UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
                                            


FORM 10-Q
 

 
(Mark One)
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   

For the quarterly period ended March 31, 2010
OR

[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   

For the transition period from                  to
                                            
Commission file number 001-31826

 
CENTENE CORPORATIO
(Exact name of registrant as specified in its charter)

Delaware
42-1406317
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification Number)
   
7711 Carondelet Avenue
 
St. Louis, Missouri
63105
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code:
 
(314) 725-4477
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: T Yes £ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). £ Yes £ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.  Large accelerated filer T Accelerated filer £ Non-accelerated filer £ (do not check if a smaller reporting company) Smaller reporting company £

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

As of April 16, 2010, the registrant had 51,502,956 shares of common stock outstanding.



 
 
 
 

CENTENE CORPORATION

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

   
PAGE
     
Part I
Financial Information
Item 1.
 
 
1
 
2
 
3
 
4
 
5
Item 2.
10
Item 3.
15
Item 4.
15
Part II
Other Information
Item 1A.
16
Item 2.
21
Item 6.
22
23

 
 
 

 
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

All statements, other than statements of current or historical fact, contained in this filing are forward-looking statements.  We have attempted to identify these statements by terminology including “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “seek,” “target,” “goal,” “may,” “will,” “should,” “can,” “continue” and other similar words or expressions in connection with, among other things, any discussion of future operating or financial performance.  In particular, these statements include statements about our market opportunity, our growth strategy, competition, expected activities and future acquisitions, investments and the adequacy of our available cash resources.  These statements may be found in the various sections of this filing, including those entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Part II, Item 1A.  “Risk Factors.”  Readers are cautioned that matters subject to forward-looking statements involve known and unknown risks and uncertainties, including economic, regulatory, competitive and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.  These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions.

All forward-looking statements included in this filing are based on information available to us on the date of this filing.  Actual results may differ from projections or estimates due to a variety of important factors, including:

·  
our ability to accurately predict and effectively manage health benefits and other operating expenses;
·  
competition;
·  
changes in healthcare practices;
·  
changes in federal or state laws or regulations;
·  
inflation;
·  
provider contract changes;
·  
new technologies;
·  
reduction in provider payments by governmental payors;
·  
major epidemics;
·  
disasters and numerous other factors affecting the delivery and cost of healthcare;
·  
the expiration, cancellation or suspension of our Medicaid managed care contracts by state governments;
·  
availability of debt and equity financing, on terms that are favorable to us; and
·  
general economic and market conditions.


 
 


PART I

FINANCIAL INFORMATION

ITEM 1. Financial Statements.

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 
   
March 31,
 2010
   
December 31,
  2009
 
ASSETS
           
Current assets:
           
Cash and cash equivalents of continuing operations, including $5,918 and $8,667, respectively, from consolidated variable interest entities
  $ 350,075     $ 400,951  
Cash and cash equivalents of discontinued operations
    14       2,801  
Total cash and cash equivalents
    350,089       403,752  
Premium and related receivables, net of allowance for uncollectible accounts of $1,338 and $1,338, respectively, including $6,565 and $11,313, respectively, from consolidated variable interest entities
    110,120       103,456  
Short-term investments, at fair value (amortized cost $39,953 and $39,230, respectively)
    40,220       39,554  
Other current assets, including $5,023 and $4,507, respectively, from consolidated variable interest entities
    69,136       64,866  
Current assets of discontinued operations other than cash
    2,337       4,506  
Total current assets
    571,902       616,134  
Long-term investments, at fair value (amortized cost $547,148 and $514,256, respectively)
    558,270       525,497  
Restricted deposits, at fair value (amortized cost $20,532 and $20,048, respectively)
    20,618       20,132  
Property, software and equipment, net of accumulated depreciation of $111,938 and $103,883, respectively, including $110,764 and $89,219, respectively, from consolidated variable interest entities
    269,492       230,421  
Goodwill
    229,512       224,587  
Intangible assets, net
    22,008       22,479  
Other long-term assets
    35,416       36,829  
Long-term assets of discontinued operations
    23,453       26,285  
Total assets
  $ 1,730,671     $ 1,702,364  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Medical claims liability
  $ 444,826     $ 470,932  
Accounts payable and accrued expenses, including $23,122 and $14,020, respectively, from consolidated variable interest entities
    200,615       132,001  
Unearned revenue
    18,362       91,644  
Current portion of long-term debt
    660       646  
Current liabilities of discontinued operations
    20,650       20,685  
Total current liabilities
    685,113       715,908  
Long-term debt
    232,064       307,085  
Other long-term liabilities
    63,575       59,561  
Long-term liabilities of discontinued operations
    385       383  
Total liabilities
    981,137       1,082,937  
                 
Commitments and contingencies
               
                 
Stockholders’ equity:
               
Common stock, $.001 par value; authorized 100,000,000 shares; 51,490,256 issued and 49,049,990 outstanding at March 31, 2010, and 45,593,383 shares issued and 43,179,373 shares outstanding at December 31, 2009
    51       46  
Additional paid-in capital
    390,878       281,806  
Accumulated other comprehensive income:
               
Unrealized gain on investments, net of tax
    7,203       7,348  
Retained earnings
    382,909       358,907  
Treasury stock, at cost (2,440,266 and 2,414,010 shares, respectively)
    (47,742 )     (47,262 )
Total Centene stockholders’ equity
    733,299       600,845  
Noncontrolling interest
    16,235       18,582  
Total stockholders’ equity
    749,534       619,427  
Total liabilities and stockholders’ equity
  $ 1,730,671     $ 1,702,364  

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

 
 
1

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)

 
 
Three Months Ended March 31,
 
 
2010
   
2009
 
Revenues:
             
Premium
$
999,315
   
$
885,006
 
Service
 
22,907
     
23,849
 
Premium and service revenues
 
1,022,222
     
908,855
 
Premium tax
 
46,499
     
23,580
 
Total revenues
 
1,068,721
     
932,435
 
Expenses:
             
Medical costs
 
839,708
     
739,340
 
Cost of services
 
17,152
     
15,962
 
General and administrative expenses
 
135,507
     
122,279
 
Premium tax
 
46,743
     
23,942
 
Total operating expenses
 
1,039,110
     
901,523
 
Earnings from operations
 
29,611
     
30,912
 
Other income (expense):
             
Investment and other income
 
7,057
     
3,613
 
Interest expense
 
(3,813
)
   
(3,986
)
Earnings from continuing operations, before income tax expense
 
32,855
     
30,539
 
Income tax expense
 
12,525
     
10,845
 
Earnings from continuing operations, net of income tax expense
 
20,330
     
19,694
 
Discontinued operations, net of income tax expense (benefit) of $4,440 and $(160), respectively
 
3,920
     
(449
)
Net earnings
 
24,250
     
19,245
 
Noncontrolling interest
 
248
     
787
 
Net earnings attributable to Centene Corporation
$
24,002
   
$
18,458
 
               
Amounts attributable to Centene Corporation common shareholders:
             
Earnings from continuing operations, net of income tax expense
$
20,082
   
$
18,907
 
Discontinued operations, net of income tax expense (benefit)
 
3,920
     
(449
)
Net earnings
$
24,002
   
$
18,458
 
               
Net earnings (loss) per share attributable to Centene Corporation:
             
Basic:
             
Continuing operations
$
0.43
   
$
0.44
 
Discontinued operations
 
0.08
     
(0.01
)
Earnings per common share
$
0.51
   
$
0.43
 
Diluted:
             
Continuing operations
$
0.41
   
$
0.43
 
Discontinued operations
 
0.08
     
(0.01
)
Earnings per common share
$
0.49
   
$
0.42
 
               
Weighted average number of shares outstanding:
             
Basic
 
47,260,714
     
43,067,992
 
Diluted
 
48,761,528
     
44,238,863
 

The accompanying notes to the consolidated financial statements are an integral part of these statements.
 
