Centene Corporation

Good day and welcome to the Centene Corporation 2026 second quarter conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad, and to withdraw your question, please press star then two. We do ask that you please limit yourself to one question. Please note, today's event is being recorded. I'd now like to turn the conference over to Jennifer Gilligan, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Rocco, and good morning, everyone. Thank you for joining us on our second quarter 2026 earnings results conference call. Sarah London, Chief Executive Officer, and Drew Asher, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call. which also can be accessed through our website at CENTEEN.com. Any remarks that CENTEEN may make about future expectations, plans, and prospects constitute forward-looking statements for the purpose of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Specifically, our commentary on our full-year 2026 outlook, including the drivers of such outlook, are forward-looking statements. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our second quarter 2026 press release and other public SEC filings which are available on the company's website under the investor section. Centene anticipates that subsequent events and developments may cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our second quarter 2026 press release. With that, I would like to turn the call over to our CEO, Sarah London.

Sarah? Thanks, Jen, and thanks, everyone, for joining us on the call. This morning we will review our second quarter results and provide details around our improved full year 2026 financial guidance. Q2 adjusted diluted earnings per share of $2.51 exceeded our previous expectations with outperformance driven by underlying business strength and a more fully informed view of our marketplace risk adjustment positioning. Thanks to strong first half results, we now expect full year 2026 adjusted diluted earnings per share of greater than $4.80. up from our prior outlook of greater than $3.40 provided during our April update. We are excited by the positive momentum we have built and remain focused on our goal of delivering industry-leading health outcomes with an industry-leading cost structure. Now let's talk about the business, starting with Medicaid. Medicaid results were in line with our expectations for the quarter, driven by disciplined execution against our operational and financial goals. We ended the quarter with just over 12 million members, a slightly larger step down in membership than anticipated. While some of this was driven by state specific program changes, we also saw an uptick in activity around enrollment and eligibility in certain states. As we look at core medical cost drivers in the quarter, the big rocks remain consistent with past quarters, with behavioral health, home health, and high cost drugs among the top contributors. We did see a slight uptick in acuity from the expansion population, directly consistent with the increased attrition in the quarter, but we were able to absorb that given the strength of our execution across quality and affordability initiatives. Rates remain a critical lever and continue to develop positively with 7-1 rates coming in better than expected. This improves our full year 2026 composite rate forecast from roughly 4.5% to roughly 5%. The tone and tenor of our state rate conversations remains constructive and rate development continues to be supported by the incorporation of more current data. As you think about our guidance, we are now expecting lower year-end membership than our previous outlook with the increased enrollment and eligibility activity as we move through the back half of the year. As is typical, we assume that additional attrition will impact acuity and have set guidance to account for that possibility in the second half of 2026. As you would imagine, we are heavily engaged with our state partners as they prepare for OB-3 implementation, and we are working hard to minimize unnecessary membership disruption. This includes investing in near real-time data exchange with states to inform ex parte member eligibility, exemption validation, and member outreach. We are also activating a nationwide playbook, building on the work programs we already have in place across our states to help members identify community engagement, education, and workforce opportunities. And we are engaging with state actuaries about the best approach to OB3-related rate adjustments. Given recent cost pressures in the business, we haven't talked as much about quality, but it is worth sharing that behind the scenes, we have been systematically driving improved quality performance across our Medicaid markets. Over the last three cycles, through expanded data capture, scalable member engagement programs, and targeted provider incentives, we have delivered improvement in more than 90% of our core clinical measures, ensuring Centene members receive more complete and better quality care each year. and in this cycle, we are targeting more than 75% of our Medicaid health plans and CQA quality ratings to be at or better than three and a half stars. Ultimately, the value of Medicaid managed care is ensuring high quality outcomes at lower costs and we are building tangible momentum around those. Turning to Medicare, our Medicare segment once again delivered out performance in Q2 with continued strength in both our PDP and our Medicare Advantage businesses. PDP benefited in the quarter from the true-up of certain prior period items, but the results also reflect fundamental favorability. While we continue to see elevated levels of specialty drug trend, they remain lower than our original expectations through the first half of the year. As a result, we now expect PDP to deliver a pre-tax margin greater than 3% in 2026 versus the 2% we guided to at the beginning of the year. Our PDP team once again took a thoughtful approach to the 2027 bid process, prioritizing sustainable profitability. As this business hits post IRA stability, we look forward to delivering consistent margin on what is now roughly 25 billion of premium revenue and successfully leveraging our greater than $60 billion in pharmacy spend through our partnership with ESI to deliver industry leading cost structure to our state customers and members across lines of business. Solid execution from the Medicare Advantage team led to outperformance once again this quarter. Medical costs remain elevated when compared to historical averages, but year-to-date trend is running modestly favorable to expectations. Key medical cost drivers were stable quarter over quarter. Decent members now represent approximately 40% of our Medicare Advantage portfolio, and that cohort continues to perform favorably. Looking ahead to 2027, we plan to further simplify our Medicare Advantage footprint focusing our benefits increasingly on the duals population where our deep expertise in Medicaid allows us to deliver a local, integrated, and differentiated experience to these members. On the STARS front, we are once again seeing year-over-year improvement in raw performance supported by the full range of quality initiatives we have deployed over the last three years. That