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EX-31.1 - CERTIFICATION - CENTENE CORPexhibit311.htm
EX-32.2 - CERTIFICATION - CENTENE CORPexhibit322.htm
EX-10.1 - PLAN AMENDMENT - CENTENE CORPexhibit101.htm
EX-12.1 - RATIO OF EARNINGS TO FIXED CHARGES - CENTENE CORPexhibit121.htm
EX-31.2 - CERTIFICATION - CENTENE CORPexhibit312.htm
EX-32.1 - CERTIFICATION - CENTENE CORPexhibit321.htm
XML - IDEA: XBRL DOCUMENT - CENTENE CORPR9999.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
____________________________________________
FORM 10-Q
____________________________________________
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015
OR

[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to
____________________________________________
Commission file number: 001-31826
____________________________________________
CENTENE CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
42-1406317
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification Number)
 
 
7700 Forsyth Boulevard
 
St. Louis, Missouri
63105
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code:
 
(314) 725-4477
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.  Large accelerated filer x Accelerated filer o Non-accelerated filer o (do not check if a smaller reporting company) Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o    No  x

As of July 17, 2015, the registrant had 119,090,635 shares of common stock outstanding.




CENTENE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS

 
 
PAGE
 
 
 
 
Part I
 
 
Financial Information
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Part II
 
 
Other Information
 
Item 1.
Item 1A.
Item 2.
Item 6.
 



CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

All statements, other than statements of current or historical fact, contained in this filing are forward-looking statements.  We have attempted to identify these statements by terminology including “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “seek,” “target,” “goal,” “may,” “will,” “would,” “could,” “should,” “can,” “continue” and other similar words or expressions in connection with, among other things, any discussion of future operating or financial performance.  In particular, these statements include statements about our market opportunity, our growth strategy, competition, expected activities and future acquisitions, including our proposed merger with Health Net, Inc. (Health Net) (Proposed Merger), investments and the adequacy of our available cash resources.  These statements may be found in the various sections of this filing, including those entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations,” Part II, Item 1A. “Risk Factors,” and Part II, Item 1 “Legal Proceedings.”  Readers are cautioned that matters subject to forward-looking statements involve known and unknown risks and uncertainties, including economic, regulatory, competitive and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.  These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions.

All forward-looking statements included in this filing are based on information available to us on the date of this filing and we undertake no obligation to update or revise the forward-looking statements included in this filing, whether as a result of new information, future events or otherwise, after the date of this filing.  Actual results may differ from projections or estimates due to a variety of important factors applicable to both us and Health Net, including but not limited to:

our ability to accurately predict and effectively manage health benefits and other operating expenses and reserves;
competition;
membership and revenue projections;
timing of regulatory contract approval;
changes in healthcare practices;
changes in federal or state laws or regulations, including the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act and any regulations enacted thereunder;
changes in expected contract start dates;
changes in expected closing dates, estimated purchase price and accretion for acquisitions;
inflation;
foreign currency fluctuations;
provider and state contract changes;
new technologies;
advances in medicine;
reduction in provider payments by governmental payors;
major epidemics;
disasters and numerous other factors affecting the delivery and cost of healthcare;
the expiration, cancellation or suspension of our or Health Net's managed care contracts by federal or state governments (including but not limited to Medicare and Medicaid);
the outcome of our or Health Net's pending legal proceedings;
availability of debt and equity financing, on terms that are favorable to us;
changes in economic, political and market conditions;
the expected closing date of the Proposed Merger;
the possibility that the expected synergies and value creation from the Proposed Merger will not be realized, or will not be realized within the expected time period;
the risk that acquired businesses will not be integrated successfully;
disruption from the Proposed Merger making it more difficult to maintain business and operational relationships;
the risk that unexpected costs related to the Proposed Merger will be incurred;
the possibility that the Proposed Merger does not close, including, but not limited to, due to the failure to satisfy the closing conditions, including the receipt of approval of both Centene's stockholders and Health Net's stockholders; and
the risk that financing for the Proposed Merger may not be available on favorable terms.

This list of important factors is not intended to be exhaustive. We discuss certain of these matters more fully, as well as certain risk factors that may affect our business operations, financial condition and results of operations, in our filings with the Securities and Exchange Commission, including our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.




Other Information

The discussion in Part I, Item 2. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" under the heading "Results of Operations" contains financial information for new and existing businesses. Existing businesses are primarily state markets, significant geographic expansion in an existing state or product that we have managed for four complete quarters. New businesses are primarily new state markets, significant geographic expansion in an existing state or product that conversely, we have not managed for four complete quarters.

Item 1A “Risk Factors” of Part II of this filing contains a further discussion of these and other important factors that could cause actual results to differ from expectations. We disclaim any current intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Due to these important factors and risks, we cannot give assurances with respect to our future premium levels or our ability to control our future medical costs.




PART I
FINANCIAL INFORMATION

ITEM 1. Financial Statements.
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
(Unaudited)
 
June 30, 2015
 
December 31, 2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,967

 
$
1,610

Premium and related receivables
1,248

 
912

Short term investments
140

 
177

Other current assets
483

 
335

Total current assets
3,838

 
3,034

Long term investments
1,541

 
1,280

Restricted deposits
101

 
100

Property, software and equipment, net
462

 
445

Goodwill
811

 
754

Intangible assets, net
148

 
120

Other long term assets
121

 
91

Total assets
$
7,022

 
$
5,824

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Medical claims liability
$
2,092

 
$
1,723

Accounts payable and accrued expenses
1,004

 
768

Return of premium payable
289

 
236

Unearned revenue
68

 
168

Current portion of long term debt
5

 
5

Total current liabilities
3,458

 
2,900

Long term debt
1,139

 
874

Other long term liabilities
330

 
159

Total liabilities
4,927

 
3,933

Commitments and contingencies


 


