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, 2012
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 ¨ 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 ¨ 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 ¨ Non-accelerated filer ¨ (do not check if a smaller reporting company) Smaller reporting company ¨

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

As of July 12, 2012, the registrant had 51,557,739 shares of common stock outstanding.




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

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


Table of Contents

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,” “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, 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,” and Part II, Item 1A.  “Risk Factors.”  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, including:

our ability to accurately predict and effectively manage health benefits and other operating expenses;
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;
inflation;
provider and state contract changes;
new technologies;
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 Medicaid managed care contracts by state governments;
availability of debt and equity financing, on terms that are favorable to us; and
general economic and market conditions.


Table of Contents

PART I
FINANCIAL INFORMATION

ITEM 1. Financial Statements.
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 
June 30,
2012
 
December 31,
2011
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
421,894

 
$
573,698

Premium and related receivables
400,194

 
157,450

Short-term investments
152,545

 
130,499

Other current assets
98,805

 
78,363

Total current assets
1,073,438

 
940,010

Long-term investments
630,866

 
506,140

Restricted deposits
33,496

 
26,818

Property, software and equipment, net
379,970

 
349,622

Goodwill
256,288

 
281,981

Intangible assets, net
22,481

 
27,430

Other long-term assets
53,011

 
58,335

Total assets
$
2,449,550

 
$
2,190,336

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Medical claims liability
$
859,035

 
$
607,985

Accounts payable and accrued expenses
142,766

 
216,504

Unearned revenue
29,133

 
9,890

Current portion of long-term debt
3,302

 
3,234

Total current liabilities
1,034,236

 
837,613

Long-term debt
405,462

 
348,344

Other long-term liabilities
61,865

 
67,960

Total liabilities
1,501,563

 
1,253,917

Commitments and contingencies
 
 
 
Stockholders’ equity:
 

 
 

Common stock, $.001 par value; authorized 100,000,000 shares; 54,320,036 issued and 51,557,064 outstanding at June 30, 2012, and 53,586,726 issued and 50,864,618 outstanding at December 31, 2011
54

 
54

Additional paid-in capital
450,506

 
421,981

Accumulated other comprehensive income:
 
 
 
Unrealized gain on investments, net of tax
5,842

 
5,761

Retained earnings
553,940

 
564,961

Treasury stock, at cost (2,762,972 and 2,722,108 shares, respectively)
(58,914
)
 
(57,123
)
Total Centene stockholders’ equity
951,428

 
935,634

Noncontrolling interest
(3,441
)
 
785

Total stockholders’ equity
947,987

 
936,419

Total liabilities and stockholders’ equity
$
2,449,550

 
$
2,190,336


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

1

Table of Contents

CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Revenues:
 
 
 
 
 
 
 
Premium
$
2,034,558

 
$
1,248,588

 
$
3,669,408

 
$
2,401,365

Service
27,041

 
29,428

 
55,659

 
55,812

Premium and service revenues
2,061,599

 
1,278,016

 
3,725,067

 
2,457,177

Premium tax
49,147

 
36,998

 
97,827

 
74,194

Total revenues
2,110,746

 
1,315,014

 
3,822,894

 
2,531,371

Expenses:
 
 
 
 
 
 
 
Medical costs
1,890,405

 
1,059,120

 
3,333,081

 
2,037,687

Cost of services
21,816

 
20,312

 
45,153

 
40,488

General and administrative expenses
168,062

 
143,045

 
331,249

 
284,133

Premium tax expense
49,176

 
37,234

 
97,926

 
74,663

Impairment loss
28,033

 

 
28,033

 

Total operating expenses
2,157,492

 
1,259,711

 
3,835,442

 
2,436,971

Earnings (loss) from operations
(46,746
)
 
55,303

 
(12,548
)
 
94,400

Other income (expense):
 
 
 
 
 
 
 
Investment and other income
4,045

 
2,933

 
9,336

 
6,682

Debt extinguishment costs

 
(8,488
)
 

 
(8,488
)
Interest expense
(4,739
)
 
(5,256
)
 
(9,538
)
 
(10,951
)
Earnings (loss) from operations, before income tax expense
(47,440
)
 
44,492

 
(12,750
)
 
81,643

Income tax expense (benefit)
(8,608
)
 
16,429

 
3,479

 
30,757

Net earnings (loss)
(38,832
)
 
28,063

 
(16,229
)
 
50,886

Noncontrolling interest
(3,833
)
 
(311
)
 
(5,208
)
 
(1,233
)
Net earnings (loss) attributable to Centene Corporation
$
(34,999
)
 
$
28,374

 
$
(11,021
)
 
$
52,119

 
 
 
 
 
 
 
 
Net earnings (loss) per common share attributable to Centene Corporation:


 


 
 
 
 
Basic earnings (loss) per common share
$
(0.68
)
 
$
0.57

 
$
(0.21
)
 
$
1.04

Diluted earnings (loss) per common share
$
(0.68
)
 
$
0.54

 
$
(0.21
)
 
$
1.00

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
51,515,895

 
50,167,052

 
51,320,784

 
49,959,892

Diluted
51,515,895

 
52,489,414

 
51,320,784

 
52,171,213


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

2

Table of Contents

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Net earnings (loss)
$
(38,832
)
 
$
28,063

 
$
(16,229
)
 
$
50,886

Reclassification adjustment, net of tax
66

 
10

 
222

 
192

Change in unrealized gains on investments, net of tax
(461
)
 
1,204

 
(141
)
 
567

Other comprehensive earnings (loss)
(395
)
 
1,214

 
81

 
759

Comprehensive earnings (loss)
(39,227
)
 