 
2

CENTENE CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)
Three Months Ended March 31, 2010
 ­
   
Centene Stockholders’ Equity
               
   
Common Stock
                       
Treasury Stock
               
   
$.001 Par
Value
Shares
   
Amt
   
Additional
Paid-in
Capital
   
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
$.001 Par
Value
Shares
 
Amt
 
Noncontrolling
Interest
   
Total
 
Balance, December 31, 2009
 
45,593,383
   
$
46
   
$
281,806
   
$
7,348 
 
$
358,907
 
2,414,010
 
$
(47,262)
 
$
18,582
   
$
619,427
 
Consolidation of Syncare LLC
 
—  
     
—  
     
—  
     
—  
   
—  
 
—  
   
—  
   
219
     
219
 
Comprehensive Earnings:
                                                           
Net earnings
 
—  
     
—  
     
—  
     
—  
   
24,002
 
—  
   
—  
   
248
     
24,250
 
Change in unrealized investment gain, net of $(53) tax
 
—  
     
—  
     
—  
     
(145)
   
—  
 
—  
   
—  
   
—  
     
(145
Total comprehensive earnings
                                                       
24,105
 
Common stock issued for stock offering
 
5,750,000
     
     
104,552
     
—  
   
—  
       
—  
   
—  
     
104,557
 
Common stock issued for employee benefit plans
 
146,873
     
—  
     
749
     
—  
   
—  
       
—  
   
—  
     
749
 
Common stock repurchases
 
—  
     
—  
     
—  
     
—  
   
—  
 
26,256
   
(480)
   
—  
     
(480
)
Issuance of stock warrants
 
—  
     
—  
     
296
     
—  
   
—  
       
—  
   
—  
     
296
 
Stock compensation expense
 
—  
     
—  
     
3,460
     
—  
   
—  
 
—  
   
—  
   
—  
     
3,460
 
Excess tax benefits from stock compensation
 
—  
     
—  
     
15
     
—  
   
—  
 
—  
   
—  
   
—  
     
15
 
Contribution from noncontrolling interest
 
—  
     
—  
     
—  
     
—  
   
—  
 
—  
   
—  
   
771
     
771
 
Distributions to noncontrolling interest
 
—  
     
—  
     
—  
     
—  
   
—  
 
—  
   
—  
   
(3,585)
     
(3,585
)
Balance, March 31, 2010
 
51,490,256
   
$
51
   
$
390,878
   
$
7,203 
 
$
382,909
 
2,440,266
 
$
(47,742)
 
$
16,235 
   
$
749,534
 

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


 
3

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

   
Three Months EndedMarch 31,
 
   
2010
   
2009
 
             
Cash flows from operating activities:
           
    Net earnings
  $ 24,250     $ 19,245  
Adjustments to reconcile net earnings to net cash provided by operating activities
               
  Depreciation and amortization
    12,527       10,233  
  Stock compensation expense
    3,460       3,789  
  (Gain) loss on sale of investments, net
    (3,547 )     439  
  (Gain) on sale of UHP
    (8,201 )      
  Deferred income taxes
    950       2,282  
  Changes in assets and liabilities
               
  Premium and related receivables
    (4,457     (39,396 )
  Other current assets
    (1,375 )     (1,397 )
  Other assets
    1,937       (497 )
  Medical claims liabilities
    (33,129 )     2,165  
  Unearned revenue
    (73,282 )     44,507  
  Accounts payable and accrued expenses
    40,433       (18,674 )
  Other operating activities
    1,934       722  
      Net cash (used in) provided by operating activities
    (38,500     23,418  
Cash flows from investing activities:
               
Capital expenditures
    (23,099 )     (11,157 )
Purchases of investments
    (146,935 )     (292,964 )
Proceeds from asset sales
    13,420        
Sales and maturities of investments
    117,469       224,312  
Investments in acquisitions, net of cash acquired
    (2,019 )     (5,191 )
     Net cash used in investing activities
    (41,164 )     (85,000 )
Cash flows from financing activities:
               
Proceeds from exercise of stock options
    519       890  
Proceeds from borrowings
    22,030       108,000  
Proceeds from stock offering
    104,557        
Payment of long-term debt
    (97,136 )     (82,573 )
Distributions to noncontrolling interest
    (3,585 )     (1,181 )
Excess tax benefits from stock compensation
    96       (17 )
Common stock repurchases
    (480 )     (407 )
     Net cash provided by financing activities
    26,001       24,712  
     Net decrease in cash and cash equivalents
    (53,663     (36,870 )
Cash and cash equivalents, beginning of period
    403,752       379,099  
Cash and cash equivalents, end of period
  $ 350,089     $ 342,229  
                 
Supplemental disclosures of cash flow information:
               
Interest paid
  $ 345     $ 724  
Income taxes paid
  $ 8,272     $ 18,602  
                 
Supplemental disclosure of non-cash investing and financing activities:
               
Contribution from noncontrolling interest
  $ 306     $  
 
The accompanying notes to the consolidated financial statements are an integral part of these statements.

 
4

CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
(Unaudited)

1. 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 for the fiscal year ended December 31, 2009 filed on Form 10-K on February 22, 2010.  The unaudited interim financial statements herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the December 31, 2009, 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 2009 amounts in the consolidated financial statements have been reclassified to conform to the 2010 presentation. These reclassifications have no effect on net earnings or stockholders’ equity as previously reported.
 
2. Recent Accounting Pronouncements

In June 2009, new guidance was issued related to the consolidation of variable interest entities to require an analysis to determine whether a variable interest gives the Company a controlling financial interest in a variable interest entity. This guidance requires an ongoing reassessment and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. This guidance is effective for fiscal years beginning after November 15, 2009, and early adoption is prohibited.  The adoption of this guidance did not have an impact on the consolidated financial statements and related disclosures.

The Company has determined that all other recently issued accounting guidance will not have a material impact on its consolidated financial position, results of operations and cash flows, or do not apply to its operations.

3. Discontinued Operations: University Health Plans, Inc.

In March 2010, the Company completed the sale of certain assets of the New Jersey health plan, University Health Plans, Inc., or UHP, and  recorded a pre-tax gain of $8,201.  Goodwill and intangible assets associated with the New Jersey operations disposed of as a part of the sale were $3,720.  The assets, liabilities and results of operations of UHP were classified as discontinued operations for all periods presented beginning in December 2008 and were previously reported in the Medicaid Managed Care segment.  The total revenue associated with UHP included in results from discontinued operations was $22,332 and $36,966 for the three months ended March 31, 2010 and 2009, respectively.   UHP had statutory capital of approximately $10,000 at March 31, 2010, which will be transferred to unregulated cash upon receiving regulatory approval.

During the three months ending March 31, 2010, the Company incurred additional exit costs related to lease termination costs and employee retention programs.  The change in the exit cost liability for UHP is summarized as follows:

   
Employee Benefits
   
Lease Termination
   
Total
 
Balance, December 31, 2009
  $ 2,726     $ 267     $ 2,993  
Incurred
    73       1,136       1,209  
Paid
    (848 )     (267     (1,115
Balance, March 31, 2010
  $ 1,951     $ 1,136     $ 3,087  

4. Variable Interest Entities

Centene Center LLC
 
In June 2009, the Company executed an agreement as a 50% joint venture partner in a real estate development entity, Centene Center LLC, associated with the construction of a real estate development to include the Company’s corporate headquarters.  Centene Center LLC is a variable interest entity, or VIE, and the Company concluded it was the primary beneficiary.  Accordingly, the Company’s consolidated financial statements include the accounts of Centene Center LLC.
 