Redeemable noncontrolling interests
155

 
148

Stockholders’ equity:
 

 
 

Preferred stock, $0.001 par value; authorized 10,000,000 shares; no shares issued or outstanding at June 30, 2015 and December 31, 2014

 

Common stock, $.001 par value; authorized 200,000,000 shares; 124,812,343 issued and 119,087,944 outstanding at June 30, 2015, and 124,274,864 issued and 118,433,416 outstanding at December 31, 2014

 

Additional paid-in capital
891

 
840

Accumulated other comprehensive loss
(4
)
 
(1
)
Retained earnings
1,154

 
1,003

Treasury stock, at cost (5,724,399 and 5,841,448 shares, respectively)
(101
)
 
(98
)
Total Centene stockholders’ equity
1,940

 
1,744

Noncontrolling interest

 
(1
)
Total stockholders’ equity
1,940

 
1,743

Total liabilities and stockholders’ equity
$
7,022

 
$
5,824

The accompanying notes to the consolidated financial statements are an integral part of these statements. 

1


CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except share data)
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Premium
$
4,692

 
$
3,331

 
$
8,991

 
$
6,402

Service
492

 
410

 
954

 
691

Premium and service revenues
5,184

 
3,741

 
9,945

 
7,093

Premium tax and health insurer fee
322

 
283

 
692

 
391

Total revenues
5,506

 
4,024

 
10,637

 
7,484

Expenses:
 
 
 
 
 
 
 
Medical costs
4,181

 
2,960

 
8,042

 
5,703

Cost of services
419

 
366

 
821

 
608

General and administrative expenses
442

 
321

 
845

 
616

Premium tax expense
239

 
253

 
520

 
331

Health insurer fee expense
52

 
31

 
107

 
63

Total operating expenses
5,333

 
3,931

 
10,335

 
7,321

Earnings from operations
173

 
93

 
302

 
163

Other income (expense):
 
 
 
 
 
 
 
Investment and other income
10

 
7

 
19

 
12

Interest expense
(11
)
 
(9
)
 
(21
)
 
(16
)
Earnings from continuing operations, before income tax expense
172

 
91

 
300

 
159

Income tax expense
84

 
45

 
147

 
79

Earnings from continuing operations, net of income tax expense
88

 
46

 
153

 
80

Discontinued operations, net of income tax expense (benefit) of $0, $1, $(1), and $1, respectively

 
2

 
(1
)
 
1

Net earnings
88

 
48

 
152

 
81

(Earnings) loss attributable to noncontrolling interests

 
1

 
(1
)
 
1

Net earnings attributable to Centene Corporation
$
88

 
$
49

 
$
151

 
$
82

 
 
 
 
 
 
 
 
Amounts attributable to Centene Corporation common shareholders:
Earnings from continuing operations, net of income tax expense
$
88

 
$
47

 
$
152

 
$
81

Discontinued operations, net of income tax expense (benefit)

 
2

 
(1
)
 
1

Net earnings
$
88

 
$
49

 
$
151

 
$
82

 
 
 
 
 
 
 
 
Net earnings (loss) per common share attributable to Centene Corporation:
Basic:
 
 
 
 
 
 
 
Continuing operations
$
0.74

 
$
0.41

 
$
1.28

 
$
0.70

Discontinued operations

 
0.01

 
(0.01
)
 
0.01

Basic earnings per common share
$
0.74

 
$
0.42

 
$
1.27

 
$
0.71

 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.72

 
$
0.39

 
$
1.24

 
$
0.68

Discontinued operations

 
0.02

 
(0.01
)
 
0.01

Diluted earnings per common share
$
0.72

 
$
0.41

 
$
1.23

 
$
0.69

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
Basic
119,003,569

 
115,517,366

 
118,894,269

 
115,244,078

Diluted
122,965,011

 
119,434,516

 
122,785,459

 
119,094,840

The accompanying notes to the consolidated financial statements are an integral part of these statements.

2


CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS
(In millions)
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net earnings
$
88

 
$
48

 
$
152

 
$
81

Reclassification adjustment, net of tax

 

 

 
(1
)
Change in unrealized gain on investments, net of tax
(4
)
 
3

 
1

 
6

Foreign currency translation adjustments
1

 

 
(4
)
 

Other comprehensive earnings
(3
)
 
3

 
(3
)
 
5

Comprehensive earnings
85

 
51

 
149

 
86

Comprehensive (earnings) loss attributable to noncontrolling interests

 
1

 
(1
)
 
1

Comprehensive earnings attributable to Centene Corporation
$
85

 
$
52

 
$
148

 
$
87


The accompanying notes to the consolidated financial statements are an integral part of this statement.


3


CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In millions, except share data)
(Unaudited)

Six Months Ended June 30, 2015

 
Centene Stockholders’ Equity
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
Treasury Stock
 
 
 
 
 
$.001 Par
Value
Shares
 
Amt
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
$.001 Par
Value
Shares
 
Amt
 
Non
controlling
Interest
 
Total
Balance, December 31, 2014
124,274,864

 
$

 
$
840

 
$
(1
)
 
$
1,003

 
5,841,448

 
$
(98
)
 
$
(1
)
 
$
1,743

Comprehensive Earnings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings

 

 

 

 
151

 

 

 

 
151

Change in unrealized gain on investments, net of tax

 

 

 
1

 

 

 

 

 
1

Foreign currency translation

 

 

 
(4
)
 

 

 

 

 
(4
)
Total comprehensive earnings
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
148

Common stock issued for acquisition

 

 
9

 

 

 
(247,580
)
 
4

 

 
13

Common stock issued for employee benefit plans
537,479

 

 
3

 

 

 

 

 

 
3

Common stock repurchases

 

 

 

 

 
130,531

 
(7
)
 

 
(7
)
Stock compensation expense

 

 
33

 

 

 

 

 

 
33

Excess tax benefits from stock compensation

 

 
6

 

 

 

 

 

 
6

Reclassification to redeemable noncontrolling interest

 

 

 

 

 

 

 
1

 
1

Balance, June 30, 2015
124,812,343

 
$

 
$
891

 
$
(4
)
 
$
1,154

 
5,724,399

 
$
(101
)
 
$

 
$
1,940

 
The accompanying notes to the consolidated financial statements are an integral part of this statement.



