Document

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 September 30, 2018
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 o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files) x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “small reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer x 
Accelerated filer
o 
Non-accelerated filer   o 
Smaller reporting company
o 
 
Emerging growth company 
o 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

As of October 12, 2018, the registrant had 205,355,367 shares of common stock outstanding.




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

 
 
PAGE
 
 
 
 
Part I
 
 
Financial Information
 
Item 1.
 
 

 

 

 

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


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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 intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with these safe-harbor provisions. We have attempted to identify these statements by terminology including “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “seek,” “target,” “goal,” “may,” “will,” “would,” “could,” “should,” “can,” “continue” and other similar words or expressions (and the negative thereof) in connection with, among other things, any discussion of future operating or financial performance. In particular, these statements include without limitation statements about our market opportunity, growth strategy, competition, expected activities in completed and future acquisitions, including statements about the impact of our recent acquisition of New York State Catholic Health Plan, Inc., d/b/a Fidelis Care New York (Fidelis Care) (Fidelis Care Acquisition), investments and the adequacy of our available cash resources. These statements may be found in the various sections of this filing, such as Part I, Item 2. “Management's Discussion and Analysis of Financial Condition and Results of Operations,” Part II, Item 1. “Legal Proceedings,” 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. Except as may be otherwise required by law, 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. You should not place undue reliance on any forward-looking statements, as actual results may differ materially from projections, estimates, or other forward-looking statements due to a variety of important factors, including but not limited to:

our ability to accurately predict and effectively manage health benefits and other operating expenses and reserves;
competition;
membership and revenue declines or unexpected trends;
changes in healthcare practices, new technologies, and advances in medicine;
increased healthcare costs;
changes in economic, political or market conditions;
changes in federal or state laws or regulations, including changes with respect to income tax reform or government healthcare programs as well as changes with respect to the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act and any regulations enacted thereunder that may result from changing political conditions;
rate cuts or other payment reductions or delays by governmental payors and other risks and uncertainties affecting our government businesses;
our ability to adequately price products on federally facilitated and state-based Health Insurance Marketplaces;
tax matters;
disasters or major epidemics;
the outcome of legal and regulatory proceedings;
changes in expected contract start dates;
provider, state, federal and other contract changes and timing of regulatory approval of contracts;
the expiration, suspension, or termination of our contracts with federal or state governments (including but not limited to Medicaid, Medicare, TRICARE or other customers);
the difficulty of predicting the timing or outcome of pending or future litigation or government investigations;
challenges to our contract awards;
cyber-attacks or other privacy or data security incidents;
the possibility that the expected synergies and value creation from acquired businesses, including, without limitation, the acquisition (Health Net Acquisition) of Health Net, Inc. (Health Net) and the Fidelis Care Acquisition, will not be realized, or will not be realized within the expected time period;
the exertion of management’s time and our resources, and other expenses incurred and business changes required in connection with complying with the undertakings in connection with any regulatory, governmental or third party consents or approvals for the Health Net Acquisition or the Fidelis Care Acquisition;
disruption caused by significant completed and pending acquisitions, including the Health Net Acquisition and the Fidelis Care Acquisition, making it more difficult to maintain business and operational relationships;
the risk that unexpected costs will be incurred in connection with the completion and/or integration of acquisition transactions, including among others, the Health Net Acquisition and the Fidelis Care Acquisition;

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changes in expected closing dates, estimated purchase price and accretion for acquisitions;
the risk that acquired businesses, including Health Net and Fidelis Care, will not be integrated successfully;
the risk that, following the Fidelis Care Acquisition, we may not be able to effectively manage our expanded operations;
restrictions and limitations in connection with our indebtedness;
our ability to achieve improvement in the Centers for Medicare and Medicaid Services (CMS) Star ratings and maintain or achieve improvement in other quality scores in each case that can impact revenue and future growth;
availability of debt and equity financing, on terms that are favorable to us;
inflation; and
foreign currency fluctuations.

This list of important factors is not intended to be exhaustive. We discuss certain of these matters more fully, as well as certain other risk factors that may affect our business operations, financial condition and results of operations, in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Item 1A. “Risk Factors” of Part II of this filing contains a further discussion of these and other important factors that could cause actual results to differ from expectations. Due to these important factors and risks, we cannot give assurances with respect to our future performance, including without limitation our ability to maintain adequate premium levels or our ability to control our future medical and selling, general and administrative costs.




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Non-GAAP Financial Presentation

The Company is providing certain non-GAAP financial measures in this report as the Company believes that these figures are helpful in allowing investors to more accurately assess the ongoing nature of the Company's operations and measure the Company's performance more consistently across periods. The Company uses the presented non-GAAP financial measures internally to allow management to focus on period-to-period changes in the Company's core business operations. Therefore, the Company believes that this information is meaningful in addition to the information contained in the GAAP presentation of financial information. The presentation of this additional non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.

Specifically, the Company believes the presentation of non-GAAP financial information that excludes amortization of acquired intangible assets, acquisition related expenses, as well as other items, allows investors to develop a more meaningful understanding of the Company's performance over time. The tables below provide reconciliations of non-GAAP items ($ in millions, except per share data):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
GAAP net earnings
$
19

 
$
205

 
$
659

 
$
598

Amortization of acquired intangible assets
65

 
38

 
149

 
117

Acquisition related expenses
401

 
7

 
423

 
13

California minimum medical loss ratio changes

 

 
30

 

Penn Treaty assessment expense

 
9

 

 
56

Income tax effects of adjustments (1)
(110
)
 
(20
)
 
(140
)
 
(68
)
Adjusted net earnings
$
375

 
$
239

 
$
1,121

 
$
716

 
 
 
 
 
 
 
 
GAAP diluted earnings per share (EPS)
$
0.09

 
$
1.16

 
$
3.37

 
$
3.39

Amortization of acquired intangible assets (2)
0.24

 
0.14

 
0.59

 
0.42

Acquisition related expenses (3)
1.46

 
0.02

 
1.65

 
0.05

California minimum medical loss ratio changes (4)

 

 
0.12

 

Penn Treaty assessment expense (5)