29,277

 
(16,148
)
 
51,645

Comprehensive earnings (loss) attributable to the noncontrolling interest
(3,833
)
 
(311
)
 
(5,208
)
 
(1,233
)
Comprehensive earnings (loss) attributable to Centene Corporation
$
(35,394
)
 
$
29,588

 
$
(10,940
)
 
$
52,878


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


3

Table of Contents

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

Six Months Ended June 30, 2012
 
Centene Stockholders’ Equity
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
Treasury Stock
 
 
 
 
 
$.001 Par
Value
Shares
 
Amt
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
$.001 Par
Value
Shares
 
Amt
 
Non
controlling
Interest
 
Total
Balance, December 31, 2011
53,586,726

 
$
54

 
$
421,981

 
$
5,761

 
$
564,961

 
2,722,108

 
$
(57,123
)
 
$
785

 
$
936,419

Comprehensive Earnings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings (loss)

 

 

 

 
(11,021
)
 

 

 
(5,208
)
 
(16,229
)
Change in unrealized investment gain, net of $89 tax

 

 

 
81

 

 

 

 

 
81

Total comprehensive earnings
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
(16,148
)
Common stock issued for employee benefit plans
733,310

 

 
10,725

 

 

 

 

 

 
10,725

Common stock repurchases

 

 

 

 

 
40,864

 
(1,791
)
 

 
(1,791
)
Stock compensation expense

 

 
11,993

 

 

 

 

 

 
11,993

Excess tax benefits from stock compensation

 

 
5,807

 

 

 

 

 

 
5,807

Contribution from noncontrolling interest

 

 

 

 

 

 

 
982

 
982

Balance, June 30, 2012
54,320,036

 
$
54

 
$
450,506

 
$
5,842

 
$
553,940

 
2,762,972

 
$
(58,914
)
 
$
(3,441
)
 
$
947,987

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



4

Table of Contents

CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net earnings (loss)
$
(16,229
)
 
$
50,886

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities
 

 
 

Depreciation and amortization
33,266

 
28,567

Stock compensation expense
11,993

 
8,839

Debt extinguishment costs

 
8,488

Impairment loss
28,033

 

Deferred income taxes
9,364

 
(3,529
)
Changes in assets and liabilities
 

 
 

Premium and related receivables
(232,745
)
 
(16,146
)
Other current assets
(34,105
)
 
(4,001
)
Other assets
1,520

 
(878
)
Medical claims liabilities
251,050

 
24,684

Unearned revenue
19,885

 
(12,465
)
Accounts payable and accrued expenses
(77,010
)
 
(34,739
)
Other operating activities
(4,922
)
 
3,448

Net cash (used in) provided by operating activities
(9,900
)
 
53,154

Cash flows from investing activities:
 

 
 

Capital expenditures
(57,442
)
 
(35,128
)
Purchases of investments
(406,901
)
 
(103,239
)
Sales and maturities of investments
253,719

 
120,448

Investments in acquisitions, net of cash acquired

 
(3,192
)
Net cash used in investing activities
(210,624
)
 
(21,111
)
Cash flows from financing activities:
 

 
 

Proceeds from exercise of stock options
10,320

 
12,264

Proceeds from borrowings
75,000

 
419,183

Payment of long-term debt
(21,601
)
 
(414,695
)
Excess tax benefits from stock compensation
5,810

 
1,369

Common stock repurchases
(1,791
)
 
(1,029
)
Contribution from noncontrolling interest
982

 
244

Debt issue costs

 
(9,095
)
Net cash provided by financing activities
68,720

 
8,241

Net (decrease) increase in cash and cash equivalents
(151,804
)
 
40,284

Cash and cash equivalents, beginning of period
573,698

 
434,166

Cash and cash equivalents, end of period
$
421,894

 
$
474,450

Supplemental disclosures of cash flow information:
 

 
 

Interest paid
$
10,312

 
$
11,822

Income taxes paid
$
32,394

 
$
40,111

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

5

Table of Contents

CENTENE CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
(Unaudited)

1. 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, 2011.  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, 2011 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 2011 amounts in the consolidated financial statements have been reclassified to conform to the 2012 presentation. These reclassifications have no effect on net earnings or stockholders’ equity as previously reported.
 
The Company reclassified certain Medical Costs and General & Administrative Expenses beginning with its financial results for the year ended December 31, 2011, as well as prior periods to conform to the current presentation, to more closely align to the National Association of Insurance Commissioners definition.  For the three months ended June 30, 2011, the net impact of the reclassification increased Medical Costs and decreased General & Administrative Expense by $23,380. For the six months ended June 30, 2011, the net impact of the reclassification increased Medical Costs and decreased General & Administrative Expense by $44,873.

2. Short-term and Long-term Investments and Restricted Deposits

Short-term and long-term investments and restricted deposits by investment type consist of the following:
 
June 30, 2012
 
December 31, 2011
 
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
$
49,184

 
$
690

 
$
(6
)
 
$
49,868

 
$
29,014

 
$
638

 
$
(13
)
 
$
29,639

Corporate securities
271,492

 
4,418

 
(340
)
 
275,570

 
186,018

 
3,762

 
(751
)
 
189,029

Restricted certificates of deposit
5,892

 

 

 
5,892

 
5,890

 

 

 
5,890

Restricted cash equivalents
13,118

 

 

 
13,118

 
13,775

 

 

 
13,775

Municipal securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

General obligation
122,535

 
2,007

 
(57
)
 
124,485

 
126,806

 
2,828

 
(26
)
 
129,608

Pre-refunded
25,867

 
239

 