4


CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Six Months Ended June 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net earnings
$
152

 
$
81

Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization
53

 
42

Stock compensation expense
33

 
23

Deferred income taxes
(13
)
 
(11
)
Gain on settlement of contingent consideration
(10
)
 

Changes in assets and liabilities
 

 
 

Premium and related receivables
(341
)
 
(161
)
Other current assets
(28
)
 
29

Other assets
(30
)
 
(29
)
Medical claims liabilities
366

 
284

Unearned revenue
(102
)
 
(18
)
Accounts payable and accrued expenses
166

 
160

Other long term liabilities
144

 
10

Other operating activities
5

 
2

Net cash provided by operating activities
395

 
412

Cash flows from investing activities:
 

 
 

Capital expenditures
(58
)
 
(42
)
Purchases of investments
(513
)
 
(475
)
Sales and maturities of investments
276

 
221

Proceeds from asset sale
7

 

Investments in acquisitions, net of cash acquired
(11
)
 
(94
)
Net cash used in investing activities
(299
)
 
(390
)
Cash flows from financing activities:
 

 
 

Proceeds from exercise of stock options
3

 
4

Proceeds from borrowings
750

 
1,145

Payment of long term debt
(479
)
 
(945
)
Excess tax benefits from stock compensation
6

 
1

Common stock repurchases
(7
)
 
(5
)
Contribution from noncontrolling interest

 
5

Debt issue costs
(4
)
 
(6
)
Payment of contingent consideration obligation
(8
)
 

Net cash provided by financing activities
261

 
199

Net increase in cash and cash equivalents
357

 
221

Cash and cash equivalents, beginning of period
1,610

 
1,038

Cash and cash equivalents, end of period
$
1,967

 
$
1,259

Supplemental disclosures of cash flow information:
 

 
 

Interest paid
$
27

 
$
16

Income taxes paid
$
145

 
$
110

Equity issued in connection with acquisitions
$
13

 
$
132

 
The accompanying notes to the consolidated financial statements are an integral part of these statements.

5


CENTENE CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
(Unaudited)
   
1. Basis of Presentation

Basis of Presentation

The accompanying interim financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited financial statements included in the Form 10-K for the fiscal year ended December 31, 2014.  The unaudited interim financial statements herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the December 31, 2014 audited financial statements have been omitted from these interim financial statements where appropriate.  In the opinion of management, these financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of the interim periods presented.
 
Certain 2014 amounts in the notes to the consolidated financial statements have been reclassified to conform to the 2015 presentation. These reclassifications have no effect on net earnings or stockholders’ equity as previously reported.

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-Q has been adjusted for the two-for-one stock split.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (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. In July 2015, the FASB deferred the effective date of the new revenue standard by one year. 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.

In April 2015, the FASB issued an ASU which changes the presentation of debt issuance costs in financial statements. Under the new standard, debt issuance costs are presented in the balance sheet as a direct deduction of the related debt liability rather than as an asset. Amortization of the cost is reported as interest expense. The new standard is effective for annual and interim periods beginning after December 15, 2015 and early adoption is permitted. The Company elected to adopt this guidance beginning in the first quarter of 2015 and has applied the new standard retrospectively to all prior periods. The reclassification of debt issuance costs impacted the Consolidated Balance Sheets by decreasing both Other Long Term Assets and Long Term Debt by $14 million at December 31, 2014 and $16 million at June 30, 2015. These reclassifications have no effect on net earnings or stockholders' equity as previously reported.

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. Early adoption is permitted. The Company is currently evaluating the effect of the new disclosure requirements.


6


2. Acquisitions and Redeemable Noncontrolling Interest

Acquisitions

Community Health Solutions of America, Inc.

In July 2014, the Company completed a transaction whereby Community Health Solutions of America, Inc. assigned its contract with the Louisiana Department of Health and Hospitals under the Bayou Health Shared Savings Program to the Company's subsidiary, Louisiana Healthcare Connections (LHC). The fair value of consideration transferred included the present value of the estimated contingent consideration, subject to membership retained by LHC in the first quarter of 2015. The fair value of contingent consideration was $18 million at December 31, 2014. During the first quarter of 2015, the Company determined the amount of the actual contingent consideration to be $8 million. A gain of $10 million related to the settlement of the obligation was recorded in General and Administrative expense.

LiveHealthier, Inc.

In January 2015, the Company acquired the remaining 79% of LiveHealthier, Inc. (LiveHealthier) for $28 million, bringing its total ownership to 100%. LiveHealthier is a provider of technology and service-based health management solutions. The fair value of consideration of $28 million consists of cash paid of $11 million, Centene common stock issued at closing of $13 million, and the present value of contingent consideration of $4 million to be paid in cash over a three year period. The contingent consideration will not exceed $9 million.

The Company's allocation of fair value resulted in goodwill of $26 million and other identifiable intangible assets of $15 million. The goodwill is not deductible for income tax purposes. The acquisition is recorded in the Managed Care segment.

