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Management's Discussion of Results of Operations (Excerpts)

For purposes of readability, Zenith attempts to strip out all tables in excerpts from the Management Discussion. That information is contained elsewhere in our articles. The idea of this summary is simply to review how well we believe Management does its reporting. Also, this highlights what Management believes is important.

In our Decision Matrix at the end of each article, a company with 0 to 2 gets a "-1", and 3 to 5 gets a "+1."

On a scale of 0 to 5, 5 being best, Zenith rates this company's Management's Discussion as a 5.


EXECUTIVE OVERVIEW

General

We are a diversified, multi-national healthcare enterprise that provides 
services to government sponsored and commercial healthcare programs, focusing 
on under-insured and uninsured individuals. We provide member-focused services 
through locally based staff by assisting in accessing care, coordinating 
referrals to related health and social services and addressing member concerns 
and questions.

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

Health Net Acquisition

On March 24, 2016, the Company acquired all of the issued and outstanding 
shares of Health Net, a publicly traded managed care organization that delivers 
healthcare services through health plans and government-sponsored managed care 
plans. The transaction was valued at $6.0 billion, including the assumption of 
debt. The acquisition allows the Company to offer a more comprehensive and 
scalable portfolio of solutions and provides opportunity for additional growth 
across the combined company's markets. Due to the size of this acquisition, one 
of the primary drivers of the six month ended variances discussed throughout 
this section are related to the acquisition of Health Net.

Regulatory Trends and Uncertainties

The U.S. Presidential administration and certain members of Congress had 
affirmatively indicated that they would pursue full repeal of or significant 
amendment to the Affordable Care Act (ACA). In May, the House of 
Representatives approved legislation, known as the American Health Care Act, to 
repeal and replace major components of the ACA. In June, the Senate released 
its draft of the new national healthcare legislation, known as the Better Care 
Reconciliation Act (BCRA) of 2017. In July, the Senate majority leader released 
revisions to the BCRA. There are still complex steps needed to be taken before 
any form of the new healthcare legislation becomes final. Most recently, the 
Senate majority leader indicated the BCRA will not be successful in repealing 
and replacing the ACA as the bill faces opposition in the Senate. We continue 
to believe we have both the capacity and capability to successfully navigate 
industry changes to the benefit of our members, customers and shareholders.


Second Quarter 2017 Highlights

Our financial performance for the second quarter of 2017 are summarized as 
follows: • Managed care membership of 12.2 million, an increase of 788,300 
members, or 7% year over year.

• Total revenues of $12.0 billion, representing 10% growth year over year.

• Health benefits ratio of 86.3%, compared to 86.6% in 2016.

• SG&A expense ratio of 9.3% for the second quarter of 2017, compared to 9.2% 
for the second quarter of 2016.

• Adjusted SG&A expense ratio of 9.3% for the second quarter of 2017, compared 
to 9.0% for the second quarter of 2016.

• Operating cash flows of $(306) million, primarily reflecting an increase in 
premium and related receivables due to the timing of June capitation payments 
from several of our states.


• Diluted earnings per share (EPS) for the second quarter of 2017 of $1.44, 
compared to $0.98 for the second quarter of 2016. The second quarter of 2017 
includes a $0.17 per diluted share net benefit related to the 2016 risk 
adjustment reconciliation under the ACA in connection with our Health Insurance 
Marketplace business. In comparison, the second quarter of 2016 includes a 
$0.19 per diluted share net benefit related to the 2015 risk adjustment and 
reinsurance reconciliations under the ACA in connection with our Health 
Insurance Marketplace business.

• Adjusted Diluted EPS for the second quarter of 2017 of $1.59, compared to 
$1.29 for the second quarter of 2016.


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


• Arizona. In January 2017, we continued our participation as a qualified 
health plan issuer in the Arizona Health Insurance Marketplace and exited the 
Health Net preferred provider organization offerings in Arizona.