 
0.03

 

 
0.20

Adjusted Diluted EPS
$
1.79

 
$
1.35

 
$
5.73

 
$
4.06

(1)
The income tax effects of adjustments are based on the effective income tax rates applicable to adjusted (non-GAAP) results.
(2)
The amortization of acquired intangible assets per diluted share are net of an income tax benefit of $0.07 and $0.07 for the three months ended September 30, 2018 and 2017, respectively, and $0.17 and $0.24 for the nine months ended September 30, 2018 and 2017, respectively.
(3)
Acquisition related expenses per diluted share are net of an income tax benefit of $0.46 and $0.02 for the three months ended September 30, 2018 and 2017, respectively, and $0.51 and $0.03 for the nine months ended September 30, 2018 and 2017, respectively.
(4)
The impact of retroactive changes to the California minimum medical loss ratio (MLR) per diluted share is net of an income tax benefit of $0.04 for the nine months ended September 30, 2018.
(5)
The Penn Treaty assessment expense per diluted share is net of an income tax benefit of $0.02 and $0.12 for the three and nine months ended September 30, 2017, respectively.

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Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
GAAP selling, general and administrative expenses
$
1,934

 
$
1,030

 
$
4,487

 
$
3,186

Acquisition related expenses
399

 
7

 
421

 
13

Penn Treaty assessment expense

 
9

 

 
56

Adjusted selling, general and administrative expenses
$
1,535

 
$
1,014

 
$
4,066

 
$
3,117


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PART I
FINANCIAL INFORMATION

ITEM 1. Financial Statements.
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except shares in thousands and per share data in dollars)
 
September 30, 2018
 
December 31, 2017

(Unaudited)
 

ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
6,847

 
$
4,072

Premium and trade receivables
4,647

 
3,413

Short-term investments
594

 
531

Other current assets
1,000

 
687

Total current assets
13,088

 
8,703

Long-term investments
6,272

 
5,312

Restricted deposits
550

 
135

Property, software and equipment, net
1,584

 
1,104

Goodwill
6,803

 
4,749

Intangible assets, net
2,423

 
1,398

Other long-term assets
437

 
454

Total assets
$
31,157

 
$
21,855




 


LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY

 
 

Current liabilities:
 

 
 

Medical claims liability
$
6,983

 
$
4,286

Accounts payable and accrued expenses
4,550

 
4,165

Return of premium payable
918

 
549

Unearned revenue
286

 
328

Current portion of long-term debt
4

 
4

Total current liabilities
12,741

 
9,332

Long-term debt
6,379

 
4,695

Other long-term liabilities
1,276

 
952

Total liabilities
20,396

 
14,979

Commitments and contingencies


 


Redeemable noncontrolling interests
11

 
12

Stockholders’ equity:
 

 
 

Preferred stock, $0.001 par value; authorized 10,000 shares; no shares issued or outstanding at September 30, 2018 and December 31, 2017

 

Common stock, $0.001 par value; authorized 400,000 shares; 207,550 issued and 205,354 outstanding at September 30, 2018, and 180,379 issued and 173,437 outstanding at December 31, 2017

 

Additional paid-in capital
7,395

 
4,349

Accumulated other comprehensive loss
(79
)
 
(3
)
Retained earnings
3,422

 
2,748

Treasury stock, at cost (2,196 and 6,942 shares, respectively)
(85
)
 
(244
)
Total Centene stockholders’ equity
10,653

 
6,850

Noncontrolling interest
97

 
14

Total stockholders’ equity
10,750

 
6,864

Total liabilities, redeemable noncontrolling interests and stockholders’ equity
$
31,157

 
$
21,855

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

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CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data in dollars)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues:

 

 

 

Premium
$
14,623

 
$
10,850

 
$
38,639

 
$
32,393

Service
732

 
571

 
2,147

 
1,634

Premium and service revenues
15,355

 
11,421

 
40,786

 
34,027

Premium tax and health insurer fee
827

 
477

 
2,771

 
1,549

Total revenues
16,182

 
11,898

 
43,557

 
35,576

Expenses:
 
 
 
 
 
 
 
Medical costs
12,626

 
9,543

 
33,045

 
28,278

Cost of services
622

 
437

 
1,823

 
1,334

Selling, general and administrative expenses
1,934

 
1,030

 
4,487

 
3,186

Amortization of acquired intangible assets
65

 
38

 
149

 
117

Premium tax expense
716

 
510

 
2,451

 
1,643

Health insurer fee expense
178

 

 
532

 

Total operating expenses
16,141

 
11,558

 
42,487

 
34,558

Earnings from operations
41

 
340

 
1,070

 
1,018

Other income (expense):

 

 
 
 
 
Investment and other income
80

 
51

 
186

 
137

Interest expense
(97
)
 
(65
)
 
(245
)
 
(189
)
Earnings from operations, before income tax expense
24

 
326

 
1,011

 
966

Income tax expense
8

 
125

 
358

 
381

Net earnings
16

 
201

 
653

 
585

Loss attributable to noncontrolling interests
3

 
4

 
6

 
13

Net earnings attributable to Centene Corporation
$
19

 
$
205

 
$
659

 
$
598



 

 

 

Net earnings per common share attributable to Centene Corporation:
Basic earnings per common share
$
0.09

 
$
1.19

 
$
3.44

 
$
3.47

Diluted earnings per common share
$
0.09

 
$
1.16

 
$
3.37

 
$
3.39



 

 

 

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

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CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In millions)
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net earnings
$
16

 
$
201

 
$
653

 
$
585

Reclassification adjustment, net of tax
1

 

 
1

 
(1
)
Change in unrealized gain (loss) on investments, net of tax
(12
)
 
7

 
(75
)
 
41

Foreign currency translation adjustments
(1
)
 
1

 
(2
)
 
5

Other comprehensive earnings (loss)
(12
)
 
8

 
(76
)
 
45

Comprehensive earnings
4

 
209

 
577

 
630

Comprehensive loss attributable to noncontrolling interests
3

 
4

 
6

 
13

Comprehensive earnings attributable to Centene Corporation
$
7

 
$
213

 
$
583

 
$
643


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


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CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In millions, except shares in thousands and per share data in dollars)
(Unaudited)