Fidelis SecureCare of Michigan, Inc.

In May 2015, the Company acquired 100% of Fidelis SecureCare of Michigan, Inc. (Fidelis) a subsidiary of Concerto Healthcare, for $57 million. Fidelis was previously selected by the Michigan Department of Community Health to provide integrated healthcare services to members who are dually eligible for Medicare and Medicaid in Macomb and Wayne counties. The fair value of consideration of $57 million consists of initial cash consideration of $7 million, the conversion of $16 million of notes funded prior to closing and the present value of the remaining contingent consideration payments of $34 million. The contingent consideration is based on duals membership and revenue per member during the first year of the contract, including reconciliation payments. The contingent consideration fair value is estimated based on expected membership during the first year of the contract as well as estimated revenue per member reflecting both member mix and risk adjustment.

The Company's preliminary allocation of fair vale resulted in goodwill of $28 million and other identifiable intangible assets of $24 million. The Company has not finalized the allocation of the fair value of assets and liabilities. 100% of the goodwill is deductible for income tax purposes. The acquisition is recorded in the Managed Care segment.

Redeemable Noncontrolling Interest

In January 2015, the Company sold 25% of its ownership in Celtic Insurance Company for $7 million. No gain or loss was recognized on the sale of the ownership interest. Celtic Insurance Company is included in the Managed Care segment. In connection with the sale of the ownership interest, the Company entered into a put agreement with the noncontrolling interest holder, allowing the noncontrolling interest holder to put its interest back to the Company beginning in 2022. As a result of put option agreements, the noncontrolling interest is considered redeemable and is classified in the Redeemable Noncontrolling Interest section of the consolidated balance sheets.

A reconciliation of the changes in the Redeemable Noncontrolling Interests is as follows ($ in millions):
Balance, December 31, 2014
$
148

Fair value of redeemable noncontrolling interest sold
7

Reclassification to redeemable noncontrolling interest
(1
)
Net earnings attributable to redeemable noncontrolling interests
1

Balance, June 30, 2015
$
155



7


3. 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):
 
June 30, 2015
 
December 31, 2014
 
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
$
451

 
$
1

 
$
(1
)
 
$
451

 
$
393

 
$
1

 
$
(2
)
 
$
392

Corporate securities
632

 
2

 
(2
)
 
632

 
556

 
2

 
(2
)
 
556

Restricted certificates of deposit
6

 

 

 
6

 
6

 

 

 
6

Restricted cash equivalents
80

 

 

 
80

 
79

 

 

 
79

Municipal securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

General obligation
96

 

 

 
96

 
54

 

 

 
54

Pre-refunded
4

 

 

 
4

 
5

 

 

 
5

Revenue
161

 
1

 
(1
)
 
161

 
101

 
1

 

 
102

Variable rate demand notes
28

 

 

 
28

 
14

 

 

 
14

Asset backed securities
162

 

 

 
162

 
180

 

 

 
180

Mortgage backed securities
77

 
1

 

 
78

 
84

 
1

 

 
85

Cost and equity method investments
68

 

 

 
68

 
68

 

 

 
68

Life insurance contracts
16

 

 

 
16

 
16

 

 

 
16

Total
$
1,781

 
$
5

 
$
(4
)
 
$
1,782

 
$
1,556

 
$
5

 
$
(4
)
 
$
1,557



8


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.  The Company's mortgage backed securities are issued by the Federal National Mortgage Association and carry guarantees by the U.S. government. As of June 30, 2015, 48% of the Company’s investments in securities recorded at fair value that carry a rating by S&P or Moody’s were rated AAA/Aaa, 66% were rated AA-/Aa3 or higher, and 90% were rated A-/A3 or higher.  At June 30, 2015, the Company held certificates of deposit, life insurance contracts and cost and equity method investments which did not carry a credit rating.

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):
 
June 30, 2015
 
December 31, 2014
 
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
)
 
$
162

 
$

 
$
16

 
$

 
$
72

 
$
(2
)
 
$
180

Corporate securities
(2
)
 
286

 

 
31

 
(2
)
 
311

 

 
1

Municipal securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

General obligation

 
51

 

 
3

 

 
4

 

 
3

Revenue
(1
)
 
52

 

 
5

 

 
16

 

 
3

Pre-refunded

 

 

 

 

 

 

 
1

Asset backed securities

 
37

 

 
15

 

 
70

 

 
10

Mortgage backed securities

 
37

 

 

 

 
18

 

 

Total
$
(4
)
 
$
625

 
$

 
$
70

 
$
(2
)
 
$
491

 
$
(2
)
 
$
198


As of June 30, 2015, the gross unrealized losses were generated from 122 positions out of a total of 357 positions.  The change in fair value of fixed income securities is 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 six months ended June 30, 2015, the Company recognized $4 million of income from equity method investments.

The contractual maturities of short term and long term investments and restricted deposits are as follows ($ in millions):
 
June 30, 2015
 
December 31, 2014
 
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
$
140

 
$
140

 
$
99

 
$
99

 
$
176

 
$
177

 
$
92

 
$
92

One year through five years
1,325

 
1,326

 
2

 
2

 
1,121

 
1,121

 
8

 
8

Five years through ten years
135

 
135

 

 

 
121

 
120

 

 

Greater than ten years
80

 
80

 

 

 
38

 
39

 

 

Total
$
1,680

 
$
1,681

 
$
101

 
$
101

 
$
1,456

 
$
1,457

 
$
100

 
$
100


9


 
Actual maturities may differ from contractual maturities due to call or prepayment options.  Asset backed and mortgage backed securities are included in the one year through five years category, while 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.

4. 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.