• Centurion. In April 2016, Centurion began providing correctional healthcare 
services for the Florida Department of Corrections in Regions 1, 2 and 3. In 
June 2016, Centurion began operating under two new contracts with the State of 
New Mexico Corrections Department to provide correctional medical healthcare 
services and pharmacy services. In June 2017, Centurion began operating under 
an expanded contract to provide correctional healthcare services for the 
Florida Department of Corrections in South Florida.



• Health Insurance Marketplace. In January 2017, we added over 500,000 new 
members across our Health Insurance Marketplace service areas.



• Health Net. On March 24, 2016, we acquired all of the issued and outstanding 
shares of Health Net for approximately $6.0 billion, including the assumption 
of debt. This strategic acquisition broadened our service offerings, providing 
expansion in both Medicaid and Medicare programs. This acquisition provided 
further diversification across our markets and products through the addition of 
commercial products and government sponsored care under federal contracts with 
the Department of Defense (DoD) and the U.S. Department of Veteran's Affairs 
(VA), as well as Medicare Advantage. Health Net's operations are primarily 
concentrated in the states of California, Arizona, Oregon, and Washington.



• Indiana. In January 2017, our Indiana subsidiary, Managed Health Services, 
began operating under a contract with the Indiana Family & Social Services 
Administration to continue providing risk-based managed care services for 
enrollees in the Healthy Indiana Plan and Hoosier Healthwise programs.



• Louisiana. In July 2016, our Louisiana subsidiary, Louisiana Healthcare 
Connections, began serving Medicaid expansion members.



• Missouri. In May 2017, our Missouri subsidiary, Home State Health, began 
providing managed care services to MO HealthNet Managed Care beneficiaries 
under an expanded statewide contract.



• Nebraska. In January 2017, our Nebraska subsidiary, Nebraska Total Care, 
began operating under a contract with the Nebraska Department of Health and 
Human Services' Division of Medicaid and Long Term Care as one of three managed 
care organizations to administer its new Heritage Health Program for Medicaid, 
ABD, CHIP, Foster Care and LTC enrollees.



• Texas. In November 2016, our Texas subsidiary, Superior HealthPlan, Inc., 
began operating under a new contract with the Texas HHSC to serve STAR Kids 
Medicaid population in seven delivery areas, more than any other successful 
bidder.



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• Washington. In April 2016, our Washington subsidiary, Coordinated Care of 
Washington, began operating as the sole contractor with the Washington State 
Health Care Authority to provide foster care services through the Apple Health 
Foster Care contract.


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


• We expect to realize the full year benefit in 2017 of business commenced 
during 2016 in Florida, Louisiana, New Mexico, Texas and Washington, and Health 
Insurance Marketplace membership growth in January 2017, as discussed above.



• In July 2017, our Georgia subsidiary, Peach State Health Plan, began 
operating under a statewide managed care contract to continue serving members 
enrolled in the Georgia Families managed care program, including PeachCare for 
Kids and Planning for Healthy Babies. Through the new contract, Peach State 
Health Plan is one of four managed care organizations providing medical, 
behavioral, dental and vision health benefits for its members.



• In July 2017, our Nevada subsidiary, SilverSummit Healthplan, began serving 
Medicaid recipients enrolled in Nevada's Medicaid managed care program.



• In July 2017, our specialty solutions subsidiary, Envolve, Inc., began 
providing health plan management services for Medicaid operations in Maryland.



• In June 2017, our Mississippi subsidiary, Magnolia Health, was selected by 
the Mississippi Division of Medicaid to continue serving Medicaid recipients 
enrolled in the Mississippi Coordinated Access Network (MississippiCAN). 
Pending regulatory approval, the new three-year agreement, which also includes 
the option of two one-year extensions, is expected to commence midyear 2018.



• In June 2017, we announced that we are expanding our offerings in the 2018 
Health Insurance Marketplace. We are planning to enter Kansas, Missouri and 
Nevada in 2018, and expanding our footprint in six existing markets: Florida, 
Georgia, Indiana, Ohio, Texas, and Washington.



• In May 2017, our Washington subsidiary, Coordinated Care of Washington, was 
selected by the Washington State Health Care Authority to provide managed care 
services to Apple Health's Fully Integrated Managed Care (FIMC) beneficiaries 
in the North Central Region. The contract is expected to commence January 1, 
2018.