As part of financing the real estate development, Centene Center LLC executed a $95,000 construction loan due June 1, 2011, which may be extended for two additional one year terms.  The Company and its development partner have guaranteed up to $65,000 each associated with this construction loan.  As of March 31, 2010, there was $41,588 outstanding under this loan and Centene Center LLC has capitalized $449 of interest in 2010.

Access Health Solutions

The Company maintains a 49% ownership interest in Access Health Solutions, LLC, a Medicaid managed care entity in Florida.  The Company also has rights to acquire the remaining assets and ownership interests in Access.  As a result of these rights, the Company determined that Access is a VIE and the Company is the primary beneficiary.  The Company records its investment in Access as a consolidated subsidiary in its financial statements.

Syncare, LLC

During the first quarter of 2010, one of the Company’s employees became the owner of Syncare, LLC, a disease management company providing services to private and public insurers.  Additionally, the Company is a guarantor on a $300 loan that was utilized to purchase the business and is a guarantor of Syncare’s $100 business loan.  As a result, the Company determined that Syncare is a VIE and the Company is the primary beneficiary.  The Company has presented Syncare, LLC as a consolidated entity effective February 1, 2010.

Summary

The carrying amounts of the consolidated assets and liabilities related to the Company’s interest in Centene Center LLC, Access Health Solutions and Syncare, LLC, are:
 
   
March 31, 2010
   
December 31, 2009
 
Cash and cash equivalents
  $ 5,918     $ 8,667  
Premium and related receivables
    6,565       11,313  
Other current assets
    5,023       4,507  
Property, software and equipment
    110,764       89,219  
                 
Accounts payable and accrued expenses
  $ 23,122     $ 14,020  
Long-term debt
    41,688       32,559  

The assets of each VIE can only be used to settle obligations of each respective VIE.  With respect to the Long-term debt balances, creditors have recourse to the Company through the guarantees discussed above.
 
 
5

5. Investments and Restricted Deposits

Short-term and long-term investments and restricted deposits by investment type consist of the following:

   
March 31, 2010
   
December 31, 2009
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
U.S. Treasury securities
  $ 27,095     $ 314     $ (3 )   $ 27,406     $ 27,080     $ 213     $ (5 )   $ 27,288  
Corporate securities
    215,198       1,138       (233 )     216,103       165,720       581       (940 )     165,361  
State and municipal securities
    319,255       9,700       (51 )     328,904       333,955       11,628       (31 )     345,552  
Equity securities
    11,515       478       (117 )     11,876       9,751       312       (170 )     9,893  
Reserve Primary fund
                            2,444                   2,444  
Life insurance contracts
    14,723                   14,723       14,650                   14,650  
Asset backed securities
    19,847       249             20,096       19,934       61             19,995  
Total
  $ 607,633     $ 11,879     $ (404 )   $ 619,108     $ 573,534     $ 12,795     $ (1,146 )   $ 585,183  

The Company’s investments are classified as available for sale with the exception of life insurance contracts and certain cost method investments.  The Company monitors investments for other than temporary impairment.  Certain investments have experienced a decline in fair value due to changes in credit quality, market interest rates and/or general economic conditions.  Based on management’s intent and ability to not sell these investments prior to their anticipated recovery, no other than temporary impairment has been recorded.  Investments in a gross unrealized loss position are as follows:

   
March 31, 2010
   
December 31, 2009
 
   
Less Than 12 Months
   
12 Months or More
   
Less Than 12 Months
   
12 Months or More
 
   
Unrealized Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
 
U.S. Treasury securities
  $ (3 )   $ 1,653     $     $     $ (5 )   $ 785     $     $  
Corporate securities
    (233 )     68,202                   (901 )     99,418       (39     892  
State and municipal securities
    (51 )     11,489                   (31 )     9,683              
Equity securities
    (34 )     143       (83     781       (84 )     527       (86     629  
Asset backed securities
                                               
Total
  $ (321 )   $ 81,487     $ (83 )   $ 781     $ (1,021 )   $ 110,413     $ (125 )   $ 1,521  

The contractual maturities of short-term and long-term investments and restricted deposits as of March 31, 2010, are as follows:

   
Investments
   
Restricted Deposits
 
   
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
One year or less
  $ 39,953     $ 40,220     $ 19,352     $ 19,394  
One year through five years
    494,830       505,585       1,180       1,224  
Five years through ten years
    31,727       32,089              
Greater than ten years
    20,591       20,596              
Total
  $ 587,101     $ 598,490     $ 20,532     $ 20,618  

The contractual maturities of short-term and long-term investments and restricted deposits as of December 31, 2009, are as follows:

   
Investments
   
Restricted Deposits
 
   
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
One year or less
  $ 39,230     $ 39,554     $ 17,737     $ 17,758  
One year through five years
    456,041       467,112       2,311       2,374  
Five years through ten years
    28,597       28,780              
Greater than ten years
    29,618       29,605              
Total
  $ 553,486     $ 565,051     $ 20,048     $ 20,132  

Actual maturities may differ from contractual maturities due to call or prepayment options.  Asset backed securities are included in the one year through five years category, while equity securities and life insurance contracts are included in the five years through ten years category.   The Company has an option to redeem at amortized cost substantially all of the securities included in the Greater than ten years category listed above.
 
The Company’s gross recorded realized gains and losses on investments were as follows:

 
Three Months Ended March 31, 2010
 
 
2010
 
2009
 
Gains
  $ 3,034     $ 380  
Losses
          (819 )
Net realized gains (losses)
  $ 3,034     $ (439 )

Investment and other income in the first quarter of 2010 included a realized gain related to the Reserve Primary money market fund.   During 2008, we recorded a loss of $4,457 related to our investment in the Reserve Primary money market fund whose Net Asset Value fell below $1.00 per share.   In January 2010, we received a distribution from the fund of $5,405 and recorded a gain of $2,961 in the first quarter of 2010, representing distributions received in excess of our adjusted basis.
 
 
6

 
6. Fair Value Measurements
 
Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the extent to which the fair value estimates are based upon observable or unobservable inputs.  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 March 31, 2010, for assets and liabilities measured at fair value on a recurring basis:
 
   
Level I
   
Level II
   
Level III
   
Total
 
Cash and cash equivalents
  $ 350,075                 $ 350,075  
                                 
Investments available for sale:
                               
U.S. Treasury securities and obligations of U.S. government corporations and agencies
  $ 17,536     $ 1,987     $     $ 19,523  
Corporate securities
          203,165             203,165  
State and municipal securities
          328,904             328,904  
    Equity securities
    4,005                   4,005  
    Asset backed securities
          20,096             20,096  
Total investments
  $ 21,541     $ 554,152     $     $ 575,693  
                                 
Restricted deposits available for sale:
                               
Cash and cash equivalents
  $ 7,331     $     $     $ 7,331  
Certificates of deposit
    5,404                   5,404  
U.S. Treasury securities and obligations of U.S. government corporations and agencies
    7,883                   7,883  
    Total restricted deposits
  $ 20,618     $     $     $ 20,618  
                                 
    Total assets at fair value
  $ 392,234     $ 554,152     $     $ 946,386  
 
The following table summarizes fair value measurements by level at December 31, 2009, for assets and liabilities measured at fair value on a recurring basis:
 
   
Level I
   
Level II
   
Level III
   
Total
 
Cash and cash equivalents
  $ 400,951                 $ 400,951  
                                 
Investments available for sale:
                               
