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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
___________________________________________
FORM 10-Q
____________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to
____________________________________________
Commission file number: 001-31826
____________________________________________
CENTENE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
42-1406317
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification Number)
 
 
 
 
7700 Forsyth Boulevard
 
 
St. Louis,
Missouri
 
63105
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (314) 725-4477 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock $0.001 Par Value
CNC
New York Stock Exchange
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 Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “small reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large Accelerated Filer
Accelerated filer
Non-accelerated filer  
Smaller reporting company
 
 
Emerging growth company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes       No  
As of April 17, 2020, the registrant had 579,129,418 shares of common stock outstanding.




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

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


Table of Contents


CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

All statements, other than statements of current or historical fact, contained in this filing are forward-looking statements. Without limiting the foregoing, forward-looking statements often use words such as “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “seek,” “target,” “goal,” “may,” “will,” “would,” “could,” “should,” “can,” “continue” and other similar words or expressions (and the negative thereof). Centene Corporation (Centene, the Company, our or we) intends such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with these safe-harbor provisions. In particular, these statements include, without limitation, statements about our future operating or financial performance, market opportunity, growth strategy, competition, expected activities in completed and future acquisitions, including statements about the impact of our recently completed acquisition (the WellCare Acquisition) of WellCare Health Plans, Inc. (WellCare), other recent and future acquisitions, investments and the adequacy of our available cash resources. These statements may be found in the various sections of this filing, such as Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations," Part II, Item 1. "Legal Proceedings," and Part II, Item 1A "Risk Factors." 

These forward-looking statements reflect our current views with respect to future events and are based on numerous assumptions and assessments made by us in light of our experience and perception of historical trends, current conditions, business strategies, operating environments, future developments and other factors we believe appropriate. By their nature, forward-looking statements involve known and unknown risks and uncertainties and are subject to change because they relate to events and depend on circumstances that will occur in the future, including economic, regulatory, competitive and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions.

All forward-looking statements included in this filing are based on information available to us on the date of this filing. Except as may be otherwise required by law, we undertake no obligation to update or revise the forward-looking statements included in this filing, whether as a result of new information, future events or otherwise, after the date of this filing. You should not place undue reliance on any forward-looking statements, as actual results may differ materially from projections, estimates, or other forward-looking statements due to a variety of important factors, variables and events including but not limited to:

uncertainty as to our expected financial performance following completion of the WellCare Acquisition;
the possibility that the expected synergies and value creation from the WellCare Acquisition will not be realized, or will not be realized within the expected time period;
the risk that unexpected costs will be incurred in connection with the integration of the WellCare Acquisition or that the integration of WellCare will be more difficult or time consuming than expected;
unexpected costs, charges or expenses resulting from the WellCare Acquisition;
the inability to retain key personnel;
disruption from the completion and integration of the WellCare Acquisition, including potential adverse reactions or changes to business relationships with customers, employees, suppliers or regulators, making it more difficult to maintain business and operational relationships;
the risk that we may not be able to effectively manage our expanded operations;
our ability to accurately predict and effectively manage health benefits and other operating expenses and reserves;
competition;
membership and revenue declines or unexpected trends;
disasters or major epidemics;
the impact of the COVID-19 pandemic and response by governments and other third parties;
changes in healthcare practices, new technologies, and advances in medicine;
increased healthcare costs;
changes in economic, political or market conditions;
changes in federal or state laws or regulations, including changes with respect to income tax reform or government healthcare programs as well as changes with respect to the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act, collectively referred to as the Affordable Care Act (ACA) and any regulations enacted thereunder that may result from changing political conditions or judicial actions, including the ultimate outcome in "Texas v. United States of America" regarding the constitutionality of the ACA;
rate cuts or other payment reductions or delays by governmental payors and other risks and uncertainties affecting our government businesses;
our ability to adequately price products on the Health Insurance Marketplaces and other commercial and Medicare products;

