Year-end at-risk managed care membership of 1,533,500, an increase of 75,300 members, or 5.2% year over year.
General and Administrative expense ratio from continuing operations of 12.8%, compared to 13.3% in 2009.
We completed the sale of University Health Plans, Inc., or UHP, our New Jersey health plan, in the first quarter of 2010. Unless specifically noted, all discussions are in the context of continuing operations, and therefore, exclude UHP. The results of operations for UHP are classified as discontinued operations for all periods presented.
South Carolina. In March 2009, we completed the acquisition of Amerigroup Community Care of South Carolina, Inc. and in June 2010, we completed the acquisition of Carolina Crescent Health Plan. We served 90,300 at-risk members in South Carolina as of December 31, 2010.
Arizona. In December 2010, we began operating under an expanded contract from the Arizona Department of Health Services to manage behavioral healthcare services for an additional four counties including Santa Cruz, Greenlee, Graham and Cochise.
Celtic Insurance Company, Inc. In July 2010, we closed on the acquisition of certain assets and liabilities of NovaSys Health, LLC, a third party administrator in Arkansas that complements our existing Celtic business. In November 2010, we began operating under a new contract with the Texas Department of Insurance to provide affordable health insurance plans for Texas small businesses under the new Healthy Texas initiative.
In February 2011, we began operating under an additional STAR+PLUS ABD contract in Texas in the Dallas service area.
The following discussion and analysis is based on our consolidated statements of operations, which reflect our results of operations for the years ended December 31, 2010, 2009 and 2008, as prepared in accordance with generally accepted accounting principles in the United States.
Our health plans generate revenues primarily from premiums we receive from the states in which we operate. We receive a fixed premium per member per month pursuant to our state contracts. We generally receive premium payments during the month we provide services and recognize premium revenue during the period in which we are obligated to provide services to our members. In some instances, our base premiums are subject to an adjustment, or risk score, based on the acuity of our membership. Generally, the risk score is determined by the state analyzing submissions of processed claims data to determine the acuity of our membership relative to the entire state’s membership. Some contracts allow for additional premium associated with certain supplemental services provided such as maternity deliveries. Revenues are recorded based on membership and eligibility data provided by the states, which may be adjusted by the states for updates to this data. These eligibility adjustments have been immaterial in relation to total revenue recorded and are reflected in the period known.
In November 2008, we announced our intention to sell certain assets of UHP, our New Jersey health plan. Accordingly, the results of operations for UHP are reported as discontinued operations for all periods presented. We completed the sale in the first quarter of 2010.
Premium and service revenues increased 10.5% in 2010 over 2009 as a result of membership growth discussed under the heading “Membership”, and net premium rate increases in 2010. The premium rates specified in our state contracts are generally updated on an annual basis through contract amendments. In 2010, we received premium rate adjustments in certain markets which yielded a net 2.3% composite increase across all of our markets. The increase in premium and service revenues was moderated by the removal of pharmacy services in two states in 2010. These pharmacy carve outs had the effect of reducing revenue by approximately $185.0 million during 2010.
The consolidated HBR of 83.8% for 2010 represented a 0.3% increase from the 2009 consolidated HBR of 83.5%. The increase is mainly due to our Florida and Texas health plans and is partially offset by improvements from our Georgia health plan. The impact from our Florida health plan is due to the higher HBR we have experienced in this market combined with the growth in membership and revenue from 2009 to 2010. The Texas health plan performance was impacted in 2010 as member mix shifted to less favorable HBR categories. The improvements from the Georgia health plan are due to provider network and utilization management initiatives.
The decrease in investment income in 2010 reflects the decline in market interest rates.
In September 2010, we determined we had an other-than-temporary impairment of our investment in Casenet, LLC, a company that provides software to automate the clinical, administrative, and technical components of care management programs. As a result, the Company recorded an impairment charge of $5,531, including $3,531 of convertible promissory notes. Additionally, we are a customer of Casenet, LLC and in December 2010, we purchased an additional investment interest in exchange for majority control of Casenet, LLC.
Excluding the amounts attributable to noncontrolling interest, our effective tax rate in 2010 was 39.7% compared to 36.2% in 2009. The increase in 2010 was primarily driven by legislation enacted in May 2010 in the state of Georgia which replaced the state income tax with a premium tax for Medicaid managed care organizations effective July 1, 2010. Accordingly, a deferred tax asset of $1.7 million related to Georgia state net operating loss carry forwards was written off during the second quarter. Additionally, the increase in the effective tax rate in 2010 was also related to a decrease in tax exempt interest and an increase in state income taxes.
