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 known and unknown risks and uncertainties, including those set forth under Part II, Item 1A. "Risk Factors" of this Form 10-Q.



                               EXECUTIVE OVERVIEW

General

We are a leading multi-national healthcare enterprise that is committed to helping people live healthier lives. We take a local approach - with local brands and local teams - to provide fully integrated, high-quality, and cost-effective services to government-sponsored and commercial healthcare programs, focusing on under-insured and uninsured individuals.

Results of operations depend on our ability to manage expenses associated with health benefits (including estimated costs incurred) and selling, general and administrative (SG&A) costs. We measure operating performance based upon two key ratios. The health benefits ratio (HBR) represents medical costs as a percentage of premium revenues, excluding premium tax and health insurer fee revenues that are separately billed, and reflects the direct relationship between the premiums received and the medical services provided. The SG&A expense ratio represents SG&A costs as a percentage of premium and service revenues, excluding premium tax and health insurer fee revenues that are separately billed.

Our insurance subsidiaries are subject to the Affordable Care Act (ACA) annual health insurer fee (HIF), absent a HIF moratorium or repeal. We recognize revenue for reimbursement of the HIF, including the "gross-up" to reflect the non-deductibility of the HIF. Collectively, this revenue is recorded as premium tax and health insurer fee revenue in the Consolidated Statements of Operations. For certain products, premium taxes, state assessments and the HIF are not pass-through payments and are recorded as premium revenue and premium tax expense or health insurer fee expense in the Consolidated Statements of Operations. A moratorium suspended the HIF for the 2019 calendar year. Due to the size of the health insurer fee, one of the primary drivers of the year-over-year variances discussed throughout this section is related to the reinstatement of the HIF in 2020.

WellCare Acquisition

On January 23, 2020, we acquired all of the issued and outstanding shares of WellCare Health Plans, Inc. (WellCare) (the WellCare Acquisition). The transaction was valued at approximately $19.6 billion, including the assumption of $1.95 billion of outstanding debt. The WellCare Acquisition brings a high-quality Medicare platform and further extends our robust Medicaid offerings. The combination enables us to provide access to more comprehensive and differentiated solutions across more markets with a continued focus on affordable, high-quality, culturally-sensitive healthcare services. Due to the size of the acquisition, one of the primary drivers of the year-over-year variances discussed throughout this section is related to the acquisition of WellCare.

COVID-19 Trends and Uncertainties

The COVID-19 outbreak has created unique and unprecedented challenges. To support our members, providers, employees and the communities we serve, we have taken several actions and made numerous investments related to the COVID-19 crisis. We have extended coverage of COVID-19 testing and screening services for Medicaid, Medicare and Marketplace members and are waiving all associated member cost share amounts for COVID-19 testing and screening. We are delivering new critical support to Safety Net providers, including Federally Qualified Healthcare Centers (FQHCs), behavioral health providers, and long-term service and support organizations. We are addressing social determinants of health for vulnerable populations during the COVID-19 crisis with a commitment to research and investment in non-medical barriers to achieving quality health outcomes. We developed initiatives designed to support the disability community affected by the pandemic. We created a provider support program to assist our network providers who are seeking benefits from the Small Business Administration (SBA) through the CARES Act. We established a Medical Reserve Leave policy to support clinical staff who want to join a medical reserve force and serve their communities during the COVID-19 pandemic. We are providing additional employee benefits including waiving cost-sharing for COVID-19 related treatment, emergency paid sick leave, and one-time payments to employees in a small number of critical office functions. We are converting our 2020 Annual Meeting of Stockholders to a virtual-only format.




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We have taken significant steps to support our employees to protect their health and safety, while also ensuring that our business can continue to operate and that provider and member payments continue without disruption. We have implemented our business continuity plans and have taken actions to support our workforce. We have transitioned the vast majority of our employees to work from home, allowing Centene to continue to operate at close to full capacity, while continuing to maintain our internal control framework.

The impact on our business in both the short-term and long-term is uncertain. It largely depends on future developments, including but not limited to: the length and severity of the outbreak, effectiveness of containment actions, and the timing around the development of treatments and vaccinations. The pandemic and these future developments will most likely impact our membership and utilization trends. We expect an increase in membership, driven by unemployment rates, causing an estimated increase of $4.0 billion to our original full year 2020 revenue guidance. Also, we expect decreased utilization, related to shelter-in-place and similar orders, which could cause delayed or avoided costs. We have already seen a significant decrease in dental and vision claims. However, the deferral of medical services may lead to higher costs of treatment once members return to seeking medical care, as their health issues may have become more acute. We expect incremental COVID-19 costs in medical expenses related to the waivers for tests and treatments. We also expect incremental costs due to investments and actions we have already taken and continued efforts to protect our members, employees and communities we serve. The pandemic has widespread economic impact, driving interest rate decreases and lowering our investment income. We also expect higher interest expense due the deferral of the early redemption of senior notes. At this point in time, we do not expect the impact of all these items to significantly impact our bottom line, and as such, we have maintained our previous Adjusted diluted EPS guidance range.