 
26,106

 
33,247

 
465

 

 
33,712

Revenue
101,285

 
2,046

 
(37
)
 
103,294

 
118,507

 
2,387

 
(34
)
 
120,860

Variable rate demand notes
110,565

 

 

 
110,565

 
64,658

 

 

 
64,658

Asset backed securities
81,092

 
992

 
(5
)
 
82,079

 
51,779

 
430

 
(17
)
 
52,192

Cost and equity method investments
11,068

 

 

 
11,068

 
9,395

 

 

 
9,395

Life insurance contracts
14,862

 

 

 
14,862

 
14,699

 

 

 
14,699

Total
$
806,960

 
$
10,392

 
$
(445
)
 
$
816,907

 
$
653,788

 
$
10,510

 
$
(841
)
 
$
663,457



6

Table of Contents

The Company’s investments are classified as available-for-sale with the exception of life insurance contracts and certain cost and equity method investments.  The Company’s investment policies are designed to provide liquidity, preserve capital and maximize total return on invested assets with the focus on high credit quality securities.  The Company limits the size of investment in any single issuer other than U.S. treasury securities and obligations of U.S. government corporations and agencies.  As of June 30, 2012, 38% of the Company’s investments in securities recorded at fair value that carry a rating by Moody’s or S&P were rated AAA, 70% were rated AA- or higher, and 99% were rated A- or higher.  At June 30, 2012, 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:
 
June 30, 2012
 
December 31, 2011
 
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
$
(6
)
 
$
1,465

 
$

 
$

 
$
(13
)
 
$
2,184

 
$

 
$

Corporate securities
(336
)
 
38,215

 
(4
)
 
72

 
(751
)
 
23,040

 

 

Municipal securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

General obligation
(57
)
 
11,543

 

 

 
(26
)
 
3,710

 

 

Revenue
(37
)
 
7,376

 

 

 
(34
)
 
12,597

 

 

Asset backed securities
(5
)
 
4,565

 

 

 
(17
)
 
20,417

 

 

Total
$
(441
)
 
$
63,164

 
$
(4
)
 
$
72

 
$
(841
)
 
$
61,948

 
$

 
$


As of June 30, 2012, the gross unrealized losses were generated from 28 positions out of a total of 401 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.

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.

The contractual maturities of short-term and long-term investments and restricted deposits are as follows:
 
June 30, 2012
 
December 31, 2011
 
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
$
151,312

 
$
152,545

 
$
26,221

 
$
26,223

 
$
129,232

 
$
130,499

 
$
19,666

 
$
19,666

One year through five years
487,966

 
495,995

 
7,230

 
7,273

 
406,140

 
413,953

 
7,085

 
7,152

Five years through ten years
34,597

 
34,643

 

 

 
34,945

 
34,961

 

 

Greater than ten years
99,634

 
100,228

 

 

 
56,720

 
57,226

 

 

Total
$
773,509

 
$
783,411

 
$
33,451

 
$
33,496

 
$
627,037

 
$
636,639

 
$
26,751

 
$
26,818

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


7

Table of Contents

Realized gains and losses are determined on the basis of specific identification or a first-in, first-out methodology, if specific identification is not practicable.  The Company’s gross recorded realized gains and losses were as follows:

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Gains
$

 
$

 
$
8

 
$
133

Losses
(1
)
 
(11
)
 
(11
)
 
(26
)
Net realized gains
$
(1
)
 
$
(11
)
 
$
(3
)
 
$
107


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.

Investment amortization of $5,918 and $5,009 was recorded in the six months ended June 30, 2012 and 2011, respectively.

3. Fair Value Measurements

Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the extent to which the fair value estimates are based upon observable or unobservable inputs.  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.
 

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The following table summarizes fair value measurements by level at June 30, 2012, for assets and liabilities measured at fair value on a recurring basis:  
 
Level I
 
Level II
 
Level III
 
Total
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
421,894

 

 

 
$
421,894

Investments available for sale:
 

 
 

 
 

 
 

U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
23,377

 
$
12,005

 

 
$
35,382

Corporate securities

 
275,570

 

 
275,570

Municipal securities:
 

 
 

 
 

 
 
General obligation

 
124,485

 

 
124,485

Pre-refunded

 
26,106

 

 
26,106

Revenue

 
103,294

 

 
103,294

Variable rate demand notes

 
110,565

 

 
110,565

Asset backed securities

 
82,079

 

 
82,079

Total investments
$
23,377

 
$
734,104

 

 
$
757,481

Restricted deposits available for sale:
 

 
 

 
 

 
 

Cash and cash equivalents
$
13,118

 

 

 
$
13,118

Certificates of deposit
5,892

 

 

 
5,892

U.S. Treasury securities and obligations of U.S. government corporations and agencies
14,486

 

 

 
14,486

Total restricted deposits
$
33,496

 

 

 
$
33,496

Other long-term assets: Interest rate swap contract

 
$
14,959

 

 
$
14,959

Total assets at fair value
$
478,767

 
$
749,063

 

 
$
1,227,830


The following table summarizes fair value measurements by level at December 31, 2011, for assets and liabilities measured at fair value on a recurring basis: 
 
Level I
 
Level II
 
Level III
 
Total
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
573,698

 

 

 
$
573,698

Investments available for sale:
 

 
 

 
 

 
 

U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
17,091

 
$
5,395

 

 
22,486

Corporate securities

 
189,029

 

 
189,029

Municipal securities:
 

 
 

 
 

 
 
General obligation

 
129,608

 

 
129,608

Pre-refunded

 
33,712

 

