
|
Total revenues internal customers
|
199
|
|
|
5,953
|
|
|
(6,152
|
)
|
|
—
|
|
Total revenues
|
37,722
|
|
|
9,037
|
|
|
(6,152
|
)
|
|
40,607
|
|
Earnings from operations
|
1,070
|
|
|
190
|
|
|
—
|
|
|
1,260
|
|
Total assets
|
17,962
|
|
|
2,235
|
|
|
—
|
|
|
20,197
|
|
Segment information as of and for the year ended
December 31, 2015
, follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Care
|
|
Specialty
Services
|
|
Eliminations
|
|
Consolidated
Total
|
Total revenues from external customers
|
$
|
20,544
|
|
|
$
|
2,216
|
|
|
$
|
—
|
|
|
$
|
22,760
|
|
Total revenues internal customers
|
100
|
|
|
4,864
|
|
|
(4,964
|
)
|
|
—
|
|
Total revenues
|
20,644
|
|
|
7,080
|
|
|
(4,964
|
)
|
|
22,760
|
|
Earnings from operations
|
513
|
|
|
192
|
|
|
—
|
|
|
705
|
|
Total assets
|
6,202
|
|
|
1,137
|
|
|
—
|
|
|
7,339
|
|
Segment information as of and for the year ended
December 31, 2014
, follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Care
|
|
Specialty
Services
|
|
Eliminations
|
|
Consolidated
Total
|
Total revenues from external customers
|
$
|
14,775
|
|
|
$
|
1,785
|
|
|
$
|
—
|
|
|
$
|
16,560
|
|
Total revenues internal customers
|
60
|
|
|
3,019
|
|
|
(3,079
|
)
|
|
—
|
|
Total revenues
|
14,835
|
|
|
4,804
|
|
|
(3,079
|
)
|
|
16,560
|
|
Earnings from operations
|
353
|
|
|
111
|
|
|
—
|
|
|
464
|
|
Total assets
|
4,706
|
|
|
1,118
|
|
|
—
|
|
|
5,824
|
|
21.
Quarterly Selected Financial Information
(In millions, except share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
(1)
|
|
March 31,
2016
|
|
June 30,
2016
|
|
September 30,
2016
|
|
December 31,
2016
|
Total revenues
|
$
|
6,953
|
|
|
$
|
10,897
|
|
|
$
|
10,846
|
|
|
$
|
11,911
|
|
Amounts attributable to Centene Corporation common shareholders:
|
Earnings (loss) from continuing operations, net of income tax expense
|
(15
|
)
|
|
171
|
|
|
148
|
|
|
255
|
|
Discontinued operations, net of income tax expense (benefit)
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
6
|
|
Net earnings (loss)
|
$
|
(16
|
)
|
|
$
|
170
|
|
|
$
|
147
|
|
|
$
|
261
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per common share attributable to Centene Corporation:
|
Basic:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.12
|
)
|
|
$
|
1.00
|
|
|
$
|
0.87
|
|
|
$
|
1.49
|
|
Discontinued operations
|
(0.01
|
)
|
|
—
|
|
|
(0.01
|
)
|
|
0.04
|
|
Basic earnings per common share
|
$
|
(0.13
|
)
|
|
$
|
1.00
|
|
|
$
|
0.86
|
|
|
$
|
1.53
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.12
|
)
|
|
$
|
0.98
|
|
|
$
|
0.84
|
|
|
$
|
1.45
|
|
Discontinued operations
|
(0.01
|
)
|
|
(0.01
|
)
|
|
—
|
|
|
0.04
|
|
Diluted earnings per common share
|
$
|
(0.13
|
)
|
|
$
|
0.97
|
|
|
$
|
0.84
|
|
|
$
|
1.49
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
125,543,076
|
|
170,558,778
|
|
170,774,587
|
|
171,143,624
|
Diluted
|
125,543,076
|
|
174,848,996
|
|
175,495,339
|
|
175,511,179
|
|
|
|
|
|
|
|
|
(1)
The Company early adopted ASU 2016-09 during the fourth quarter of 2016. The ASU requires adjustments be reflected as of the beginning of the fiscal year of adoption and as a result, prior periods have been restated accordingly. Refer to Note 2,
Summary of Significant Accounting Policies
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
March 31,
2015
|
|
June 30,
2015
|
|
September 30,
2015
|
|
December 31,
2015
|
Total revenues
|
$
|
5,131
|
|
|
$
|
5,506
|
|
|
$
|
5,821
|
|
|
$
|
6,302
|
|
Amounts attributable to Centene Corporation common shareholders:
|
Earnings from continuing operations, net of income tax expense
|
64
|
|
|
88
|
|
|
92
|
|
|
112
|
|
Discontinued operations, net of income tax expense (benefit)
|
(1
|
)
|
|
—
|
|
|
1
|
|
|
(1
|
)
|
Net earnings
|
$
|
63
|
|
|
$
|
88
|
|
|
$
|
93
|
|
|
$
|
111
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per common share attributable to Centene Corporation:
|
Basic:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.54
|
|
|
$
|
0.74
|
|
|
$
|
0.77
|
|
|
$
|
0.94
|
|
Discontinued operations
|
(0.01
|
)
|
|
—
|
|
|
0.01
|
|
|
(0.01
|
)
|
Basic earnings per common share
|
$
|
0.53
|
|
|
$
|
0.74
|
|
|
$
|
0.78
|
|
|
$
|
0.93
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.52
|
|
|
$
|
0.72
|
|
|
$
|
0.75
|
|
|
$
|
0.91
|
|
Discontinued operations
|
(0.01
|
)
|
|
—
|
|
|
0.01
|
|
|
(0.01
|
)
|
Diluted earnings per common share
|
$
|
0.51
|
|
|
$
|
0.72
|
|
|
$
|
0.76
|
|
|
$
|
0.90
|
|
|
|
|
|
|
|
|
|
22.