We are confident we have the team, systems, expertise and financial strength to effectively navigate this challenging pandemic landscape.

Regulatory Trends and Uncertainties

The United States government, politicians, and healthcare experts continue to discuss and debate various elements of the United States healthcare payment model. From the constitutionality of the Affordable Care Act, to Medicare for All (single payer), to pharmacy pricing structures, all areas of healthcare are being challenged to assure adequate healthcare is delivered to all segments of the population. During this time of deliberation, we remain focused on the promise of delivering access to high quality, affordable healthcare to all of our members and believe we are well positioned to meet the needs of the changing healthcare landscape.

We have more than three decades of experience, spanning six presidents from both sides of the aisle, in delivering high-quality healthcare services on behalf of states and the federal government to under-insured and uninsured families, commercial organizations and military families. This expertise has allowed us to deliver cost effective services to our government sponsors and our members. While healthcare experts maintain focus on personalized healthcare technology, we continue to make strategic decisions to accelerate development of new software platforms and analytical capabilities. We continue to believe we have both the capacity and capability to successfully navigate industry changes to the benefit of our members, customers and shareholders.

On April 27, 2020, the Supreme Court ruled that the federal government will be required to pay health insurers for payments due under the risk corridor program, originally established under the Affordable Care Act. The Company will have a claim for risk corridor payments, which it intends to pursue. As of March 31, 2020, the Company did not have any risk corridor receivables recorded on its balance sheet.

For additional information regarding regulatory trends and uncertainties, see Part II, Item 1A, "Risk Factors."

First Quarter 2020 Highlights

Our financial performance for the first quarter of 2020 is summarized as follows: • Managed care membership of 23.8 million, an increase of 9.0 million

members, or 61% year-over-year.

• Total revenues of $26.0 billion, representing 41% growth year-over-year.

• HBR of 88.0%, compared to 85.7% for the first quarter of 2019.

• SG&A expense ratio of 9.9%, compared to 9.6% for the first quarter of 2019.




•      Adjusted SG&A expense ratio of 8.6%, compared to 9.5% for the first
       quarter of 2019.


•      Operating cash flows of $(240) million. Operating cash flow was negatively
       affected by a delay in premium payments from the state of New York of
       approximately $700 million and growth in our Medicare Prescription Drug
       Plan (PDP) business, which used working capital.



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•      Diluted earnings per share (EPS) for the first quarter of 2020 of $0.08,
       compared to $1.24 for the first quarter of 2019, reflecting an increase of
       acquisition related expenses due to the closing of the WellCare
       Acquisition.


•      Adjusted Diluted EPS for the first quarter of 2020 of $0.86, compared to
       $1.39 for the first quarter of 2019. Both diluted EPS and Adjusted Diluted
       EPS for the first quarter of 2020 have been negatively impacted by $0.05
       due to lower investment income and incremental senior note interest
       expense.

A reconciliation from GAAP Diluted EPS to Adjusted Diluted EPS is highlighted below, and additional detail is provided above under the heading "Non-GAAP Financial Presentation":


                                                  Three Months Ended March 31,
                                                         2020                   2019
GAAP Diluted EPS, attributable to Centene  $          0.08                     $ 1.24
Amortization of acquired intangible assets            0.23                       0.12
Acquisition related expenses                          0.49                       0.03
Other adjustments (1)                                 0.06                          -
Adjusted Diluted EPS                       $          0.86                     $ 1.39

(1) Other adjustments include the following items for the three months ended

March 31, 2020: (a) gain related to the divestiture of certain products of
    our Illinois health plan of $93 million or $0.10 per diluted share, net of an
    income tax expense of $0.07; (b) non-cash impairment of our third-party care
    management software business of $72 million or $0.10 per diluted share, net
    of an income tax benefit of $0.03; and (c) debt extinguishment costs of $44
    million or $0.06 per diluted share, net of an income tax benefit of $0.02.

The following items contributed to our growth over the last year:



•      Arkansas. In March 2019, our Arkansas subsidiary, Arkansas Total Care,
       assumed full-risk on a Medicaid special needs population comprised of
       people with high behavioral health needs and individuals with
       developmental/intellectual disabilities.