 
33,712

Revenue

 
120,860

 

 
120,860

Variable rate demand notes

 
64,658

 

 
64,658

Asset backed securities

 
52,192

 

 
52,192

Total investments
$
17,091

 
$
595,454

 

 
$
612,545

Restricted deposits available for sale:
 

 
 

 
 

 
 

Cash and cash equivalents
$
13,775

 

 

 
$
13,775

Certificates of deposit
5,890

 

 

 
5,890

U.S. Treasury securities and obligations of U.S. government corporations and agencies
7,153

 

 

 
7,153

Total restricted deposits
$
26,818

 

 

 
$
26,818

Other long-term assets: Interest rate swap contract

 
$
11,431

 

 
$
11,431

Total assets at fair value
$
617,607

 
$
606,885

 

 
$
1,224,492

 

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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, 2012, there were $8,286 of transfers from Level I to Level II and $1,364 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 $25,930 and $24,094 as of June 30, 2012 and December 31, 2011, respectively.

4. Debt
 
Debt consists of the following:
 
June 30, 2012
 
December 31, 2011
Senior notes, at par
$
250,000

 
$
250,000

Unamortized discount on Senior notes
(2,555
)
 
(2,814
)
Interest rate swap fair value
14,959

 
11,431

Senior notes, net
262,404

 
258,617

Revolving credit agreement
55,000

 

Mortgage notes payable
85,530

 
86,948

Capital leases and other
5,830

 
6,013

Total debt
408,764

 
351,578

Less current portion
(3,302
)
 
(3,234
)
 Long-term debt
$
405,462

 
$
348,344


Senior Notes

In May 2011, the Company issued non-callable $250,000 5.75% Senior Notes due June 1, 2017 ($250,000 Notes) at a discount to yield 6%.  At June 30, 2012, the unamortized debt discount was $2,555.  In connection with the issuance, the Company entered into an interest rate swap.  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 $250,000 Notes.  At June 30, 2012, the fair value of the interest rate swap increased the fair value of the notes by $14,959.  At June 30, 2012, the variable interest rate of the swap was 3.97%.

Revolving Credit Agreement

The Company has a $350,000 revolving credit facility due in January 2016.  The revolver is unsecured and has  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 bear interest based upon LIBOR rates, the Federal funds rate, or the prime rate.  As of June 30, 2012, the Company had $55,000 in borrowings outstanding under the agreement, leaving availability of $295,000.

The Company has outstanding letters of credit of $35,631 as of June 30, 2012, which are not part of the revolver.  The letters of credit bore interest at 1.57%.


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Table of Contents

5. Impairment Loss

During the second quarter of 2012, the Company's subsidiary, Celtic Insurance Company, experienced a high level of medical costs for individual health policies, especially for recently issued policies related to members converted from another insurer throughout the first quarter of 2012. Additionally, in June 2012, the U.S. Supreme Court upheld the constitutionality of the Patient Protection and Affordable Care Act. The Affordable Care Act, among other things, limits the profitability of the individual health insurance business because of minimum medical loss ratios, guaranteed issue policies, and increased competition in the exchange market. As a result of these factors, the Company's expectations for future growth and profitability are lower than previous estimates. The Company conducted an impairment analysis of the identifiable intangible assets and goodwill of the Celtic reporting unit, which encompasses Celtic Insurance Company, CeltiCare Health Plan of Massachusetts, Inc., and Novasys Health, Inc. For the purpose of testing goodwill, the fair value of the Celtic reporting unit was determined using discounted expected cash flows. For the purpose of testing the customer relationship intangible, the fair value was determined using the discounted expected cash flows. The impairment analysis resulted in goodwill and intangible asset impairments of $28,033, recorded as impairment loss in the consolidated statement of operations. The impaired identifiable intangible assets of $2,340 and goodwill of $25,693 were reported under the Specialty Services segment, of which $26,589 of the impairment loss is not deductible for income tax purposes.

6. Earnings (Loss) Per Share

The following table sets forth the calculation of basic and diluted net earnings (loss) per common share:

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Net earnings (loss) attributable to Centene Corporation
$
(34,999
)
 
$
28,374

 
$
(11,021
)
 
$
52,119

 
 
 
 
 
 
 
 
Shares used in computing per share amounts:
 

 
 

 
 
 
 
Weighted average number of common shares outstanding
51,515,895

 
50,167,052

 
51,320,784

 
49,959,892

Common stock equivalents (as determined by applying the treasury stock method)

 
2,322,362

 

 
2,211,321

Weighted average number of common shares and potential dilutive common shares outstanding
51,515,895

 
52,489,414

 
51,320,784

 
52,171,213

 
 
 
 
 
 
 
 
Net earnings (loss) per share attributable to Centene Corporation:
 
 
 
 
 
 
 
Basic earnings (loss) per common share
$
(0.68
)
 
$
0.57

 
$
(0.21
)
 
$
1.04

Diluted earnings (loss) per common share
$
(0.68
)
 
$
0.54

 
$
(0.21
)
 
$
1.00


The calculation of diluted earnings (loss) per common share for the three and six months ended June 30, 2012 excludes the impact of 4,530,436 and 4,693,165 shares (before application of the treasury stock method), 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, 2011 excludes the impact of 30,586 and 113,244 shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units.

7. Segment Information

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, care management software, 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.
 