i

Table of Contents

tax matters;
the outcome of legal and regulatory proceedings;
changes in expected contract start dates;
provider, state, federal and other contract changes and timing of regulatory approval of contracts;
the expiration, suspension, or termination of our contracts with federal or state governments (including but not limited to Medicaid, Medicare, TRICARE or other customers);
the difficulty of predicting the timing or outcome of pending or future litigation or government investigations;
challenges to our contract awards;
cyber-attacks or other privacy or data security incidents;
the possibility that the expected synergies and value creation from acquired businesses, including businesses we may acquire in the future, will not be realized, or will not be realized within the expected time period;
the exertion of management’s time and our resources, and other expenses incurred and business changes required in connection with complying with the undertakings in connection with any regulatory, governmental or third party consents or approvals for acquisitions;
disruption caused by significant completed and pending acquisitions, including, among others, the WellCare Acquisition, making it more difficult to maintain business and operational relationships;
the risk that unexpected costs will be incurred in connection with the completion and/or integration of acquisition transactions;
changes in expected closing dates, estimated purchase price and accretion for acquisitions;
the risk that acquired businesses will not be integrated successfully;
the risk that we may not be able to effectively manage our operations as they have expanded as a result of the WellCare Acquisition;
restrictions and limitations in connection with our indebtedness;
our ability to maintain or achieve improvement in the Centers for Medicare and Medicaid Services (CMS) Star ratings and maintain or achieve improvement in other quality scores in each case that can impact revenue and future growth;
availability of debt and equity financing, on terms that are favorable to us;
inflation; and
foreign currency fluctuations.

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




ii

Table of Contents

Non-GAAP Financial Presentation

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

Specifically, the Company believes the presentation of non-GAAP financial information that excludes amortization of acquired intangible assets and acquisition related expenses, as well as other items, allows investors to develop a more meaningful understanding of the Company's performance over time. The tables below provide reconciliations of non-GAAP items ($ in millions, except per share data):
 
Three Months Ended March 31,
 
2020
 
2019
 
 
 
 
GAAP net earnings
$
46

 
$
522

Amortization of acquired intangible assets
166

 
65

Acquisition related expenses
313

 
18

Other adjustments (1)
23

 

Income tax effects of adjustments (2)
(72
)
 
(20
)
Adjusted net earnings
$
476

 
$
585

 
 
 
 
GAAP diluted earnings per share (EPS)
$
0.08

 
$
1.24

Amortization of acquired intangible assets (3)
0.23

 
0.12

Acquisition related expenses (4)
0.49

 
0.03

Other adjustments (1)
0.06

 

Adjusted Diluted EPS
$
0.86

 
$
1.39

(1)
Other adjustments include the following items for the three months ended March 31, 2020: (a) gain related to the divestiture of certain products of our Illinois health plan of $93 million, or $0.10 per diluted share, net of an income tax expense of $0.07; (b) non-cash impairment of our third-party care management software business of $72 million, or $0.10 per diluted share, net of an income tax benefit of $0.03; and (c) debt extinguishment costs of $44 million, or $0.06 per diluted share, net of an income tax benefit of $0.02.
(2)
The income tax effects of adjustments are based on the effective income tax rates applicable to each adjustment.
(3)
The amortization of acquired intangible assets per diluted share is net of an income tax benefit of $0.07 and $0.04 for the three months ended March 31, 2020 and 2019, respectively.
(4)
Acquisition related expenses per diluted share are net of an income tax benefit of $0.08 and $0.01 for the three months ended March 31, 2020 and 2019, respectively.
 
Three Months Ended March 31,
 
2020
 
2019
 
 
 
 
GAAP selling, general and administrative expenses
$
2,384

 
$
1,609

Acquisition related expenses
295

 
17

Adjusted selling, general and administrative expenses
$
2,089

 
$
1,592


iii

Table of Contents

PART I
FINANCIAL INFORMATION

ITEM 1. Financial Statements.
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except shares in thousands and per share data in dollars)
 
March 31, 2020
 
December 31, 2019

(Unaudited)
 

ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
9,308

 
$
12,123

Premium and trade receivables
11,304

 
6,247

Short-term investments
1,386

 
863

Other current assets
2,698

 
1,090

Total current assets
24,696

 
20,323

Long-term investments
10,521

 
7,717

Restricted deposits
1,014

 
658

Property, software and equipment, net
2,439

 
2,121

Goodwill
17,417

 
6,863

Intangible assets, net
8,898

 
2,063

Other long-term assets
1,446

 
1,249

Total assets
$
66,431

 
$
40,994




 


LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY

 
 

Current liabilities:
 

 
 

Medical claims liability
$
11,413

 
$
7,473

Accounts payable and accrued expenses
8,531

 
4,164

Return of premium payable
1,052

 
824

Unearned revenue
526

 
383

Current portion of long-term debt
129

 
88

Total current liabilities
21,651

 
12,932

Long-term debt
17,150

 
13,638

Other long-term liabilities
3,938

 
1,732

Total liabilities
42,739

 
28,302

Commitments and contingencies


 


Redeemable noncontrolling interests
36

 
33

Stockholders’ equity:
 

 
 

Preferred stock, $0.001 par value; authorized 10,000 shares; no shares issued or outstanding at March 31, 2020 and December 31, 2019

 

Common stock, $0.001 par value; authorized 800,000 shares; 594,890 issued and 579,122 outstanding at March 31, 2020, and 421,508 issued and 415,048 outstanding at December 31, 2019

 

Additional paid-in capital
19,279

 
7,647

Accumulated other comprehensive earnings (loss)
(5
)
 
134

Retained earnings
5,030

 
4,984

Treasury stock, at cost (15,768 and 6,460 shares, respectively)
(755
)
 
(214
)
Total Centene stockholders’ equity
23,549

 
12,551

Nonredeemable Noncontrolling interest
107

 
108

Total stockholders’ equity
23,656

 
12,659

Total liabilities, redeemable noncontrolling interests and stockholders’ equity
$
66,431

 
$
40,994

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

1

Table of Contents

CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except shares in thousands and per share data in dollars)
(Unaudited)
 
Three Months Ended March 31,
 
2020
 
2019
Revenues:

 

Premium
$
23,214

 
$
16,203

Service
958

 
635

Premium and service revenues
24,172

 
16,838

Premium tax and health insurer fee
1,853

 
1,606

Total revenues
26,025

 
18,444

Expenses:
 
 
 
Medical costs
20,420

 
13,882

Cost of services
825

 
544

Selling, general and administrative expenses
2,384

 
1,609

Amortization of acquired intangible assets
166

 
65

Premium tax expense
1,625

 
1,659

Health insurer fee expense
345

 

Impairment
72

 

Total operating expenses
25,837

 
17,759

Earnings from operations
188

 
685

Other income (expense):

 

Investment and other income
167

 
99

Debt extinguishment costs
(44
)
 

Interest expense
(180
)
 
(99
)
Earnings from operations, before income tax expense
131

 
685

Income tax expense
85

 
166

Net earnings
46

 
519

Loss attributable to noncontrolling interests

 
3

Net earnings attributable to Centene Corporation
$
46

 
$
522



 

Net earnings per common share attributable to Centene Corporation:
Basic earnings per common share
$
0.08

 
$
1.26

Diluted earnings per common share
$
0.08

 
$
1.24



 

Weighted average number of common shares outstanding:
 
 
 
Basic
544,436

 
412,924

Diluted
552,062

 
419,752

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

2

Table of Contents

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

 
Three Months Ended March 31,
 
2020
 
2019
Net earnings
$
46

 
$
519

Change in unrealized gain on investments, net of tax
(134
)
 
94

Defined benefit pension plan net gain, net of tax
2

 

Foreign currency translation adjustments
(7
)
 

Other comprehensive earnings (loss)
(139
)
 
94

Comprehensive earnings (loss)
(93
)
 
613

Comprehensive (earnings) loss attributable to noncontrolling interests

 
3

Comprehensive earnings (loss) attributable to Centene Corporation
$
(93
)
 
$
616


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


3

Table of Contents

CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions, except shares in thousands and per share data in dollars)
(Unaudited)
Three Months Ended March 31, 2020
 
Centene Stockholders’ Equity
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
Treasury Stock
 
 
 
 
 
$0.001 Par
Value
Shares
 
Amt
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive Income
(Loss)
 
Retained
Earnings
 
$.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

 

Three Months Ended March 31, 2019
 
Centene Stockholders’ Equity
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
Treasury Stock
 