Nine Months Ended September 30, 2018

 
Centene Stockholders’ Equity
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
Treasury Stock
 
 
 
 
 
$.001 Par
Value
Shares
 
Amt
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
$.001 Par
Value
Shares
 
Amt
 
Non-
controlling
Interest
 
Total
Balance, December 31, 2017
180,379

 
$

 
$
4,349

 
$
(3
)
 
$
2,748

 
6,942

 
$
(244
)
 
$
14

 
$
6,864

Comprehensive Earnings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings

 

 

 

 
659

 

 

 
(3
)
 
656

Other comprehensive loss, net of ($23) tax

 

 

 
(76
)
 

 

 

 

 
(76
)
Common stock issued for acquisitions

 

 
331

 

 

 
(4,894
)
 
176

 

 
507

Common stock issued
26,604

 

 
2,779

 

 

 

 

 

 
2,779

Common stock issued for employee benefit plans
567

 

 
12

 

 

 

 

 

 
12

Common stock repurchases

 

 

 

 

 
148

 
(17
)
 

 
(17
)
Stock compensation expense

 

 
105

 

 

 

 

 

 
105

Cumulative-effect of adopting new accounting guidance

 

 

 

 
15

 

 

 

 
15

Contribution from noncontrolling interest

 

 

 

 

 

 

 
3

 
3

Purchase of noncontrolling interest

 

 
(181
)
 

 

 

 

 
(15
)
 
(196
)
Acquisition resulting in noncontrolling interest

 

 

 

 

 

 

 
98

 
98

Balance, September 30, 2018
207,550

 
$

 
$
7,395

 
$
(79
)
 
$
3,422

 
2,196

 
$
(85
)
 
$
97

 
$
10,750

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



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CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net earnings
$
653

 
$
585

Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization
354

 
264

Stock compensation expense
105

 
99

Deferred income taxes
(103
)
 
(32
)
Changes in assets and liabilities
 

 
 

Premium and trade receivables
(696
)
 
(749
)
Other assets
65

 
(39
)
Medical claims liabilities
1,380

 
406

Unearned revenue
(150
)
 
255

Accounts payable and accrued expenses
35

 
205

Other long-term liabilities
199

 
45

Other operating activities, net
26

 

Net cash provided by operating activities
1,868

 
1,039

Cash flows from investing activities:
 

 
 

Capital expenditures
(489
)
 
(301
)
Purchases of investments
(2,691
)
 
(1,693
)
Sales and maturities of investments
1,575

 
1,308

Acquisitions, net of cash acquired
(1,958
)
 

Net cash used in investing activities
(3,563
)
 
(686
)
Cash flows from financing activities:
 

 
 

Proceeds from the issuance of common stock
2,779

 

Proceeds from long-term debt
5,480

 
1,170

Payments of long-term debt
(3,692
)
 
(1,124
)
Common stock repurchases
(17
)
 
(18
)
Purchase of noncontrolling interest
(63
)
 
(33
)
Debt issuance costs
(25
)
 

Other financing activities, net
(2
)
 
2

Net cash provided by (used in) financing activities
4,460

 
(3
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash

 
1

Net increase in cash, cash equivalents and restricted cash
2,765

 
351

Cash, cash equivalents, and restricted cash and cash equivalents, beginning of period
4,089

 
3,936

Cash, cash equivalents, and restricted cash and cash equivalents, end of period
$
6,854

 
$
4,287

Supplemental disclosures of cash flow information:
 

 
 

Interest paid
$
213

 
$
210

Income taxes paid
$
340

 
$
358

Equity issued in connection with acquisitions
$
507

 
$


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

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CENTENE CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
   
1. Organization and Operations

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, 2017. 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, 2017 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 2017 amounts in the consolidated financial statements and notes to the consolidated financial statements have been reclassified to conform to the 2018 presentation. These reclassifications have no effect on net earnings or stockholders' equity as previously reported.
 
On July 1, 2018, the Company acquired substantially all of the assets of New York State Catholic Health Plan, Inc. d/b/a Fidelis Care New York (Fidelis Care) for approximately $3.47 billion of cash consideration, which includes a working capital adjustment. The Fidelis Care acquisition expanded the Company's scale and presence to New York State. The acquisition was accounted for as a business combination, which requires that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. Those estimated amounts are reflected in the accompanying financial statements.

As a result of the completion of the Fidelis Care acquisition, the Company's results of operations for the three and nine months ended September 30, 2018 include the results of operations of Fidelis Care from July 1, 2018 to September 30, 2018. The Fidelis Care operations are included in the Managed Care segment.

Recently Adopted Accounting Guidance

In August 2018, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) which modifies the disclosure requirements on fair value measurements.  The amendments in this ASU remove the requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements.  The amendments require public entities to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements for instruments held at the end of the reporting period, and the range and weighted average used to develop significant inputs for Level 3 fair value measurements.  For investments in certain entities that calculate net asset value, the standard requires the disclosure of the period of time over which the underlying assets might be liquidated if the investee has announced the timing publicly.  The Company adopted the new guidance in the third quarter of 2018.  The new guidance did not have any impact on the Company’s consolidated financial position, results of operations or cash flows.

In June 2018, the FASB issued an ASU that simplifies the accounting for share-based payment arrangements with non-employees for goods and services. Under the ASU, the guidance on such payments to non-employees is aligned with the accounting for share-based payments granted to employees, including the measurement of equity-classified awards, which is fixed at the grant date under the new guidance. The Company adopted the new guidance in the second quarter of 2018 using the modified retrospective approach with an immaterial cumulative-effect adjustment to retained earnings.

In February 2018, the FASB issued an ASU which allows a reclassification from accumulated other comprehensive income (OCI) to retained earnings for stranded tax effects resulting from the Tax Cuts and Job Acts (TCJA). Consequently, the amendments eliminate the stranded tax effects resulting from the TCJA and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the TCJA, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this ASU also require certain disclosures about stranded tax effects. The Company adopted the new guidance in the first quarter of 2018 and elected to reclassify stranded tax effects as a result of the TCJA related to unrealized gains and losses on investments and defined benefit plan obligations. The Company uses the individual security approach to release income tax effects from accumulated OCI. The new guidance did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.