Premium and service revenues increased 8.0% in 2010 due to membership growth and net premium rate increases in 2010. Earnings from operations increased 17.9% in 2010 reflecting overall growth in our membership and leveraging of our general and administrative expenses.
In November 2007, we received a contract amendment from the State of Georgia providing for an effective premium rate increase in Georgia effective July 1, 2007. The State of Georgia returned the fully executed contract in January 2008 and, accordingly, we recorded the additional revenue, retroactive to July 1, 2007, in the first quarter of 2008. The premium revenue, related to the period from July 1, 2007 to December 31, 2007, totals approximately $20.8 million.
The table below depicts the HBR for our external membership by member category:
The consolidated G&A expense ratio for the years ended December 31, 2009 and 2008 was 13.3% and 13.6%, respectively. The decrease in the ratio in 2009 primarily reflects the leveraging of our expenses over higher revenues, partially offset by the effect of the acquisition of Celtic, our business expansion costs for Florida, Massachusetts and Mississippi and the consolidation of Access.
Decreases in investment income in 2009 reflect the decline in market interest rates.
The 2008 results included a loss of $4.5 million related to our investment in the Reserve Primary money market fund whose Net Asset Value fell below $1.00 per share.
Excluding the amounts attributable to noncontrolling interest, our effective tax rate in 2009 was 36.2% compared to 38.4% in 2008. The decrease in 2009 was primarily related to an increase in 2008 due to a change in the estimated benefit to be realized from New Jersey state net operating loss carryforwards.
Premium and service revenues increased 28.5% in 2009 primarily due to a full year effect of the Celtic acquisition, the commencement of our new health plan in Massachusetts, and membership growth in our Medicaid segment and the associated specialty services provided to this increased membership. Earnings from operations increased 67.4% in 2009 from 2008 levels primarily due to the increase in revenue and leveraging of the segments infrastructure costs over this higher revenue base. Earnings from operations also increased due to a lower HBR.
Shown below is a condensed schedule of cash flows for the years ended December 31, 2010, 2009 and 2008, that we use throughout our discussion of liquidity and capital resources ($ in millions).
Normal operations are funded primarily through operating cash flows and borrowings under our revolving credit facility. Operating activities provided cash of $168.9 million in 2010, compared to $248.2 million in 2009 and $222.0 million in 2008. Cash flows from operations benefited in 2010 and 2009 as a result of prepayments from several of our states. We record prepayments from our states as unearned revenue. Cash flows from operations in 2010 also reflected an increase in premium and related receivables due to increased business in Florida, Massachusetts and South Carolina. As of December 31, 2010, we had unearned revenues and premium and related receivables of approximately $117.3 million and $136.2 million, respectively, representing advance payments and receivables from our state customers.
Cash flows from operations in 2009 also reflected an increase in medical claims liability primarily as a result of increased business in Florida, Massachusetts and South Carolina. Cash flows from operations in 2008 reflected an increase in our medical claims liability as a result of new business in Texas, South Carolina and Arizona.
Investing activities used cash of $210.6 million in 2010, $270.1 million in 2009 and $153.9 million in 2008. Cash flows from investing activities in 2010 and 2009 primarily consisted of additions to the investment portfolio of our regulated subsidiaries, including transfers from cash and cash equivalents to long-term investments, and capital expenditures. In 2009, cash flows from investing activities also include membership conversion fees in Florida and acquisitions in Florida and South Carolina. Cash flows from investing activities in 2008 included the acquisition of Celtic, which we acquired on July 1, 2008, capital expenditures and our investment in the Reserve Primary fund.
Our investment policies are designed to provide liquidity, preserve capital and maximize total return on invested assets within our guidelines. Net cash provided by and used in investing activities will fluctuate from year to year due to the timing of investment purchases, sales and maturities. As of December 31, 2010, our investment portfolio consisted primarily of fixed-income securities with an average duration of 2.2 years. These securities generally are actively traded in secondary markets and the reported fair market value is determined based on recent trading activity, recent trading activity in similar securities and other observable inputs. Our investment guidelines are compliant with the regulatory restrictions enacted in each state.