•      Correctional. In July 2019, Centurion began operating under a contract to
       provide comprehensive healthcare services to inmates housed in Arizona's
       state prison system. In July 2019, Centurion began operating under a
       re-awarded contract to continue the provision of mental and dental health
       services to the Georgia Department of Correction's state prison
       facilities. In February 2019, Centurion began operating under a new
       contract to provide comprehensive healthcare services to detainees of the
       Metropolitan Detention Center located in Albuquerque, New Mexico.



•      Florida. In December 2018, our Florida subsidiary, Sunshine Health, began
       providing physical and behavioral healthcare services
       through Florida's Statewide Medicaid Managed Care Program under its new
       five year contract which was implemented for all 11 regions by February
       2019.



•      Health Insurance Marketplace. In January 2020, we expanded our offerings
       in the 2020 Health Insurance Marketplace in ten existing markets: Arizona,
       Florida, Georgia, Kansas, North Carolina, Ohio, South Carolina, Tennessee,
       Texas, and Washington.



•      HealthSmart. In May 2019, we acquired HealthSmart, a third party
       administrator providing customizable and scalable health plan solutions
       for self-funded employers, universities and colleges, and Native American
       Tribal Enterprises. Services include plan administration, care management
       and wellness programs, network, casualty claim, and pharmacy benefit
       solutions.



•      Illinois. In February 2020, we began operating in Illinois under the first
       phase of an expanded contract for the Medicaid Managed Care Program. The
       expanded contract includes children who are in need through the Department
       of Children and Family Services/Youth Care by Illinois Department of
       Healthcare and Family Services and Foster Care.



•      Iowa. In July 2019, our Iowa subsidiary, Iowa Total Care, Inc., began
       operating under a new statewide contract for the IA Health Link Program.



•      Kansas. In January 2019, our Kansas subsidiary, Sunflower Health Plan,
       continued providing managed care services to KanCare beneficiaries
       statewide under a new contract.




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•      Louisiana. In January 2020, our Louisiana subsidiary, Louisiana HealthCare
       Connections, began operating under a one-year emergency contract extension
       in response to protested contract awards. Louisiana's state procurement
       officer overturned the Louisiana Department of Health's plan to award
       Medicaid contracts to four health plans, excluding our Louisiana
       subsidiary. According to the chief procurement officer, the state health
       department failed to follow state law or its own evaluation and bid
       guidelines in its award.



•      Medicare. In January 2020, we expanded our Medicare offerings. We entered
       Nevada and expanded our footprint in twelve existing markets: Arizona,
       Arkansas, California, Georgia, Kansas, Louisiana, Missouri, New Mexico,
       New York, Ohio, Pennsylvania, and Texas.



•      New Hampshire. In September 2019, our New Hampshire subsidiary, NH Healthy
       Families, began operating under a new five-year contract to continue to
       provide service to Medicaid enrollees statewide.



•      Pennsylvania. In January 2018, our Pennsylvania subsidiary, Pennsylvania
       Health & Wellness, began serving enrollees in the Community HealthChoices
       program in the Southeast region as part of the statewide contract that was
       fully implemented statewide by January 2020.



•      QualChoice. In April 2019, we completed the acquisition of QCA Health
       Plan, Inc. and QualChoice Life and Health Insurance Company, Inc. The
       acquisition expands our footprint in Arkansas by adding additional members
       primarily through Commercial products.



•      Spain. In December 2019, our Spanish subsidiary, Ribera Salud, acquired
       93% of Hospital Povisa, S.A., a private hospital in the Vigo region of
       Spain. In June 2019, our Spanish subsidiary, Primero Salud, acquired
       additional ownership in Ribera Salud, increasing our ownership in the
       Spanish healthcare company from 50% to 90%.



•      Washington. In January 2019, our Washington State subsidiary, Coordinated
       Care of Washington, began providing managed care services to Apple
       Health's Fully Integrated Managed Care beneficiaries in the Greater
       Columbia, King and Pierce Regions. This integration continued with the
       addition of the North Sound Region in July 2019.



•      WellCare. On January 23, 2020, we completed the WellCare Acquisition. The
       WellCare Acquisition brings a high-quality Medicare platform and further
       extends our robust Medicaid offerings. The WellCare Acquisition is a key
       part of our growth as we become one of the nation's largest sponsors of
       government health coverage. The transaction is valued at approximately
       $19.6 billion, including the assumption of $1.95 billion of outstanding
       debt.

The growth items listed above were partially offset by the following items:



•      In January 2020, in connection with the WellCare Acquisition, we completed
       the divestiture of certain products in our Illinois health plan, including
       the Medicaid and Medicare Advantage lines of business.



•      Effective December 2019, we no longer serve under the state-wide
       correctional contract in New Mexico.



