Health Insurance

Health insurer Centene cuts 2018 forecast after delays in closing Fidelis acquisition

Key Points
  • Centene cut its 2018 earnings per share forecast to a range of $6.75 to $7.15 from a prior estimate of $6.95 to $7.35 per share.
  • The company has pushed back the close of its $3.75 billion acquisition of nonprofit insurer Fidelis to the end of the current quarter due to regulatory conditions for approval.
  • The Fidelis acquisition will be more costly due to rising interest rates.
Michael Neidorff, CEO of Centene Corporation.
Cameron Costa | CNBC

Health insurer Centene has been aggressive in using acquisitions to grow its Medicaid and Obamacare exchange footprint, but the delay in closing a key deal and extra regulatory costs associated with its approval forced the health insurer to lower its forecast for 2018.

The company has now pushed back the close of its $3.75 billion acquisition of nonprofit insurer Fidelis to the end of the current quarter, three months later than originally planned, due to regulatory conditions for approval in New York state.

"We are actively working with the New York attorney general to obtain the final approvals. We believe this should be received relatively soon. This helps to ensure a closing date no later than July 1," said Michael Neidorrf, Centene chairman and CEO, on the company's first-quarter earnings call. "The integration planning is underway and going extremely well. We will be able to hit the ground running upon the close of the transaction. "

One of the concessions for winning state regulatory approval to convert Fidelis to a for-profit unit includes a $340 million contribution to New York state, payable over a five-year period, which will be treated as increased administrative costs.

Centene lowered its full-year earnings-per-share forecast to a range of $6.75 to $7.15 from a prior range of $6.95 to $7.35 per share, in part to reflect higher financing costs for the current quarter and the delay in the expected earnings benefits from the deal.

Executives continue to expect the Fidelis acquisition to add to earnings this year. However, the rising interest rate environment, which saw the 10-year Treasury rate hit 3 percent this morning, will likely result in higher financing costs for the transaction, which is to be funded by $2.3 billion in equity and $1.6 billion in debt.

"The ultimate timing of the debt and equity financing will be subject to market conditions … bond rates have moved against us. Share price has moved in our favor," CFO Jeffrey Schwaneke explained on the call.

Centene's first-quarter results topped expectations, with the company's expanded Obamacare individual exchange footprint resulting in stronger-than-expected membership growth. Yet, medical costs for the quarter fell to 84.3 percent from 87.3 percent a year ago, despite increased costs from the severe flu season.

"We saw an uptick in flu in the first quarter and it peaked in February," Neidorrf said. "We were able to absorb these costs through our diversity and scale."

"With core earnings outperforming despite transitory flu impact and Fidelis on track to close and contribute 13% incremental (year over year) growth to 2019 as a starting point before core growth, we view this as an overall positive print," wrote Evercore ISI analyst Michael Newshel in a research note.

At the end of the quarter, Centene had more than 1.6 million exchange enrollees, up 35 percent from a year ago, making it the largest insurer on the marketplaces nationally. Executives declined to discuss their outlook for 2019 exchange participation but said they were not concerned by the repeal of the individual mandate to purchase insurance.

"When I was at CMS, I never really thought the individual mandate was all that powerful," said new senior vice president Kevin Counihan, the former CEO of HealthCare.gov under the Obama administration. "In a way, the new mandate is actually higher health-care costs. I think people want to have insurance coverage; they want to protect themselves and their families."

Centene executives were equally confident about their expanding Medicaid business despite Trump administration regulatory changes, which allow more states to impose work requirements under the safety-net program.

"Back when Vice President [Mike] Pence was governor of Indiana … we were very supportive to help him (figure out) how to do it," said Neidorrf. "We will work very diligently with the states that want to do it, to implement it in a very responsible way."

Centene shares were recently down about 2.5 percent.