In June 2009, our real estate joint venture executed a $95 million construction loan associated with the development. In December 2010, we acquired the remaining ownership interest in the joint venture and refinanced the $95 million construction loan with an $80 million 10 year mortgage note payable. The mortgage note is non-recourse to the Company, bears a 5.14% interest rate and has a financial covenant requiring a minimum debt service coverage ratio.
Our financing activities provided cash of $72.1 million in 2010, $46.6 million in 2009 and $42.4 million in 2008. During 2010, our financing activities primarily related to proceeds from our stock offering and resulting payoff of our revolving credit facility discussed below, as well as borrowings for the construction of the real estate development discussed above. During 2009, our financing activities primarily related to proceeds from borrowings under our $300 million credit facility and construction financing of the real estate development discussed above. During 2008, our financing activities primarily related to borrowings under our $300 million revolver and stock repurchases.
At December 31, 2010, we had working capital, defined as current assets less current liabilities, of $(108.4) million, as compared to $(99.8) million at December 31, 2009. We manage our short-term and long-term investments with the goal of ensuring that a sufficient portion is held in investments that are highly liquid and can be sold to fund short-term requirements as needed. Our working capital was negative due to our efforts to increase investment returns through purchases of investments that have maturities of greater than one year and, therefore, are classified as long-term.
At December 31, 2010, our debt to capital ratio, defined as total debt divided by the sum of total debt and total equity, was 29.3%, compared to 33.2% at December 31, 2009. Excluding the $80.0 million non-recourse mortgage note, our debt to capital ratio is 23.9%. We utilize the debt to capital ratio as a measure, among others, of our leverage and financial flexibility.
We had a $300 million revolving credit agreement which bore interest based upon LIBOR rates, the Federal Funds Rate or the Prime Rate. As of December 31, 2010, we had $60.0 million in borrowings outstanding under the agreement and $41.6 million in letters of credit outstanding, leaving availability of $198.4 million. As of December 31, 2010, we were in compliance with all covenants.
In January 2011, we replaced the $300 million revolving credit agreement with a new $350 million revolving credit facility, or the revolver. The revolver is unsecured and has a five-year maturity with non-financial and financial covenants, including requirements of minimum fixed charge coverage ratios, maximum debt to EBITDA ratios and minimum net worth. Borrowings under the revolver will bear interest based upon LIBOR rates, the Federal funds rate, or the prime rate. There is a commitment fee on the unused portion of the agreement that ranges from 0.25% to 0.50% depending on the total debt to EBITDA ratio. As a result of the refinancing, the outstanding balance associated with the previous revolving credit agreement continues to be classified as long term as of December 31, 2010.
We have a stock repurchase program authorizing us to repurchase up to four million shares of common stock from time to time on the open market or through privately negotiated transactions. No duration has been placed on the repurchase program, however the terms of the Senior Notes require that all such redemptions are consummated on or before April 1, 2011. We reserve the right to discontinue the repurchase program at any time. We did not make any repurchases under this plan during 2010.
The National Association of Insurance Commissioners has adopted rules which set minimum risk-based capital requirements for insurance companies, managed care organizations and other entities bearing risk for healthcare coverage. As of December 31, 2010, each of our health plans were in compliance with the risk-based capital requirements enacted in those states.
Additionally, we contract with independent actuaries to review our estimates on a quarterly basis. The independent actuaries provide us with a review letter that includes the results of their analysis of our medical claims liability. We do not solely rely on their report to adjust our claims liability. We utilize their calculation of our claims liability only as additional information, together with management’s judgment to determine the assumptions to be used in the calculation of our liability for claims.
Our development of the medical claims liability estimate is a continuous process which we monitor and refine on a monthly basis as additional claims receipts and payment information becomes available. As more complete claim information becomes available, we adjust the amount of the estimates, and include the changes in estimates in medical costs in the period in which the changes are identified. In every reporting period, our operating results include the effects of more completely developed medical claims liability estimates associated with previously reported periods. We consistently apply our reserving methodology from period to period. As additional information becomes known to us, we adjust our actuarial model accordingly to establish medical claims liability estimates.
Reflects estimated potential changes in medical claims liability caused by changes in cost trend factors for the most recent periods.
While we believe our estimates are appropriate, it is possible future events could require us to make significant adjustments for revisions to these estimates. For example, a 1% increase or decrease in our estimated medical claims liability would have affected net earnings by $2.8 million for the year ended December 31, 2010. The estimates are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our providers and information available from other outside sources.