said, we along with the industry are facing headwinds from artificial cut point increases and overall STARS program methodology changes, not to mention uncertainty around the future of the program overall. As you'll recall, the company took steps coming into 2025 to de-risk STARS results more broadly as we considered our Medicare Advantage strategy of focusing on lower income complex populations in the face of a STARS program that fails to effectively risk adjust for these members. Thanks to these actions, including portfolio optimization, strong operational execution and SG&A management, and strategic duals growth, we are seeing accelerated margin improvement and we are confident in our plan to deliver breakeven or better results in 2027 and margin improvement thereafter. Overall, we are pleased with the momentum building in our Medicare segment thus far in 2026 and look forward to leveraging that strength as we prepare for 2027. Last, but certainly not least, Marketplace delivered excellent Q2 results after more than a year's worth of focused execution to achieve meaningful margin recovery in that business. Recall that we moderated our pre-tax margin expectations for the Marketplace at the end of Q1. Our 3% pre-tax guidance at the time accounted for elevated utilization patterns we observed in Q1, largely driven by our Silver Tier members, and did not fully reflect the corresponding risk adjustment offset we anticipated given the level of observed membership acuity. A posture that we felt was prudent in advance of receiving the first full Wakely report, which includes the first view of overall market acuity. Rolling those assumptions forward to Q2, first, we continued to see higher utilization patterns among our Silver Tier members, but these moderated over the quarter compared to what we assumed in our guidance. At the same time, a thorough analysis of the highly anticipated June Wakely report not only confirmed our hypothesis about the relative acuity of our population, but has also allowed us to revise our view of full year performance for the marketplace business. And finally, we received favorable development on our final 2025 CMS risk adjustment reconciliation to the tune of $180 million in the quarter. In light of the aggregate first half results, we now expect to deliver a pre-tax margin between 4.5% and 5% for the marketplace business for the full year, an improvement compared to our previous guidance as well as our initial guidance issued in February. While the year is not finished, it feels important to pause and reflect on the strength of these results, and I would be remiss if I did not take this opportunity to very publicly acknowledge and thank our Marketplace team for the exceptional leadership and discipline they demonstrated over the last year to get us to this point. They saw and called a market-wide issue first. They leveraged more than a decade of experience and the breadth and depth of data that comes with operating in 29 markets to comprehensively diagnose the issue at hand quickly translate that into actionable insight, execute in a very tight window to appropriately reprice our business for 2026 while correctly and conservatively planning for how 2025 would ultimately unfold. I am humbled by their expertise and grateful to have them guiding this business through an unprecedented year of turbulence and uncertainty. Looking to the rest of 2026, we are dumping off a Q2 membership of roughly 3.5 million members, slightly better than previous expectations. with metal tier distribution, age, and other key demographics largely unchanged from our Q1 results. We continue to expect membership to decline as we move through the rest of the year, consistent with a return to more regular seasonality, and our guidance has accounted for membership impacts related to various ongoing CMS program integrity efforts. As a leader in this market, we will continue to push for and promote transparency and policy stability as we believe that regardless of the origin story you give it, The individual market is a compelling, future-proof platform that can deliver access to high-quality healthcare for hardworking Americans and small business owners, and increasingly serve as a flexible, portable, and affordable alternative to employer-provided insurance options. Overall, we are very pleased to deliver a quarter of solid performance and year-over-year progress in each of our business lines. While this dynamic healthcare operating landscape has presented challenges, it has also Thank you for joining us today. Organizing our teams in a way that even more fully leverages our scale and of course deploying data technology and AI to streamline our service delivery and improve our member experience While we have made progress across all of these categories. I'd like to touch briefly on our AI strategy You've heard us reference examples over the last few quarters of high-value AI enabled use cases including integrating AI into our forecasting processes to improve precision and and the always-on suite of fraud, waste and abuse algorithms that learn from our inbound claims data every day. And there are others. Even our legal department has several high ROI agentic use cases in production, including one agent that reviews invoices from outside counsel firms and now saves us a point and a half in our legal bills every month. We view these early successes as proof points for a much larger opportunity to head. As we look to the next phase of our AI strategy, our focus is increasingly shifting from individual use cases to the underlying capabilities that make AI scalable across the enterprise. As a Medicaid first company operating in a margin conscious environment, we take a deliberate approach to where we invest. That means prioritizing investments in foundational capabilities such as trusted data products, dynamic context management, and open standards that keep business knowledge reusable and portable as the technology evolves. We believe long-term differentiation will increasingly come from proprietary data and context as model technology becomes more commoditized. This disciplined approach positions us to unlock the full potential of AI while maintaining a relentless focus on ROI. It also provides a governed, predictable foundation for AI, which is critical in a regulated environment where consistency, auditability and compliance are non-negotiable. This work, like all of our transformation efforts, is designed in service of delivering industry-leading outcomes with an industry-leading cost structure, fulfilling our mission and ultimately supporting our ambition to not just manage care, but to power health for the communities we serve. In closing, we are making meaningful progress on our path to margin restoration while advancing the platform and processes that will modernize and improve the way we do business. This momentum is visible in our strong second quarter results and our increased earnings outlook for 2026. With our members at the center of every strategic decision we make, we see significant opportunity to reshape the healthcare experience for millions of Americans. With that, I'll turn it over to Drew to provide more details on the quarter and our updated full year outlook.