10


 
The following table summarizes fair value measurements by level at June 30, 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
$
1,967

 
$

 
$

 
$
1,967

Investments available for sale:
 

 
 

 
 

 
 

U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
433

 
$
3

 
$

 
$
436

Corporate securities

 
632

 

 
632

Municipal securities:
 

 
 

 
 

 
 
General obligation

 
96

 

 
96

Pre-refunded

 
4

 

 
4

Revenue

 
161

 

 
161

Variable rate demand notes

 
28

 

 
28

Asset backed securities

 
162

 

 
162

Mortgage backed securities

 
78

 

 
78

Total investments
$
433

 
$
1,164

 
$

 
$
1,597

Restricted deposits available for sale:
 

 
 

 
 

 
 

Cash and cash equivalents
$
80

 
$

 
$

 
$
80

Certificates of deposit
6

 

 

 
6

U.S. Treasury securities and obligations of U.S. government corporations and agencies
15

 

 

 
15

Total restricted deposits
$
101

 
$

 
$

 
$
101

Other long term assets: Interest rate swap agreements
$

 
$
10

 
$

 
$
10

Total assets at fair value
$
2,501

 
$
1,174

 
$

 
$
3,675

Liabilities
 
 
 
 
 
 
 
Other long term liabilities:
      Interest rate swap agreements
$

 
$
5

 
$

 
$
5

Total liabilities at fair value
$

 
$
5

 
$

 
$
5



11


The following table summarizes fair value measurements by level at December 31, 2014, 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
$
1,610

 
$

 
$

 
$
1,610

Investments available for sale:
 

 
 

 
 

 
 

U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
360

 
$
17

 
$

 
$
377

Corporate securities

 
556

 

 
556

Municipal securities:
 

 
 

 
 

 
 
General obligation

 
54

 

 
54

Pre-refunded

 
5

 

 
5

Revenue

 
102

 

 
102

Variable rate demand notes

 
14

 

 
14

Asset backed securities

 
180

 

 
180

Mortgage backed securities

 
85

 

 
85

Total investments
$
360

 
$
1,013

 
$

 
$
1,373

Restricted deposits available for sale:
 

 
 

 
 

 
 

Cash and cash equivalents
$
79

 
$

 
$

 
$
79

Certificates of deposit
6

 

 

 
6

U.S. Treasury securities and obligations of U.S. government corporations and agencies
15

 

 

 
15

Total restricted deposits
$
100

 
$

 
$

 
$
100

Other long term assets: Interest rate swap agreements
$

 
$
11

 
$

 
$
11

Total assets at fair value
$
2,070

 
$
1,024

 
$

 
$
3,094

 
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 June 30, 2015, there were less than $1 million of transfers from Level I to Level II and $14 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 $84 million and $84 million as of June 30, 2015 and December 31, 2014, respectively.
   
5. Health Insurance Marketplace

The Affordable Care Act (ACA) established risk spreading premium stabilization programs effective January 1, 2014 for the Health Insurance Marketplace product. 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 for the Health Insurance Marketplace. 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 medical loss ratio.

In June 2015, CMS released final results on reinsurance and risk-adjustment for the 2014 plan year. These final results had an insignificant impact to the Company for the 2014 plan year.



12


The Company's receivables (payables) for each of these programs are as follows ($ in millions):
 
June 30, 2015
 
December 31, 2014
Risk adjustment
$
(99
)
 
$
(44
)
Reinsurance
20

 
11

Risk corridor
(29
)
 
(9
)
Minimum medical loss ratio
(18
)
 
(6
)


6. Debt
 
Debt consists of the following ($ in millions):
 
June 30, 2015
 
December 31, 2014
$425 million 5.75% Senior notes, due June 1, 2017
$
429

 
$
429

$500 million 4.75% Senior notes, due May 15, 2022
500

 
300

Fair value of interest rate swap agreements
5

 
11

Senior notes
934

 
740

Revolving credit agreement
150

 
75

Mortgage notes payable
69

 
70

Capital leases
7

 
8

Debt issuance costs
(16
)
 
(14
)
Total debt
1,144

 
879

Less current portion
(5
)
 
(5
)
 Long term debt
$
1,139

 
$
874


Senior Notes

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 both the $425 million notes due 2017 and the $500 million notes due 2022 contain non-financial and financial covenants, including requirements of a minimum fixed charge coverage ratio.

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 $750 million of notional amount of interest rate swap agreements consisting of $250 million which are scheduled to expire on June 1, 2017 and $500 million that are scheduled to expire May 15, 2022. Under the Swap Agreements, the Company receives a fixed rate of interest and pays an average variable rate of the three month LIBOR plus 2.85% adjusted quarterly. At June 30, 2015, the weighted average rate was 3.12%.

The Swap Agreements are formally designated and qualify as fair value hedges and are recorded at fair value in the Consolidated Balance Sheet in other assets 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.


13


Revolving Credit Agreement

The Company has an unsecured $500 million 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 June 1, 2018, provided it will mature 90 days prior to the maturity date of the Company's 5.75% Senior Notes due 2017 if such notes are not refinanced (or extended), certain financial conditions are not met, or the Company does not carry $100 million of unrestricted cash. As of June 30, 2015, the Company had $150 million of borrowings outstanding under the agreement with a weighted average interest rate of 3.75%.

The agreement contains non-financial and financial covenants, including requirements of minimum fixed charge coverage ratios, maximum debt-to-EBITDA ratios and minimum tangible net worth. The Company is required to not exceed a maximum debt-to-EBITDA ratio of 3.0 to 1.0. As of June 30, 2015, there were no limitations on the availability under the revolving credit agreement as a result of the debt-to-EBITDA ratio.

