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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• 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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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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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,
% Change % Change
2012 2011 2011-2012 2012 2011 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):
% Change
2012 2011 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, of 90.8% was an
increase of 590 basis points over 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.
General & Administrative Expenses
General and administrative expenses, or G&A, increased by $47.1 million in the
six months ended June 30, 2012, compared to the corresponding period in
2011. This was primarily due to expenses for additional staff and facilities to
support our membership growth, partially offset by a reduction in performance
based compensation expense in 2012.
The consolidated G&A expense ratio for the six months ended June 30, 2012, and
2011 was 8.9% and 11.6% respectively. The year over year decrease in the G&A
expense ratio reflects the leveraging of expenses over higher revenues in 2012
and a reduction in performance based compensation expense in 2012 which lowered
the G&A expense ratio by 60 basis points.
Other Income (Expense)
The following table summarizes the components of other income (expense) for the
six months ended June 30, ($ in millions):
2012 2011
Investment income $ 9.3 $ 6.7
Debt extinguishment costs - (8.5 )
Interest expense (9.5 ) (11.0 )
Other income (expense), net $ (0.2 ) $ (12.8 )
The increase in investment income in 2012 reflects an increase in investment
balances over 2011. Interest expense decreased during the six months ended
June 30, 2012 by $1.5 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
Income tax expense for the six months ended June 30, 2012 was $3.5 million
compared to $30.8 million in the corresponding period in 2011. The decrease in
income tax expense resulted from decreased earnings in the second quarter of
2012, partially offset by Celtic's non-deductible goodwill impairment.
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 six
months ended June 30, (in millions):
% Change
2012 2011 2011-2012
Premium and Service Revenues
Medicaid Managed Care $ 3,336.5 $ 2,132.6 56.5 %
Specialty Services 1,190.1 682.1 74.5 %
Eliminations (801.5 ) (357.5 ) 124.2 %
Consolidated Total $ 3,725.1 $ 2,457.2 51.6 %
Earnings (Loss) from Operations
Medicaid Managed Care $ (14.4 ) $ 70.6 (120.5 )%
Specialty Services 1.9 23.8 (91.9 )%
Consolidated Total $ (12.5 ) $ 94.4 (113.3 )%
Medicaid Managed Care
Premium and service revenues increased 56.5% in the six 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 $85.0 million in the six 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 74.5% in the six 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 $21.9 million in the six months ended June 30, 2012, reflecting the
impairment loss of $28.0 million and a high level of medical costs in our
individual health business, especially for recently issued polices related to
members converted in the first quarter of 2012, partially offset by growth in
our pharmacy business and the associated specialty services provided to our
increased Medicaid membership.
Earnings (Loss) Per Share and Shares Outstanding
Our earnings (loss) per share calculation for the six months ended June 30, 2012
reflects lower diluted weighted average shares outstanding resulting from the
exclusion of the effect of outstanding stock awards which would be anti-dilutive
to earnings per share.
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LIQUIDITY AND CAPITAL RESOURCES
Shown below is a condensed schedule of cash flows for the six months ended
June 30, 2012 and 2011, used in the discussion of liquidity and capital
resources ($ in millions).
Six Months Ended June 30,
2012 2011
Net cash (used in) provided by operating activities $ (9.9 ) $
53.2
Net cash used in investing activities (210.6 ) (21.1 )
Net cash provided by financing activities 68.7
8.2
Net (decrease) increase in cash and cash equivalents $ (151.8 ) $
40.3
Cash Flows (Used In) Provided by Operating Activities
Normal operations are funded primarily through operating cash flows and
borrowings under our revolving credit facility. Operating activities used cash
of $9.9 million in the six months ended June 30, 2012, compared to providing
cash of $53.2 million in the comparable period in 2011. The cash used in
operations was primarily due to the delay of $160.3 million in premium payments
from the State of Georgia and the timing of payments from other state customers
totaling $72.4 million, partially offset by an increase in medical claims
liabilities related to the start up of our Louisiana plan and the expansion of
our Texas health plan.
Cash flows from operations in each year were impacted by the timing of payments
we receive from our states. States may prepay the following month premium
payment, which we record as unearned revenue, or they may delay our premium
payment, which we record as a receivable. We typically receive capitation
payments monthly, however the states in which we operate may decide to adjust
their payment schedules which could positively or negatively impact our reported
cash flows from operating activities in any given period. The table below
details the impact to cash flows from operations from the timing of payments
from our states ($ in millions).