•      Beginning January 1, 2019, Health Net of Arizona, Inc. began discontinuing
       and non-renewing all of its Employer Group plans for small and large
       business groups in Arizona. The effective date of coverage termination for
       existing groups is dependent on remaining renewals; however, coverage is
       no longer provided to any group policyholders and/or members as of
       December 31, 2019.

We expect the following items to contribute to our revenue or future growth potential:



•      We expect to realize the benefit in 2020 of acquisitions, investments, and
       business commenced during 2019 and 2020, as discussed above.



•      In April 2020, Centurion was awarded a contract by the Kansas Department
       of Administration to provide healthcare services in the Department of
       Corrections' facilities. The two-year contract is expected to commence on
       July 1, 2020 and includes two, two-year renewal options.



•      In April 2020, Centurion began providing medical services, behavioral
       healthcare, and substance abuse treatment within four prisons and six
       community corrections centers across the state of Delaware.




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•      In October 2019, our North Carolina joint venture, Carolina Complete
       Health, was awarded an additional service area to provide Medicaid managed
       care services in Region 4. With the addition of this new Region, Carolina
       Complete Health will provide Medicaid managed care services in three
       contiguous regions: Region 3, 4 and 5. In February 2019, WellCare was
       awarded a statewide contract to administer the state's Medicaid Prepaid
       Health Plans. The new contracts are expected to commence in the second
       half of 2020.



•      In October 2018, CMS published updated Medicare Star quality ratings for
       the 2019 rating year. Our Star ratings returned to a 4.0 Star parent
       rating. The 2019 rating year will positively affect quality bonus payments
       for Medicare Advantage plans in 2020.

The future growth items listed above are partially offset by the following items:

• In October 2019, CMS published updated Medicare Star quality ratings for


       the 2020 rating year. Approximately 46% of our Medicare members are in a 4
       star or above plan for the 2021 bonus year, compared to 86% for the 2020
       bonus year. Our quality bonus and rebates may be negatively impacted in
       2021.

• In July 2019, our Oregon subsidiary, Trillium Community Health Plan, was


       notified by the Oregon Health Authority (OHA) of its intent to award
       Trillium Community Health Plan an expanded contract to serve as a
       coordinated care organization for six counties in the state; however, an
       additional competitor was added to Lane County. As a result, our
       membership is expected to decrease. Pending successful completion of OHA's
       readiness review and additional contract negotiations, the contract is
       expected to begin July 2020.



                                   MEMBERSHIP

From March 31, 2019 to March 31, 2020, we increased our managed care membership
by 8,979,700, or 61%. The following table sets forth our membership by line of
business:
                                         March 31,         December 31,        March 31,
                                           2020                2019              2019
Medicaid:
TANF, CHIP & Foster Care                   10,259,700         7,528,700         7,491,100
ABD & LTSS                                  1,410,100         1,043,500         1,036,200
Behavioral Health                             158,000            66,500            56,000
Total Medicaid                             11,827,800         8,638,700         8,583,300
Medicare Prescription Drug Plan
(PDP)                                       4,416,500                 -                 -
Commercial                                  2,728,200         2,331,100         2,472,700
Medicare (1)                                  976,700           404,500           393,900
International                                 599,900           599,800           151,600
Correctional                                  172,000           180,000           153,200
Total at-risk membership                   20,721,100        12,154,100        11,754,700
TRICARE eligibles                           2,864,800         2,860,700         2,855,800
Non-risk membership                           216,200           227,000           211,900
Total                                      23,802,100        15,241,800        14,822,400

(1) Membership includes Medicare Advantage, Medicare Supplement, Special Needs Plans, and Medicare-Medicaid Plans (MMP).

The following table sets forth additional membership statistics, which are included in the membership information above:


                                        March 31,         December 31,        March 31,
                                           2020               2019              2019
Dual-eligible (2)                            879,000           639,200           625,600
Health Insurance Marketplace               2,199,300         1,805,200         1,968,700
Medicaid Expansion                         1,764,600         1,346,700         1,312,100

(2) Membership includes dual-eligible ABD & LTSS and dual-eligible Medicare membership in the table above.





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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 months ended March 31, 2020 and 2019, prepared in accordance with generally accepted accounting principles in the United States.