U.S. Treasury securities and obligations of U.S. government corporations and agencies
  $ 16,635     $ 2,764     $     $ 19,399  
Corporate securities
          152,919             152,919  
State and municipal securities
          345,552             345,552  
    Equity securities
    3,585                   3,585  
    Asset backed securities
          19,995             19,995  
Total investments
  $ 20,220     $ 521,230     $     $ 541,450  
                                 
Restricted deposits available for sale:
                               
Cash and cash equivalents
  $ 7,285     $     $     $ 7,285  
Certificates of deposit
    4,958                   4,958  
U.S. Treasury securities and obligations of U.S. government corporations and agencies
    7,889                   7,889  
    Total restricted deposits
  $ 20,132     $     $     $ 20,132  
                                 
    Total assets at fair value
  $ 441,303     $ 521,230     $     $ 962,533  

The Company periodically transfers U.S. Treasury securities between Level I and Level II fair value measurements dependent upon the level of trading activity for the specific securities at the measurement date.  The Company utilizes matrix pricing services to estimate fair value for securities which are not actively traded on the measurement date.  We designate these securities as Level II fair value measurements.  The aggregate carrying amount of the Company’s life insurance contracts and cost-method investments, which approximates fair value, was $22,797 and $23,601 as of March 31, 2010, and December 31, 2009, respectively.

 
7. Debt

Debt consists of the following:
   
March 31, 2010
   
December 31, 2009
 
$175,000 senior notes
  $ 175,000     $ 175,000  
$300,000 revolving credit agreement
          84,000  
Joint venture construction loan
    41,588       32,559  
Mortgage note payable
    9,800       9,900  
Capital leases and other
    6,336       6,272  
     Total debt
    232,724       307,731  
Less current maturities
    (660 )     (646 )
     Long-term debt
  $ 232,064     $ 307,085  

During the first quarter of 2010, the Company completed the sale of 5.75 million shares of common stock for $19.25 per share.  A portion of the proceeds was used to repay the outstanding indebtedness under our $300,000 revolving credit agreement ($84,000 as of December 31, 2009).

 
7

8. Earnings Per Share

The following table sets forth the calculation of basic and diluted net earnings per common share:

   
Three Months Ended March 31,
 
   
2010
   
2009
 
Earnings (loss) attributable to Centene Corporation common shareholders:
               
Earnings from continuing operations, net of tax
 
$
20,082
   
$
18,907
 
Discontinued operations, net of tax
   
3,920
     
(449
)
Net earnings
 
$
24,002
   
$
18,458
 
Shares used in computing per share amounts:
               
Weighted average number of common shares outstanding
   
47,260,714
     
43,067,992
 
Common stock equivalents (as determined by applying the treasury stock method)
   
1,500,814
     
1,170,871
 
Weighted average number of common shares and potential dilutive common shares outstanding
   
48,761,528
     
44,238,863
 
                 
Net earnings (loss) per share attributable to Centene Corporation:
               
Basic:
               
  Continuing operations
 
$
0.43
   
$
0.44
 
  Discontinued operations
   
0.08
     
(0.01
)
  Earnings per common share
 
$
0.51
   
$
0.43
 
                 
Diluted:
               
  Continuing operations
 
$
0.41
   
$
0.43
 
  Discontinued operations
   
0.08
     
(0.01
)
  Earnings per common share
 
$
0.49
   
$
0.42
 
                 
The calculation of diluted earnings per common share for the three months ended March 31, 2010 and 2009, excludes the impact of 2,202,671 and 2,594,786 shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units.
 
9. Stockholders’ Equity

During the first quarter of 2010, the Company completed the sale of 5.75 million shares of common stock for $19.25 per share. Net proceeds from the sale of the additional shares were approximately $104,600.  A portion of the proceeds was used to repay the outstanding indebtedness under our $300,000 revolving credit loan facility ($84,000 as of December 31, 2009).  The Company intends to use the remaining net proceeds for general corporate purposes, which may include the repayment of indebtedness, funding for acquisitions, capital expenditures, additions to working capital and to meet statutory capital requirements in new or existing states.

On October 26, 2009, the Company’s Board of Directors extended the Company’s stock repurchase program.  The program authorizes the repurchase of up to 4,000,000 shares of the Company’s common stock from time to time on the open market or through privately negotiated transactions.  No duration has been placed on the repurchase program and the Company reserves the right to discontinue the repurchase program at any time.  The Company did not make any repurchases under this plan during the first quarter of 2010.

As a component of the employee stock compensation plan, employees can use shares of restricted stock which have vested to satisfy personal tax withholding obligations.  During the three months ended March 31, 2010, the Company purchased 26,126 vested shares from employees at an aggregate cost of $480.  These shares are included in the Company’s treasury stock.
 
10. Segment Information

Centene operates in two segments: Medicaid Managed Care and Specialty Services.  The Medicaid Managed Care segment consists of Centene’s health plans including all of the functions needed to operate them.  The health plans in Florida, Georgia, Indiana, Ohio, South Carolina, Texas and Wisconsin are included in the Medicaid Managed Care segment.  The Specialty Services segment consists of Centene’s specialty companies which offer products for behavioral health, health insurance exchanges, individual health, life and health management, long-term care, managed vision, telehealth services, pharmacy benefits management and treatment compliance functions.  The health plans in Arizona, which is operated by our long-term care company, and Massachusetts, which is operated by our individual health insurance provider, are included in the Specialty Services segment.

Segment information for the three months ended March 31, 2010, follows:
 
   
Medicaid
Managed Care
   
Specialty
Services
   
Eliminations
   
Consolidated
Total
 
Revenue from external customers
  $ 879,979     $ 142,243     $     $ 1,022,222  
Revenue from internal customers
    15,126       124,986       (140,112 )      
Total premium and service revenues
  $ 895,105     $ 267,229     $ (140,112 )   $ 1,022,222  
                                 
Earnings from operations
  $ 18,700     $ 10,911     $     $ 29,611  
 
 
8

Segment information for the three months ended March 31, 2009, follows:
 
   
Medicaid
Managed Care
   
Specialty
Services
   
Eliminations
   
Consolidated
Total
 
Revenue from external customers
  $ 795,902     $ 112,953     $     $ 908,855  
Revenue from internal customers
    15,674       134,076       (149,750 )      
Total premium and service revenues
  $ 811,576     $ 247,029     $ (149,750 )   $ 908,855  
                                 
Earnings from operations
  $ 16,743     $ 14,169     $     $ 30,912  
 
11. Comprehensive Earnings

Differences between net earnings and total comprehensive earnings resulted from changes in unrealized gains (losses) on investments available for sale, as follows:

   
Three Months Ended March 31,
 
   
2010
   
2009
 
Net earnings
  $ 24,250     $ 19,245  
                 
Reclassification adjustment, net of tax
    74       (107 )
Change in unrealized gains on investments, net of tax
    (219 )     2,091  
Total change
    (145 )     1,984  
                 
Comprehensive earnings
    24,105       21,229  
Comprehensive earnings attributable to the noncontrolling interest
    248       787  
Comprehensive earnings attributable to Centene Corporation
  $ 23,857     $ 20,442  


 
9

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

We are a multi-line healthcare enterprise operating in two segments: Medicaid Managed Care and Specialty Services.  Our Medicaid Managed Care segment provides Medicaid and Medicaid-related health plan coverage to individuals through government subsidized programs, including Medicaid, the State Children’s Health Insurance Program, or CHIP, Foster Care, Medicare Special Needs Plans and the Supplemental Security Income Program, also known as the Aged, Blind or Disabled Program, or collectively ABD.  Our health plans in Florida, Georgia, Indiana, Ohio, South Carolina, Texas and Wisconsin are included in the Medicaid Managed Care segment.  Our Specialty Services segment offers products for behavioral health, health insurance exchanges, individual health insurance, life and health management, long-term care programs, managed vision, telehealth services, and pharmacy benefits management to state programs, healthcare organizations, employer groups and other commercial organizations, as well as to our own subsidiaries.  Our health plans in Arizona, which is operated by our long-term care company, and Massachusetts, which is operated by our individual health insurance provider, are included in the Specialty Services segment.