The acquisition in 2008 includes reserves acquired in connection with our acquisition of Celtic.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Centene Corporation and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Centene Corporation’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 21, 2011 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
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 University Health Plans, Inc. are classified as discontinued operations for all periods presented.
The Company uses the cost and equity methods to account for its investment in entities that it does not control and for which it does not have the ability to exercise significant influence over operating and financial policies. These investments are recorded at the lower of their cost or fair value.
The Company tests goodwill for impairment using a fair value approach. The Company is required to test for impairment at least annually, absent some triggering event including 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’s health plans generate revenues primarily from premiums received from the states in which it operates health plans. The Company receives a fixed premium per member per month pursuant to its state contracts. The Company generally receives premium payments during the month it provides services and recognizes premium revenue during the period in which it is obligated to provide services to its members. 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. 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. Some contracts allow for additional premium related to certain supplemental services provided such as maternity deliveries. Revenues are recorded based on membership and eligibility data provided by the states, which may be adjusted by the states for updates to this data. These eligibility adjustments have been immaterial in relation to total revenue recorded and are reflected in the period known.
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 June 30, 2011 and December 31, 2014. States whose aggregate annual contract value exceeded 10% of annual revenues and the respective percentage of the Company’s total revenues for the years ended December 31, are as follows:
Carolina Crescent Health Plan. In June 2010, the Company acquired certain assets of Carolina Crescent Health Plan, a South Carolina Medicaid managed care organization for $17,993 in total consideration. The Company recorded an initial allocation of fair value that resulted in goodwill of $14,394 and other identifiable intangible assets of $3,599. The Company allocated the total consideration to assets acquired and liabilities assumed based on its initial estimates of fair value using methodologies and assumptions that it believed were reasonable. During 2010, the Company finalized the allocation of the total consideration to identifiable assets and liabilities which increased goodwill to $16,543 and decreased other identifiable intangible assets to $1,450. The acquisition is recorded in the Medicaid Managed Care segment. All of the goodwill is deductible for income tax purposes.
Access Health Solutions, LLC. In December 2010, the Company exercised its right to obtain the remaining assets and ownership interest in Access Health Solutions, LLC, or Access, for zero dollars. Prior to the acquisition of the remaining interest, the Company had reported its investment in Access as a consolidated variable interest entity (VIE) in which the Company was the primary beneficiary. Subsequent to the acquisition of the remaining interest, Access continues to be consolidated in the Company’s Medicaid Managed Care segment results as a wholly owned subsidiary of the Company.
The Company allocated total consideration paid to the assets acquired and liabilities assumed based on its estimates of fair value using methodologies and assumptions that it believed were reasonable. The purchase price allocation resulted in estimated identifiable intangible assets and goodwill of $8,600 and $24,300, respectively. The identifiable intangible assets have estimated useful lives ranging from seven to 15 years. The acquired goodwill is not deductible for income tax purposes.
As of December 31, 2010, the gross unrealized losses were generated from 31 positions out of a total of 352 positions. The decline in fair value of fixed income securities is a result of movement in interest rates subsequent to the purchase of the security.
The contractual maturities of short-term and long-term investments and restricted deposits as of December 31, 2009, are as follows:
Investment and other income included a net realized gain of $2,479 related to sales of fixed income investments and also included realized gains of $3,287 related to the Reserve Primary money market fund for distributions made during 2010. Investment amortization of $10,750, $7,209 and $3,388 was recorded in the years ended December 31, 2010, 2009 and 2008, respectively.
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 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 cost-method investments, which approximates fair value, was $21,451 and $23,601 as of December 31, 2010 and December 31, 2009, respectively.
The following table summarizes the changes in goodwill by operating segment:
Amortization expense was $4,119, $3,692 and $2,480 for the years ended December 31, 2010, 2009 and 2008, respectively.
The Company's deferred tax assets include federal and state net operating losses, or NOLs, of which $1,136 were acquired in business combinations. Accordingly, the total and annual deduction for those NOLs is limited by tax law. The Company's federal NOLs expire between the years 2011 and 2023 and the state NOLs expire between the years 2011 and 2030. Valuation allowances are recorded for those NOLs the Company believes are more likely than not to expire unused. During 2010 and 2009, the Company recorded valuation allowance additions in the tax provision of $3,324 and $1,381, respectively. In 2010 and 2009, the Company recorded valuation allowance reductions of $323 and $80, respectively.