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In November 2016, the FASB issued an ASU clarifying the classification and presentation of changes in restricted cash on the statement of cash flows. The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash. Therefore, amounts generally described as restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted the new guidance in the first quarter of 2018. The new guidance did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. Cash, cash equivalents, and restricted cash and cash equivalents reported on the Consolidated Statements of Cash Flows includes restricted cash and cash equivalents of $6 million, $6 million, $17 million and $7 million as of December 31, 2016, September 30, 2017, December 31, 2017 and September 30, 2018, respectively.

In March 2016, the FASB issued an ASU which requires entities to measure equity investments at fair value and recognize any change in fair value in net income. The standard does not apply to accounting methods that result in consolidation of the investee and those accounted for under the equity method. The standard also requires entities to record changes in instrument-specific credit risk for financial liabilities measured under the fair value option in other comprehensive income. Companies are required to record a cumulative-effect adjustment to the statement of financial position as of the beginning of the fiscal year in which the guidance is adopted, with the exception of amendments related to equity investments without readily determinable fair values, which will be applied prospectively to all investments that exist as of the date of adoption. The Company adopted the new guidance in the first quarter of 2018. The new guidance did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.

In May 2014, the FASB issued an ASU which supersedes existing revenue recognition standards with a single model unless those contracts are within the scope of other standards (e.g., an insurance entity's insurance contracts). Under the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted the new guidance in the first quarter of 2018 using the modified retrospective approach with a cumulative-effect increase to retained earnings of $16 million. The Company also elected the practical expedient of applying the new guidance only to contracts that are not completed as of the date of initial application. The majority of the Company's revenues are derived from insurance contracts and are excluded from the new standard.

Accounting Guidance Not Yet Adopted

In August 2018, the FASB issued an ASU which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license).  The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update.  The amendments in this ASU require an entity that is the customer in a hosting arrangement to follow the guidance on internal-use software to determine which implementation costs to capitalize and which costs to expense.  The standard also requires an entity that is the customer to expense the capitalized implementation costs of a hosting arrangement over the term of the hosting arrangement.  The new guidance requires an entity to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element.  The entity is also required to present the capitalized implementation costs in the statement of financial position in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented.  The guidance is effective for annual and interim periods beginning after December 15, 2019.  Early adoption is permitted. The new guidance is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.


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In February 2016, the FASB issued an ASU which introduces a lessee model that requires the majority of leases to be recognized on the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in Accounting Standards Codification 606, the FASB's new revenue recognition standard, and addresses other concerns related to the current lessee model. The standard also requires lessors to increase the transparency of their exposure to changes in value of their residual assets and how they manage that exposure. It is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The initial standard required a modified retrospective transition approach, with application, including disclosures, in all comparative periods presented. In July 2018, the FASB issued an ASU which gives all entities a transition option and provides lessors with a practical expedient. The transition option allows entities to not apply the new standard in the comparative periods they present in their financial statements in the year of adoption. Under the transition option, entities can continue to apply the legacy guidance in ASC 840, including its disclosure requirements, in the comparative periods presented in the year of adoption of the lease standard. Entities that elect this option will adopt the standard using the modified retrospective transition method but recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. The practical expedient provides lessors the option to not separate the non-lease components from the associated lease components when certain criteria are met and requires them to account for the combined component in accordance with the new revenue standard if the associated non-lease components are the predominant components. The Company is currently evaluating the effect of the new lease guidance and plans to elect the transition option of using the effective date of the new standard as the date of initial application.

2. Fidelis Care Acquisition

On July 1, 2018, the Company acquired substantially all of the assets of Fidelis Care for approximately $3.47 billion of cash consideration, which includes a working capital adjustment. The acquisition consideration was funded through the issuance of 26.6 million shares of Centene common stock as further discussed in Note 8. Stockholders Equity and the issuance of long-term debt as further discussed in Note 7. Debt. The Fidelis Care acquisition expanded the Company's scale and presence to New York State.

The acquisition of Fidelis Care was accounted for as a business combination using the acquisition method of accounting which requires assets acquired and liabilities assumed to be recognized at fair value as of the acquisition date. The valuation of assets acquired and liabilities assumed has not yet been finalized. Any necessary adjustments from preliminary estimates will be finalized within one year from the date of acquisition. Measurement period adjustments will be recorded in the period in which they are determined, as if they had been completed at the acquisition date. Due to the timing of the acquisition, the Company has performed limited valuation procedures, and the valuation of all assets and liabilities assumed is not yet complete. The Company's preliminary allocation of the fair value of assets acquired and liabilities assumed as of the acquisition date of July 1, 2018 is as follows ($ in millions):
Assets acquired and liabilities assumed
 
 
Cash and cash equivalents
 
$
2,001

Premium and related receivables
 
535

Other current assets
 
32

Restricted deposits
 
495

Property, software and equipment, net
 
80

Intangible assets (a)
 
1,000

Other long-term assets
 
18

Total assets acquired
 
4,161

 
 
 
Medical claims liability
 
1,319

Accounts payable and accrued expenses
 
300

Return of premium payable
 
124

Unearned revenue
 
115

Other long-term liabilities
 
261

Total liabilities assumed
 
2,119

 
 
 
Total identifiable net assets
 
2,042

Goodwill (b)
 
1,428

Total assets acquired and liabilities assumed
 
$
3,470



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The Company has made the following preliminary fair value adjustments based on information reviewed through September 30, 2018. Significant fair value adjustments are noted as follows:

(a)
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. As discussed above, due to the timing of the acquisition date, the Company has only performed limited valuation procedures, and the intangible asset valuation is incomplete. The Company has estimated the preliminary fair value of intangible assets to be $1.0 billion with a weighted average life of 13 years. The Company expects the identifiable intangible assets to include customer relationships, provider contracts, trade names and developed technology.