Our financial performance for the first quarter of 2010 is summarized as follows:

—  
Quarter-end at-risk managed care membership of 1,468,600.
—  
Premium and service revenues of $1.022 billion.
—  
Health Benefits Ratio of 84.0%.
—  
General and Administrative expense ratio of 13.3%.
—  
Diluted net earnings per share of $0.41.
—  
Total operating cash flow of $(38.5) million.

We completed the sale of certain assets of University Health Plans, Inc, or UHP, our New Jersey health plan, during the first quarter of 2010.  The results of operations for UHP are classified as discontinued operations for all periods presented.  Unless specifically noted, these discussions are in the context of continuing operations and, therefore, exclude UHP.

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

—  
In July 2009, we began operating in Massachusetts to manage healthcare services for members under the state’s Commonwealth Care program and in October 2009 under the Commonwealth Care Bridge program, operating as CeltiCare Health Plan of Massachusetts.  At March 31, 2010, we served 26,900 members.
—  
In March 2009, we completed an acquisition of certain assets in South Carolina.  We now serve 53,900 at-risk members in South Carolina at March 31, 2010.
—  
In February 2009, we began converting non-risk managed care membership in Florida from Access Health Solutions LLC, or Access, to our new subsidiary, Sunshine State Health Plan on an at-risk basis.  Additionally, we also completed an acquisition of certain assets in Florida, adding to our membership.  At March 31, 2010, we served 105,900 members on an at-risk basis while Access served 58,200 members on a non-risk basis.

We expect our revenue and membership base to continue to grow in 2010.  The following items will contribute to our growth potential in 2010:

—  
In November 2009, we announced we were selected to provide managed care services in Mississippi to Medicaid recipients through the Mississippi Coordinated Access Network (MississippiCan) program.  We are working with the State and currently expect an October 1, 2010 start date.
—  
In February 2010, we announced a definitive agreement to acquire certain Medicaid assets in South Carolina.  The transaction is expected to close in the second quarter of 2010 and add revenues of approximately $60 million for 2010.
—  
In March 2010, we announced that our specialty company, Cenpatico Behavioral Health, retained its existing service area contract and was also awarded an expanded contract by the Arizona Department of Health Services to manage behavioral healthcare services for an additional four counties including Santa Cruz, Greenlee, Graham and Cochise.  The expanded contract is expected to take effect July 1, 2010.
—  
The impact of a full year of our new health plan in Massachusetts, continued membership conversion in Florida, and the full year impact in 2010 of membership growth experienced during 2009.

In April 2010, we were notified by the Wisconsin Department of Health Services that our Wisconsin subsidiary, Managed Health Services (MHS), was not awarded the Southeast Wisconsin BadgerCare Plus Managed Care contract. The change is effective November 1, 2010; after a two-month transition period (September through October), MHS will no longer serve BadgerCare Plus Standard and Benchmark members in Milwaukee, Washington, Ozaukee, Waukesha and Kenosha counties.   MHS will continue to serve more than 6,000 Wisconsin Core Plan and SSI members in this region and more than 71,000 members in other regions of the state.

On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act and on March 30, 2010 President Obama signed the accompanying Health Care and Education Affordability Reconciliation Act.  We are currently evaluating the provisions of the Acts and do not expect material effects on our results of operations, liquidity and cash flows in 2010.  The Acts contain provisions we expect will have a significant effect on our business in coming years including expanding Medicaid eligibility beginning in 2014 to recipients with incomes below 133% of the federal poverty level, retaining the CHIP program in its current form, and requiring state-based Exchanges similar to our experience in Massachusetts in the future.  The Acts also entitle managed care organizations to receive similar rebates from pharmaceutical companies that the states are able to receive.  In the current form, the Acts also impose an excise tax on health insurers beginning in 2014 based upon relative market share.
 
MEMBERSHIP

From March 31, 2009 to March 31, 2010, we increased our at-risk managed care membership by 17.7%.  The following table sets forth our membership by state for our managed care organizations:

   
March 31,
   
December 31,
 
   
2010
   
2009
   
2009
 
Arizona
    19,000       15,500       18,100  
Florida
    105,900       29,100       102,600  
Georgia
    301,000       289,300       309,700  
Indiana
    211,400       179,100       208,100  
Massachusetts
    26,900             27,800  
Ohio
    156,000       137,000       150,800  
South Carolina
    53,900       48,500       48,600  
Texas
    459,600       421,100       455,100  
Wisconsin
    134,900       127,700       134,800  
Total at-risk membership
    1,468,600       1,247,300       1,455,600  
Non-risk membership
    62,200       96,000       63,700  
Total
    1,530,800       1,343,300       1,519,300  
 
The following table sets forth our membership by line of business:
 
   
March 31,
   
December 31,
 
   
2010
   
2009
   
2009
 
Medicaid
    1,088,300       921,100       1,081,400  
CHIP & Foster Care
    266,300       256,900       263,600  
ABD & Medicare
    87,100       69,300       82,800  
Other State programs
    26,900             27,800  
Total at-risk membership
    1,468,600       1,247,300       1,455,600  
Non-risk membership
    62,200       96,000       63,700  
Total
    1,530,800       1,343,300       1,519,300  
 
10

The following table provides supplemental information of other membership categories:

   
March 31,
   
December 31,
 
   
2010
   
2009
   
2009
 
Cenpatico Behavioral Health:
                 
Arizona
    119,300       104,700       120,100  
Kansas
    39,800       40,600       41,400  
Bridgeway:
                       
Long-term Care
    2,700       2,300       2,600  
 
RESULTS OF CONTINUING 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, 2010 and 2009, prepared in accordance with generally accepted accounting principles in the United States.

March 31, 2010, compared to March 31, 2009

Summarized comparative financial data for the three months ended March 31, is as follows ($ in millions):

   
2010
   
2009
   
% Change
2009-2010
 
Premium
  $ 999.3     $ 885.0       12.9 %
Service
    22.9       23.8       (3.9 )%
Premium and service revenues
    1,022.2       908.8       12.5 %
Premium tax
    46.5       23.6       97.2 %
Total revenues
    1,068.7       932.4       14.6 %
Medical costs
    839.7       739.3       13.6 %
Cost of services
    17.2       16.0       7.5 %
General and administrative expenses
    135.5       122.3       10.8 %
Premium tax expense
    46.7       23.9       95.2 %
Earnings from operations
    29.6       30.9       (4.2 )%
Investment and other income, net
    3.2       (0.4 )     %
Earnings from continuing operations, before income tax expense
    32.8       30.5       7.6 %
Income tax expense
    12.5       10.8       15.5 %
Earnings from continuing operations, net of income tax expense
    20.3       19.7       3.2 %
Discontinued operations, net of income tax expense (benefit) of $4.4 and $(0.2) respectively
    3.9       (0.4 )     %
Net earnings
    24.2       19.3       26.0 %
Noncontrolling interest
    0.2       0.8       (68.5 )%
Net earnings attributable to Centene Corporation
  $ 24.0     $ 18.5       30.0 %
                         
Amounts attributable to Centene Corporation common shareholders:
                       
Earnings from continuing operations, net of income tax expense
  $ 20.1     $ 18.9       6.2 %
Discontinued operations, net of income tax expense (benefit)
    3.9       (0.4 )     %
Net earnings
  $ 24.0     $ 18.5       30.0 %
                         
Diluted earnings per common share attributable to Centene Corporation:
                       
Continuing operations
  $ 0.41     $ 0.43       (4.7 )%
Discontinued operations
    0.08       (0.01 )     %
Total diluted earnings per common share
  $ 0.49     $ 0.42       16.7 %

Revenues and Revenue Recognition
 
Premium and service revenues increased 12.5% in the three months ended March 31, 2010 over 2009 as a result of membership growth in all our states.  This increase was moderated by the removal of pharmacy services in two states beginning in 2010.  These pharmacy carve outs had the effect of reducing 2010 revenue by approximately $35 million.