 
 
 
 
$0.001 Par
Value
Shares
 
Amt
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive Income
(Loss)
 
Retained
Earnings
 
$.001 Par
Value
Shares
 
Amt
 
Non-redeemable
 Non-
controlling
Interest
 
Total
Balance, December 31, 2018
417,695

 
$

 
$
7,449

 
$
(56
)
 
$
3,663

 
5,217

 
$
(139
)
 
$
96

 
$
11,013

Comprehensive Earnings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings (loss)

 

 

 

 
522

 

 

 
(2
)
 
520

Other comprehensive earnings, net of $30 tax

 

 

 
94

 

 

 

 

 
94

Common stock issued for employee benefit plans
1,363

 

 
4

 

 

 

 

 

 
4

Common stock repurchases

 

 

 

 

 
536

 
(35
)
 

 
(35
)
Stock compensation expense

 

 
38

 

 

 

 

 

 
38

Balance, March 31, 2019
419,058

 
$

 
$
7,491

 
$
38

 
$
4,185

 
5,753

 
$
(174
)
 
$
94

 
$
11,634


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

4

Table of Contents

CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions, unaudited)
 
Three Months Ended March 31,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net earnings
$
46

 
$
519

Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization
288

 
155

Stock compensation expense
117

 
38

Impairment
72

 

Loss on debt extinguishment
44

 

Deferred income taxes
112

 
23

Gain on divestiture
(93
)
 

Other adjustments, net
24

 
(11
)
Changes in assets and liabilities
 

 
 

Premium and trade receivables
(2,182
)
 
(662
)
Other assets
97

 
20

Medical claims liabilities
252

 
548

Unearned revenue
(88
)
 
(22
)
Accounts payable and accrued expenses
704

 
357

Other long-term liabilities
361

 
347

Other operating activities, net
6

 
4

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

Cash flows from investing activities:
 

 
 

Capital expenditures
(177
)
 
(176
)
Purchases of investments
(1,400
)
 
(580
)
Sales and maturities of investments
902

 
383

Acquisitions, net of cash acquired
(3,048
)
 

Divestiture proceeds, net of divested cash
456

 

Other investing activities, net
(5
)
 

Net cash used in investing activities
(3,272
)
 
(373
)
Cash flows from financing activities:
 

 
 

Proceeds from long-term debt
2,542

 
1,018

Payments of long-term debt
(1,039
)
 
(927
)
Common stock repurchases
(558
)
 
(35
)
Payments for debt extinguishment
(21
)
 

Debt issuance costs
(92
)
 

Other financing activities, net
7

 
2

Net cash provided by financing activities
839

 
58

Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(1
)
 

Net increase (decrease)
(2,674
)
 
1,001

Cash, cash equivalents, and restricted cash and cash equivalents, beginning of period
12,131

 
5,350

Cash, cash equivalents, and restricted cash and cash equivalents, end of period
$
9,457

 
$
6,351

Supplemental disclosures of cash flow information:
 

 
 

Interest paid
$
104

 
$
87

Income taxes paid
$
3

 
$
6

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:
 
March 31,
 
2020
 
2019
Cash and cash equivalents
$
9,308

 
$
6,345

Restricted cash and cash equivalents, included in restricted deposits
149

 
6

Total cash, cash equivalents, and restricted cash and cash equivalents
$
9,457

 
$
6,351

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

5

Table of Contents

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, 2019. 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, 2019 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 2019 amounts in the consolidated financial statements and notes to the consolidated financial statements have been reclassified to conform to the 2020 presentation. These reclassifications have no effect on net earnings or stockholders' equity as previously reported.

On January 23, 2020, the Company acquired all of the issued and outstanding shares of WellCare Health Plans, Inc. (WellCare) (the WellCare Acquisition). The acquisition was accounted for as a business combination. See Note 2. Acquisitions for further details.