(b)
The acquisition resulted in $1.4 billion of goodwill related primarily to synergies expected from the acquisition and the assembled workforce of Fidelis Care. All of the goodwill has been assigned to the Managed Care segment. The goodwill is deductible for income tax purposes.

Statement of Operations

From the acquisition date through September 30, 2018, the Company's Consolidated Statements of Operations include total Fidelis Care revenues of $2,797 million. It is impracticable to determine the effect on net income resulting from the Fidelis Care acquisition for the three and nine months ended September 30, 2018, as the Company began immediately integrating Fidelis Care into its ongoing operations.

Unaudited Pro Forma Financial Information

The unaudited pro forma total revenues for the nine months ended September 30, 2018 were $49,170 million. It is impracticable for the Company to determine the pro forma earnings information for the nine months ended September 30, 2018 due to the nature of obtaining that information as the Company began immediately integrating Fidelis Care into its ongoing operations. The following table presents supplemental pro forma information for the three and nine months ended September 30, 2017 ($ in millions, except per share data):
 
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
Total revenues
 
$
14,387

 
$
42,954

Net earnings attributable to Centene Corporation
 
$
248

 
$
721

Diluted earnings per share
 
$
1.22

 
$
3.55


The pro forma results do not reflect any anticipated synergies, efficiencies, or other cost savings of the acquisition. Accordingly, the unaudited pro forma financial information is not indicative of the results if the acquisition had been completed on January 1, 2017 and is not a projection of future results.

The unaudited pro forma financial information reflects the historical results of Centene and Fidelis Care adjusted as if the acquisition had occurred on January 1, 2017, primarily for the following:

Additional premium tax expense related to Fidelis Care no longer being a not-for-profit entity.
Additional Health Insurer Fee revenue in 2018 related to Fidelis Care as some of those revenues will be subject to the Health Insurer Fee following the first year of the closing of the Fidelis Care acquisition, absent a Health Insurer Fee moratorium.
Reduced Fidelis Care investment income to reflect lower investment balances and mix of investments associated with the acquired assets.
Interest expense associated with debt incurred to finance the transaction.
An adjustment to basic and diluted shares outstanding to reflect the shares issued by Centene to finance the transaction.
An adjustment to income tax expense to reflect the tax impact of the acquisition and Fidelis Care becoming subject to income tax.
Elimination of acquisition related costs.

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Commitments

As part of the regulatory approval process, the Company entered into certain undertakings with the New York State Department of Health. The undertakings contain various commitments by the Company effective upon completion of the Fidelis Care acquisition. One of the undertakings includes a $340 million contribution by the Company to the State of New York to be paid over a five-year period for initiatives consistent with our mission of providing high quality healthcare to vulnerable populations within New York State. As a result of the closing of the Fidelis Care acquisition, the present value of the $340 million contribution to the State of New York, approximately $324 million, was expensed in SG&A during the third quarter of 2018.

3. Short-term and Long-term Investments, Restricted Deposits

Short-term and long-term investments and restricted deposits by investment type consist of the following ($ in millions):
 
September 30, 2018
 
December 31, 2017
 
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
$
259

 
$

 
$
(3
)
 
$
256

 
$
311

 
$

 
$
(2
)
 
$
309

Corporate securities
2,774

 
4

 
(44
)
 
2,734

 
2,208

 
12

 
(10
)
 
2,210

Restricted certificates of deposit
430

 

 

 
430

 
4

 

 

 
4

Restricted cash equivalents
7

 

 

 
7

 
17

 

 

 
17

Municipal securities
2,231

 
2

 
(35
)
 
2,198

 
2,085

 
12

 
(10
)
 
2,087

Asset-backed securities
598

 

 
(4
)
 
594

 
437

 
1

 
(1
)
 
437

Residential mortgage-backed securities
382

 

 
(14
)
 
368

 
337

 
1

 
(6
)
 
332

Commercial mortgage-backed securities
317

 

 
(8
)
 
309

 
272

 
1

 
(2
)
 
271

Private equity investments
382

 

 

 
382

 
176

 

 

 
176

Life insurance contracts
138

 

 

 
138

 
135

 

 

 
135

Total
$
7,518

 
$
6

 
$
(108
)
 
$
7,416

 
$
5,982

 
$
27

 
$
(31
)
 
$
5,978


The Company’s investments are debt securities classified as available-for-sale with the exception of life insurance contracts and certain private equity 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 September 30, 2018, 96% of the Company’s investments in rated securities carry an investment grade rating by nationally recognized statistical rating organizations. At September 30, 2018, the Company held certificates of deposit, life insurance contracts and private equity investments which did not carry a credit rating.

The Company's residential mortgage-backed securities are primarily issued by the Federal National Mortgage Association, Government National Mortgage Association or Federal Home Loan Mortgage Corporation, which carry implicit or explicit guarantees of the U.S. government. The Company's commercial mortgage-backed securities are primarily senior tranches with a weighted average rating of AA+ and a weighted average duration of 3.8 years at September 30, 2018.

In March 2018, the Company completed a 25% investment in RxAdvance, a full-service pharmacy benefit manager. In May 2018, the Company made an additional investment, bringing the total ownership to 28%. The investment is accounted for using the equity method of accounting. In September 2018, the Company made an additional investment in RxAdvance in the form of convertible preferred stock.