The Company recognizes interest accrued related to unrecognized tax benefits in the provision for income taxes. Interest accrued, net of federal benefit, was $707 and $1,072 as of December 31, 2010 and December 31, 2009, respectively. No penalties have been accrued.
The federal income tax returns for 2007 through 2010 are open tax years. In May 2008, the Internal Revenue Service, or IRS, began an audit of the Company's 2007 tax return. In connection with the IRS examination of the Company's 2007 tax return, the field agent initially denied the $34,856 tax benefit related to the abandonment of the FirstGuard stock in 2007 based on certain assumptions of fact by the IRS. The most significant change was to re-characterize the loss as a capital loss versus an ordinary loss.
In June 2009, Centene Center LLC executed a $95,000 construction loan associated with the construction of a real estate development to include the Company’s corporate headquarters. Centene Center LLC capitalized $1,089 and $116 of interest in 2010 and 2009, respectively. In December 2010, the Company acquired the remaining ownership interest in the joint venture and refinanced the $95,000 construction loan with an $80,000 10 year mortgage note payable. The mortgage note is non-recourse to the Company, bears a 5.14% interest rate and has a financial covenant requiring a minimum debt service coverage ratio.
The Company also has a mortgage note of $9,500 collateralized by another building and parking garage. The collateralized properties had a net book value of $22,443 at December 31, 2010. The mortgage is due August 31, 2014 and bears interest at the LIBOR rate plus 3% or the bank’s certificate of deposit rate plus 2%. The mortgage includes a financial covenant requiring a minimum fixed charge coverage ratio. The weighted average interest rate of outstanding borrowings was 3.12% at December 31, 2010.
The fair value of outstanding debt was approximately $336,766 and $305,544 at December 31, 2010 and 2009, respectively.
As a component of the employee stock compensation plan, employees can use shares of stock which have vested to satisfy personal tax withholding obligations. During 2010, the Company repurchased 141,073 shares at an aggregate cost of $3,224. During 2009, the Company repurchased 332,595 shares at an aggregate cost of $6,304. These shares are included in the Company’s treasury stock.
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, 2010 and 2009, Centene’s subsidiaries, including UHP, had aggregate statutory capital and surplus of $516,100 and $453,200, respectively, compared with the required minimum aggregate statutory capital and surplus of $308,000 and $286,500, respectively.
For the years ended December 31, 2010, 2009 and 2008, 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 along with the implied volatility of exchange traded options to purchase Centene common stock. 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.
A summary of the Company's non-vested restricted stock and restricted stock unit shares as of December 31, 2010, and changes during the year ended December 31, 2010, is presented below:
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 $4,044, $3,499 and $3,681 during the years ended December 31, 2010, 2009 and 2008, respectively.
In May 2008, the Internal Revenue Services began an audit of the Company’s 2006 and 2007 tax returns. In connection with the IRS examination, the field agent initially denied the $34,856 tax benefit related to the abandonment of the FirstGuard stock in 2007 based on certain assumptions of fact by the IRS. The most significant change was to re-characterize the loss as a capital loss versus an ordinary loss.
Centene operates in two segments: Medicaid Managed Care and Specialty Services. The Medicaid Managed Care segment consists of Centene’s health plans including all of the functions needed to operate them. The Specialty Services segment consists of Centene’s specialty companies offering products for behavioral health, health insurance exchanges, individual health insurance, life and health management, long-term care programs, managed vision, telehealth services, and pharmacy benefits management. The health plans in Arizona, operated by our long-term care company, and Massachusetts, operated by our individual health insurance provider, are included in the Specialty Services segment.
Segment information as of and for the year ended December 31, 2010, follows:
Differences between net earnings and total comprehensive earnings resulted from changes in unrealized gains on investments available for sale, as follows:
Due to our centralized cash management function, all cash flows generated by our unrestricted subsidiaries, including management fees, are transferred to the parent company, primarily to repay borrowings on the parent company’s revolving credit facility. The parent company may also utilize the cash flow to make acquisitions, fund capital contributions to subsidiaries and fund its operations. During the years ended December 31, 2010, 2009, and 2008, cash flows received by the parent from unrestricted subsidiaries was $38.0 million, $102.2 million, and $49.4 million and was included in cash flows from operating activities.
During 2010, 2009 and 2008, the Registrant received dividends from its subsidiaries totaling $67,891, $19,122 and $48,411, respectively.