Item 1. Financial Statements.

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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, 2021		December 31, 2020
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	13,423	$	10,800
Premium and trade receivables	11,516		9,696
Short-term investments	1,517		1,580
Other current assets	1,600		1,317
Total current assets	28,056		23,393
Long-term investments	13,561		12,853
Restricted deposits	1,114		1,060
Property, software and equipment, net	3,302		2,774

Goodwill	19,699		18,652
Intangible assets, net	8,143		8,388
Other long-term assets	3,868		1,599
Total assets	$	77,743	$	68,719
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY
Current liabilities:
Medical claims liability	$	14,099	$	12,438
Accounts payable and accrued expenses	8,089		7,069
Return of premium payable	2,238		1,458
Unearned revenue	371		523
Current portion of long-term debt	245		97
Total current liabilities	25,042		21,585
Long-term debt	18,594		16,682
Deferred tax liability	1,440		1,534
Other long-term liabilities	5,993		2,956
Total liabilities	51,069		42,757
Commitments and contingencies
Redeemable noncontrolling interests	84		77
Stockholders’ equity:
Preferred stock, $0.001 par value; authorized 10,000 shares; no shares issued or outstanding at September 30, 2021 and December 31, 2020	—		—
Common stock, $0.001 par value; authorized 800,000 shares; 600,708 issued and 583,500 outstanding at September 30, 2021, and 598,249 issued and 581,479 outstanding at December 31, 2020	1		1
Additional paid-in capital	19,594		19,459
Accumulated other comprehensive earnings	176		337
Retained earnings	7,540		6,792
Treasury stock, at cost (17,208 and 16,770 shares, respectively)	(845)		(816)
Total Centene stockholders’ equity	26,466		25,773
Nonredeemable noncontrolling interest	124		112
Total stockholders’ equity	26,590		25,885
Total liabilities, redeemable noncontrolling interests and stockholders’ equity	$	77,743	$	68,719

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

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except shares in thousands and per share data in dollars)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenues:
Premium	$	28,876	$	26,537	$	83,436	$	74,496
Service	1,638		922		4,054		2,859
Premium and service revenues	30,514		27,459		87,490		77,355
Premium tax and health insurer fee	1,892		1,631		5,924		5,472
Total revenues	32,406		29,090		93,414		82,827
Expenses:
Medical costs	25,430		22,932		73,210		63,659
Cost of services	1,355		861		3,510		2,519
Selling, general and administrative expenses	2,684		2,507		7,324		7,146
Amortization of acquired intangible assets	198		164		581		527
Premium tax expense	1,965		1,389		6,129		4,737
Health insurer fee expense	—		376		—		1,100
Impairment	229		—		229		72
Legal settlement	—		—		1,250		—
Total operating expenses	31,861		28,229		92,233		79,760
Earnings from operations	545		861		1,181		3,067
Other income (expense):
Investment and other income	424		95		566		375
Debt extinguishment costs	(79)		—		(125)		(44)
Interest expense	(170)		(184)		(503)		(551)
Earnings before income tax expense	720		772		1,119		2,847
Income tax expense	139		207		376		1,034
Net earnings	581		565		743		1,813
Loss attributable to noncontrolling interests	3		3		5		7
Net earnings attributable to Centene Corporation	$	584	$	568	$	748	$	1,820

Net earnings per common share attributable to Centene Corporation:
Basic earnings per common share	$	1.00	$	0.98	$	1.28	$	3.21
Diluted earnings per common share	$	0.99	$	0.97	$	1.27	$	3.16

Weighted average number of common shares outstanding:
Basic	583,244		579,510		582,636		567,586
Diluted	590,702		587,971		590,154		575,732

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

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(In millions)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net earnings	$	581	$	565	$	743	$	1,813
Reclassification adjustment, net of tax	1		—		(16)		1
Change in unrealized gain (loss) on investments, net of tax	(47)		38		(125)		152
Defined benefit pension plan net gain, net of tax	—		—		—		2
Foreign currency translation adjustments	(17)		10		(20)		4
Other comprehensive earnings (loss)	(63)		48		(161)		159
Comprehensive earnings	518		613		582		1,972
Comprehensive loss attributable to noncontrolling interests	3		3		5		7
Comprehensive earnings attributable to Centene Corporation	$	521	$	616	$	587	$	1,979

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

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In millions, except shares in thousands and per share data in dollars)

(Unaudited)

Three and Nine Months Ended September 30, 2021


	Centene Stockholders’ Equity
	Common Stock									Treasury Stock
	$0.001 Par Value Shares	Amt		Additional Paid-in Capital		Accumulated Other Comprehensive Earnings (Loss)		Retained Earnings		$0.001 Par Value Shares	Amt		Non-redeemable Non- controlling Interest		Total
Balance, December 31, 2020	598,249	$	1	$	19,459	$	337	$	6,792	16,770	$	(816)	$	112	$	25,885
Comprehensive Earnings:
Net earnings (loss)	—	—		—		—		699		—	—		(5)		694
Other comprehensive loss, net of $(49) tax	—	—		—		(161)		—		—	—		—		(161)


