Centene Corporation (CNC) — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. The filing was signed July 27, 2021.
Business context and performance
Centene provides managed-care and specialty healthcare services, primarily through government-sponsored and commercial programs. Membership growth, including Medicaid enrollment gains during the suspension of eligibility redeterminations, supported revenue growth. Results were also affected by returning healthcare utilization, the COVID-19 comparison, the health insurer fee repeal, acquisitions and a significant Envolve-related legal reserve.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $31.0 billion | $27.7 billion | $61.0 billion | $53.7 billion |
| Net earnings attributable to Centene | $(535) million | $1,206 million | $164 million | $1,252 million |
| Diluted EPS | $(0.92) | $2.05 | $0.28 | $2.20 |
| Adjusted diluted EPS (non-GAAP) | $1.25 | $2.40 | $2.88 | $3.31 |
| Health benefits ratio (HBR) | 88.3% | 82.1% | 87.6% | 84.9% |
| SG&A expense ratio | 7.9% | 8.8% | 8.1% | 9.3% |
Q2 premium and service revenue was $28.9 billion. Q2 revenue increased 12% year over year; Medicaid revenue rose 12% and Medicare revenue rose 28%, while Commercial revenue declined 1% and Medicare PDP revenue declined 24%. For the first half, revenue rose 14%. Adjusted EPS is a company-defined non-GAAP measure and excludes specified items.
Cash flow: Operating cash flow was $1.728 billion for the six months ended June 30, versus $3.474 billion a year earlier. Investing activities used $1.420 billion; financing activities used $46 million. Cash, cash equivalents and restricted cash totaled $11.195 billion at June 30. The filing’s cash flow statement reports six-month, not standalone-quarter, cash flow.
Liquidity and debt: Current assets were $25.464 billion and current liabilities $23.642 billion, or working capital of approximately $1.8 billion. Total debt was $16.789 billion, including $253 million current; the debt-to-capital ratio was 39.2%. Centene reported covenant compliance and no limitation on revolving-credit availability from its debt-to-EBITDA ratio. It stated available resources should fund operations and capital expenditures for at least 12 months from the filing date.
Membership: Managed-care membership was 25.4 million at June 30, up 0.8 million, or 3%, year over year. Medicaid membership was 14.0 million. Centene reported 30% of Medicare members in plans rated four stars or above for the 2022 bonus year, down from 46% for 2021 and 86% for 2020.
Material changes and unusual items
- Q2 GAAP results included a $1.25 billion legal-settlement expense related to Envolve Pharmacy Solutions’ past practices, causing the quarterly net loss. The filing says this reserve estimate includes the Ohio and Mississippi settlements; it separately identifies $88 million payable to Ohio and $55 million to Mississippi, and describes a $1.1 billion reserve estimate for other affected states exclusive of those settlements.
- Q2 HBR increased 6.2 percentage points year over year. Management attributed the change to unusually low utilization in Q2 2020, higher 2021 Marketplace utilization, including pent-up demand, and an unfavorable 2020 risk adjustment in 2021.
- The ACA health insurer fee repeal eliminated related expense in 2021; the comparable 2020 expense was $379 million for Q2 and $724 million for the first half. This also affected year-over-year revenue comparisons.
- Centene recorded a $62 million reduction to a previously reported Illinois health-plan divestiture gain following a working-capital adjustment. First-half 2021 results also included $46 million of debt-extinguishment costs.
- Prior-year medical claims development reduced first-half 2021 medical costs by $1.367 billion. Medical claims liability was $12.763 billion at June 30, including $8.636 billion of IBNR and expected development on reported claims.
Outlook, commentary and risks
- Management cited ongoing uncertainty from COVID-19, including variants, utilization patterns, deferred care, premium rates and risk-sharing arrangements. Medicaid membership had increased by 2.1 million from March 31, 2020 through June 30, 2021; management expected eligibility redeterminations to resume in 2022, potentially reducing enrollment.
- For the remainder of 2021, Centene expected approximately $785 million of net dividends from insurance subsidiaries and approximately $520 million of additional capital expenditures.
- The Magellan Health acquisition, announced at $95 per share in cash and approximately $2.2 billion enterprise value, was expected to close in the second half of 2021, subject to state regulatory approvals and other conditions. In July, Centene issued $1.8 billion of 2.45% notes due 2028, intending to use proceeds partly for the acquisition. Also in July, it acquired the remaining interest in Circle Health for approximately $700 million in cash.
- Other key risks include adequacy and pricing of medical costs, retroactive risk-adjustment changes, government contract and rate decisions, Medicare Star ratings, regulatory scrutiny and possible further Envolve-related claims, acquisitions and integration, cybersecurity and privacy incidents, investment losses and substantial indebtedness.
Most important facts for investors to verify
- Whether the Envolve reserve and settlements adequately cover claims, investigations and litigation in other states or by federal authorities or shareholders.
- Whether medical utilization, risk-adjustment estimates and claims reserves support reported margins as care patterns normalize.
- Magellan’s approval and closing status, financing use, integration costs and expected benefits; also assess the Circle Health acquisition’s effects.
- How Medicaid redeterminations, state rate actions and declining Medicare Star ratings affect membership, revenue and profitability.
- Whether operating cash generation, regulated-subsidiary dividend capacity and debt levels remain consistent with Centene’s liquidity and investment plans.