• In January 2017, we signed a joint venture agreement with the North Carolina 
Medical Society, working in conjunction with the North Carolina Community 
Health Center Association, to collaborate on a patient-focused approach to 
Medicaid under the reform plan enacted in the State of North Carolina. The 
newly created health plan, Carolina Complete Health, was created to establish, 
organize and operate a physician-led health plan to provide Medicaid managed 
care services in North Carolina.



• In January 2017, our Pennsylvania subsidiary, Pennsylvania Health & Wellness, 
was selected by the Pennsylvania Department of Human Services to serve Medicaid 
recipients enrolled in the HealthChoices program in three zones. Expected 
contract commencement dates vary by zone, starting January 2018, and will be 
fully implemented by January 2019, pending regulatory approval and successful 
completion of a readiness review.



• In August 2016, our Pennsylvania subsidiary, Pennsylvania Health & Wellness, 
was selected by the Pennsylvania Department of Human Services to serve 
enrollees in the Community HealthChoices program statewide. Expected contract 
commencement dates vary by zone, starting January 2018, and will be fully 
implemented by January 2019, pending regulatory approval and successful 
completion of a readiness review.



• In July 2016, it was announced that the Department of Defense awarded our 
wholly-owned subsidiary, Health Net Federal Services, the TRICARE West Region 
contract. We currently administer services for the TRICARE program in the North 
Region. In connection with this latest generation of TRICARE contracts, the 
Department of Defense has consolidated the prior North, South and West TRICARE 
regions into two: the West and East Regions (the East combining the current 
North and South Regions). We expect health care delivery for this new contract 
to begin on January 1, 2018.


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


• In January 2018, the State of California will no longer include costs for 
in-home support services (IHSS) in its Medicaid contracts. In June 2017, the 
governor approved the removal of these services from managed care and returned 
responsibility for the IHSS program costs back to the counties.



• In Georgia and Indiana, we have recently been successful in reprocuring 
contracts. However, the Medicaid programs were expanded to include additional 
insurers, which could reduce our market share.


MEMBERSHIP

From June 30, 2016 to June 30, 2017, we increased our managed care membership 
by 788,300, or 7%.



RESULTS OF OPERATIONS

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

Total Revenues

Total revenues increased 10% in the three months ended June 30, 2017 over the 
corresponding period in 2016 primarily due to growth in the Health Insurance 
Marketplace business in 2017 and expansions and new programs in many of our 
states in 2016 and 2017, partially offset by lower membership in the commercial 
business in California as a result of margin improvement actions taken last 
year, the moratorium of the Health Insurer Fee in 2017, and lower specialty 
pharmacy revenues.

Operating Expenses

Medical Costs

Results of operations depend on our ability to manage expenses associated with 
health benefits and to accurately estimate costs incurred. The health benefits 
ratio, or HBR, represents medical costs as a percentage of premium revenues 
(excluding premium tax and health insurer fee revenues) and reflects the direct 
relationship between the premium received and the medical services provided.

The HBR for the three months ended June 30, 2017 was 86.3%, compared to 86.6% 
in the same period in 2016. The decrease compared to last year is primarily 
attributable to growth in the Health Insurance Marketplace business, which 
operates at a lower HBR.

Cost of Services

Cost of services decreased by $59 million in the three months ended June 30, 
2017, compared to the corresponding period in 2016. This was primarily due to 
lower specialty pharmacy sales and decreased costs associated with our federal 
services business, partially offset by growth in our correctional business. The 
cost of service ratio for the three months ended June 30, 2017, was 85.1%, 
compared to 87.6% in the same period in 2016.

Selling, General & Administrative Expenses

Selling, general and administrative expenses, or SG&A, increased by $116 
million in the three months ended June 30, 2017, compared to the corresponding 
period in 2016. This was due to expansions, new programs and growth in many of 
our states in 2016 and 2017 and increased variable compensation expenses 
related to the performance of the business in 2017.