Letters of Credit & Surety Bonds

The Company had outstanding letters of credit of $47 million as of June 30, 2015, which were not part of the revolving credit facility. The Company also had letters of credit for $53 million (valued at June 30, 2015 conversion rate), or €48 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 1.64% as of June 30, 2015. The Company had outstanding surety bonds of $260 million as of June 30, 2015.

7. Earnings Per Share

The following table sets forth the calculation of basic and diluted net earnings per common share ($ in millions, except per share data):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Earnings attributable to Centene Corporation:
 
 
 
 
 
 
 
Earnings from continuing operations, net of tax
$
88

 
$
47

 
$
152

 
$
81

Discontinued operations, net of tax

 
2

 
(1
)
 
1

Net earnings
$
88

 
$
49

 
$
151

 
$
82

 
 
 
 
 
 
 
 
Shares used in computing per share amounts:
 

 
 
 
 
 
 
Weighted average number of common shares outstanding
119,003,569

 
115,517,366

 
118,894,269

 
115,244,078

Common stock equivalents (as determined by applying the treasury stock method)
3,961,442

 
3,917,150

 
3,891,190

 
3,850,762

Weighted average number of common shares and potential dilutive common shares outstanding
122,965,011

 
119,434,516

 
122,785,459

 
119,094,840

 
 
 
 
 
 
 
 
Net earnings (loss) per common share attributable to Centene Corporation:
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Continuing operations
$
0.74

 
$
0.41

 
$
1.28

 
$
0.70

Discontinued operations

 
0.01

 
(0.01
)
 
0.01

Basic earnings per common share
$
0.74

 
$
0.42

 
$
1.27

 
$
0.71

 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.72

 
$
0.39

 
$
1.24

 
$
0.68

Discontinued operations

 
0.02

 
(0.01
)
 
0.01

Diluted earnings per common share
$
0.72

 
$
0.41

 
$
1.23

 
$
0.69



14


The calculation of diluted earnings per common share for the three and six months ended June 30, 2015 excludes the impact of 49,754 and 59,828 shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units. The calculation of diluted earnings per common share for the three and six months ended June 30, 2014 excludes the impact of 103,710 shares and 111,088 shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units.

8. 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 Specialty Services segment consists of Centene’s specialty companies offering auxiliary healthcare services and products.
 
Segment information for the three months ended June 30, 2015, follows ($ in millions):
 
Managed Care
 
Specialty
Services
 
Eliminations
 
Consolidated
Total
Premium and service revenues from external customers
$
4,647

 
$
537

 
$

 
$
5,184

Premium and service revenues from internal customers
25

 
1,176

 
(1,201
)
 

Total premium and service revenues
$
4,672

 
$
1,713

 
$
(1,201
)
 
$
5,184

Earnings from operations
$
125

 
$
48

 
$

 
$
173


Segment information for the three months ended June 30, 2014, follows ($ in millions):
 
Managed Care
 
Specialty
Services
 
Eliminations
 
Consolidated
Total
Premium and service revenues from external customers
$
3,225

 
$
516

 
$

 
$
3,741

Premium and service revenues from internal customers
13

 
676

 
(689
)
 

Total premium and service revenues
$
3,238

 
$
1,192

 
$
(689
)
 
$
3,741

Earnings from operations
$
64

 
$
29

 
$

 
$
93


Segment information for the six months ended June 30, 2015, follows ($ in millions):
 
Managed Care
 
Specialty
Services
 
Eliminations
 
Consolidated
Total
Premium and service revenues from external customers
$
8,890

 
$
1,055

 
$

 
$
9,945

Premium and service revenues from internal customers
49

 
2,251

 
(2,300
)
 

Total premium and service revenues
$
8,939

 
$
3,306

 
$
(2,300
)
 
$
9,945

Earnings from operations
$
220

 
$
82

 
$

 
$
302


Segment information for the six months ended June 30, 2014, follows ($ in millions):
 
Managed Care
 
Specialty
Services
 
Eliminations
 
Consolidated
Total
Premium and service revenues from external customers
$
6,195

 
$
898

 
$

 
$
7,093

Premium and service revenues from internal customers
26

 
1,315

 
(1,341
)
 

Total premium and service revenues
$
6,221

 
$
2,213

 
$
(1,341
)
 
$
7,093

Earnings from operations
$
108

 
$
55

 
$

 
$
163



15


9. Contingencies
On July 5, 2013, the Company's subsidiary, Kentucky Spirit Health Plan, Inc. (Kentucky Spirit), terminated its contract with the Commonwealth of Kentucky (the Commonwealth). Kentucky Spirit believes it had a contractual right to terminate the contract and filed a lawsuit in Franklin Circuit Court seeking a declaration of this right. The Commonwealth has alleged that Kentucky Spirit's exit constitutes a material breach of contract.  The Commonwealth seeks to recover substantial damages and to enforce its rights under Kentucky Spirit's $25 million performance bond. The Commonwealth's attorneys have 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 disputes the Commonwealth's alleged damages, and is pursuing its own litigation claims for damages against the Commonwealth.

On February 6, 2015, the Kentucky Court of Appeals affirmed a Franklin Circuit Court ruling that Kentucky Spirit does not have a contractual right to terminate the contract early. The Court of Appeals also found that the contract’s liquidated damages provision “is applicable in the event of a premature termination of the Contract term.” Kentucky Spirit intends to seek Kentucky Supreme Court review of the finding that its departure constituted a breach of contract. The Commonwealth may seek review of the ruling that the liquidated damages provision is applicable in the event of a premature termination.