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Segment information for the three months ended June 30, 2012, follows:
 
Medicaid
Managed Care
 
Specialty
Services
 
Eliminations
 
Consolidated
Total
Premium and service revenues from external customers
$
1,843,134

 
$
218,465

 
$

 
$
2,061,599

Premium and service revenues from internal customers
22,761

 
439,827

 
(462,588
)
 

Total premium and service revenues
$
1,865,895

 
$
658,292

 
$
(462,588
)
 
$
2,061,599

Earnings (loss) from operations
$
(28,457
)
 
$
(18,289
)
 
$

 
$
(46,746
)

Segment information for the three months ended June 30, 2011, follows:
 
Medicaid
Managed Care
 
Specialty
Services
 
Eliminations
 
Consolidated
Total
Premium and service revenues from external customers
$
1,098,924

 
$
179,092

 
$

 
$
1,278,016

Premium and service revenues from internal customers
17,297

 
177,351

 
(194,648
)
 

Total premium and service revenues
$
1,116,221

 
$
356,443

 
$
(194,648
)
 
$
1,278,016

Earnings from operations
$
42,551

 
$
12,752

 
$

 
$
55,303


Segment information for the six months ended June 30, 2012, follows:
 
Medicaid
Managed Care
 
Specialty
Services
 
Eliminations
 
Consolidated
Total
Premium and service revenues from external customers
$
3,298,869

 
$
426,198

 
$

 
$
3,725,067

Premium and service revenues from internal customers
37,613

 
763,906

 
(801,519
)
 

Total premium and service revenues
$
3,336,482

 
$
1,190,104

 
$
(801,519
)
 
$
3,725,067

Earnings (loss) from operations
$
(14,483
)
 
$
1,935

 
$

 
$
(12,548
)

Segment information for the six months ended June 30, 2011, follows:
 
Medicaid
Managed Care
 
Specialty
Services
 
Eliminations
 
Consolidated
Total
Premium and service revenues from external customers
$
2,099,563

 
$
357,614

 
$

 
$
2,457,177

Premium and service revenues from internal customers
33,044

 
324,471

 
(357,515
)
 

Total premium and service revenues
$
2,132,607

 
$
682,085

 
$
(357,515
)
 
$
2,457,177

Earnings from operations
$
70,617

 
$
23,783

 
$

 
$
94,400


8. Contingencies
In June 2012, a putative class action lawsuit was filed against the Company and certain of its officers in the United States District Court for the Eastern District of Missouri.  The lawsuit alleges, on behalf of purchasers of the Company's securities from February 7, 2012 through June 8, 2012, that the Company and certain of its officers violated federal securities laws by making false or misleading statements principally concerning the Company's fiscal 2012 earnings guidance.  According to the complaint, these allegedly materially false statements had the effect of artificially inflating the price of the Company's securities, which subsequently dropped following the announcement of its revised fiscal 2012 earnings guidance on June 11, 2012.  The Company believes the case is without merit and plans to vigorously defend its position.
In June 2012, we were notified by the Ohio Department of Job and Family Services (ODJFS) that Buckeye, our Ohio subsidiary, was awarded a contract to serve Medicaid members in Ohio, effective January 2013. In July 2012, a lawsuit was filed by another managed care organization against ODJFS and a temporary restraining order was granted, preventing ODJFS from implementing the new Medicaid contracts previously awarded. At June 30, 2012, the Company continued to carry goodwill and intangible assets of $42,780 associated with Buckeye pending final resolution of the award.
In addition, the Company is routinely subjected to legal proceedings in the normal course of business. While the ultimate resolution of such matters is uncertain, the Company does not expect the results of any of these matters discussed above individually, or in the aggregate, to have a material effect on its financial position or results of operations.


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Table of Contents

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 both known and unknown risks and uncertainties, including those set forth under Part II, Item 1A. “Risk Factors” of this Form 10-Q.

OVERVIEW
During the second quarter of 2012, we recorded a loss of $(0.68) per diluted share composed of a $(0.16) loss from operations and an impairment loss of $(0.52), compared to net earnings per share of $0.54 in the prior year and $0.45 in the preceding quarter. The losses were the result of three primary factors:
In our Texas health plan, we experienced a high level of medical costs related to the March 1, 2012, expansion areas.
In our Kentucky health plan, we experienced increased medical costs primarily resulting from the retroactive assignment of members and a higher level of non-inpatient claims receipts during the quarter.
In our Celtic subsidiary, we experienced a high level of medical costs related to individual health policies. This was primarily associated with recently issued policies related to members converted from another insurer throughout the first quarter of 2012. In addition to the operating loss, we also recorded an impairment loss of $28.0 million, discussed below under the caption "Impairment Loss."
Our financial performance for the second quarter of 2012 is summarized as follows:
Quarter-end at-risk managed care membership of 2,397,500, an increase of 817,000 members, or 51.7% year over year.
Premium and service revenues of $2.1 billion, representing 61.3% growth year over year.
Health Benefits Ratio of 92.9%, compared to 84.8% in 2011.
General and Administrative expense ratio of 8.2%, compared to 11.2% in 2011.
Diluted net loss per share of $(0.68), including an impairment loss of $(0.52) per diluted share, compared to net earnings per share of $0.54 in the prior year.
Operating cash flow of $22.2 million for the second quarter of 2012.