Summarized comparative financial data for the three months ended March 31, 2020 and 2019 is as follows ($ in millions, except per share data in dollars):


                                                             Three Months Ended March 31,
                                                           2020            2019       % Change
Premium                                                $   23,214       $ 16,203          43  %
Service                                                       958            635          51  %
 Premium and service revenues                              24,172         16,838          44  %
Premium tax and health insurer fee                          1,853          1,606          15  %
Total revenues                                             26,025         18,444          41  %
Medical costs                                              20,420         13,882          47  %
Cost of services                                              825            544          52  %
Selling, general and administrative expenses                2,384          1,609          48  %
Amortization of acquired intangible assets                    166             65         155  %
Premium tax expense                                         1,625          1,659          (2 )%
Health insurer fee expense                                    345              -        n.m.
Impairment                                                     72              -        n.m.
Earnings from operations                                      188            685         (73 )%
Investment and other income                                   167             99          69  %
Debt extinguishment costs                                     (44 )            -        n.m.
Interest expense                                             (180 )          (99 )        82  %
Earnings from operations, before income tax expense           131            685         (81 )%
Income tax expense                                             85            166         (49 )%
Net earnings                                                   46            519         (91 )%
Loss attributable to noncontrolling interests                   -              3        n.m.

Net earnings attributable to Centene Corporation $ 46 $ 522 (91 )% Diluted earnings per common share attributable to Centene Corporation

$     0.08       $   1.24         (94 )%



n.m.: not meaningful

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Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

Total Revenues

The following table sets forth supplemental revenue information for the three months ended March 31, ($ in millions):



                                   2020                    2019                % Change
Medicaid                  $             17,041     $           12,608                   35 %
Commercial                               4,119                  3,645                   13 %
Medicare (1)                             3,016                  1,382                  118 %
Medicare PDP                               600                      -                 n.m.
Other                                    1,249                    809                   54 %
Total Revenues            $             26,025     $           18,444                   41 %

(1) Medicare includes Medicare Advantage, Medicare Supplement, Special Needs Plans, and MMP. n.m.: not meaningful

Total revenues increased 41% in the three months ended March 31, 2020 over the corresponding period in 2019, due to the acquisition of WellCare, growth in the Health Insurance Marketplace business, expansions and new programs in many of our states throughout 2019 and 2020, particularly Iowa and Pennsylvania, and the reinstatement of the health insurer fee in 2020, partially offset by the divestiture of our Illinois health plan and the timing of pass through payments from the state of New York. During the three months ended March 31, 2020, we received premium rate adjustments that yielded a net 1% 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 estimate costs incurred. The health benefits ratio, or HBR, represents medical costs as a percentage of premium revenues (excluding premium tax and health insurer fee revenues that are separately billed) and reflects the direct relationship between the premium received and the medical services provided.

The HBR for the three months ended March 31, 2020, was 88.0%, compared to 85.7% in the same period in 2019. The year-over-year increase was attributable to the Health Insurance Marketplace business where margins continue to normalize, as expected. The increase also includes the acquisition of WellCare and new or expanded markets, which initially operate at a higher HBR. These increases were partially offset by the reinstatement of the health insurer fee.

Cost of Services

Cost of services increased by $281 million in the three months ended March 31, 2020, compared to the corresponding period in 2019, primarily attributable to an increase in specialty pharmacy volume, pharmacy sales to our recently divested Illinois health plan, and growth from newly acquired businesses. The cost of service ratio for the three months ended March 31, 2020, was 86.1%, compared to 85.7% in the same period in 2019. The increase in the cost of service ratio was driven by a higher mix of specialty pharmacy business, which carries a higher cost of service ratio.

Selling, General & Administrative Expenses

Selling, general and administrative expenses, or SG&A, increased by $775 million in the three months ended March 31, 2020, compared to the corresponding period in 2019. The SG&A increase was primarily due to the addition of the WellCare business and $295 million of acquisition related costs in the first quarter of 2020.




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The SG&A expense ratio was 9.9% for the first quarter of 2020, compared to 9.6% in the first quarter of 2019. The increase to the SG&A expense ratio was driven by higher acquisition related expenses due to the closing of the WellCare acquisition, partially offset by the addition of the WellCare business, which operates at a lower SG&A ratio. The Adjusted SG&A expense ratio was 8.6% for the first quarter of 2020, compared to 9.5% in the first quarter of 2019. The Adjusted SG&A expense ratio benefited from the addition of the WellCare business, which operates at a lower SG&A ratio, and the leveraging of expenses over higher revenues.

Health Insurer Fee Expense

Health insurer fee expense was $345 million for the three months ended March 31, 2020. As a result of the health insurer fee moratorium, which suspended the health insurance provider fee for the 2019 calendar year, we did not record health insurer fee expense for the corresponding period in 2019.

Impairment

During the first quarter of 2020, we recorded $72 million of a non-cash impairment of our third-party care management software business.