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The fair value of available-for-sale debt securities 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 ($ in millions):
 
September 30, 2018
 
December 31, 2017
 
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
$
(1
)
 
$
93

 
$
(2
)
 
$
161

 
$
(1
)
 
$
222

 
$
(1
)
 
$
79

Corporate securities
(31
)
 
1,913

 
(13
)
 
337

 
(6
)
 
1,044

 
(4
)
 
185

Municipal securities
(25
)
 
1,518

 
(10
)
 
286

 
(7
)
 
943

 
(3
)
 
175

Asset-backed securities
(3
)
 
409

 
(1
)
 
66

 
(1
)
 
228

 

 
28

Residential mortgage-backed securities
(4
)
 
186

 
(10
)
 
178

 
(1
)
 
109

 
(5
)
 
171

Commercial mortgage-backed securities
(4
)
 
174

 
(4
)
 
90

 
(1
)
 
112

 
(1
)
 
51

Total
$
(68
)
 
$
4,293

 
$
(40
)
 
$
1,118

 
$
(17
)
 
$
2,658

 
$
(14
)
 
$
689


As of September 30, 2018, the gross unrealized losses were generated from 3,200 positions out of a total of 3,954 positions. The change in fair value of fixed income securities is primarily 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 ($ in millions):
 
September 30, 2018
 
December 31, 2017
 
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
$
517

 
$
515

 
$
201

 
$
201

 
$
474

 
$
474

 
$
48

 
$
47

One year through five years
2,674

 
2,636

 
350

 
349

 
2,424

 
2,420

 
88

 
88

Five years through ten years
2,277

 
2,242

 

 

 
1,773

 
1,779

 

 

Greater than ten years
202

 
202

 

 

 
129

 
130

 

 

Asset-backed securities
1,297

 
1,271

 

 

 
1,046

 
1,040

 

 

Total
$
6,967

 
$
6,866

 
$
551

 
$
550

 
$
5,846

 
$
5,843

 
$
136

 
$
135

 
Actual maturities may differ from contractual maturities due to call or prepayment options. Private equity investments 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.

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 private equity 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.

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4. Fair Value Measurements

Assets and liabilities recorded at fair value in the Consolidated Balance Sheets are categorized based upon observable or unobservable inputs used to estimate fair value. 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 September 30, 2018, for assets and liabilities measured at fair value on a recurring basis ($ in millions):  
 
Level I
 
Level II
 
Level III
 
Total
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
6,847

 
$

 
$

 
$
6,847

Investments available for sale:
 

 
 

 
 

 
 

U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
143

 
$

 
$

 
$
143

Corporate securities

 
2,734

 

 
2,734

Municipal securities

 
2,198

 

 
2,198

Asset-backed securities

 
594

 

 
594

Residential mortgage-backed securities

 
368

 

 
368

Commercial mortgage-backed securities

 
309

 

 
309

Total investments
$
143

 
$
6,203

 
$

 
$
6,346

Restricted deposits available for sale:
 

 
 

 
 

 
 

Cash and cash equivalents
$
7

 
$

 
$

 
$
7

Certificates of deposit
430

 

 

 
430

U.S. Treasury securities and obligations of U.S. government corporations and agencies
113

 

 

 
113

Total restricted deposits
$
550

 
$

 
$

 
$
550

 
 
 
 
 
 
 
 
Total assets at fair value
$
7,540

 
$
6,203

 
$

 
$
13,743

Liabilities
 
 
 
 
 
 
 
Other long-term liabilities:
 
 
 
 
 
 
 
Interest rate swap agreements
$

 
$
147

 
$

 
$
147

Total liabilities at fair value
$

 
$
147

 
$

 
$
147




























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The following table summarizes fair value measurements by level at December 31, 2017, for assets and liabilities measured at fair value on a recurring basis ($ in millions): 
 
Level I
 
Level II
 
Level III
 
Total
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
4,072

 
$

 
$

 
$
4,072

Investments available for sale:
 

 
 

 
 

 
 

U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
195

 
$

 
$

 
$
195

Corporate securities

 
2,210

 

 
2,210

Municipal securities

 
2,087

 

 
2,087

Asset-backed securities

 
437

 

 
437

Residential mortgage-backed securities

 
332

 

 
332

Commercial mortgage-backed securities

 
271

 

 
271

Total investments
$
195

 
$
5,337

 
$

 
$
5,532

Restricted deposits available for sale:
 

 
 

 
 

 
 

Cash and cash equivalents
$
17

 
$

 
$

 
$
17

Certificates of deposit
4

 

 

 
4

U.S. Treasury securities and obligations of U.S. government corporations and agencies
114

 

 

 
114

Total restricted deposits
$
135

 
$

 
$

 
$
135

Other long-term assets:
 
 
 
 
 
 
 
Interest rate swap agreements
$

 
$
1

 
$

 
$
1

Total assets at fair value
$
4,402

 
$
5,338

 
$

 
$
9,740

Liabilities
 
 
 
 
 
 
 
Other long-term liabilities:
 
 
 
 
 
 
 
Interest rate swap agreements
$

 
$
72

 
$

 
$
72

Total liabilities at fair value
$

 
$
72

 
$

 
$
72

 
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. In addition, the aggregate carrying amount of the Company’s life insurance contracts and other private equity investments, which approximates fair value, was $520 million and $311 million as of September 30, 2018 and December 31, 2017, respectively.


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5. Medical Claims Liability

The following table summarizes the change in medical claims liability ($ in millions):

 
 
Nine Months Ended September 30,
 
 
2018
 
2017
Balance, January 1
 
$
4,286

 
$
3,929

Less: Reinsurance recoverable
 
18

 
5

Balance, January 1, net
 
4,268

 
3,924

Acquisitions
 
1,319

 

Incurred related to:
 
 
 
 
          Current year
 
33,465

 
28,666

          Prior years
 
(420
)
 
(388
)
         Total incurred
 
33,045

 
28,278

Paid related to:
 
 
 
 
          Current year
 
28,194

 
24,787

          Prior years
 
3,485

 
3,099

         Total paid
 
31,679

 
27,886

Balance at September 30, net
 
6,953

 
4,316

Plus: Reinsurance recoverable
 
30

 
17

Balance, September 30
 
$
6,983

 
$
4,333


Reinsurance recoverables related to medical claims are included in premium and related receivables. Changes in estimates of incurred claims for prior years are primarily attributable to reserving under moderately adverse conditions. Additionally, as a result of development within "Incurred related to: Prior years" due to minimum health benefits ratio (HBR) and other return of premium programs, we recorded $23 million as a reduction to premium revenues and $4 million as an increase to premium revenues in the nine months ended September 30, 2018 and 2017, respectively.

Incurred but not reported (IBNR) plus expected development on reported claims as of September 30, 2018 was $5,326 million. Total IBNR plus expected development on reported claims represents estimates for claims incurred but not reported, development on reported claims, and estimates for the costs necessary to process unpaid claims at the end of each period. We estimate our liability using actuarial methods that are commonly used by health insurance actuaries and meet Actuarial Standards of Practice. These actuarial methods consider factors such as historical data for payment patterns, cost trends, product mix, seasonality, utilization of healthcare services and other relevant factors.
 