The following items contributed to our revenue and membership growth over the last year:
Arizona. In October 2011, Bridgeway Health Solutions began operating under an expanded contract to deliver long-term care services in three geographic service areas of Arizona.
Illinois. In May 2011, our subsidiary, IlliniCare Health Plan, began providing managed care services for older adults and adults with disabilities under the Integrated Care Program in six counties.
Kentucky. In November 2011, our subsidiary, Kentucky Spirit Health Plan, began providing managed care services under a three-year contract with the Kentucky Finance and Administration Cabinet to serve Medicaid beneficiaries.
Louisiana. In February 2012, our joint venture subsidiary, Louisiana Healthcare Connections (LHC), began operating under a new contract in Louisiana to provide healthcare services to Medicaid enrollees participating in the Bayou Health program. LHC completed its three-phase membership roll-out for the three geographical service areas during the second quarter of 2012. In addition, Nurtur, our subsidiary which provides life, health and wellness programs, commenced operations to provide disease management services for state employees in Louisiana beginning in January 2012.
Mississippi. In January 2011, we began operating through the Mississippi Coordinated Access Network program to serve Medicaid beneficiaries. During the second quarter of 2011, the contract effectiveness provision was amended and, accordingly, revenue, medical cost and related earnings for January 1, 2011 through March 31, 2011 were recorded during the second quarter of 2011. As a result, the recognition of earnings of approximately $0.07 per diluted share related to the Mississippi operations from the first quarter were recorded in the second quarter of 2011. General and administrative expenses related to the Mississippi operations were recognized in our consolidated statement of operations during the first quarter of 2011.
Ohio. In October 2011, Buckeye Community Health Plan, or Buckeye, began operating under an amended contract with the Ohio Department of Job and Family Services which includes the management of the pharmacy benefits for Buckeye's members.

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Table of Contents

Texas. In March 2012, the Company began operating under contracts in Texas that expanded its operations through new service areas including the 10 county Hidalgo Service Area and the Medicaid Rural Service Areas of West Texas, Central Texas and North-East Texas, as well as the addition of STAR+PLUS in the Lubbock Service Area.  The expansion also added the management of outpatient pharmacy benefits in all service areas and products, as well as inpatient facility services for the STAR+PLUS program.

We expect the following items to contribute to our future growth potential:
We expect to realize the continued benefit of business commenced during 2011 in Arizona, Illinois, Kentucky, Louisiana, Texas and Ohio as discussed above.
In July 2012, we began operating under a new contract with the Washington Health Care Authority to serve Medicaid beneficiaries in the state, initially operating as Coordinated Care. 
In July 2012, our subsidiary, Home State Health Plan, began operating under a new contract with the Office of Administration for Missouri to serve Medicaid beneficiaries in the Eastern, Central, and Western Managed Care Regions of the state.
In June 2012, we were notified by the Ohio Department of Job and Family Services that Buckeye Community Health Plan (Buckeye), our Ohio subsidiary, was selected to be awarded a new and expanded contract to serve Medicaid members in Ohio, effective January 2013. Under the new state contract, Buckeye will operate statewide through Ohio's three newly aligned regions (West, Central/Southeast, and Northeast). The award remains subject to ongoing legal proceedings from other managed care organizations that were not awarded a contract. At June 30, 2012, we continued to carry goodwill and intangible assets of $42.8 million associated with Buckeye pending final resolution of the award.
In June 2012, our Kansas subsidiary, Sunflower State Health Plan, was awarded a statewide contract to serve members in the state's KanCare program, which includes TANF, ABD non-duals, long-term care and CHIP beneficiaries. Operations are expected to commence in the first quarter of 2013.
In May 2012, we announced the Governor and Executive Council of New Hampshire had given approval for the Department of Health and Human Services to contract with our subsidiary, Granite State Health Plan, to serve Medicaid beneficiaries in New Hampshire. Operations are currently expected to commence in the first quarter of 2013.

MEMBERSHIP

From June 30, 2011 to June 30, 2012, we increased our at-risk managed care membership by 817,000, or 51.7%.  The following table sets forth our membership by state for our managed care organizations:
 
June 30,
 
December 31,
 
2012
 
2011
 
2011
Arizona
24,000

 
22,800

 
23,700

Florida
204,100

 
190,600

 
198,300

Georgia
313,300

 
303,100

 
298,200

Illinois
17,800

 
700

 
16,300

Indiana
205,000

 
206,700

 
206,900

Kentucky
143,500

 

 
180,700

Louisiana
168,700

 

 

Massachusetts
41,400

 
32,900

 
35,700

Mississippi
30,100

 
30,800

 
31,600

Ohio
166,800

 
159,900

 
159,900

South Carolina
87,800

 
82,800

 
82,900

Texas
919,200

 
470,400

 
503,800

Wisconsin
75,800

 
79,800

 
78,000

Total at-risk membership
2,397,500

 
1,580,500

 
1,816,000

Non-risk membership

 
10,400

 
4,900

Total
2,397,500

 
1,590,900

 
1,820,900



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Table of Contents

The following table sets forth our membership by line of business:
 
June 30,
 
December 31,
 
2012
 
2011
 
2011
Medicaid
1,848,500

 
1,172,400
 
1,336,800
CHIP & Foster Care
222,600

 
211,400
 
213,900
ABD & Medicare
269,900

 
156,300
 
218,000
Hybrid Programs
48,100

 
35,500
 
40,500
Long-term Care
8,400

 
4,900
 
6,800
Total at-risk membership
2,397,500

 
1,580,500
 
1,816,000
Non-risk membership

 
10,400
 
4,900
Total
2,397,500

 
1,590,900
 
1,820,900
 
The following table provides supplemental information of other membership categories:
 
June 30,
 
December 31,
 
2012
 
2011
 
2011
Cenpatico Behavioral Health:
 
 
 
 
 
Arizona
159,900

 
173,200
 
168,900
Kansas
44,300

 
45,000
 
46,200

The following table identifies the Company's dual eligible membership by line of business. The membership table above includes these members.
 