Common stock issued for employee benefit plans	1,675	—		9		—		—		—	—		—		9
Common stock repurchases	(316)	—		(19)		—		—		156	(10)		—		(29)
Stock compensation expense	—	—		51		—		—		—	—		—		51

Contribution from noncontrolling interest	—	—		—		—		—		—	—		9		9



Balance, March 31, 2021	599,608	$	1	$	19,500	$	176	$	7,491	16,926	$	(826)	$	116	$	26,458
Comprehensive Earnings:
Net earnings (loss)	—	—		—		—		(535)		—	—		(3)		(538)
Other comprehensive earnings, net of $19 tax	—	—		—		63		—		—	—		—		63


Common stock issued for employee benefit plans	390	—		9		—		—		—	—		—		9
Common stock repurchases	(10)	—		—		—		—		60	(4)		—		(4)
Stock compensation expense	—	—		36		—		—		—	—		—		36
Contribution from noncontrolling interest	—	—		—		—		—		—	—		21		21



Balance, June 30, 2021	599,988	$	1	$	19,545	$	239	$	6,956	16,986	$	(830)	$	134	$	26,045
Comprehensive Earnings:
Net earnings (loss)	—	—		—		—		584		—	—		(8)		576
Other comprehensive loss, net of $(15) tax	—	—		—		(63)		—		—	—		—		(63)


Common stock issued for employee benefit plans	720	—		9		—		—		—	—		—		9
Common stock repurchases	—	—		—		—		—		222	(15)		—		(15)
Stock compensation expense	—	—		40		—		—		—	—		—		40

Contribution from noncontrolling interest	—	—		—		—		—		—	—		5		5
Divestiture of noncontrolling interest	—	—		—		—		—		—	—		(10)		(10)
Acquisition resulting in noncontrolling interest	—	—		—		—		—		—	—		3		3
Balance, September 30, 2021	600,708	$	1	$	19,594	$	176	$	7,540	17,208	$	(845)	$	124	$	26,590

Three and Nine Months Ended September 30, 2020


	Centene Stockholders’ Equity
	Common Stock									Treasury Stock
	$0.001 Par Value Shares	Amt		Additional Paid-in Capital		Accumulated Other Comprehensive Earnings (Loss)		Retained Earnings		$0.001 Par Value Shares	Amt		Non-redeemable Non- controlling Interest		Total
Balance, December 31, 2019	421,508	$	—	$	7,647	$	134	$	4,984	6,460	$	(214)	$	108	$	12,659
Comprehensive Earnings:
Net earnings (loss)	—	—		—		—		46		—	—		(3)		43
Other comprehensive loss, net of $(40) tax	—	—		—		(139)		—		—	—		—		(139)
Common stock issued for acquisitions	171,225	—		11,526		—		—		—	—		—		11,526

Common stock issued for employee benefit plans	2,448	—		5		—		—		—	—		—		5
Common stock repurchases	(291)	—		(17)		—		—		9,308	(541)		—		(558)
Stock compensation expense	—	—		117		—		—		—	—		—		117
Contribution from noncontrolling interest	—	—		—		—		—		—	—		2		2



Other	—	—		1		—		—		—	—		—		1
Balance, March 31, 2020	594,890	$	—	$	19,279	$	(5)	$	5,030	15,768	$	(755)	$	107	$	23,656
Comprehensive Earnings:
Net earnings (loss)	—	—		—		—		1,206		—	—		(6)		1,200
Other comprehensive earnings, net of $76 tax	—	—		—		250		—		—	—		—		250


Common stock issued for employee benefit plans	269	—		7		—		—		—	—		—		7
Common stock repurchases	1	—		—		—		—		47	(3)		—		(3)
Stock compensation expense	—	—		47		—		—		—	—		—		47
Contribution from noncontrolling interest	—	—		—		—		—		—	—		15		15




Balance, June 30, 2020	595,160	$	—	$	19,333	$	245	$	6,236	15,815	$	(758)	$	116	$	25,172
Comprehensive Earnings:
Net earnings (loss)	—	—		—		—		568		—	—		(6)		562
Other comprehensive earnings, net of $13 tax	—	—		—		48		—		—	—		—		48


Common stock issued for employee benefit plans	531	—		8		—		—		—	—		—		8
Common stock repurchases	(69)	—		(5)		—		—		81	(4)		—		(9)
Stock compensation expense	—	—		54		—		—		—	—		—		54
Contribution from noncontrolling interest	—	—		—		—		—		—	—		8		8




Balance, September 30, 2020	595,622	$	—	$	19,390	$	293	$	6,804	15,896	$	(762)	$	118	$	25,843

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

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions, unaudited)


	Nine Months Ended September 30,
	2021		2020
Cash flows from operating activities:
Net earnings	$	743	$	1,813
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization	1,098		916
Stock compensation expense	127		218
Impairment	229		72
Loss on debt extinguishment	125		44
Gain on acquisition	(309)		—
Deferred income taxes	(143)		(154)
Gain on divestiture	62		(104)
Other adjustments, net	(6)		—
Changes in assets and liabilities
Premium and trade receivables	(1,723)		(1,640)
Other assets	(124)		185