Condensed Financial Information of Registrant
Centene Corporation (Parent Company Only)
Condensed Balance Sheets
(In millions, except share data)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
5
|
|
|
$
|
4
|
|
Short term investments, at fair value (amortized cost $1 and $5, respectively)
|
1
|
|
|
5
|
|
Other current assets
|
29
|
|
|
25
|
|
Total current assets
|
35
|
|
|
34
|
|
Long term investments, at fair value (amortized cost $19 and $6, respectively)
|
19
|
|
|
6
|
|
Investment in subsidiaries
|
10,674
|
|
|
3,435
|
|
Other long term assets
|
52
|
|
|
35
|
|
Total assets
|
$
|
10,780
|
|
|
$
|
3,510
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
Current liabilities
|
$
|
78
|
|
|
$
|
13
|
|
Long term debt
|
4,573
|
|
|
1,147
|
|
Other long term liabilities
|
75
|
|
|
26
|
|
Total liabilities
|
4,726
|
|
|
1,186
|
|
|
|
|
|
Redeemable noncontrolling interest
|
145
|
|
|
156
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
Preferred stock, $.001 par value; authorized 10,000,000 shares; no shares issued or outstanding at December 31, 2016 and December 31, 2015
|
—
|
|
|
—
|
|
Common stock, $.001 par value; authorized 400,000,000 shares; 178,134,306 issued and 171,919,071 outstanding at December 31, 2016, and 126,855,477 issued and 120,342,981 outstanding at December 31, 2015
|
—
|
|
|
—
|
|
Additional paid-in capital
|
4,190
|
|
|
956
|
|
Accumulated other comprehensive loss
|
(36
|
)
|
|
(10
|
)
|
Retained earnings
|
1,920
|
|
|
1,358
|
|
Treasury stock, at cost (6,215,235 and 6,512,496 shares, respectively)
|
(179
|
)
|
|
(147
|
)
|
Total Centene stockholders' equity
|
5,895
|
|
|
2,157
|
|
Noncontrolling interest
|
14
|
|
|
11
|
|
Total stockholders' equity
|
5,909
|
|
|
2,168
|
|
Total liabilities and stockholders' equity
|
$
|
10,780
|
|
|
$
|
3,510
|
|
See notes to condensed financial information of registrant.
Centene Corporation (Parent Company Only)
Condensed Statements of Operations
(In millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Expenses:
|
|
|
|
|
|
Selling, general and administrative expenses
|
$
|
10
|
|
|
$
|
9
|
|
|
$
|
3
|
|
Gain on contingent consideration
|
(5
|
)
|
|
(44
|
)
|
|
—
|
|
Other income (expense):
|
|
|
|
|
|
Investment and other income
|
2
|
|
|
(5
|
)
|
|
1
|
|
Interest expense
|
(201
|
)
|
|
(39
|
)
|
|
(30
|
)
|
Earnings (loss) before income taxes
|
(204
|
)
|
|
(9
|
)
|
|
(32
|
)
|
Income tax benefit
|
(76
|
)
|
|
(26
|
)
|
|
(8
|
)
|
Net earnings (loss) before equity in subsidiaries
|
(128
|
)
|
|
17
|
|
|
(24
|
)
|
Equity in earnings from subsidiaries
|
686
|
|
|
341
|
|
|
285
|
|
Net earnings
|
558
|
|
|
358
|
|
|
261
|
|
(Earnings) loss attributable to noncontrolling interests
|
1
|
|
|
(2
|
)
|
|
7
|
|
Net earnings attributable to Centene
|
$
|
559
|
|
|
$
|
356
|
|
|
$
|
268
|
|
|
|
|
|
|
|
Net earnings per share from continuing operations:
|
|
|
|
|
|
Basic earnings per common share
|
$
|
3.50
|
|
|
$
|
2.99
|
|
|
$
|
2.30
|
|
Diluted earnings per common share
|
$
|
3.41
|
|
|
$
|
2.89
|
|
|
$
|
2.23
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
Basic
|
159,567,607
|
|
|
119,100,744
|
|
|
116,345,764
|
|
Diluted
|
163,975,407
|
|
|
123,066,370
|
|
|
120,360,212
|
|
See notes to condensed financial information of registrant.