The SG&A expense ratio was 9.3% for the second quarter of 2017, compared to 
9.2% in the second quarter of 2016. The increase in the SG&A expense ratio is 
primarily attributable to higher variable compensation expenses based on the 
performance of the business in 2017 and increased business expansion costs, 
partially offset by higher Health Net acquisition related expenses in 2016.

The Adjusted SG&A expense ratio was 9.3% for the second quarter of 2017, 
compared to 9.0% in the second quarter of 2016. The increase in the Adjusted 
SG&A expense ratio is primarily attributable to higher variable compensation 
expenses based on the performance of the business in 2017 and increased 
business expansion costs.

Health Insurer Fee Expense

As a result of the health insurer fee moratorium, which suspended the health 
insurance provider fee for the 2017 calendar year, we did not record health 
insurer fee expense for the three months ended June 30, 2017, compared to $130 
million for the three months ended June 30, 2016.

Other Income (Expense)

The increase in investment income in 2017 reflects higher interest rates and 
investment balances over 2016, as well as interest income from the state of 
Illinois related to capitation payment delays. Interest expense increased in 
2017 compared to 2016, reflecting a net increase in borrowings.

Income Tax Expense

For the three months ended June 30, 2017, we recorded income tax expense of 
$169 million on pre-tax earnings of $421 million, or an effective tax rate of 
40.1%. The current quarter effective tax rate reflects the impact of the health 
insurer fee moratorium. For the three months ended June 30, 2016, we recorded 
income tax expense of $187 million on pre-tax earnings of $357 million, or an 
effective tax rate of 52.4%, which reflects the non-deductibility of the health 
insurer fee expense.

Segment Results


In January 2017, we reclassified Cenpatico Behavioral Health of Arizona, LLC 
and the related Cenpatico Integrated Care health plan from the specialty 
segment to the Managed Care segment due to a reorganization of the Arizona 
management structure following the Health Net integration. As a result, the 
financial results of Cenpatico Behavioral Health of Arizona, LLC and the 
related Cenpatico Integrated Care health plan have been reclassified from the 
Specialty Services segment to the Managed Care segment for all periods 
presented.

Managed Care

Total revenues increased 10% in the three months ended June 30, 2017, compared 
to the corresponding period in 2016, primarily as a result of expansions, new 
programs, and growth in many of our states, particularly Arizona, Florida, 
Georgia, Indiana, Louisiana, Missouri, Nebraska, and Texas. Earnings from 
operations increased $37 million between years primarily reflecting growth in 
the Health Insurance Marketplace business.

Specialty Services

Total revenues increased 46% in the three months ended June 30, 2017, compared 
to the corresponding period in 2016, resulting primarily from the continued 
integration of Health Net into our specialty services, increased services 
associated with membership growth in the Managed Care segment, and growth in 
our correctional services business. Earnings from operations increased $24 
million in the three months ended June 30, 2017, compared to the corresponding 
period in 2016, primarily due to increased profitability associated with our 
federal services business.



Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

Total Revenues

Total revenues increased 33% in the six months ended June 30, 2017 over the 
corresponding period in 2016 primarily as a result of the acquisition of Health 
Net, as well as the impact of growth in the Health Insurance Marketplace 
business in 2017 and expansions and new programs in many of our states in 2016 
and 2017, partially offset by lower membership in the commercial business in 
California as a result of margin improvement actions taken last year, the 
moratorium of the Health Insurer Fee in 2017, and lower specialty pharmacy 
revenues. As a result of the health insurer fee moratorium, which suspended the 
health insurance provider fee for the 2017 calendar year, we did not record 
health insurer fee revenue for the six months ended June 30, 2017, compared to 
$242 million for the six months ended June 30, 2016. During the six months 
ended June 30, 2017, we received premium rate adjustments which yielded a net 
1% composite change across all of our markets.

Operating Expenses

Medical Costs

Results of operations depend on our ability to manage expenses associated with 
health benefits and to accurately estimate costs incurred. The HBR represents 
medical costs as a percentage of premium revenues (excluding premium tax and 
health insurer fee revenues) and reflects the direct relationship between the 
premium received and the medical services provided.