Medical claims liabilities	1,661		1,563
Unearned revenue	(169)		(212)
Accounts payable and accrued expenses	993		(861)
Other long-term liabilities	964		663
Other operating activities, net	2		19
Net cash provided by operating activities	3,530		2,522
Cash flows from investing activities:
Capital expenditures	(662)		(663)
Purchases of investments	(5,253)		(2,911)
Sales and maturities of investments	4,069		3,408
Acquisitions, net of cash acquired	(534)		(3,000)
Divestiture proceeds, net of divested cash	(62)		466

Net cash used in investing activities	(2,442)		(2,700)
Cash flows from financing activities:

Proceeds from long-term debt	9,247		2,687
Payments of long-term debt	(7,411)		(1,654)
Common stock repurchases	(49)		(570)
Payments for debt extinguishment	(157)		(21)
Debt issuance costs	(72)		(94)
Other financing activities, net	39		35
Net cash provided by financing activities	1,597		383
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	(8)		8
Net increase in cash, cash equivalents and restricted cash and cash equivalents	2,677		213
Cash, cash equivalents, and restricted cash and cash equivalents, beginning of period	10,957		12,131
Cash, cash equivalents, and restricted cash and cash equivalents, end of period	$	13,634	$	12,344
Supplemental disclosures of cash flow information:
Interest paid	$	479	$	479
Income taxes paid	$	477	$	920
Equity issued in connection with acquisitions	$	—	$	11,526

The following table provides a reconciliation of cash, cash equivalents, and restricted cash and cash equivalents reported within the Consolidated Balance Sheets to the totals above:
	September 30,
	2021		2020
Cash and cash equivalents	$	13,423	$	12,198
Restricted cash and cash equivalents, included in restricted deposits	211		146
Total cash, cash equivalents, and restricted cash and cash equivalents	$	13,634	$	12,344

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

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, 2020. The unaudited interim financial statements herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, footnote disclosures that would substantially duplicate the disclosures contained in the December 31, 2020 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 2020 amounts in the consolidated financial statements and notes to the consolidated financial statements have been reclassified to conform to the 2021 presentation. These reclassifications have no effect on net earnings or stockholders’ equity as previously reported.

Recently Adopted Accounting Guidance

In December 2019, the Financial Accounting Standards Board issued an Accounting Standards Update which simplifies the accounting for income taxes. The guidance is effective for annual and interim periods beginning after December 15, 2020. The Company adopted the new guidance in the first quarter of 2021. The new guidance did not have a material impact on the Company's consolidated financial position, results of operations and cash flows.

2. 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, 2021								December 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Debt securities:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	656	$	—	$	—	$	656	$	907	$	4	$	—	$	911
Corporate securities	7,686		178		(37)		7,827		6,560		262		(8)		6,814
Restricted certificates of deposit	4		—		—		4		105		—		—		105
Restricted cash equivalents	211		—		—		211		157		—		—		157
Short-term time deposits	78		—		—		78		53		—		—		53
Municipal securities	3,381		97		(8)		3,470		2,970		129		(2)		3,097
Asset-backed securities	1,141		8		(1)		1,148		1,154		13		(3)		1,164
Residential mortgage-backed securities	902		15		(6)		911		1,068		27		—		1,095
Commercial mortgage-backed securities	818		18		(6)		830		748		30		(5)		773
Equity securities (1)	317		—		—		317		318		—		—		318
Private equity investments	561		—		—		561		838		—		—		838
Life insurance contracts	179		—		—		179		168		—		—		168
Total	$	15,934	$	316	$	(58)	$	16,192	$	15,046	$	465	$	(18)	$	15,493

(1) Investments in equity securities primarily consists of exchange traded funds in fixed income securities.

The Company’s investments are debt securities classified as available-for-sale with the exception of equity securities, certain private equity investments and life insurance contracts. 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, 2021, 98% of the Company’s investments in rated securities carry an investment grade rating by nationally recognized statistical rating organizations. At September 30, 2021, the Company held certificates of deposit, equity securities, private equity investments and life insurance contracts, which did not carry a credit rating. Accrued interest income on available-for-sale debt securities was $92 million and $86 million at September 30, 2021 and December 31, 2020, respectively, and is included in other current assets on the Consolidated Balance Sheets.

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 4 years at September 30, 2021.

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, 2021								December 31, 2020
	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

Corporate securities	$	(35)	$	3,089	$	(2)	$	75	$	(7)	$	953	$	(1)	$	24
Municipal securities	(7)		929		(1)		26		(2)		238		—		—
Asset-backed securities	(1)		334		—		36		(2)		302		(1)		105
Residential mortgage-backed securities	(6)		428		—		1		—		59		—		2
Commercial mortgage-backed securities	(4)		272		(2)		33		(5)		147		—		13

Total	$	(53)	$	5,052	$	(5)	$	171	$	(16)	$	1,699	$	(2)	$	144

As of September 30, 2021, the gross unrealized losses were generated from 1,887 positions out of a total of 6,468 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 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, the Company did not record the unrealized loss in earnings for these securities.