Other Income (Expense)

The following table summarizes the components of other income (expense) for the three months ended March 31, ($ in millions):


                             2020      2019
Investment and other income $ 167     $ 99
Debt extinguishment costs     (44 )      -
Interest expense             (180 )    (99 )

Other income (expense), net $ (57 ) $ -

Investment and other income. Investment and other income increased by $68 million in the three months ended March 31, 2020 compared to the corresponding period in 2019. The increase was due to a $93 million gain related to the divestiture of certain products of our Illinois health plan as part of the previously announced divestiture agreements associated with the WellCare Acquisition as well as overall higher investment balances. This was partially offset by a decline in the performance of our deferred compensation investment fund portfolio and our exchange traded funds, which both fluctuate with their underlying investments. The losses from our deferred compensation portfolio were substantially offset by decreases in deferred compensation expense, recorded in SG&A expense.

Debt extinguishment costs. In February 2020, we redeemed all of our outstanding $1.0 billion 6.125% Senior Notes, due February 15, 2024 (the 2024 Notes) and recognized a pre-tax loss on extinguishment of approximately $44 million. The loss includes the call premium, the write-off of unamortized debt issuance costs and the loss on the termination of the $1.0 billion interest rate swap associated with the 2024 Notes.

Interest expense. Interest expense increased by $81 million in the three months ended March 31, 2020 compared to the corresponding period in 2019. The increase is driven by an increase in borrowings related to the issuance of an additional $7.0 billion in senior notes in December 2019 to finance the cash consideration of the WellCare Acquisition. The increase was also driven by incremental interest expense related to our decision to defer the redemption of our $1.0 billion 2022 Senior Notes as well as incremental borrowings on our revolving credit facility, both as measures to preserve liquidity due to the economic environment created by COVID-19.

Income Tax Expense

For the three months ended March 31, 2020, we recorded income tax expense of $85 million on pre-tax earnings of $131 million, or an effective tax rate of 64.9%, driven by the reinstatement of the health insurer fee in 2020, the non-deductibility of certain acquisition related expenses, and the tax impact associated with the Illinois divestiture. For the three months ended March 31, 2019, we recorded income tax expense of $166 million on pre-tax earnings of $685 million, or an effective tax rate of 24.2%, which reflects the health insurer fee moratorium.




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Segment Results

The following table summarizes our consolidated operating results by segment for the three months ended March 31, ($ in millions):


                            2020         2019      % Change
Total Revenues
Managed Care             $ 25,036     $ 17,722         41  %
Specialty Services          3,903        3,206         22  %
Eliminations               (2,914 )     (2,484 )      (17 )%
Consolidated Total       $ 26,025     $ 18,444         41  %
Earnings from Operations
Managed Care             $    217     $    615        (65 )%
Specialty Services            (29 )         70       (141 )%
Consolidated Total       $    188     $    685        (73 )%



Managed Care

Total revenues increased 41% in the three months ended March 31, 2020, compared to the corresponding period in 2019, due to the acquisition of WellCare, growth in the Health Insurance Marketplace business, expansions and new programs in many of our states throughout 2019 and 2020, particularly Iowa and Pennsylvania, and the reinstatement of the health insurer fee in 2020, partially offset by the divestiture of our Illinois health plan and the timing of pass through payments from the state of New York. Earnings from operations decreased $398 million between years, primarily as a result of higher acquisition related expenses and normalized margins in the Health Insurance Marketplace business, partially offset by the reinstatement of the health insurer fee in 2020.

Specialty Services

Total revenues increased 22% in the three months ended March 31, 2020, compared to the corresponding period in 2019, resulting primarily from increased services associated with membership growth in the Managed Care segment, acquisitions, increased volume in our specialty pharmacy business, and sales to our recently divested Illinois business. Earnings from operations decreased $99 million in the three months ended March 31, 2020, compared to the corresponding period in 2019, due to the previously discussed $72 million impairment related to our third-party care management software business and our move to transparent pharmacy pricing which began in the second quarter of 2019.



                        LIQUIDITY AND CAPITAL RESOURCES

Shown below is a condensed schedule of cash flows used in the discussion of liquidity and capital resources ($ in millions).


                                                          Three Months Ended March 31,
                                                            2020                 2019

Net cash (used in) provided by operating activities $ (240 ) $ 1,316 Net cash used in investing activities

                         (3,272 )               (373 )
Net cash provided by financing activities                        839                   58
Effect of exchange rate changes on cash and cash
equivalents                                                       (1 )                  -

Net increase (decrease) in cash, cash equivalents, and restricted cash and cash equivalents

$       (2,674 )     $        1,001

Cash Flows 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 $240 million in the three months ended March 31, 2020 compared to providing cash of $1.3 billion in the comparable period in 2019. Operating cash flow in 2020 was negatively affected by a delay in premium payments from the state of New York of approximately $700 million and growth in our Medicare PDP business, which used working capital.