The HBR for the six months ended June 30, 2017, was 87.0%, compared to 87.4% in 
the same period in 2016. The decrease compared to last year is primarily 
attributable to growth in the Health Insurance Marketplace business, which 
operates at a lower HBR.

Cost of Services

Cost of services increased by $15 million in the six months ended June 30, 
2017, compared to the corresponding period in 2016. This was primarily due to 
growth in our correctional business and the acquisition of Health Net, 
partially offset by lower specialty pharmacy sales. The cost of service ratio 
for the six months ended June 30, 2017, was 84.4%, compared to 87.1% in the 
same period in 2016.

Selling, General & Administrative Expenses

SG&A increased by $485 million in the six months ended June 30, 2017, compared 
to the corresponding period in 2016. This was primarily due to the acquisition 
of Health Net and the impact of new programs in many of our states in 2016 and 
2017, partially offset by a decrease in acquisition related expenses. In 
addition, in the six months ended June 30, 2017, we recognized $47 million for 
our estimated share of the undiscounted guaranty association assessment 
resulting from the liquidation of Penn Treaty.

The SG&A expense ratio for the six months ended June 30, 2017 was 9.5%, 
compared to 10.0% for the six months ended June 30, 2016. The decrease in the 
SG&A expense ratio is primarily attributable to the Health Net acquisition 
related expenses, partially offset by the Penn Treaty assessment and the 
addition of the Health Net business, which operates at a higher SG&A expense 
ratio due to a greater mix of commercial and Medicare business.

The Adjusted SG&A expense ratio for the six months ended June 30, 2017 was 
9.3%, compared to 8.7% for the six months ended June 30, 2016. The increase in 
the Adjusted SG&A expense ratio is primarily attributable to the addition of 
the Health Net business, which operates at a higher SG&A expense ratio due to a 
greater mix of commercial and Medicare business.

Health Insurer Fee Expense

As a result of the health insurer fee moratorium, which suspended the health 
insurance provider fee for the 2017 calendar year, we did not record health 
insurer fee expense for the six months ended June 30, 2017, compared to $204 
million for the six months ended June 30, 2016.

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Other Income (Expense)

The increase in investment income in 2017 reflects higher interest rates and 
investment balances over 2016, as well as interest income from the state of 
Illinois related to capitation payment delays. Interest expense increased 
during the six months ended June 30, 2017 by $39 million due to an increase in 
net borrowings, primarily related to the issuance of an additional $2.4 billion 
in Senior Notes in February 2016 in connection with the financing of the Health 
Net transaction.

Income Tax Expense

For the six months ended June 30, 2017, we recorded income tax expense of $256 
million on pre-tax earnings of $640 million, or an effective tax rate of 40.0%. 
The current effective tax rate reflects the impact of the health insurer fee 
moratorium. For the six months ended June 30, 2016, we recorded income tax 
expense of $203 million on pre-tax earnings of $359 million, or an effective 
tax rate of 56.5%, which reflects the non-deductibility of the health insurer 
fee expense as well as the non-deductibility of certain acquisition related 
costs incurred in connection with the closing of our acquisition of Health Net.

Segment Results

As previously discussed, Cenpatico Behavioral Health of Arizona, LLC and the 
related Cenpatico Integrated Care health plan were reclassified to the Managed 
Care segment in January 2017.


Managed Care

Total revenues increased 33% in the six months ended June 30, 2017, compared to 
the corresponding period in 2016, primarily as a result of the acquisition of 
Health Net and expansions or new programs in many of our states, particularly 
Florida, Georgia, Indiana, Louisiana, Missouri, Nebraska, and Texas. Earnings 
from operations increased $243 million between years primarily reflecting the 
impact of the Health Net acquisition, including decreased acquisition related 
expenses in 2017.

Specialty Services

Total revenues increased 51% in the six months ended June 30, 2017, compared to 
the corresponding period in 2016, resulting primarily from the acquisition of 
Health Net, the continued integration of Health Net into our specialty 
services, increased services associated with membership growth in the Managed 
Care segment, and growth in our correctional services business. Earnings from 
operations increased $38 million in the six months ended June 30, 2017, 
compared to the corresponding period in 2016, primarily due to the acquisition 
of Health Net.