In addition, the Company continuously monitors available-for-sale debt securities for credit losses. 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 allowance when evidence demonstrates that it is credit related. Evidence of a credit related loss may include rating agency actions, adverse conditions specifically related to the security, or failure of the issuer of the security to make scheduled payments.

In June 2019, the Company acquired 40% of Circle Health, one of the U.K.’s largest independent operators of hospitals. The initial 40% investment was accounted for as an equity method investment. In July 2021, the Company acquired the remaining 60% interest of Circle Health for $705 million. As a result of the acquisition, the Company recorded a non-cash gain of $309 million on its original investment in the three months ended September 30, 2021. The gain was included in investment and other income on the Consolidated Statement of Operations. Beginning in July 2021, the Company consolidates 100% of Circle Health.

In September 2021, the Company recorded a $229 million impairment of its equity method investment in RxAdvance, a pharmacy benefit manager. During the third quarter, the Company made a strategic decision to transition from using the RxAdvance platform and consolidate its business on an alternative external platform as a result of the Company's focus on simplification of its pharmacy operations. The impairment was based on the Company’s estimate of RxAdvance’s future cash flows and other market indicators of fair value.

The contractual maturities of short-term and long-term debt securities and restricted deposits are as follows ($ in millions):


	September 30, 2021								December 31, 2020
	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	$	1,355	$	1,361	$	507	$	508	$	1,407	$	1,414	$	817	$	818
One year through five years	5,701		5,845		355		355		4,748		4,937		221		223
Five years through ten years	3,791		3,865		243		243		3,460		3,639		18		19
Greater than ten years	56		61		8		8		81		87		—		—
Asset-backed securities	2,861		2,889		—		—		2,970		3,032		—		—
Total	$	13,764	$	14,021	$	1,113	$	1,114	$	12,666	$	13,109	$	1,056	$	1,060

Actual maturities may differ from contractual maturities due to call or prepayment options. Equity securities, private equity investments and life insurance contracts are excluded from the table above because they do not have a contractual maturity. 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.

3. 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.

The following table summarizes fair value measurements by level at September 30, 2021, 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	$	13,423	$	—	$	—	$	13,423
Investments:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	216	$	—	$	—	$	216
Corporate securities	—		7,796		—		7,796
Municipal securities	—		3,042		—		3,042
Short-term time deposits	—		78		—		78
Asset-backed securities	—		1,148		—		1,148
Residential mortgage-backed securities	—		911		—		911
Commercial mortgage-backed securities	—		830		—		830
Equity securities	315		2		—		317
Total investments	$	531	$	13,807	$	—	$	14,338
Restricted deposits:
Cash and cash equivalents	$	211	$	—	$	—	$	211
Certificates of deposit	—		4		—		4
Corporate securities	—		31		—		31
Municipal securities	—		428		—		428
U.S. Treasury securities and obligations of U.S. government corporations and agencies	440		—		—		440
Total restricted deposits	$	651	$	463	$	—	$	1,114
Other current assets:
Foreign currency swap agreement	$	—	$	18	$	—	$	18
Total assets at fair value	$	14,605	$	14,288	$	—	$	28,893

The following table summarizes fair value measurements by level at December 31, 2020, 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	$	10,800	$	—	$	—	$	10,800
Investments:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	165	$	—	$	—	$	165
Corporate securities	—		6,789		—		6,789
Municipal securities	—		3,070		—		3,070
Short-term time deposits	—		53		—		53
Asset backed securities	—		1,164		—		1,164
Residential mortgage backed securities	—		1,095		—		1,095
Commercial mortgage backed securities	—		773		—		773
Equity securities	316		2		—		318
Total investments	$	481	$	12,946	$	—	$	13,427
Restricted deposits:
Cash and cash equivalents	$	157	$	—	$	—	$	157
Certificates of deposit	—		105		—		105
Corporate securities	—		25		—		25
Municipal securities	—		27		—		27
U.S. Treasury securities and obligations of U.S. government corporations and agencies	746		—		—		746
Total restricted deposits	$	903	$	157	$	—	$	1,060



Total assets at fair value	$	12,184	$	13,103	$	—	$	25,287

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 private equity investments and life insurance contracts, which approximates fair value, was $740 million and $1,006 million as of September 30, 2021 and December 31, 2020, respectively.