The premium rates specified in our state contracts are generally updated on an annual basis through contract amendments.  In 2010, we received premium rate adjustments in certain markets which yielded a net 0.1% composite decrease across all of our markets.

Some states enact premium taxes, similar assessments and provider pass-through payments, collectively, premium taxes, and these taxes are recorded as a component of revenues as well as operating expenses.  In 2009, one of the states in which we operate increased their premium which was required to be passed through to hospitals in the state.  For the three months ended March 31, 2010 and 2009, this pass-through totaled $28.7 million and zero, respectively, and increased our premium tax revenue and expense.

Operating Expenses
 
Medical Costs
 
Results of operations depend on our ability to manage expenses associated with health benefits and to accurately predict costs incurred. The health benefits ratio, or HBR, represents medical costs as a percentage of premium revenues (excluding premium taxes) and reflects the direct relationship between the premium received and the medical services provided. The table below depicts the HBR for our external membership by member category:
 
   
Three Months Ended March 31,
 
   
2010
   
2009
 
Medicaid and CHIP
    85.6 %     84.8 %
ABD and Medicare
    80.3       81.4  
Specialty Services
    80.6       78.3  
Total
    84.0       83.5  
 
The consolidated HBR for the three months ended March 31, 2010 of 84.0% was an increase of 0.5% over the comparable period in 2009.  A reconciliation of the change in HBR from the prior year same period is presented below:
 
 
First Quarter 2009
83.5
%
 
 
   Improvements in existing markets
(0.5
)
 
 
   New markets reserved at higher rates
1.0
   
 
First Quarter 2010
84.0
%
 
  
The increase in the first quarter of 2010 over the comparable period in 2009 was primarily due to higher HBR in our new markets, partially offset by improvements in our existing markets.
 
 
11

General and Administrative Expenses

General and administrative expenses, or G&A, increased by $13.2 million in the three months ended March 31, 2010 compared to 2009.  This was primarily due to expenses for additional staff and facilities to support our growth, especially in our new market in Massachusetts and to support membership growth in Florida.  Additionally, G&A expenses in the first quarter of 2010 included a $4.6 million increase in contributions to our charitable foundation, $3.0 million of which was funded by the gain on the Reserve Primary fund distribution recorded as Other Income. 

The consolidated G&A expense ratio for the three months ended March 31, 2010 and 2009 was 13.3%, and 13.5%, respectively.  The decrease in the ratio in 2010 primarily reflects the leveraging of our expenses over higher revenues, partially offset by the increased charitable donations.
 
Other Income (Expense)

 
The following table summarizes the components of investment and other income, net ($ in millions): 

   
Three Months Ended March 31,
 
   
2010
   
2009
 
Investment income
  $ 4.0     $ 3.6  
Gain on Reserve Primary Fund distributions
    3.0        
Interest expense
    (3.8 )     (4.0 )
  Other income (expense), net
  $ 3.2     $ (0.4 )

The increase in investment income in 2010 reflects increased investment balances.  In January 2010, the Company received  distributions from the Reserve Primary Fund of $5.4 million resulting in a gain of $3.0 million being recorded for the distributions received in excess of our adjusted basis.  Interest expense declined reflecting the reduction in debt outstanding.

Income Tax Expense
 
Excluding the effects of noncontrolling interests, our effective tax rate would be 38.4% compared to 36.5% in 2009.  The increase in 2010 is due to the higher state taxes as a result of reduced benefits to be realized from New Jersey state net operating loss carryforwards and a decrease in tax exempt interest.

Discontinued Operations

Pre-tax earnings related to discontinued operations (consisting solely of the New Jersey health plan operations) were $8.4 million in the three months ended March 31, 2010 compared to a pre-tax loss of $0.6 million in the comparable period of 2009.  As a result of the sale of certain assets of the New Jersey operations in March 2010, we recognized a pre-tax gain of $8.2 million, which was $3.9 million after tax, or $0.08 per diluted share.  Additionally, we recognized $1.2 million of restructuring costs associated with the exit primarily due to lease termination costs and employee retention programs.  The total revenue associated with UHP included in results from discontinued operations was $22.3 million and $37.0 million for the three months ended March 31, 2010 and 2009, respectively.

We anticipate future costs to wind down operations for UHP and pay remaining claims to be minimal.  Regulatory capital will be returned over the next 12 months after receiving regulatory approval.  It is currently estimated that statutory capital to be transferred to unregulated cash of the Company will be approximately $10 million.

Segment Results

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

   
2010
   
2009
   
% Change
2009-2010
 
Premium and Service Revenues
                 
Medicaid Managed Care
  $ 895.1     $ 811.6       10.3 %
Specialty Services
    267.2       247.0       8.2 %
Eliminations
    (140.1 )     (149.7 )     (6.4 )%
Consolidated Total
  $ 1,022.2     $ 908.9       12.5 %
                         
Earnings from Operations
                       
Medicaid Managed Care
  $ 18.7     $ 16.7       11.7 %
Specialty Services
    10.9       14.2       (23.0 )%
Consolidated Total
  $ 29.6     $ 30.9       (4.2 )%

Medicaid Managed Care

Premium and service revenues increased 10.3% in the three months ended March 31, 2010 over 2009 due to membership growth in our states.  Earnings from operations increased 11.7% in the three months ended March 30, 2010 from 2009 reflecting the overall growth in our membership and revenue base.

Specialty Services

Premium and service revenues increased 8.2% in the three months ended March 31, 2010 compared to 2009 primarily due to the commencement of our new health plan in Massachusetts, membership growth in our Medicaid segment and the associated specialty services provided to this increased membership.  Earnings from operations decreased 23.0% in the three months ended March 31, 2010 from 2009 reflecting the effect of pharmacy carve outs in two states and a higher HBR in 2010.
 
 
12

LIQUIDITY AND CAPITAL RESOURCES

Shown below is a condensed schedule of cash flows for the three months ended March 31, 2010 and 2009, used in the discussion of liquidity and capital resources.

 
   
$ in millions
 
   
Three Months Ended March 31,
 
   
2010
   
2009
 
Net cash (used in) provided by operating activities
 
$
(38.5
 
$
23.4
 
Net cash used in investing activities
   
(41.2
)
   
(85.0
)
Net cash provided by financing activities
   
26.0
     
24.7
 
Net decrease in cash and cash equivalents
 
$
(53.7
 
$
(36.9

Normal operations are funded primarily through operating cash flows and borrowings under our revolving credit facility.  Operating activities used cash of $38.5 million in the three months ended March 31, 2010 compared to providing cash of $23.4 million in the comparable period in 2009.  Cash flow from operations in the three months ended March 31, 2010, reflected a $73.3 million decrease in unearned revenue from December 31, 2009 as a result of the timing of receipt of monthly premium payments.  In 2010, only two monthly premium payments were received during the quarter for Ohio and Florida.  