LIQUIDITY AND CAPITAL RESOURCES


Cash Flows Provided by (Used in) Operating Activities

Normal operations are funded primarily through operating cash flows and 
borrowings under our revolving credit facility. Operating activities provided 
cash of $942 million in the six months ended June 30, 2017, compared to cash 
used of $223 million in the comparable period in 2016. The cash provided by 
operating activities in 2017 was primarily due to net earnings, an increase in 
other long-term liabilities driven by the recognition of risk adjustment 
payable for Health Insurance Marketplace in 2017, an increase in medical claims 
liabilities resulting from growth in the Health Insurance Marketplace business 
and the commencement of the Nebraska health plan, and an increase in unearned 
revenue primarily due to the receipt of several July capitation payments in 
June. Cash flows provided by operating activities were partially offset by an 
increase in premium and related receivables of $696 million, primarily due to 
the timing of June capitation payments from several of our states.

Cash flows used in operations in 2016 reflects an increase in premium and 
related receivables of approximately $600 million due to the timing of June 
capitation payments from several of our states (substantially all of which was 
collected in July 2016).

Cash flows from operations in each year were impacted by the timing of payments 
we receive from our states. As we have seen historically, states may prepay the 
following month premium payment, which we record as unearned revenue, or they 
may delay our premium payment, which we record as a receivable. We typically 
receive capitation payments monthly; however, the states in which we operate 
may decide to adjust their payment schedules which could positively or 
negatively impact our reported cash flows from operating activities in any 
given period.

Cash Flows Used in Investing Activities

Investing activities used cash of $486 million for the six months ended June 
30, 2017, and $1,319 million in the comparable period in 2016. Cash flows used 
in investing activities in 2017 primarily consisted of net additions to the 
investment portfolio of our regulated subsidiaries, including transfers from 
cash and cash equivalents to long-term investments, and capital expenditures.

Cash flows used in investing activities in 2016 primarily consisted of our 
acquisition of Health Net, net additions to the investment portfolio of our 
regulated subsidiaries, including transfers from cash and cash equivalents to 
long-term investments, and capital expenditures.

We spent $181 million and $94 million in the six months ended June 30, 2017 and 
2016, respectively, on capital expenditures for system enhancements and market 
expansions.

As of June 30, 2017, our investment portfolio consisted primarily of 
fixed-income securities with an average duration of 3.2 years. We had 
unregulated cash and investments of $291 million at June 30, 2017, compared to 
$264 million at December 31, 2016.

Cash Flows Provided by Financing Activities

Our financing activities provided cash of $39 million in the six months ended 
June 30, 2017, compared to providing cash of $2,492 million in the comparable 
period in 2016. During 2017, our financing activities primarily related to 
increased borrowings on our revolving credit agreement.

During 2016, our financing activities primarily related to the proceeds from 
the issuance of Senior Notes in February 2016 associated with the Health Net 
acquisition and the issuance of additional Senior Notes in June 2016, partially 
offset by the repayment of debt.

In February 2016, our wholly owned unrestricted subsidiary (Escrow Issuer) 
issued $1,400 million of 5.625% Senior Notes ($1,400 Million Notes) at par due 
2021 and $1,000 million of 6.125% Senior Notes ($1,000 Million Notes) at par 
due 2024. We used the net proceeds of the offering, together with borrowings 
under the our new $1,000 million revolving credit facility and cash on hand, to 
fund the cash consideration for the Health Net acquisition and to pay 
acquisition and offering related fees and expenses. In connection with the 
February 2016 issuance, we entered into interest rate swap agreements for 
notional amounts of $600 million and $1,000 million, at floating rates of 
interest based on the three month LIBOR plus 4.22% and the three month LIBOR 
plus 4.44%, respectively. Gains and losses due to changes in the fair value of 
the interest rate swaps completely offset changes in the fair value of the 
hedged portion of the underlying debt and are recorded as an adjustment to the 
$1,400 Million Notes and $1,000 Million Notes.