4. Medical Claims Liability

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


	Nine Months Ended September 30,
	2021		2020

Balance, January 1	$	12,438	$	7,473
Less: Reinsurance recoverable	23		20
Balance, January 1, net	12,415		7,453
Acquisitions and divestitures	—		3,872

Incurred related to:
Current year	74,736		64,105
Prior years	(1,526)		(446)
Total incurred	73,210		63,659
Paid related to:
Current year	62,205		56,074
Prior years	9,344		6,032
Total paid	71,549		62,106
Balance at September 30, net	14,076		12,878
Plus: Reinsurance recoverable	23		21
Balance, September 30	$	14,099	$	12,899

Reinsurance recoverables related to medical claims are included in premium and trade receivables. Changes in estimates of incurred claims for prior years are primarily attributable to reserving under moderately adverse conditions. Additionally, as a result of minimum health benefits ratio (HBR) and other return of premium programs, the Company recorded $438 million and $97 million as a reduction to premium revenue in the nine months ended September 30, 2021 and 2020, respectively.

Incurred but not reported (IBNR) plus expected development on reported claims as of September 30, 2021 was $9,346 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. The Company estimates its 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.

5. Affordable Care Act

The Affordable Care Act established risk spreading premium stabilization programs as well as a minimum annual medical loss ratio (MLR) and cost sharing reductions.

In June 2021, the Centers for Medicare and Medicaid Services (CMS) announced the final risk adjustment transfers for the 2020 benefit year. As a result of the announcement, the Company increased its risk adjustment net payables by $83 million from December 31, 2020. After consideration of minimum MLR and other related impacts, the net pre-tax expense recognized was approximately $80 million in the second quarter of 2021.

The Company's net receivables (payables) for each of the programs are as follows ($ in millions):


	September 30, 2021		December 31, 2020
Risk adjustment receivable	$	463	$	340
Risk adjustment payable	(472)		(1,224)
Minimum medical loss ratio	(65)		(238)
Cost sharing reduction receivable	92		101
Cost sharing reduction payable	(12)		(1)

6. Debt

Debt consists of the following ($ in millions):


	September 30, 2021		December 31, 2020
$2,200 million 4.75% Senior Notes due January 15, 2025	$	—	$	2,230
$1,800 million 5.375% Senior Notes due June 1, 2026	—		1,800
$750 million 5.375% Senior Notes due August 15, 2026	—		794
$2,500 million 4.25% Senior Notes due December 15, 2027	2,484		2,482
$2,300 million 2.45% Senior Notes due July 15, 2028	2,304		—
$3,500 million 4.625% Senior Notes due December 15, 2029	3,500		3,500
$2,000 million 3.375% Senior Notes due February 15, 2030	2,000		2,000
$2,200 million 3.00% Senior Notes due October 15, 2030	2,200		2,200
$2,200 million 2.50% Senior Notes due March 1, 2031	2,200		—
$1,300 million 2.625% Senior Notes due August 1, 2031	1,300		—

Total senior notes	15,988		15,006
Term loan facility	2,195		1,450
Revolving credit agreement	150		97
Mortgage notes payable	—		50
Construction loan payable	188		180
Finance leases and other	495		153
Debt issuance costs	(177)		(157)
Total debt	18,839		16,779
Less current portion	(245)		(97)
Long-term debt	$	18,594	$	16,682

Senior Notes

In February 2021, the Company issued $2,200 million 2.50% Senior Notes due 2031 (the 2031 Notes). In conjunction with the 2031 Notes offering, the Company completed a tender offer (the Tender Offer) to purchase for cash, subject to certain conditions, any and all of the outstanding aggregate principal amount of the $2,200 million 4.75% Senior Notes due 2025 (the 2025 Notes). The Company used the net proceeds from the 2031 Notes, together with available cash on hand, to fund the purchase price for the 2025 Notes accepted for purchase in the Tender Offer (approximately 36% of the aggregate principal amount outstanding) and used the remaining proceeds to redeem any of the 2025 Notes that remained outstanding following the Tender Offer, including all premiums, accrued interest and costs and expenses related to the redemption. The Company recognized a pre-tax loss on extinguishment of $46 million on the redemption of the 2025 Notes, including the call premium, the write-off of the unamortized premium and debt issuance costs, and expenses related to the redemption.

In July 2021, the Company issued $1,800 million 2.45% Senior Notes due 2028 (the 2028 Notes). The Company intends to use the net proceeds from the offering of the 2028 Notes to finance a portion of the cash consideration payable in connection with its previously announced acquisition of Magellan Health Inc. and to pay related fees and expenses. If the Magellan Acquisition is not completed, the Company expects to use the net proceeds of the offering for debt repayment and general corporate purposes.

In August 2021, the Company issued $1,800 million aggregate principal amount of Senior Notes which included $500 million aggregate principal amount of additional 2028 Notes at a premium to yield 2.31% and $1,300 million aggregate principal amount of new 2.625% Senior Notes due 2031. The Company used the net proceeds of the offering, together with cash on hand and term loan facility borrowings, to redeem all of its outstanding 5.375% Senior Notes due 2026 and WellCare Health Plans, Inc.'s outstanding 5.375% Senior Notes due 2026 (together the 2026 Notes), including all premiums, accrued interest and costs and expenses. The Company recognized a pre-tax loss on extinguishment of $79 million on the redemptions of the 2026 Notes, including the call premium, the write-off of the unamortized premium and debt issuance costs, and expenses related to the redemptions.