Kentucky Spirit also filed a lawsuit 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 December 9, 2014, the Franklin Circuit Court denied the Commonwealth's motion for partial summary judgment on Kentucky Spirit's damages claims. On March 15, 2015, the Franklin Circuit Court denied the Commonwealth's motion to stay discovery and ordered that discovery proceed on those claims.

On March 9, 2015, the Secretary of the Kentucky Cabinet for Health and Family Services (CHFS) issued a determination letter finding that Kentucky Spirit owed the Commonwealth $40 million in actual damages plus prejudgment interest at 8 percent. On March 18, 2015, in a letter to the Kentucky Finance and Administration Cabinet, Kentucky Spirit contested CHFS' jurisdiction to make such a determination. Depending on the response from the Finance and Administration Cabinet, Kentucky Spirit may bring the matter to the Franklin Circuit Court.

The resolution of the Kentucky litigation matters may result in a range of possible outcomes.  If Kentucky Spirit prevails on its claims, it would be entitled to damages.  If the Commonwealth prevails, a liability to the Commonwealth could be recorded.  The Company is unable to estimate the ultimate outcome resulting from the Kentucky litigation.  As a result, the Company has not recorded any receivable or any liability for potential damages under the contract as of June 30, 2015.  While uncertain, the ultimate resolution of the pending litigation could have a material effect on the financial position, cash flow or results of operations of the Company in the period it is resolved or becomes known.

Excluding the Kentucky matters discussed above, the Company is also routinely subjected to legal proceedings in the normal course of business.  While the ultimate resolution of such matters in the normal course of business is uncertain, the Company does not expect the results of any of these matters individually, or in the aggregate, to have a material effect on its financial position, results of operations or cash flows.

16



10. Subsequent Events
On July 2, 2015, the Company announced that the Company and two direct, newly formed subsidiaries of the Company had entered into a definitive merger agreement with Health Net, Inc. (Health Net) under which Centene will acquire all of the issued and outstanding shares of Health Net. Under the terms of the agreement, at the closing of the transaction, Health Net stockholders (with limited exceptions) would receive 0.622 of a validly issued, fully paid, non-assessable share of Centene common stock and $28.25 in cash for each share of Health Net common stock. The transaction is valued at approximately $6.8 billion (based on the Centene closing stock price on July 1, 2015), including the assumption of debt. The transaction is expected to close in early 2016 and is subject to approval by Centene and Health Net stockholders, the expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, approvals by relevant state insurance and healthcare regulators and other customary closing conditions. The Company expects to fund the cash portion of the acquisition through a combination of existing cash on hand and debt financing.

17



ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this filing.  The discussion contains forward-looking statements that involve known and unknown risks and uncertainties, including those set forth under Part II, Item 1A. “Risk Factors” of this Form 10-Q.

OVERVIEW

In 2013, we classified the operations for Kentucky Spirit Health Plan (KSHP) as discontinued operations for all periods presented in our consolidated financial statements. The following discussion and analysis, with the exception of cash flow information, is presented in the context of continuing operations unless otherwise identified.

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-Q has been adjusted for the two-for-one stock split.

Key financial metrics for the second quarter of 2015 are summarized as follows:
Quarter-end managed care membership of 4.6 million, an increase of 1.3 million members, or 38% year over year.
Premium and service revenues of $5.2 billion, representing 39% growth year over year.
Health Benefits Ratio of 89.1%, compared to 88.9% in 2014.
General and Administrative expense ratio of 8.5%, compared to 8.6% in 2014.
Operating cash flows of $350 million for the second quarter of 2015.
Diluted net earnings per share of $0.72, compared to $0.39 in 2014.

The following items contributed to our revenue and membership growth over the last year:

California. In December 2014, the ABD membership of our California subsidiary, California Health and Wellness, increased as a result of the mandatory transition of the ABD population to managed care. The enrollment of this population to managed care was previously voluntary.

Florida. In May 2014, our Florida subsidiary, Sunshine Health, began operating under a new contract in 9 of 11 regions of the Managed Medical Assistance (MMA) program. The MMA program includes TANF recipients as well as ABD and dual-eligible members. In addition, we began operating as the sole provider under a new statewide contract for the Child Welfare Specialty Plan (Foster Care). Enrollment for both the MMA program and Foster Care began in May 2014 and was implemented by region through August 2014.

Health Insurance Marketplaces (HIM). In January 2015, we expanded our participation in Health Insurance Marketplaces to include members in certain regions of Illinois and Wisconsin.

Illinois. In March 2014, our Illinois subsidiary, IlliniCare Health, began operating under a new contract as part of the Illinois Medicare-Medicaid Alignment Initiative serving dual-eligible members in Cook, DuPage, Lake, Kane, Kankakee and Will counties (Greater Chicago region).

In July 2014, IlliniCare Health began operating under a new contract with the Cook County Health and Hospitals System to perform third party administrative services to members enrolled in the CountyCare program, as well as care coordination, behavioral health, vision care and pharmacy benefit management services.

In September 2014, IlliniCare Health began serving additional Medicaid members under the state's Medicaid and Medicaid expansion programs.

Indiana. In February 2015, our Indiana subsidiary, Managed Health Services, began operating under an expanded contract with the Indiana Family & Social Services Administration to provide Medicaid services under the state's Healthy Indiana Plan 2.0 program.


18


In April 2015, Managed Health Services began operating under an expanded contract with the Indiana Family & Social Services Administration to provide services to its ABD Medicaid enrollees who qualify for the new Hoosier Care Connect Program.

Louisiana. In July 2014, we completed the transaction whereby Community Health Solutions of America, Inc. (CHS) assigned its contract with the Louisiana Department of Health and Hospitals under the Bayou Health Shared Savings Program to our subsidiary, Louisiana Healthcare Connections (LHC).