Investing activities used cash of $41.2 million in the three months ended March 31, 2010 compared to $85.0 million in the comparable period in 2009.  Cash flows from investing activities in 2010 primarily consisted of additions to the investment portfolios of our regulated subsidiaries including transfers from cash and cash equivalents to long-term investments.

Our investment policies are designed to provide liquidity, preserve capital and maximize total return on invested assets within our guidelines.  Net cash provided by and used in investing activities will fluctuate from year to year due to the timing of investment purchases, sales and maturities.  As of March 31, 2010, our investment portfolio consisted primarily of fixed-income securities with an average duration of 2.5 years. These securities generally are actively traded in secondary markets and the reported fair market value is determined based on recent trading activity, recent trading activity in similar securities and other observable inputs.  Our investment guidelines are compliant with the regulatory restrictions enacted in each state.

The following table summarizes our cash and investment balances ($ in millions):
 
   
March 31, 2010
   
December 31, 2009
 
             
Cash, cash equivalents and short-term investments
  $ 390.3     $ 440.5  
Long-term investments
    558.3       525.5  
Restricted deposits
    20.6       20.1  
Total cash, investments and restricted deposits
  $ 969.2     $ 986.1  
                 
Unregulated cash and investments
  $ 51.3     $ 36.2  
Regulated cash, investments and restricted deposits
    917.9       949.9  
Consolidated Total
  $ 969.2     $ 986.1  
                 
Regulated cash and investments from discontinued operations1
  $ 22.0     $ 24.9  
________________________
               
                1 The regulated cash and investments will be transferred to our unregulated cash upon regulatory approval.

We spent $23.1 million and $11.2 million in the three months ended March 31, 2010 and 2009, respectively, on capital expenditures.  Exclusive of our real estate development discussed below, we anticipate spending an additional $35 million on capital expenditures in 2010 primarily associated with system enhancements and market expansions.

During the second quarter of 2009, we executed an agreement as a joint venture partner in an entity that will develop property adjoining our corporate office, which is necessary to accommodate our growing business.  For the three months ended March 31, 2010 and 2009, we had capital expenditures of $14.2 million and $2.8 million, respectively, for costs associated with the real estate development.  The development is expected to be complete in 2010 and we anticipate spending an additional $100 million on capital expenditures related to the construction in 2010.

The joint venture maintains a $95 million construction loan associated with the development.  The construction loan is due June 1, 2011 and may be extended for two additional one year terms.  As of March 31, 2010, there was $41.6 million outstanding under the construction loan.

Our financing activities provided cash of $26.0 million in the three months ended March 31, 2010 and $24.7 million in 2009.  During 2010, our financing activities primarily related to proceeds from our stock offering and resulting payoff of our revolving credit facility discussed below, as well as borrowings for the construction of the real estate development discussed above.

During the first quarter of 2010, we completed the sale of 5.75 million shares of common stock for $19.25 per share. Net proceeds from the sale of the shares were approximately $104.6 million.  A portion of the net proceeds were used to repay the outstanding indebtedness under the $300 million revolving credit loan facility ($84.0 million as of December 31, 2009).  The remaining net proceeds are available for general corporate purposes, which may include the repayment of indebtedness, funding for acquisitions, capital expenditures, additions to working capital and to meet statutory capital requirements in new or existing states.
 
At March 31, 2010, we had working capital, defined as current assets less current liabilities, of $(113.2) million, compared to $(99.8) million at December 31, 2009.  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.  Our working capital was negative at March 31, 2010 and December 31, 2009, due to our efforts to increase investment returns through purchases of investments that have maturities of greater than one year and, therefore, are classified as long-term.

At March 31, 2010, the debt to capital ratio, defined as total debt divided by the sum of total debt and total equity, was 23.7%, compared to 33.2% at December 31, 2009.  We utilize the debt to capital ratio as a measure, among others, of our leverage and financial flexibility.

We have a $300 million revolving credit agreement. Borrowings under the agreement bear interest based upon LIBOR rates, the Federal Funds Rate or the Prime Rate.  There is a commitment fee on the unused portion of the agreement that ranges from 0.15% to 0.275% depending on the total debt to EBITDA ratio.  The agreement contains non-financial and financial covenants, including requirements of minimum fixed charge coverage ratios, maximum debt to EBITDA ratios and minimum net worth.  The agreement expires in September 2011.  As of March 31, 2010, we did not have any borrowings outstanding under the agreement and $45.1 million in letters of credit outstanding, leaving availability of $254.9 million.  As of March 31, 2010, we were in compliance with all covenants.

In 2007, we issued $175 million aggregate principal amount of our 7.25% Senior Notes due April 1, 2014, or the Notes.  The Notes were registered under the Securities Act of 1933, pursuant to a registration rights agreement with the initial purchasers.  The indenture governing the Notes contains non-financial and financial covenants, including requiring a minimum fixed charge coverage ratio.  Interest is paid semi-annually in April and October.  As of March 31, 2010, we were in compliance with all covenants.

We have a stock repurchase program authorizing us to repurchase up to 4.0 million shares of common stock from time to time on the open market or through privately negotiated transactions.  No duration has been placed on the repurchase program and we reserve the right to discontinue the repurchase program at any time. We did not make any repurchases under this plan during the first quarter of 2010.

Based on our operating plan, we expect that our available cash, cash equivalents and investments, cash from our operations and cash available under our credit facility and construction loan will be sufficient to finance our general operations, planned acquisition of Medicaid assets in South Carolina and capital expenditures for at least 12 months from the date of this filing.

 
13


REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS
 
Our operations are conducted through our subsidiaries.  As managed care organizations, these subsidiaries are subject to state regulations 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 subsidiaries are required to maintain minimum capital requirements prescribed by various regulatory authorities in each of the states in which we operate.  As of March 31, 2010, our subsidiaries, including UHP, had aggregate statutory capital and surplus of approximately $480 million, compared with the required minimum aggregate statutory capital and surplus requirements of approximately $280 million and we estimate our Risk Based Capital, or RBC, percentage to be approximately 350% of the Authorized Control Level.

The National Association of Insurance Commissioners 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, 2010, each of our health plans were in compliance with the risk-based capital requirements enacted in those states.

RECENT ACCOUNTING PRONOUNCEMENTS
 
For this information, refer to Note 2, Recent Accounting Pronouncements, in the Notes to the Consolidated Financial Statements, included herein.

 
14

 
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.

INVESTMENTS

As of March 31, 2010, we had short-term investments of $40.2 million and long-term investments of $578.9 million, including restricted deposits of $20.6 million.  The short-term investments generally consist of highly liquid securities with maturities between three and 12 months.  The long-term investments consist of municipal, corporate and U.S. Agency bonds, life insurance contracts, U.S. Treasury investments, asset backed securities and equity securities and have maturities greater than one year.  Restricted deposits consist of investments required by various state statutes to be deposited or pledged to state agencies.  Due to the nature of the states’ requirements, these investments are classified as long-term regardless of the contractual maturity date.  Our investments are subject to interest rate risk and will decrease in value if market rates increase.   Assuming a hypothetical and immediate 1% increase in market interest rates at March 31, 2010, the fair value of our fixed income investments would decrease by approximately $13.8 million.  Declines in interest rates over time will reduce our investment income.  For a discussion of the interest rate risk that our investments are subject to, see "Risk Factors–Risks Related to Our Business–Our investment portfolio may suffer losses from reductions in market interest rates and changes in market conditions which could materially and adversely affect our results of operations or liquidity.”