Foreign Currency Swap

In connection with the July 2021 acquisition of the remaining 60% interest of Circle Health, the Company funded an intercompany note receivable with an international subsidiary, which is denominated in Great British Pounds and remeasured through earnings each period. In order to manage the resulting foreign exchange risk associated with the note receivable, the Company entered into a foreign currency swap agreement for a notional amount of $705 million, to purchase £509 million. The swap agreement is formally designated and qualifies as a fair value hedge. Gains and losses due to changes in the fair value of the foreign currency swap completely offset changes in the remeasurement of the intercompany note receivable within investment and other income in the Consolidated Statement of Operations. Therefore, there is no net impact to the Consolidated Statement of Operations. The swap expires on March 1, 2022.

The fair value of the swap agreement as of September 30, 2021, was $18 million, which was recorded in other current assets in the Consolidated Balance Sheet. Based on the current fair value of the swap, the Company expects an immaterial impact to its cash flows upon concurrent settlement of the swap and intercompany note receivable. The offsetting changes in fair value of the foreign currency swap and the remeasurement on the underlying intercompany note receivable were both recognized in investment and other income in the Consolidated Statements of Operations. The Company does not hold or issue any derivative instruments for trading or speculative purposes.

The fair value of the swap contract excludes accrued interest and considers the swap counterparty’s credit risk and the current likelihood of the counterparty’s compliance with its contractual obligations.

Revolving Credit Agreement and Term Loan Credit Facility

In August 2021, the Company amended and restated its existing credit agreement to, among other things, (i) extend the various maturities under the Existing Credit Agreement until 2026, (ii) increase the aggregate principal amount of the U.S. dollar unsecured term loan facility under the Existing Credit Agreement from $1,450 million to $2,200 million, (iii) increase the maximum total net leverage ratio permitted under the total debt to EBITDA financial covenant from 3.50:1.00 to 4.00:1.00, (iv) reduce the applicable margin with respect to borrowings to between 1.50% to 1.125%, based on the total debt to EBITDA ratio and type of borrowing and (v) include scheduled amortization payments with respect to the term loan facility equal to 0.0% for the first year following closing, 2.5% for the second year following closing and 5% thereafter until maturity.

Construction Loan

In October 2017, the Company executed a $200 million non-recourse construction loan to fund the expansion of the Company's corporate headquarters. Until final completion of the construction project, which occurred in July 2021, the loan bore interest based on one month LIBOR plus 2.70%, which reduced to LIBOR plus 2.00% at the time construction was completed. The agreement contains financial and non-financial covenants similar to those contained in the Company Credit Facility. The Company guaranteed completion of the construction project associated with the loan. In April 2021, the Company finalized the one year extension of the construction loan maturing in April 2022. As of September 30, 2021, the Company had $188 million in borrowings outstanding under the loan, which is included in the current portion of long-term debt.

Mortgage Notes Payable

The Company paid its non-recourse mortgage note of $50 million in January 2021. The mortgage note was collateralized by its corporate headquarters building and bore a 5.14% interest rate.

7. Leases

The Company records right of use (ROU) assets and lease liabilities for non-cancelable operating leases primarily for real estate and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Expense related to leases is recorded on a straight-line basis over the lease term, including rent holidays. The Company recognized operating lease expense of $123 million and $68 million for the three months ended September 30, 2021 and 2020, respectively, and $257 million and $202 million for the nine months ended September 30, 2021 and 2020, respectively. The increase in operating lease expense is primarily due to the acquisition of the remaining 60% interest of Circle Health, one of the U.K.’s largest independent operators of hospitals, in July 2021, which leases its hospitals and facilities.

The following table sets forth the ROU assets and lease liabilities ($ in millions):


	September 30, 2021		December 31, 2020
Assets

ROU assets (recorded within other long-term assets)	$	3,637	$	1,311

Liabilities
Short-term (recorded within accounts payable and accrued expenses)	$	200	$	204
Long-term (recorded within other long-term liabilities)	3,660		1,334
Total lease liabilities	$	3,860	$	1,538

During the three and nine months ended September 30, 2021, the Company reduced its lease liabilities by $136 million and $274 million, respectively, for cash paid. In addition, new operating leases commenced or were acquired resulting in the recognition of ROU assets and lease liabilities of $2,396 million and $2,504 million, during the three and nine months ended September 30, 2021, respectively. Of the newly commenced operating leases, $2,351 million of the increase in ROU assets and lease liabilities is due to the Company’s acquisition of the remaining 60% interest in its investment in Circle Health that occurred in July 2021. As of September 30, 2021, the Company had additional operating leases that have not yet commenced of $43 million. These operating leases will commence in 2021 and 2022 with lease terms ranging from two to nine years.