In connection with the closing of the Health Net acquisition on March 24, 2016, 
our then-existing unsecured $500 million revolving credit facility was 
terminated and simultaneously replaced with a new $1,000 million unsecured 
revolving credit facility (Revolving Credit Facility). Borrowings under the 
agreement bear interest based upon LIBOR rates, the Federal Funds Rate or the 
Prime Rate. The agreement has a maturity date of March 24, 2021.

In June 2016, we issued an additional $500 million of 4.75% Senior Notes due 
2022 at a premium to yield 4.41% ($500 Million Add-on Notes). The $500 Million 
Add-on Notes were offered as additional debt securities under the indenture 
governing the $500 million of 4.75% Senior Notes issued April 2014. We used the 
net proceeds of the offering to repay amounts outstanding under our Revolving 
Credit Facility and to pay offering related fees and expenses.

Liquidity Metrics

The credit agreement underlying our Revolving Credit Facility contains 
non-financial and financial covenants, including requirements of minimum fixed 
charge coverage ratios and maximum debt-to-EBITDA ratios. We are required to 
not exceed a maximum debt-to-EBITDA ratio of 3.0 to 1.0 on and subsequent to 
December 31, 2016. As of June 30, 2017, we had $150 million in borrowings 
outstanding under our revolving credit facility, and we were in compliance with 
all covenants. As of June 30, 2017, there were no limitations on the 
availability under the revolving credit agreement as a result of the 
debt-to-EBITDA ratio.

We had outstanding letters of credit of $52 million as of June 30, 2017, which 
were not part of our revolving credit facility. We also had letters of credit 
for $42 million (valued at the June 30, 2017 conversion rate), or €38 million, 
representing our proportional share of the letters of credit issued to support 
Ribera Salud’s outstanding debt which are a part of the revolving credit 
facility. Collectively, the letters of credit bore weighted interest of 1.32% 
as of June 30, 2017. In addition, we had outstanding surety bonds of $390 
million as of June 30, 2017.

The indentures governing our various maturities of senior notes contain 
non-financial and financial covenants of Centene Corporation, including 
requirements of a minimum fixed charge coverage ratio. As of June 30, 2017, we 
were in compliance with all covenants.

In February 2017 and in connection with the November 2016 issuance of $1,200 
million of 4.75% Senior Notes, due January 15, 2025 ($1,200 Million Notes), the 
Company entered into interest rate swap agreements for a notional amount of 
$600 million, at floating rates of interest based on the one month LIBOR plus 
2.53%. Gains and losses due to the changes in the fair value of the interest 
rate swaps completely offset changes in the fair value of the hedged portion of 
the underlying debt and are recorded as an adjustment to the $1,200 Million 
Notes.

At June 30, 2017, we had working capital, defined as current assets less 
current liabilities, of $682 million, compared to negative $258 million at 
December 31, 2016. We manage our short-term and long-term investments with the 
goal of ensuring that a sufficient portion is held in investments that are 
highly liquid and can be sold to fund short-term requirements as needed.

At June 30, 2017, our debt to capital ratio, defined as total debt divided by 
the sum of total debt and total equity, was 42.5%, compared to 44.1% at 
December 31, 2016. Excluding the $63 million non-recourse mortgage note, our 
debt to capital ratio was 42.1% as of June 30, 2017, compared to 43.7% at 
December 31, 2016. We utilize the debt to capital ratio as a measure, among 
others, of our leverage and financial flexibility.

2017 Expectations

During the remainder of 2017, we expect to make net capital contributions to 
our insurance subsidiaries of approximately $117 million associated with our 
growth and spend approximately $300 million in additional capital expenditures 
primarily associated with system enhancements and market expansions. These 
amounts are expected to be funded by unregulated cash flow generation in 2017 
and borrowings on our Revolving Credit Facility. However, from time to time we 
may elect to raise additional funds for these and other purposes, either 
through issuance of debt or equity, the sale of investment securities or 
otherwise, as appropriate. In addition, we may strategically pursue refinancing 
opportunities to extend maturities and/or improve terms of our indebtedness if 
we believe such opportunities are favorable to us.