In February 2015, LHC began operating under a new contract with the Louisiana Department of Health and Hospitals to serve Bayou Health (Medicaid) beneficiaries. Members previously served under the shared savings program were transitioned to the at-risk program on February 1, 2015.

Michigan. In May 2015, we completed the acquisition of Fidelis SecureCare of Michigan, Inc. (Fidelis). Fidelis began operating under a new contract with the Michigan Department of Community Health and the Centers for Medicare and Medicaid Services to provide integrated healthcare services to members who are dually eligible for Medicare and Medicaid in Macomb and Wayne counties in May 2015. Passive enrollment began in July 2015.

Mississippi. In July 2014, our Mississippi subsidiary, Magnolia Health, began operating as one of two contractors under a new statewide managed care contract serving members enrolled in the Mississippi Coordinated Access Network program. Program expansion began in December 2014 and continued through July 2015.

In January 2015, Magnolia Health began operating under a new temporary six-month contract with the State of Mississippi to provide services under the Children's Health Insurance Program (CHIP). In July 2015, Magnolia Health began operating under a two-year CHIP contract with the State of Mississippi.

New Hampshire. In September 2014, our New Hampshire subsidiary, New Hampshire Healthy Families, began serving members under the state's Medicaid expansion program.

Ohio. In May 2014, our Ohio subsidiary, Buckeye Health Plan (Buckeye), began operating under a new contract with the Ohio Department of Medicaid and the Centers for Medicare and Medicaid Services to serve Medicaid members in a dual-eligible demonstration program in three of seven regions: Northeast (Cleveland), Northwest (Toledo) and West Central (Dayton). This three-year program, which is part of the Integrated Care Delivery System expansion, serves those who have both Medicare and Medicaid eligibility. Passive enrollment for Medicaid began in May 2014 and implementation was completed in July 2014. Passive enrollment for Medicare began in January 2015.

South Carolina. In February 2015, our South Carolina subsidiary, Absolute Total Care, began operating under a new contract with the South Carolina Department of Health and Human Services and the Centers for Medicare and Medicaid Services to serve dual-eligible members as part of the state's dual demonstration program.

Texas. In September 2014, we began operating under a new contract with the Texas Health and Human Services Commission (HHSC) to expand our operations and serve STAR+PLUS members in two Medicaid Rural Service Areas. We also began providing expanded coverage in September 2014 under our STAR+PLUS contracts to provide acute care services for intellectually and developmentally disabled members. In March 2015, we began operating under an expanded STAR+PLUS contract with the Texas HHSC to include nursing facility benefits.

In March 2015, we also began operating under a new contract with the Texas HHSC and the Centers for Medicare and Medicaid Services to serve dual-eligible members in three counties as part of the state's dual demonstration program.

Vermont. In February 2015, Centurion began operating under a new contract with the State of Vermont Department of Corrections to provide comprehensive correctional healthcare services.
    
In addition, in July 2014, we completed an investment accounted for under the equity method for the purchase of a noncontrolling interest in Ribera Salud S.A. (Ribera Salud), a Spanish health management group. Centene is a joint shareholder with Ribera Salud's remaining investor, Banco Sabadell S.A.


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We expect the following items to contribute to our future growth potential:

We expect to realize the full year benefit in 2015 of business commenced during 2014 in Florida, Illinois, Louisiana, Mississippi, New Hampshire, Ohio and Texas as discussed above.

In July 2015, we announced that we and two of our direct, newly formed subsidiaries had entered into a definitive merger agreement with Health Net, Inc. (Health Net) under which we will acquire all of the issued and outstanding shares of Health Net. The transaction is valued at approximately $6.8 billion (based on the Centene closing stock price on July 1, 2015), including the assumption of debt. The transaction is expected to close in early 2016.

In July 2015, Centurion began operating under a new contract with the Mississippi Department of Corrections to provide comprehensive correctional healthcare services.

In May 2015, Sunshine Health was tentatively recommended for a statewide contract award by the Florida Healthy Kids Corporation to manage healthcare services for children ages five through 18 in all 11 regions of Florida. The two-year contract award is expected to commence in the fourth quarter of 2015.

In January 2015, we signed a definitive agreement to acquire Agate Resources, Inc., a diversified holding company that offers primarily Medicaid and other healthcare products and services to Oregon residents. The transaction is expected to close in the third quarter of 2015, subject to customary closing conditions.

In December 2014, our subsidiary, Cenpatico Integrated Care, in partnership with University of Arizona Health Plan, was selected by the Arizona Department of Health Services/Division of Behavioral Health Services to be the Regional Behavioral Health Authority for the new southern geographic service area. The new contract is expected to commence in the fourth quarter of 2015.

In the fourth quarter of 2015, Louisiana Healthcare Connections expects to begin operating under an expanded contract to include behavioral health benefits, and Magnolia Health anticipates operating under an expanded contract to include the inpatient benefit for Medicaid and ABD members.


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MEMBERSHIP

From June 30, 2014 to June 30, 2015, we increased our managed care membership by 1.3 million, or 38%.  The following table sets forth our membership by state for our managed care organizations:
 
June 30,
2015
 
December 31,
2014
 
June 30,
2014
Arizona
210,900

 
204,000

 
189,200

Arkansas
45,400

 
38,400

 
31,100

California
178,700

 
163,900

 
131,100

Florida
470,300

 
425,700

 
313,800

Georgia
405,000

 
389,100

 
373,000

Illinois
209,100

 
87,800

 
29,500

Indiana
250,400

 
197,700

 
200,500

Kansas
143,000

 
143,300

 
146,100

Louisiana
358,900

 
152,900

 
148,600

Massachusetts
61,500

 
48,400

 
47,200