Prior to the acquisition of the remaining Circle Health portfolio, the average remaining lease term of the Company’s operating lease population was 9.2 years. The average remaining lease term of the Circle Health portfolio is 28.9 years resulting in a weighted average remaining lease term for the Company of 21.4 years as of September 30, 2021. The lease liabilities as of September 30, 2021 reflect a weighted average discount rate of 5.7%. Lease payments over the next five years and thereafter are as follows ($ in millions):


	September 30, 2021
2021	$	86
2022	409
2023	388
2024	370
2025	337
2026	316
Thereafter	5,546
Total lease payments	7,452
Less: imputed interest	(3,592)
Total lease liabilities	$	3,860

8. Earnings Per Share

The following table sets forth the calculation of basic and diluted net earnings per common share ($ in millions, except per share data in dollars and shares in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020

Earnings attributable to Centene Corporation	$	584	$	568	$	748	$	1,820

Shares used in computing per share amounts:
Weighted average number of common shares outstanding	583,244		579,510		582,636		567,586
Common stock equivalents (as determined by applying the treasury stock method)	7,458		8,461		7,518		8,146
Weighted average number of common shares and potential dilutive common shares outstanding	590,702		587,971		590,154		575,732

Net earnings per common share attributable to Centene Corporation:
Basic earnings per common share	$	1.00	$	0.98	$	1.28	$	3.21
Diluted earnings per common share	$	0.99	$	0.97	$	1.27	$	3.16

The calculation of diluted earnings per common share for the three months ended September 30, 2021 and 2020 excludes the impact of 111 thousand and 64 thousand shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units.

The calculation of diluted earnings per common share for the nine months ended September 30, 2021 and 2020 excludes the impact of 57 thousand and 75 thousand shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units.

9. 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. Factors used in determining the reportable business segments include the nature of operating activities, the existence of separate senior management teams, and the type of information presented to the Company’s chief operating decision-maker to evaluate all results of operations. Segment information for the three and nine months ended September 30, 2020 has been conformed to the 2021 presentation of segment eliminations.

Segment information for the three months ended September 30, 2021, is as follows ($ in millions):


	Managed Care		Specialty Services		Eliminations		Consolidated Total
Total revenues from external customers	$	30,888	$	1,518	$	—	$	32,406
Total revenues from internal customers	1		3,209		(3,210)		—
Total revenues	$	30,889	$	4,727	$	(3,210)	$	32,406
Earnings from operations	$	699	$	(154)	$	—	$	545

Segment information for the three months ended September 30, 2020, is as follows ($ in millions):


	Managed Care		Specialty Services		Eliminations		Consolidated Total
Total revenues from external customers	$	28,014	$	1,076	$	—	$	29,090
Total revenues from internal customers	2		2,698		(2,700)		—
Total revenues	$	28,016	$	3,774	$	(2,700)	$	29,090
Earnings from operations	$	888	$	(27)	$	—	$	861

Segment information for the nine months ended September 30, 2021, is as follows ($ in millions):


	Managed Care		Specialty Services		Eliminations		Consolidated Total
Total revenues from external customers	$	89,078	$	4,336	$	—	$	93,414
Total revenues from internal customers	4		9,217		(9,221)		—
Total revenues	$	89,082	$	13,553	$	(9,221)	$	93,414
Earnings from operations	$	1,240	$	(59)	$	—	$	1,181

Segment information for the nine months ended September 30, 2020, is as follows ($ in millions):


	Managed Care		Specialty Services		Eliminations		Consolidated Total
Total revenues from external customers	$	79,573	$	3,254	$	—	$	82,827
Total revenues from internal customers	4		7,949		(7,953)		—
Total revenues	$	79,577	$	11,203	$	(7,953)	$	82,827
Earnings from operations	$	3,014	$	53	$	—	$	3,067

10. Contingencies

Overview

The Company is routinely subjected to legal and regulatory proceedings in the normal course of business. These matters can include, without limitation:

periodic compliance and other reviews and investigations by various federal and state regulatory agencies with respect to requirements applicable to the Company’s business, including, without limitation, those related to payment of out-of-network claims, submissions to CMS for risk adjustment payments or the False Claims Act, submissions to state agencies related to payments or state false claims acts, pre-authorization penalties, timely review of grievances and appeals, timely and accurate payment of claims, and the Health Insurance Portability and Accountability Act of 1996 and other federal and state fraud, waste and abuse laws;
litigation arising out of general business activities, such as tax matters, disputes related to healthcare benefits coverage or reimbursement, putative securities class actions and medical malpractice, privacy, real estate, intellectual property and employment-related claims; and
disputes regarding reinsurance arrangements, claims arising out of the acquisition or divestiture of various assets, class actions and claims relating to the performance of contractual and non-contractual obligations to providers, members, employer groups and others, including, but not limited to, the alleged failure to properly pay claims and challenges to the manner in which the Company processes claims, claims related to network adequacy and claims alleging that the Company has engaged in unfair business practices.

Among other things, these matters may result in awards of damages, fines or penalties, which could be substantial, and/or could require changes to the Company’s business. The Company intends to vigorously defend itself against legal and regulatory proceedings to which it is currently a party; however, these proceedings are subject to many uncertainties. In some of the cases pending against the Company, substantial non-economic or punitive damages are being sought.