Six Months Ended June 30,
2012 2011
Premium and related receivables $ (232.7 ) $ (16.1 )
Unearned revenue
19.9 (12.5 )
Net decrease in operating cash flow $ (212.8 ) $ (28.6 )
Cash Flows Used in Investing Activities
Investing activities used cash of $210.6 million in the six months ended
June 30, 2012 and $21.1 million in the comparable period in 2011. Cash flows
from investing activities in 2012 and 2011 primarily consisted of additions to
the investment portfolio of our regulated subsidiaries, including transfers from
cash and cash equivalents to long-term investments, and capital expenditures. As
of June 30, 2012, our investment portfolio consisted primarily of fixed-income
securities with an average duration of 2.1 years. We had unregulated cash and
investments of $40.6 million at June 30, 2012, compared to $38.3 million at
December 31, 2011.
We spent $57.4 million and $35.1 million in the six months ended June 30, 2012
and 2011, respectively, on capital expenditures for system enhancements, a new
datacenter and market expansions including $20.9 million for land in close
proximity to our corporate headquarters to support future growth. We anticipate
spending approximately $35 million additional on capital expenditures in 2012
primarily associated with system enhancements and market expansions.
Cash Flows Provided by Financing Activities
Our financing activities provided cash of $68.7 million in the six months ended
June 30, 2012 compared to $8.2 million in the comparable period in 2011. During
2012, our financing activities primarily related to proceeds from stock option
exercises and borrowings under our revolving credit facility of $55.0 million at
June 30, 2012. The revolving credit facility borrowings were subsequently repaid
in July 2012.
We expect to make capital contributions of approximately $350 million during the
second half of 2012 associated with our growth. These capital contributions are
expected to be funded by unregulated cash flow generation in the second half of
2012 and borrowings on our revolving credit facility.
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At June 30, 2012, receivables from the State of Georgia totaled approximately
$221 million. Upon payment from the State of Georgia, unregulated cash flow will
increase by approximately $131 million resulting from the repayment of
intercompany loans made as of June 30, 2012, to our Georgia health plan to fund
their operations as a result of the State's delayed payments.
At June 30, 2012, we had working capital, defined as current assets less current
liabilities, of $39.2 million, as compared to $102.4 million at December 31,
2011. We manage our short-term and long-term investments with the goal of
ensuring that a sufficient portion is held in investments that are highly liquid
and can be sold to fund short-term requirements as needed.
At June 30, 2012, our debt to capital ratio, defined as total debt divided by
the sum of total debt and total equity, was 30.1%, compared to 27.3% at
December 31, 2011. Excluding the $76.6 million non-recourse mortgage note, our
debt to capital ratio is 25.9%, compared to 22.6% at December 31, 2011. We
utilize the debt to capital ratio as a measure, among others, of our leverage
and financial flexibility.
Based on our operating plan, we expect that our available cash, cash equivalents
and investments, cash from our operations and cash available under our credit
facility will be sufficient to finance our general operations and capital
expenditures for at least 12 months from the date of this filing.
REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS
Our operations are conducted through our subsidiaries. As managed care
organizations, these subsidiaries are subject to state regulations that, among
other things, require the maintenance of minimum levels of statutory capital, as
defined by each state, and restrict the timing, payment and amount of dividends
and other distributions that may be paid to us. Generally, the amount of
dividend distributions that may be paid by a regulated subsidiary without prior
approval by state regulatory authorities is limited based on the entity's level
of statutory net income and statutory capital and surplus.
Our subsidiaries are required to maintain minimum capital requirements
prescribed by various regulatory authorities in each of the states in which we
operate. As of June 30, 2012, our subsidiaries had aggregate statutory capital
and surplus of $761.2 million, compared with the required minimum aggregate
statutory capital and surplus requirements of $446.8 million. We estimate our
Risk Based Capital, or RBC, percentage to be in excess of 350% of the Authorized
Control Level.
The National Association of Insurance Commissioners has adopted rules which set
minimum risk-based capital requirements for insurance companies, managed care
organizations and other entities bearing risk for healthcare coverage. As of
June 30, 2012, each of our health plans was in compliance with the risk-based
capital requirements enacted in those states.
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