Quarterly report pursuant to Section 13 or 15(d)

Health Net (Tables)

v3.5.0.2
Health Net (Tables)
9 Months Ended
Sep. 30, 2016
Business Combinations [Abstract]  
Schedule of Recognized Identified Assets Acquired and Liabilities Assumed
The Company's preliminary allocation of the fair value of assets acquired and liabilities assumed as of the acquisition date of March 24, 2016 is as follows ($ in millions):

Assets Acquired and Liabilities Assumed
 
 
Cash and cash equivalents
 
$
1,401

Premium and related receivables (a)
 
1,258

Short term investments
 
74

Other current assets
 
448

Long term investments
 
2,037

Restricted deposits
 
30

Property, software and equipment, net
 
41

Intangible assets (b)
 
1,500

Other long term assets
 
136

Total assets acquired
 
6,925

 
 
 
Medical claims liability
 
1,453

Borrowings under revolving credit facility
 
285

Accounts payable and accrued expenses (c)
 
2,033

Return of premium payable
 
435

Unearned revenue
 
130

Long term deferred tax liabilities (d)
 
330

Long term debt (e)
 
418

Other long term liabilities
 
430

Total liabilities assumed
 
5,514

 
 
 
Total identifiable net assets
 
1,411

Goodwill (f)
 
3,876

Total assets acquired and liabilities assumed
 
$
5,287


The Company has made certain preliminary fair value adjustments based on information reviewed through September 30, 2016. Significant preliminary fair value adjustments are noted as follows:

(a)
The preliminary fair value of premium and related receivables approximated their historical cost, with the exception of the risk corridor receivable associated with the Health Insurance Marketplace. The fair value of the risk corridor receivable was estimated at $9 million.
(b)
The identifiable intangible assets acquired are to be measured at fair value as of the completion of the acquisition. The fair value of intangible assets is determined primarily using variations of the "income approach," which is based on the present value of the future after tax cash flows attributable to each identified intangible asset. Other valuation methods, including the market approach and cost approach, were also considered in estimating the fair value. The Company has estimated the preliminary fair value of intangibles to be $1.5 billion with a weighted average life of 10 years. The Company expects the identifiable intangible assets to include purchased contract rights, provider contracts, trade names and developed technology. The Company is still in the process of finalizing its intangible valuation.

(c)
Accounts payable and accrued expenses includes approximately $285 million related to premium deficiency reserves based on cost trends existing prior to the acquisition date. The premium deficiency reserves are primarily associated with losses in the individual commercial business, largely in California, unfavorable performance in the Arizona commercial business as well as unfavorable performance in the Medicare business primarily in Oregon and Arizona. The premium deficiency reserve for the individual PPO commercial contracts in California includes anticipated future losses in 2016 associated with substance abuse rehabilitation claims. During the third quarter, the Company lowered the premium deficiency reserve by $15 million, reflecting its revised estimate of substance abuse cost trends.

(d)
The preliminary deferred tax liabilities are presented net of $526 million of deferred tax assets.

(e)
Debt is required to be measured at fair value under the acquisition method of accounting. The fair value of Health Net's $400 million Senior Notes assumed in the acquisition was $418 million. The $18 million increase will be amortized as a reduction to interest expense over the remaining life of the debt.

(f)
The acquisition resulted in $3.9 billion of goodwill related primarily to buyer specific synergies expected from the acquisition and the assembled workforce of Health Net. This goodwill is not deductible for income tax purposes. The assignment of goodwill to the Company's respective segments has not been completed at this time.    

Schedule of Unaudited Pro Forma Financial Information
The following table presents supplemental pro forma information for the three and nine months ended September 30, 2015 ($ in millions, except per share data).
 
Three Months Ended
September 30, 2015
 
Nine Months Ended
September 30, 2015
Total revenues
$
9,960

 
$
28,617

Net earnings attributable to Centene Corporation
$
85

 
$
215

Diluted earnings per share
$
0.49

 
$
1.25

Restructuring Related Charges
Changes in the restructuring liability for the nine months ended September 30, 2016 were as follows ($ in millions):

 
 
September 30, 2016
 
 
Employee Termination Costs
 
Stock Based Compensation
 
Total
Total accrued restructuring costs as of December 31, 2015
 
$

 
$

 
$

Charges incurred
 
39

 
40

 
79

Paid/settled
 
(25
)
 
(40
)
 
(65
)
Total accrued restructuring costs as of September 30, 2016
 
$
14

 
$

 
$
14