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Cash flows provided by operations in 2019 was due to net earnings, an increase in medical claims liabilities, primarily resulting from growth in the Health Insurance Marketplace business, the commencement or expansion of the Arkansas, Florida, Pennsylvania and New Mexico health plans, and an increase in other long-term liabilities, driven by the recognition of the risk adjustment payable for Health Insurance Marketplace in 2019. Cash flows from operations were partially offset by an increase in premium and trade receivables, primarily due to a delay in payment from one of our state customers.

Cash flows from operations in each year can be impacted by the timing of payments we receive from our states. As we have seen historically, 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.

Cash Flows Used in Investing Activities

Investing activities used cash of $3.3 billion for the three months ended March 31, 2020, and $373 million in the comparable period in 2019. Cash flows used in investing activities in 2020 primarily consisted of our acquisition of WellCare and net additions to the investment portfolio of our regulated subsidiaries (including transfers from cash and cash equivalents to long-term investments), partially offset by divestiture proceeds.

In January 2020, we completed the acquisition of WellCare for $19.6 billion, including the assumption of debt. Total consideration for the acquisition was $17.6 billion, consisting of Centene common shares valued at $11.4 billion, $6.1 billion in cash, and $95 million related to the fair value of replacement equity awards associated with pre-combination service.

Cash flows used in investing activities in 2019 primarily consisted of the net additions to the investment portfolio of our regulated subsidiaries (including transfers from cash and cash equivalents to long-term investments) and capital expenditures.

We spent $177 million and $176 million in the three months ended March 31, 2020 and 2019, respectively, on capital expenditures for system enhancements, market growth, and corporate headquarters expansions.

As of March 31, 2020, our investment portfolio consisted primarily of fixed-income securities with an average duration of 3.0 years. We had unregulated cash and investments of $2.9 billion at March 31, 2020, compared to $7.2 billion at December 31, 2019. Of the $2.9 billion, $2.0 billion represents cash and cash equivalents held by unregulated entities.

Cash Flows Provided by Financing Activities

Our financing activities provided cash of $839 million in the three months ended March 31, 2020, compared to $58 million in the comparable period in 2019. During 2020 and 2019, our net financing activities were due to increased borrowings, partially offset by common stock repurchases.

Liquidity Metrics

In connection with the WellCare Acquisition, in January 2020, we completed an exchange offer for $1.2 billion of 5.25% Senior Notes due 2025 and $750 million of 5.375% Senior Notes due 2026 (collectively, the WellCare Notes) issued by WellCare and issued $1.1 billion aggregate principal amount of 5.25% Senior Notes due 2025 and $747 million aggregate principal amount of 5.375% Senior Notes due 2026. Additionally, our wholly owned subsidiary, WellCare Health Plans, Inc., assumed the remaining unexchanged WellCare Notes.

In February 2020, we issued $2.0 billion 3.375% Senior Notes due 2030 (the 2030 Notes). We used the net proceeds from the 2030 Notes to redeem all of our outstanding 2024 Notes. We recognized a pre-tax loss on extinguishment of approximately $44 million, including the call premium, the write-off of unamortized debt issuance costs and a loss on the termination of the $1.0 billion interest rate swap associated with the 2024 Notes. We also intended to use remaining proceeds to redeem our $1.0 billion 4.75% Senior Notes due 2022 (the 2022 Notes). However, as a result of the spread of COVID-19 and the resulting disruption and volatility in the global capital markets, we deferred the redemption of the 2022 Notes at this time.

During the three months ended March 31, 2020, the Company terminated the interest rate swap agreements associated with the 2022 Notes and the Senior Notes due January 15, 2025, (the 2025 Notes). The interest rate swaps associated with the 2024 Notes were also terminated in connection with the redemption of those notes as discussed above. In total, the Company terminated three interest rate swap contracts with a notional amount of $2.1 billion.




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The credit agreement underlying our Revolving Credit Facility and Term Loan Facility contains customary covenants as well as financial covenants including a minimum fixed charge coverage ratio and a maximum debt-to-EBITDA ratio. Our maximum debt-to-EBITDA ratio under the credit agreement may not exceed 4.0 to 1.0. As of March 31, 2020, we had $588 million of borrowings outstanding under our Revolving Credit Facility, $1.45 billion of borrowings under our Term Loan Facility, and we were in compliance with all covenants. As of March 31, 2020, there were no limitations on the availability of our Revolving Credit Facility as a result of the debt-to-EBITDA ratio.

We have a $200 million non-recourse construction loan to fund the expansion of our 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 our revolving credit agreement. We have guaranteed completion of the construction project associated with the loan. As of March 31, 2020, we had $149 million in borrowings outstanding under the loan.