June 30,
 
December 31,
 
2012
 
2011
 
2011
ABD
62,000

 
33,000
 
45,400
Long-term Care
7,600

 
4,600
 
6,200
Medicare
3,600

 
3,000
 
3,200
Total
73,200

 
40,600
 
54,800



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Table of Contents

RESULTS OF OPERATIONS
The following discussion and analysis is based on our consolidated statements of operations, which reflect our results of operations for the three and six months ended June 30, 2012 and 2011, prepared in accordance with generally accepted accounting principles in the United States. 
Summarized comparative financial data for the three and six months ended June 30, 2012 and 2011 is as follows ($ in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
% Change 2011-2012
 
2012
 
2011
 
% Change 2011-2012
Premium
$
2,034.5

 
$
1,248.6

 
62.9
 %
 
$
3,669.4

 
$
2,401.4

 
52.8
 %
Service
27.1

 
29.4

 
(8.1
)%
 
55.7

 
55.8

 
(0.3
)%
Premium and service revenues
2,061.6

 
1,278.0

 
61.3
 %
 
3,725.1

 
2,457.2

 
51.6
 %
Premium tax
49.1

 
37.0

 
32.8
 %
 
97.8

 
74.2

 
31.9
 %
Total revenues
2,110.7

 
1,315.0

 
60.5
 %
 
3,822.9

 
2,531.4

 
51.0
 %
Medical costs
1,890.4

 
1,059.1

 
78.5
 %
 
3,333.1

 
2,037.7

 
63.6
 %
Cost of services
21.9

 
20.3

 
7.4
 %
 
45.2

 
40.5

 
11.5
 %
General and administrative expenses
168.0

 
143.0

 
17.5
 %
 
331.2

 
284.1

 
16.6
 %
Premium tax expense
49.1

 
37.2

 
32.1
 %
 
97.9

 
74.7

 
31.2
 %
Impairment loss
28.0

 

 
 %
 
28.0

 

 
 %
Earnings (loss) from operations
(46.7
)
 
55.4

 
(184.5
)%
 
(12.5
)
 
94.4

 
(113.3
)%
Investment and other income, net
(0.7
)
 
(10.9
)
 
(93.6
)%
 
(0.2
)
 
(12.8
)
 
(98.4
)%
Earnings from operations, before income tax expense
(47.4
)
 
44.5

 
(206.6
)%
 
(12.7
)
 
81.6

 
(115.6
)%
Income tax expense (benefit)
(8.6
)
 
16.4

 
(152.4
)%
 
3.5

 
30.7

 
(88.7
)%
Net earnings (loss)
(38.8
)
 
28.1

 
(238.4
)%
 
(16.2
)
 
50.9

 
(131.9
)%
Noncontrolling interest
(3.8
)
 
(0.3
)
 
1,132.5
 %
 
(5.2
)
 
(1.2
)
 
322.4
 %
Net earnings (loss) attributable to Centene Corporation
$
(35.0
)
 
$
28.4

 
(223.3
)%
 
$
(11.0
)
 
$
52.1

 
(121.1
)%
Diluted earnings (loss) per common share attributable to Centene Corporation
$
(0.68
)
 
$
0.54

 
(225.9
)%
 
$
(0.21
)
 
$
1.00

 
(121.0
)%
Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011
Premium and Service Revenues
Premium and service revenues increased 61.3% in the three months ended June 30, 2012 over the corresponding period in 2011 as a result of the additions between years of our Illinois, Kentucky and Louisiana contracts, Texas and Arizona expansion, pharmacy carve-ins, and membership growth. 
While the Mississippi plan began operating January 1, 2011, the contract effectiveness provision wasn’t amended until the second quarter of 2011 and, accordingly, revenue, medical costs and related earnings for January 1, 2011 through March 31, 2011 were recorded during the second quarter of 2011.  As a result, the recognition of $52.8 million of premium and service revenue related to the first quarter of 2011 was recognized during the second quarter of 2011.
Operating Expenses
Medical Costs
Results of operations depend on our ability to manage expenses associated with health benefits and to accurately predict costs incurred. The Health Benefits Ratio, or HBR, represents medical costs as a percentage of premium revenues (excluding premium taxes) and reflects the direct relationship between the premium received and the medical services provided. The table below depicts the HBR for our membership by member category for the three months ended June 30:

 
2012
 
2011
Medicaid and CHIP
92.3
%
 
81.3
%
ABD and Medicare
92.7

 
90.7

Specialty Services
97.1

 
88.7

Total
92.9

 
84.8


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The consolidated HBR for the three months ended June 30, 2012, of 92.9% was an increase over 84.8% in the comparable period in 2011.  The increase compared to last year primarily reflects (1) increased medical costs in the March 1, 2012 expansion areas in Texas, (2) increased medical costs resulting from retroactive assignment of members and increased non-inpatient claims in Kentucky, and (3) a high level of medical costs in the individual health business, especially for recently issued polices related to members converted in the first quarter of 2012. Excluding the impact of these items, the second quarter 2012 HBR would have been 88.5%.
At June 30, 2012, a premium deficiency reserve analysis was completed for each insurance contract. For all contracts, premiums over the expected contract life are expected to support the estimated costs to service the policies. As a result, we did not record premium deficiency reserves.
General & Administrative Expenses
General and administrative expenses, or G&A, increased by $25.0 million in the three months ended June 30, 2012, compared to the corresponding period in 2011.  This was primarily due to expenses for additional staff and facilities to support our membership growth, partially offset by a reduction in performance based compensation expense in 2012.
The consolidated G&A expense ratio for the three months ended June 30, 2012, and 2011 was 8.2%, and 11.2%, respectively.  The year over year decrease in the G&A expense ratio reflects the leveraging of expenses over higher revenues in 2012 and a reduction in performance based compensation expense in 2012 which lowered the G&A expense ratio by 80 basis points.  The G&A ratio in 2011 reflects a 50 basis point decrease resulting from the recognition of revenue in the second quarter of 2011 from our Mississippi contract for the period January 1, 2011 through March 31, 2011.
Other Income (Expense)
The following table summarizes the components of other income (expense) for the three months ended June 30, ($ in millions): 
 