Centene Corporation (Parent Company Only)
Condensed Statements of Cash Flows
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Cash flows from operating activities:
|
|
|
|
|
|
Cash provided by (used in) operating activities
|
$
|
(646
|
)
|
|
$
|
462
|
|
|
$
|
317
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Capital contributions to subsidiaries, net of dividends
|
(566
|
)
|
|
(660
|
)
|
|
(384
|
)
|
Purchases of investments
|
(112
|
)
|
|
(17
|
)
|
|
(32
|
)
|
Sales and maturities of investments
|
169
|
|
|
9
|
|
|
14
|
|
Investments in acquisitions
|
(2,248
|
)
|
|
(113
|
)
|
|
(137
|
)
|
Other investing activities, net
|
—
|
|
|
7
|
|
|
—
|
|
Net cash used in investing activities
|
(2,757
|
)
|
|
(774
|
)
|
|
(539
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from borrowings
|
8,934
|
|
|
1,925
|
|
|
1,875
|
|
Payment of long term debt
|
(5,377
|
)
|
|
(1,575
|
)
|
|
(1,650
|
)
|
Common stock repurchases
|
(63
|
)
|
|
(53
|
)
|
|
(29
|
)
|
Debt issuance costs
|
(76
|
)
|
|
(4
|
)
|
|
(7
|
)
|
Other financing activities, net
|
(14
|
)
|
|
20
|
|
|
33
|
|
Net cash provided by financing activities
|
3,404
|
|
|
313
|
|
|
222
|
|
Net increase in cash and cash equivalents
|
1
|
|
|
1
|
|
|
—
|
|
Cash and cash equivalents,
beginning of period
|
4
|
|
|
3
|
|
|
3
|
|
Cash and cash equivalents,
end of period
|
$
|
5
|
|
|
$
|
4
|
|
|
$
|
3
|
|
See notes to condensed financial information of registrant.
Notes to Condensed Financial Information of Registrant
Note A - Basis of Presentation and Significant Accounting Policies
The parent company only financial statements should be read in conjunction with Centene Corporation's audited consolidated financial statements and the notes to consolidated financial statements included in this Form 10-K.
The parent company's investment in subsidiaries is stated at cost plus equity in undistributed earnings of the subsidiaries. The parent company's share of net income of its unconsolidated subsidiaries is included in income using the equity method of accounting. Certain unrestricted subsidiaries receive monthly management fees from our restricted subsidiaries. The management and service fees received by our unrestricted subsidiaries are associated with all of the functions required to manage the restricted subsidiaries including but not limited to salaries and wages for all personnel, rent, utilities, medical management, provider contracting, compliance, member services, claims processing, information technology, cash management, finance and accounting, and other services. The management fees are based on a percentage of the restricted subsidiaries revenue.
Due to our centralized cash management function, cash flows generated by our unrestricted subsidiaries are transferred to the parent company to the extent required, primarily to repay borrowings on the parent company's revolving credit facility, make acquisitions, fund capital contributions to subsidiaries and fund its operations. During the year ended December 31, 2016, operating cash flows were negatively impacted by the funding of the Health Net acquisition related expenses as well as refinancing the
$400 million
of Health Net Senior Notes. These Senior Notes were redeemed in December 2016. During the years ended December 31, 2015 and 2014, cash flows received by the parent from unrestricted subsidiaries were
$445 million
and
$341 million
, respectively, and were included in cash flows from operating activities.
Certain amounts presented in the parent company only financial statements are eliminated in the consolidated financial statements of Centene Corporation. Certain amounts in the parent company only financial statements have been reclassified to conform to the
2016
presentation. These reclassifications have no effect on net earnings or stockholders' equity as previously reported.
Note B - Dividends
During
2016, 2015 and 2014
, the Registrant received dividends from its regulated subsidiaries totaling
$121 million
,
$11 million
and
$50 million
, respectively, reflected as investing cash flows.