Recently Adopted Accounting Guidance

In June 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) which changes how entities measure credit losses for most financial assets and certain other investments that are not measured at fair value through net income. The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The amended guidance requires the measurement of all expected credit losses for financial assets (or groups of financial assets) and available for sale debt securities held at the reporting date over the remaining life based on historical experience, current conditions, and reasonable and supportable forecasts. The guidance is effective for annual and interim periods beginning after December 15, 2019. The Company adopted the new guidance in the first quarter of 2020. The majority of the Company’s receivables and other financial instruments are with government entities and, therefore, the adoption did not have a material impact on its receivables and other financial instruments. The Company evaluated its investment portfolio under the new available-for-sale debt securities impairment model guidance. The vast majority of the Company’s investment portfolio are low risk, investment grade securities. The impact of our evaluation of the investment portfolio resulted in an immaterial decrease to retained earnings at January 1, 2020. The Company evaluates available-for-sale debt securities on a regular basis and records an allowance for credit losses, if necessary. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The new guidance did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In August 2018, the FASB issued an ASU which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The amendments in this ASU require an entity that is the customer in a hosting arrangement to follow the guidance on internal-use software to determine which implementation costs to capitalize and which costs to expense. The standard also requires an entity that is the customer to expense the capitalized implementation costs of a hosting arrangement over the term of the hosting arrangement. The new guidance requires an entity to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. The entity is also required to present the capitalized implementation costs in the statement of financial position in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented. The guidance is effective for annual and interim periods beginning after December 15, 2019. The Company adopted the new guidance in the first quarter of 2020. The new guidance did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.


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Recent Accounting Guidance Not Yet Adopted

In December 2019, the FASB issued an ASU which simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740. The ASU also clarifies and amends certain areas of ASC Topic 740 to improve consistent application of and simplify the generally accepted accounting principles within Topic 740. The guidance is effective for annual and interim periods beginning after December 15, 2020. The Company is currently evaluating the potential impact of the ASU on the Company's consolidated financial position, results of operations and cash flows.

2. Acquisitions

WellCare Acquisition

On January 23, 2020, the Company acquired all of the issued and outstanding shares of WellCare. The transaction was valued at $19,555 million, including the assumption of debt. The WellCare Acquisition brings a high-quality Medicare platform and further extends our robust Medicaid offerings. The WellCare Acquisition also enables us to provide access to more comprehensive and differentiated solutions across more markets with a continued focus on affordable, high-quality, culturally-sensitive healthcare services. With the WellCare Acquisition, we further broadened our product offerings by adding a Medicare prescription drug plan to our existing business lines. 

Total consideration paid for the acquisition was $17,605 million, consisting of Centene common shares valued at $11,431 million (based on Centene's stock price of $66.76), $6,079 million in cash, and $95 million related to the fair value of replacement equity awards associated with pre-combination service. Each WellCare share was converted into 3.38 of validly issued, fully paid, non-assessable shares of Centene common stock and $120.00 in cash. In total, 171 million shares of Centene common stock were issued to the WellCare stockholders. The cash portion of the acquisition was funded through the issuance of long-term debt as further discussed in Note 7. Debt. The Company also recognized $313 million of acquisition related costs, primarily related to WellCare, that were in the consolidated statement of operations for the three months ended March 31, 2020.

The acquisition of WellCare was accounted for as a business combination using the acquisition method of accounting that requires assets acquired and liabilities assumed to be recognized at fair value as of the acquisition date. Due to the timing of the acquisition, the valuation of the assets acquired and liabilities assumed has not yet been finalized, and as a result, the preliminary estimates have been recorded and are subject to change. Any necessary adjustments from our preliminary estimates will be finalized within one year from the date of acquisition. Measurement period adjustments will be recorded in the period in which they are determined, as if they had been completed at the acquisition date.


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The Company's preliminary allocation of the fair value of assets acquired and liabilities assumed as of the acquisition date of January 23, 2020 is as follows ($ in millions):
Assets acquired and liabilities assumed
 
 
Cash and cash equivalents
 
$
2,899

Premium and related receivables
 
3,414

Short-term investments
 
403

Other current assets
 
1,158

Long-term investments
 
2,699

Restricted deposits
 
319

Property, software and equipment
 
270

Intangible assets (a)
 
7,000

Other long-term assets
 
261

Total assets acquired
 
18,423

 
 