We had outstanding letters of credit of $114 million as of March 31, 2020, which were not part of our revolving credit facility. We also had letters of credit for $13 million (valued at the March 31, 2020 conversion rate), or €12 million, representing our 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 weighted interest of 0.7% as of March 31, 2020. In addition, we had outstanding surety bonds of $920 million as of March 31, 2020.

The indentures governing our various maturities of senior notes contain restrictive covenants. As of March 31, 2020, we were in compliance with all covenants.

At March 31, 2020, we had working capital, defined as current assets less current liabilities, of $3.0 billion, compared to $7.4 billion at December 31, 2019. 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 March 31, 2020, our debt to capital ratio, defined as total debt divided by the sum of total debt and total equity, was 42.2%, compared to 52.0% at December 31, 2019. Excluding $202 million of non-recourse debt, our debt to capital ratio was 41.9% as of March 31, 2020, compared to 51.7% at December 31, 2019. We utilize the debt to capital ratio as a measure, among others, of our leverage and financial flexibility.

2020 Expectations

During the remainder of 2020, we expect to receive net dividends from our insurance subsidiaries of approximately $210 million and spend approximately $950 million in additional capital expenditures primarily associated with system enhancements and market and corporate headquarters expansions. These amounts are expected to be funded by unregulated cash flow generation in 2020 and borrowings on our Revolving Credit Facility and construction loan. However, from time to time we may elect to raise additional funds for these and other purposes, either through issuance of debt or equity, the sale of investment securities or otherwise, as appropriate. In addition, we may strategically pursue refinancing or redemption opportunities to extend maturities and/or improve terms of our indebtedness if we believe such opportunities are favorable to us.

Based on our operating plan, we expect that our available cash, cash equivalents and investments, cash from our operations and cash available under our Revolving Credit Facility will be sufficient to finance our general operations and capital expenditures for at least 12 months from the date of this filing. While we are currently in a strong liquidity position and believe we have adequate access to capital, we may elect to increase borrowings on our Revolving Credit Facility, and we have deferred the intended early redemption of the 2022 Notes as a result of the spread of COVID-19 and the related disruption and volatility in the global capital markets.

Contractual Obligations

Our contractual obligations, including medical claims liabilities, debt and interest, and lease obligations were significantly impacted due to the WellCare Acquisition, which closed in the first quarter of 2020. For additional information regarding the WellCare Acquisition and the impact to our estimated contractual obligations, refer to Note 2. Acquisitions, Note 5. Medical Claims Liability, Note 7. Debt and Note 8. Leases, included in Part I, Item 1. "Notes to the Consolidated Financial Statements" of this filing.



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                  REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS

Our operations are conducted through our subsidiaries. As managed care organizations, most of our subsidiaries are subject to state regulations and other requirements 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 regulated subsidiaries are required to maintain minimum capital requirements prescribed by various regulatory authorities in each of the states in which we operate. During the three months ended March 31, 2020, we made net capital contributions of $181 million to our regulated subsidiaries. For our subsidiaries that file with the National Association of Insurance Commissioners (NAIC), the aggregate RBC level as of December 31, 2019, which was the most recent date for which reporting was required, was in excess of 350% of the Authorized Control Level. We intend to continue to maintain an aggregate RBC level in excess of 350% of the Authorized Control Level during 2020 (excluding the interim impact of the health insurer fee).

Under the California Knox-Keene Health Care Service Plan Act of 1975, as amended ("Knox-Keene"), certain of our California subsidiaries must comply with tangible net equity (TNE) requirements. Under these Knox-Keene TNE requirements, actual net worth less unsecured receivables and intangible assets must be more than the greater of (i) a fixed minimum amount, (ii) a minimum amount based on premiums or (iii) a minimum amount based on healthcare expenditures, excluding capitated amounts. In addition, certain of our California subsidiaries have made certain undertakings to the California Department of Managed Health Care (DMHC) to restrict dividends and loans to affiliates, to the extent that the payment of such would reduce such entities' TNE below the required amount as specified in the undertaking.

Under the New York State Department of Health Codes, Rules and Regulations Title 10, Part 98, our New York subsidiary must comply with contingent reserve requirements. Under these requirements, net worth based upon admitted assets must equal or exceed a minimum amount based on annual net premium income.

The NAIC 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 March 31, 2020, each of our health plans was in compliance with the risk-based capital requirements enacted in those states.

As a result of the above requirements and other regulatory requirements, certain of our subsidiaries are subject to restrictions on their ability to make dividend payments, loans or other transfers of cash to their parent companies. Such restrictions, unless amended or waived or unless regulatory approval is granted, limit the use of any cash generated by these subsidiaries to pay our obligations. The maximum amount of dividends that can be paid by our insurance company subsidiaries without prior approval of the applicable state insurance departments is subject to restrictions relating to statutory surplus, statutory income and unassigned surplus.



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