2012
 
2011
Investment income
$
4.0

 
$
2.9

Debt extinguishment costs

 
(8.5
)
Interest expense
(4.7
)
 
(5.3
)
Other income (expense), net
$
(0.7
)
 
$
(10.9
)
The increase in investment income in 2012 reflects an increase in investment balances over 2011.  Interest expense decreased during the quarter by $0.6 million reflecting the refinancing of our Senior Notes and execution of the associated interest rate swap agreement in 2011, as well as a reduction in borrowings on our revolver over the prior year.
Income Tax Expense
Excluding the effects of noncontrolling interests, our effective tax rate for the three months ended June 30, 2012 was a benefit of 19.7% compared to an expense of 36.7% in the corresponding period in 2011.  The change in the effective tax rate primarily relates to the impact of Celtic's non-deductible goodwill impairment resulting in a reduced tax benefit on a pre-tax loss.
Impairment Loss
During the second quarter of 2012, our subsidiary, Celtic Insurance Company, experienced a high level of medical costs for individual health policies, especially for recently issued policies related to members converted from another insurer throughout the first quarter of 2012. Additionally, in June 2012, the U.S. Supreme Court upheld the constitutionality of the Patient Protection and Affordable Care Act. The Affordable Care Act, among other things, limits the profitability of the individual health insurance business because of minimum medical loss ratios, guaranteed issue policies, and increased competition in the exchange market. As a result of these factors, our expectations for future growth and profitability are lower than previous estimates. We conducted an impairment analysis of the identifiable intangible assets and goodwill of the Celtic reporting unit, which encompasses Celtic Insurance Company, CeltiCare Health Plan of Massachusetts, Inc., and Novasys Health, Inc. The impairment analysis resulted in goodwill and intangible asset impairments of $28.0 million, recorded as impairment loss in the consolidated statement of operations. The impaired identifiable intangible assets of $2.3 million and goodwill of $25.7 million were reported under the Specialty Services segment, of which $26.6 million of the impairment loss is not deductible for income tax purposes.

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Segment Results
The following table summarizes our operating results by segment for the three months ended June 30, (in millions):

 
2012
 
2011
 
% Change
2011-2012
Premium and Service Revenues
 
 
 
 
 
Medicaid Managed Care
$
1,865.9

 
$
1,116.2

 
67.2
 %
Specialty Services
658.3

 
356.4

 
84.7
 %
Eliminations
(462.6
)
 
(194.6
)
 
137.7
 %
Consolidated Total
$
2,061.6

 
$
1,278.0

 
61.3
 %
Earnings (Loss) from Operations
 

 
 

 
 

Medicaid Managed Care
$
(28.4
)
 
$
42.5

 
(166.9
)%
Specialty Services
(18.3
)
 
12.8

 
(243.4
)%
Consolidated Total
$
(46.7
)
 
$
55.3

 
(184.5
)%
Medicaid Managed Care
Premium and service revenues increased 67.2% in the three months ended June 30, 2012, due to the addition of our Illinois, Kentucky and Louisiana contracts, Texas expansion, pharmacy carve-ins, and membership growth.  Earnings from operations decreased $70.9 million in the three months ended June 30, 2012, primarily due to higher medical costs in our Kentucky and Texas health plans.
Specialty Services
Premium and service revenues increased 84.7% in the three months ended June 30, 2012, due to growth in our Medicaid segment and the associated specialty services provided to this increased membership as well as the Arizona expansion and carve-in of pharmacy services in Texas and Ohio.  Earnings from operations decreased $31.1 million in the three months ended June 30, 2012, reflecting the impairment loss of $28.0 million and a high level of medical costs in our individual health insurance business, especially for recently issued policies related to members converted from another insurer throughout the first quarter of 2012, partially offset by growth in our pharmacy business and the associated specialty services provided to our increased Medicaid membership.
Earnings (Loss) Per Share and Shares Outstanding
Our earnings (loss) per share calculation for the three months ended June 30, 2012 reflects lower diluted weighted average shares outstanding resulting from the exclusion of the effect of outstanding stock awards which would be anti-dilutive to earnings per share.
Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011
Premium and Service Revenues
Premium and service revenues increased 51.6% in the six months ended June 30, 2012 over the corresponding period in 2011 as a result of the additions between years of our Illinois, Kentucky and Louisiana contracts, Texas and Arizona expansion, pharmacy carve-ins, and membership growth.  During the six months ended June 30, 2012, we received premium rate adjustments which yielded a net 0% composite change across all of our markets.
Operating Expenses
Medical Costs
Results of operations depend on our ability to manage expenses associated with health benefits and to accurately predict costs incurred. The Health Benefits Ratio, or HBR, represents medical costs as a percentage of premium revenues (excluding premium taxes) and reflects the direct relationship between the premium received and the medical services provided. The table below depicts the HBR for our membership by member category for the six months ended June 30:

 
2012
 
2011
Medicaid and CHIP
90.2
%
 
82.7
%
ABD and Medicare
91.1

 
89.4

Specialty Services
94.0

 
87.0

Total
90.8

 
84.9


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The consolidated HBR for the six months ended June 30, 2012