 
Medical claims liability
 
3,962

Accounts payable and accrued expenses
 
3,142

Return of premium payable
 
238

Unearned revenue
 
223

Long-term debt (b)
 
2,055

Deferred tax liabilities (c)
 
1,537

Other long-term liabilities
 
281

Total liabilities assumed
 
11,438

 
 
 
Total identifiable net assets
 
6,985

Goodwill (d)
 
10,620

Total assets acquired and liabilities assumed
 
$
17,605



The Company has made the following preliminary fair value adjustments based on information reviewed through March 31, 2020. Significant fair value adjustments are noted as follows:

(a)
The identifiable intangible assets acquired are to be measured at fair value as of the completion of the acquisition. The fair value of intangible assets will be determined primarily using variations of the income approach, which is based on the present value of the future after tax cash flows attributable to each identified intangible asset. Other valuation methods, including the market approach and cost approach, will be considered in estimating the fair value. The identifiable intangible assets include purchased contract rights, trade names, provider contracts and developed technologies. The Company has estimated the preliminary fair value of intangible assets to be $7,000 million with a weighted average life of 13 years.

The preliminary fair values and weighted average useful lives for identifiable intangible assets acquired are as follows:
 
 
Fair Value
 
Weighted Average Useful Life (in years)
Purchased contract rights
 
$
5,200

 
 
Trade names
 
800

 
 
Provider contracts
 
700

 
 
Developed technologies
 
300

 
 
Total intangible assets acquired
 
$
7,000

 
13

(b)
Debt is required to be measured at fair value under the acquisition method of accounting. The fair value of WellCare's aggregate principle of $1,950 million Senior Notes assumed in the acquisition was $2,055 million. The $105 million increase will be amortized as a reduction to interest expense over the remaining life of the debt.

(c)
The preliminary deferred tax liabilities are presented net of $408 million of deferred tax assets.


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(d)
The acquisition resulted in $10.6 billion of goodwill related primarily to synergies expected from the acquisition and the assembled workforce of WellCare. The assignment of goodwill to the Company's respective segments has not been completed at this time, but the majority of goodwill is expected to be allocated to the Managed Care segment. The majority of the goodwill is not deductible for income tax purposes.

Divestitures

Immediately prior to the closing of the WellCare Acquisition, Anthem, Inc. acquired WellCare's Missouri Medicaid health plan, a WellCare Missouri Medicare Advantage health plan, and WellCare's Nebraska Medicaid health plan. CVS Health Corporation acquired portions of Centene's Illinois Medicaid and Medicare Advantage health plans as part of previously announced divestiture agreements. The Company recorded a $93 million pre-tax gain as a result of the Illinois divestiture, which is included in investment and other income on the Consolidated Statements of Operations.

Unaudited Pro Forma Financial Information

The following table presents supplemental pro forma information for the three months ended March 31, 2019 ($ in millions, except per share data):
 
 
Three Months Ended
March 31, 2019
Total revenues
 
$
25,169

Net earnings attributable to common stockholders
 
$
552

Diluted earnings per share
 
$
0.93



The unaudited pro forma total revenues for the three months ended March 31, 2020 were $27,815 million. It is impracticable for the Company to determine the pro forma earnings information for the three months ended March 31, 2020 due to the nature of obtaining that information as the Company immediately began integrating WellCare into its ongoing operations.

The unaudited pro forma financial information reflects the historical results of Centene and WellCare adjusted as if the acquisition had occurred on January 1, 2019, primarily for the following:
Interest expense associated with debt incurred to finance the transaction.
Elimination of historical WellCare intangible asset amortization expense and addition of amortization expense based on the preliminary estimated values of identifiable intangible assets of approximately $7.0 billion.
Issuance of 171 million shares of Centene common stock in connection with the per share common stock consideration.
Elimination of acquisition related costs.
Adjustments to income tax expense related to pro forma adjustments and increased income tax expense related to IRS Regulation 162(m)(6).

The pro forma results do not reflect any anticipated synergies, efficiencies, or other cost savings of the acquisition. Accordingly, the unaudited pro forma financial information is not indicative of the results if the acquisition had been completed on January 1, 2019 and is not a projection of future results. The unaudited pro forma financial information does not reflect the previously discussed divestitures as the impact would be impracticable to quantify.