6. Affordable Care Act

The Affordable Care Act (ACA) established risk spreading premium stabilization programs effective January 1, 2014. These programs, commonly referred to as the “three Rs,” include a permanent risk adjustment program, a transitional reinsurance program, and a temporary risk corridor program. Additionally, the ACA established a minimum annual MLR and cost sharing reductions. Each of the three R programs are taken into consideration to determine if the Company’s estimated annual medical costs are less than the minimum loss ratio and require an adjustment to Premium revenue to meet the minimum MLR.

During the second quarter of 2018, the Company recognized a $79 million net pre-tax benefit related to the reconciliation of the 2017 risk adjustment program compared to a $48 million net pre-tax benefit related to the reconciliation of the 2016 risk adjustment program during the second quarter of 2017.




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Table of Contents

The Company's net receivables (payables) for each of these programs are as follows ($ in millions):
 
September 30, 2018
 
December 31, 2017
Risk adjustment
$
(784
)
 
$
(677
)
Reinsurance
1

 
15

Risk corridor
4

 
6

Minimum MLR
(154
)
 
(22
)
Cost sharing reductions
(61
)
 
(96
)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
7. Debt
 
Debt consists of the following ($ in millions):
 
September 30, 2018
 
December 31, 2017
$1,400 million 5.625% Senior notes, due February 15, 2021
$
1,400

 
$
1,400

$1,000 million 4.75% Senior notes, due May 15, 2022
1,005

 
1,006

$1,000 million 6.125% Senior notes, due February 15, 2024
1,000

 
1,000

$1,200 million 4.75% Senior notes, due January 15, 2025
1,200

 
1,200

$1,800 million 5.375% Senior notes, due June 1, 2026
1,800

 

Fair value of interest rate swap agreements
(147
)
 
(71
)
Total senior notes
6,258

 
4,535

Revolving credit agreement
100

 
150

Mortgage notes payable
59

 
61

Construction loan payable
40

 

Capital leases and other
5

 
18

Debt issuance costs
(79
)
 
(65
)
Total debt
6,383

 
4,699

Less current portion
(4
)
 
(4
)
 Long-term debt
$
6,379

 
$
4,695


Senior Notes

In May 2018, a wholly-owned unrestricted subsidiary of the Company (Escrow Issuer) issued $1,800 million in aggregate principal amount of 5.375% Senior Notes at par due 2026. In connection with the closing of the Fidelis Care acquisition, the Escrow Issuer merged with and into the Company and the Company assumed the obligations of the Escrow Issuer under the 5.375% Senior Notes due 2026. The Company used the net proceeds of the offering to finance a portion of the cash consideration for the Fidelis Care acquisition, which closed in July 2018, to pay related fees and expenses, and for general corporate purposes, including the repayment of outstanding indebtedness.

The indentures governing the senior notes listed in the table above contain restrictive covenants of Centene Corporation. At September 30, 2018, the Company was in compliance with all covenants.

Interest Rate Swaps

The Company uses interest rate swap agreements to convert a portion of its interest rate exposure from fixed rates to floating rates to more closely align interest expense with interest income received on its cash equivalent and variable rate investment balances. The following is a summary of the notional amounts of the Company's interest rate swap agreements as of September 30, 2018:

Expiration Date
 
Notional Amount
February 15, 2021
 
$
600

May 15, 2022
 
500

February 15, 2024
 
1,000

January 15, 2025
 
600

Total
 
$
2,700


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The fair value of the swap agreements shown above are recorded in other long-term liabilities in the Consolidated Balance Sheets. Under the swap agreements, the Company receives a fixed rate of interest and pays an average variable rate of either the one or three month LIBOR plus 3.61% adjusted monthly or quarterly, based on the terms of the individual swap agreements. At September 30, 2018, the weighted average rate was 5.89%.

The swap agreements are formally designated and qualify as fair value hedges. Gains and losses due to changes in fair value of the interest rate swap agreements completely offset changes in the fair value of the hedged portion of the underlying debt. Therefore, no gain or loss has been recognized due to hedge ineffectiveness. Offsetting changes in fair value of both the interest rate swaps and the hedged portion of the underlying debt both were recognized in interest expense in the Consolidated Statements of Operations. The Company does not hold or issue any derivative instrument for trading or speculative purposes.

Revolving Credit Agreement

The Company has an unsecured $1,500 million revolving credit facility. The agreement has a maturity date of December 14, 2022. Borrowings under the agreement bear interest based upon LIBOR rates, the Federal Funds Rate or the Prime Rate. As of September 30, 2018, the Company had $100 million borrowings outstanding under the agreement and the Company was in compliance with all covenants.

The revolving credit facility contains non-financial and financial covenants, including requirements of minimum fixed charge coverage ratios and maximum debt-to-EBITDA ratios. The Company is required to not exceed a maximum debt-to-EBITDA ratio of 3.5 to 1.0. As of September 30, 2018, there were no limitations on the availability under the revolving credit agreement as a result of the debt-to-EBITDA ratio.

Mortgage Notes Payable

The Company has a non-recourse mortgage note of $59 million at September 30, 2018 collateralized by its corporate headquarters building. The mortgage note is due January 1, 2021 and bears a 5.14% interest rate. The collateralized property had a net book value of $164 million at September 30, 2018.

Construction Loan

The Company has a $200 million non-recourse construction loan to fund the expansion of the Company's corporate headquarters. The loan bears interest based on the one month LIBOR plus 2.70% and matures in April 2021 with an optional one-year extension. The agreement contains financial and non-financial covenants aligning with the Company's revolving credit agreement. The Company has guaranteed completion of the construction project associated with the loan. As of September 30, 2018, the Company had $40 million in borrowings outstanding under the loan.