ITEM 4. Controls and Procedures.
 
Evaluation of Disclosure Controls and Procedures - We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
In connection with the filing of this Form 10-Q, management evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2010. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2010.
 
Changes in Internal Control Over Financial Reporting  -  There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


 
15

PART II
ITEM 1A. Risk Factors.

FACTORS THAT MAY AFFECT FUTURE RESULTS AND THE
TRADING PRICE OF OUR COMMON STOCK

You should carefully consider the risks described below before making an investment decision.  The trading price of our common stock could decline due to any of these risks, in which case you could lose all or part of your investment.  You should also refer to the other information in this filing, including our consolidated financial statements and related notes.  The risks and uncertainties described below are those that we currently believe may materially affect our Company.  Additional risks and uncertainties that we are unaware of or that we currently deem immaterial also may become important factors that affect our Company.

Risks Related to Being a Regulated Entity

Reduction in Medicaid, CHIP and ABD funding could substantially reduce our profitability.

Most of our revenues come from Medicaid, CHIP and ABD premiums. The base premium rate paid by each state differs, depending on a combination of factors such as defined upper payment limits, a member’s health status, age, gender, county or region, benefit mix and member eligibility categories. Future levels of Medicaid, CHIP and ABD funding and premium rates may be affected by continuing government efforts to contain healthcare costs and may further be affected by state and federal budgetary constraints.

States periodically consider reducing or reallocating the amount of money they spend for Medicaid, CHIP, Foster Care and ABD. The current adverse economic conditions have, and are expected to continue to, put pressures on state budgets as tax and other state revenues decrease while the Medicaid eligible population increases, creating more need for funding. We anticipate this will require government agencies with whom we contract to find funding alternatives, which may result in reductions in funding for current programs and program expansions, contraction of covered benefits, limited or no premium rate increases or premium decreases. In recent years, the majority of states have implemented measures to restrict Medicaid, CHIP, Foster Care and ABD costs and eligibility. If any state in which we operate were to decrease premiums paid to us, or pay us less than the amount necessary to keep pace with our cost trends, it could have a material adverse effect on our revenues and operating results.

On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act and on March 30, 2010 President Obama signed the accompanying Health Care and Education Affordability Reconciliation Act. The Acts permit states to expand Medicaid to all individuals under age 65 with incomes up to 133% of the federal poverty level beginning April 1, 2010 and requires this expansion by January 1, 2014. Additional federal funds will be provided to states, but the amount of the federal support decreases each year. We cannot predict when the states will make these expansions. Further, because the states have to pay for a portion of the care, states may reduce our rates in order to afford the additional beneficiaries.

The American Reinvestment and Recovery Act of 2009, which was signed into law on February 17, 2009, provides $87 billion in additional federal Medicaid funding for states’ Medicaid expenditures between October 1, 2008 and December 31, 2010. States meeting certain eligibility requirements will temporarily receive additional money in the form of an increase in the federal medical assistance percentage (FMAP). Thus, for a limited period of time, the share of Medicaid costs that are paid for by the federal government will go up, and each state’s share will go down. We cannot predict whether states are, or will remain, eligible to receive the additional federal Medicaid funding, or whether the states will have sufficient funds for their Medicaid programs.

Changes to Medicaid, CHIP, Foster Care and ABD programs could reduce the number of persons enrolled in or eligible for these programs, reduce the amount of reimbursement or payment levels, or increase our administrative or healthcare costs under these programs, all of which could have a negative impact on our business. Recent legislation generally requires that eligibility levels be maintained, but this could cause states to reduce reimbursement or reduce benefits in order to afford to maintain eligibility levels.  We believe that reductions in Medicaid, CHIP, Foster Care and ABD payments could substantially reduce our profitability. Further, our contracts with the states are subject to cancellation by the state after a short notice period in the event of unavailability of state funds.

If we are unable to participate in CHIP programs, our growth rate may be limited.

CHIP is a federal initiative designed to provide coverage for low-income children not otherwise covered by Medicaid or other insurance programs. The programs vary significantly from state to state. Participation in CHIP programs is an important part of our growth strategy.  If states do not allow us to participate or if we fail to win bids to participate, our growth strategy may be materially and adversely affected.

If CHIP is not reauthorized or states face shortfalls, our business could suffer.

Federal support for CHIP has been authorized through 2019, with funding authorized through 2015. We cannot be certain that funding for CHIP will be reauthorized when current funding expires in 2015. Thus, we cannot predict the impact that reauthorization will have on our business.

States receive matching funds from the federal government to pay for their CHIP programs, which matching funds have a per state annual cap. Because of funding caps, there is a risk that states could experience shortfalls in future years, which could have an impact on our ability to receive amounts owed to us from states in which we have CHIP contracts.

If any of our state contracts are terminated or are not renewed, our business will suffer.

We provide managed care programs and selected services to individuals receiving benefits under federal assistance programs, including Medicaid, CHIP and ABD. We provide those healthcare services under contracts with regulatory entities in the areas in which we operate. Our contracts with various states are generally intended to run for one or two years and may be extended for one or two additional years if the state or its agent elects to do so. Our current contracts are set to expire or renew between June 30, 2010 and August 31, 2013. When our contracts expire, they may be opened for bidding by competing healthcare providers. There is no guarantee that our contracts will be renewed or extended. For example, on August 25, 2006, we received notification from the Kansas Health Policy Authority that FirstGuard Health Plan Kansas, Inc.’s contract with the State would not be renewed or extended, and as a result, our contract ended on December 31, 2006. Further, our contracts with the states are subject to cancellation by the state after a short notice period in the event of unavailability of state funds. For example, the Indiana contract under which we operate can be terminated by the State without cause. Our contracts could also be terminated if we fail to perform in accordance with the standards set by state regulatory agencies. If any of our contracts are terminated, not renewed, renewed on less favorable terms, or not renewed on a timely basis, our business will suffer, and our financial position, results of operations or cash flows may be materially affected.

Changes in government regulations designed to protect the financial interests of providers and members rather than our investors could force us to change how we operate and could harm our business.

Our business is extensively regulated by the states in which we operate and by the federal government. The applicable laws and regulations are subject to frequent change and generally are intended to benefit and protect the financial interests of health plan providers and members rather than investors. The enactment of new laws and rules or changes to existing laws and rules or the interpretation of such laws and rules could, among other things:
• force us to restructure our relationships with providers within our network;
• require us to implement additional or different programs and systems;
• mandate minimum medical expense levels as a percentage of premium revenues;
• restrict revenue and enrollment growth;
• require us to develop plans to guard against the financial insolvency of our providers;
• increase our healthcare and administrative costs;
• impose additional capital and reserve requirements; and
• increase or change our liability to members in the event of malpractice by our providers.

Regulations may decrease the profitability of our health plans.

Certain states have enacted regulations which require us to maintain a minimum health benefits ratio, or establish limits on our profitability. Other states require us to meet certain performance and quality metrics in order to receive our full contractual revenue. In certain circumstances, our plans may be required to pay a rebate to the state in the event profits exceed established levels. These regulatory requirements, changes in these requirements or the adoption of similar requirements by other regulators may limit our ability to increase our overall profits as a percentage of revenues. Most states, including but not limited to Georgia, Indiana, New Jersey, Texas and Wisconsin have implemented prompt-payment laws and many states are enforcing penalty provisions for failure to pay claims in a timely manner. Failure to meet these requirements can result in financial fines and penalties. In addition, states may attempt to reduce their contract premium rates if regulators perceive our health benefits ratio as to