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

Short-term and long-term investments and restricted deposits by investment type consist of the following ($ in millions):
 
March 31, 2020
 
December 31, 2019
 
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
$
771

 
$
7

 
$

 
$
778

 
$
211

 
$
1

 
$

 
$
212

Corporate securities
5,036

 
76

 
(134
)
 
4,978

 
3,629

 
108

 
(4
)
 
3,733

Restricted certificates of deposit
153

 

 

 
153

 
482

 

 

 
482

Restricted cash equivalents
149

 

 

 
149

 
8

 

 

 
8

Short-term time deposits
84

 

 

 
84

 

 

 

 

Municipal securities
2,511

 
77

 
(4
)
 
2,584

 
2,320

 
69

 
(1
)
 
2,388

Asset-backed securities
1,050

 
4

 
(36
)
 
1,018

 
741

 
5

 
(2
)
 
744

Residential mortgage-backed securities
997

 
32

 
(2
)
 
1,027

 
464

 
8

 
(1
)
 
471

Commercial mortgage-backed securities
590

 
10

 
(13
)
 
587

 
380

 
9

 
(1
)
 
388

Equity securities (1)
685

 

 

 
685

 

 

 

 

Private equity investments
748

 

 

 
748

 
664

 

 

 
664

Life insurance contracts
130

 

 

 
130

 
148

 

 

 
148

Total
$
12,904

 
$
206

 
$
(189
)
 
$
12,921

 
$
9,047

 
$
200

 
$
(9
)
 
$
9,238

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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, life insurance contracts and certain private equity investments. The Company’s investment policies are designed to provide liquidity, preserve capital and maximize total return on invested assets with the focus on high credit quality securities. The Company limits the size of investment in any single issuer other than U.S. treasury securities and obligations of U.S. government corporations and agencies. As of March 31, 2020, 97% of the Company’s investments in rated securities carry an investment grade rating by nationally recognized statistical rating organizations. At March 31, 2020, the Company held certificates of deposit, equity securities, life insurance contracts and private equity investments which did not carry a credit rating. Accrued interest income on available for sale debt securities was $78 million at March 31, 2020, and is included in other current assets on the consolidated balance sheet.

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 March 31, 2020.


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The fair value of available-for-sale debt securities with gross unrealized losses by investment type and length of time that individual securities have been in a continuous unrealized loss position were as follows ($ in millions):
 
March 31, 2020
 
December 31, 2019
 
Less Than 12 Months
 
12 Months or More
 
Less Than 12 Months
 
12 Months or More
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$

 
$
374

 
$

 
$

 
$

 
$
11

 
$

 
$
31

Corporate securities
(130
)
 
2,461

 
(4
)
 
16

 
(2
)
 
192

 
(2
)
 
48

Municipal securities
(4
)
 
275

 

 
1

 
(1
)
 
185

 

 
11

Asset-backed securities
(30
)
 
628

 
(6
)
 
102

 
(1
)
 
153

 
(1
)
 
151

Residential mortgage-backed securities
(2
)
 
68

 

 
6

 

 
44

 
(1
)
 
81

Commercial mortgage-backed securities
(13
)
 
280

 

 
3

 
(1
)
 
118

 

 
21

Short-term time deposits

 

 

 
2

 

 

 

 

Total
$
(179
)
 
$
4,086

 
$
(10
)
 
$
130

 
$
(5
)
 
$
703

 
$
(4
)
 
$
343



As of March 31, 2020, the gross unrealized losses were generated from 2,636 positions out of a total of 5,998 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 impairment for these securities.

In addition, the Company continuously monitors investments 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.

The contractual maturities of short-term and long-term debt securities and restricted deposits are as follows ($ in millions):
 
March 31, 2020
 
December 31, 2019
 
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
$
1,239

 
$
1,237

 
$
841

 
$
842

 
$
750

 
$
752

 
$
550

 
$
550

One year through five years
3,954

 
3,935

 
169

 
172

 
3,034

 
3,106

 
106

 
108

Five years through ten years
2,430

 
2,465

 

 

 
2,162

 
2,257

 

 

Greater than ten years
72