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, except for the reserve estimate as described below with respect to claims or potential claims involving services provided by Envolve Pharmacy Solutions, Inc. (Envolve), as the Company’s pharmacy benefits manager subsidiary. 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.

California

On October 20, 2015, the Company’s California subsidiary, Health Net of California, Inc. (Health Net California), was named as a defendant in a California taxpayer action filed in Los Angeles County Superior Court, captioned as Michael D. Myers v. State Board of Equalization, Dave Jones, Insurance Commissioner of the State of California, Betty T. Yee, Controller of the State of California, et al., Los Angeles Superior Court Case No. BS158655. This action is brought under a California statute that permits an individual taxpayer to sue a governmental agency when the taxpayer believes the agency has failed to enforce governing law. Plaintiff contends that Health Net California, a California licensed Health Care Service Plan (HCSP), is an “insurer” for purposes of taxation despite acknowledging it is not an “insurer” under regulatory law. Under California law, “insurers” must pay a gross premiums tax (GPT), calculated as 2.35% on gross premiums. As a licensed HCSP, Health Net California has paid the California Corporate Franchise Tax (CFT), the tax generally paid by California businesses. Plaintiff contends that Health Net California must pay the GPT rather than the CFT. Plaintiff seeks a writ of mandate directing the California taxing agencies to collect the GPT, and seeks an order requiring Health Net California to pay GPT, interest and penalties for a period dating to eight years prior to the October 2015 filing of the complaint. This lawsuit is being coordinated with similar lawsuits filed against other entities (collectively, Related Actions). In March 2018, the Court overruled the Company’s demurrer seeking to dismiss the complaint and denied the Company’s motion to strike allegations seeking retroactive relief. In August 2018, the trial court stayed all the Related Actions pending determination of a writ of mandate by the California Court of Appeals in two of the Related Actions. In March 2019, the California Court of Appeals denied the writ of mandate. The defendants in those Related Actions sought review by the California Supreme Court, which declined to review the matter. Upon the return of the matter to the Los Angeles County Superior Court, motions for summary judgment were scheduled. Health Net California’s motion for summary judgment was heard by the Court in March 2020. In March 2020, the Court granted Health Net California’s motion for summary judgment. In September 2020, the plaintiff appealed the Court’s decision. The Company intends to continue its vigorous defense against these claims; however, this matter is subject to many uncertainties, and an adverse outcome in this matter could potentially have a materially adverse impact on the Company’s financial position, results of operations and cash flows.

Beginning in April 2021, several lawsuits have been filed against the Company and its subsidiaries, alleging that the defendants failed to prevent Health Net members' personal and health data from being exposed in connection with a data breach involving Accellion's File Transfer Appliance. The Company denies any wrongdoing and intends to vigorously defend against the claims in these lawsuits. In addition, claims related to these lawsuits are anticipated to be covered in part by the Company’s insurance carrier. As a result, while these matters are subject to many uncertainties, the Company does not believe that an adverse outcome in these matters is likely to have a materially adverse impact on the Company’s financial position, results of operations and cash flows.

Ohio, Mississippi and Other States

On March 11, 2021, the State of Ohio filed a civil action against the Company and the Company’s subsidiaries, Buckeye Health Plan Community Solutions, Inc. and Envolve, in Franklin County Court of Common Pleas, captioned as Ohio Department of

Medicaid, et al. v. Centene Corporation, et al. The complaint alleged breaches of contract with the Ohio Department of Medicaid relating to the provision of pharmacy benefits management (PBM) services and violations of Ohio law relating to such contracts, including among other things, by (i) seeking payment for services already reimbursed, (ii) not accurately disclosing to the Ohio Department of Medicaid the true cost of the PBM services and (iii) inflating dispensing fees for prescription drugs. The plaintiffs sought an undisclosed sum of money in damages, penalties, and possible termination of the contract with Buckeye Health Plan.

In June 2021, the Company reached no-fault agreements with the Attorney General of Ohio and with the Attorney General and State Auditor of Mississippi to resolve claims and/or allegations made by the states related to services provided by Envolve. The Company will pay $88 million to Ohio and $55 million to Mississippi. As a result of the settlement, the Ohio Attorney General’s litigation against the Company was dismissed. In addition, in September 2021, the Company reached no-fault agreements with the Attorney General of Arkansas and the Attorney General of Illinois to resolve claims related to services provided by Envolve. The Company will pay $15 million to Arkansas and $57 million to Illinois. Additionally, the Company is in discussions with a plaintiff’s group in an effort to bring final resolution to similar concerns in other affected states. Consistent with those discussions, the Company recorded a reserve estimate of $1,250 million in the second quarter of 2021 related to this issue, inclusive of the above settlements. Additional claims, reviews or investigations relating to the Company’s PBM business may be brought by other states, the federal government or shareholder litigants, and there is no guarantee the Company will have the ability to settle such claims with other states within the reserve estimate the Company has recorded and on other acceptable terms, or at all. This matter is subject to many uncertainties, and an adverse outcome in this matter could have an adverse impact on the Company’s financial position, results of operations and cash flows.

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