Letters of Credit & Surety Bonds

The Company had outstanding letters of credit of $55 million as of September 30, 2018, which were not part of the revolving credit facility. The Company also had letters of credit for $44 million (valued at September 30, 2018 conversion rate), or €38 million, representing its proportional share of the letters of credit issued to support Ribera Salud’s outstanding debt, which are a part of the revolving credit facility. Collectively, the letters of credit bore interest at 1.33% as of September 30, 2018. The Company had outstanding surety bonds of $501 million as of September 30, 2018.

8. Stockholders' Equity
 
In May 2018, the Company completed a registered offering of 26.6 million shares of Centene common stock with a fair value of $2,860 million. This included the 10% over allotment option to purchase additional shares from the Company which was exercised in full by the underwriters. Net proceeds after underwriting discounts and commissions was $2,779 million. The Company used the net proceeds of the offering to finance a portion of the cash consideration in connection with the Fidelis Care acquisition, to pay related fees and expenses, and for general corporate purposes, including the repayment of outstanding indebtedness.

In April 2018, the Company acquired MHM Services Inc. (MHM) and issued 1.7 million shares of Centene common stock to the selling shareholders, with a fair value of $183 million.

In March 2018, the Company acquired Community Medical Holdings Corp., d/b/a Community Medical Group (CMG) and issued 1.4 million shares of Centene common stock to the selling shareholders, with a fair value of $149 million.

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In March 2018, the Company acquired an additional 61% of Interpreta Holdings, Inc. (Interpreta) and issued 1.7 million shares of Centene common stock to the selling shareholders, with a fair value of $175 million.
 
9. Earnings Per Share

The following table sets forth the calculation of basic and diluted net earnings per common share ($ in millions, except shares in thousands and per share data in dollars):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Earnings attributable to Centene Corporation
$
19

 
$
205

 
$
659

 
$
598

 
 
 
 
 
 
 
 
Shares used in computing per share amounts:
 

 
 
 
 
 
 
Weighted average number of common shares outstanding
205,295

 
172,508

 
191,628

 
172,314

Common stock equivalents (as determined by applying the treasury stock method)
4,227

 
4,407

 
4,005

 
4,100

Weighted average number of common shares and potential dilutive common shares outstanding
209,522

 
176,915

 
195,633

 
176,414

 
 
 
 
 
 
 
 
Net earnings per common share attributable to Centene Corporation:
Basic earnings per common share
$
0.09

 
$
1.19

 
$
3.44

 
$
3.47

Diluted earnings per common share
$
0.09

 
$
1.16

 
$
3.37

 
$
3.39


The calculation of diluted earnings per common share for the three and nine months ended September 30, 2018 excludes the impact of 10 thousand and 27 thousand shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units. The calculation of diluted earnings per common share for both the three and nine months ended September 30, 2017 excludes the impact of 4 thousand and 27 thousand shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units.

10. Segment Information

Centene operates in two segments: Managed Care and Specialty Services. The 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 auxiliary healthcare services and products.

Segment information for the three months ended September 30, 2018, follows ($ in millions):
 
Managed Care
 
Specialty
Services
 
Eliminations
 
Consolidated
Total
Total revenues from external customers
$
15,420

 
$
762

 
$

 
$
16,182

Total revenues from internal customers
26

 
2,350

 
(2,376
)
 

Total revenues
$
15,446

 
$
3,112

 
$
(2,376
)
 
$
16,182

Earnings from operations
$
92

 
$
(51
)
 
$

 
$
41


Segment information for the three months ended September 30, 2017, follows ($ in millions):
 
Managed Care
 
Specialty
Services
 
Eliminations
 
Consolidated
Total
Total revenues from external customers
$
11,248

 
$
650

 
$

 
$
11,898

Total revenues from internal customers
11

 
2,367

 
(2,378
)
 

Total revenues
$
11,259

 
$
3,017

 
$
(2,378
)
 
$
11,898

Earnings from operations
$
238

 
$
102

 
$

 
$
340


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Segment information for the nine months ended September 30, 2018, follows ($ in millions):
 
Managed Care
 
Specialty
Services
 
Eliminations
 
Consolidated
Total
Total revenues from external customers
$
41,153

 
$
2,404

 
$

 
$
43,557

Total revenues from internal customers
76

 
6,919

 
(6,995
)
 

Total revenues
$
41,229

 
$
9,323

 
$
(6,995
)
 
$
43,557

Earnings from operations
$
983

 
$
87

 
$

 
$
1,070


Segment information for the nine months ended September 30, 2017, follows ($ in millions):
 
Managed Care
 
Specialty
Services
 
Eliminations
 
Consolidated
Total
Total revenues from external customers
$
33,704

 
$
1,872

 
$

 
$
35,576

Total revenues from internal customers
33

 
7,112

 
(7,145
)
 

Total revenues
$
33,737

 
$
8,984

 
$
(7,145
)
 
$
35,576

Earnings from operations
$
799

 
$
219

 
$

 
$
1,018


11. Contingencies

Overview

The Company records reserves and accrues costs for certain legal proceedings and regulatory matters to the extent that it determines an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. While such reserves and accrued costs reflect the Company's best estimate of the probable loss for such matters, the recorded amounts may differ materially from the actual amount of any such losses. In some cases, no estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made because of the inherently unpredictable nature of legal and regulatory proceedings, which may be exacerbated by various factors, including but not limited to, they may involve indeterminate claims for monetary damages or may involve fines, penalties or punitive damages; present novel legal theories or legal uncertainties; involve disputed facts; represent a shift in regulatory policy; involve a large number of parties, claimants or regulatory bodies; are in the early stages of the proceedings; involve a number of separate proceedings and/or a wide range of potential outcomes; or result in a change of business practices.

As of the date of this report, amounts accrued for legal proceedings and regulatory matters were not material. However, it is possible that in a particular quarter or annual period the Company’s financial condition, results of operations, cash flow and/or liquidity could be materially adversely affected by an ultimate unfavorable resolution of or development in legal and/or regulatory proceedings, including as described below. Except for the proceedings discussed below, the Company believes that the ultimate outcome of any of the regulatory and legal proceedings that are currently pending against it should not have a material adverse effect on financial condition, results of operations, cash flow or liquidity.


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