Based on our operating plan, we expect that our available cash, cash 
equivalents and investments, cash from our operations and cash available under 
our Revolving Credit Facility will be sufficient to finance our general 
operations and capital expenditures for at least 12 months from the date of 
this filing.

REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS

Our operations are conducted through our subsidiaries. As managed care 
organizations, most of our subsidiaries are subject to state regulations and 
other requirements that, among other things, require the maintenance of minimum 
levels of statutory capital, as defined by each state, and restrict the timing, 
payment and amount of dividends and other distributions that may be paid to us. 
Generally, the amount of dividend distributions that may be paid by a regulated 
subsidiary without prior approval by state regulatory authorities is limited 
based on the entity’s level of statutory net income and statutory capital and 
surplus.

Our regulated subsidiaries are required to maintain minimum capital 
requirements prescribed by various regulatory authorities in each of the states 
in which we operate. As of June 30, 2017, our subsidiaries had aggregate 
statutory capital and surplus of $4,828 million, compared with the required 
minimum aggregate statutory capital and surplus requirements of $2,219 million. 
During the six months ended June 30, 2017, we received net dividends of $78 
million from our regulated subsidiaries. For our subsidiaries that file with 
the National Association of Insurance Commissioners (NAIC), we estimate our RBC 
percentage to be in excess of 350% of the Authorized Control Level.

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

The NAIC has adopted rules which set minimum risk based capital requirements 
for insurance companies, managed care organizations and other entities bearing 
risk for healthcare coverage. As of June 30, 2017, each of our health plans was 
in compliance with the risk-based capital requirements enacted in those states.

As a result of the above requirements and other regulatory requirements, 
certain of our subsidiaries are subject to restrictions on their ability to 
make dividend payments, loans or other transfers of cash to their parent 
companies. Such restrictions, unless amended or waived or unless regulatory 
approval is granted, limit the use of any cash generated by these subsidiaries 
to pay our obligations. The maximum amount of dividends that can be paid by our 
insurance company subsidiaries without prior approval of the applicable state 
insurance departments is subject to restrictions relating to statutory surplus, 
statutory income and unassigned surplus. As of June 30, 2017, the amount of 
capital and surplus or net worth that was unavailable for the payment of 
dividends or return of capital to us was $2,219 million in the aggregate.

Quantitative and Qualitative Disclosures About Market Risk.

INVESTMENTS AND DEBT

As of June 30, 2017, we had short-term investments of $586 million and 
long-term investments of $4,953 million, including restricted deposits of $137 
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. Treasury securities, 
government sponsored obligations, life insurance contracts, 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. Substantially all of 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 
June 30, 2017, the fair value of our fixed income investments would decrease by 
approximately $167 million. Declines in interest rates over time will reduce 
our investment income.

We have interest rate swap agreements for a notional amount of $2,700 million 
with creditworthy financial institutions to manage the impact of market 
interest rates on interest expense. Our swap agreements convert a portion of 
our interest expense from fixed to variable rates to better match the impact of 
changes in market rates on our variable rate cash equivalent investments. As a 
result, the fair value of $2,700 million of our long-term debt varies with 
market interest rates. Assuming a hypothetical and immediate 1% increase in 
market interest rates at June 30, 2017, the fair value of our debt would 
decrease by approximately $132 million. An increase in interest rates decreases 
the fair value of the debt and conversely, a decrease in interest rates 
increases the value.

For a discussion of the interest rate risk that our investments are subject to, 
see “Risk Factors – Our investment portfolio may suffer losses which could 
materially and adversely affect our results of operations or liquidity.”

INFLATION

The inflation rate for medical care costs has been higher than the overall 
inflation rate for all items. We use various strategies to mitigate the 
negative effects of healthcare cost inflation. Specifically, our health plans 
try to control medical and hospital costs through our state savings initiatives 
and contracts with independent providers of healthcare services. Through these 
contracted care providers, our health plans emphasize preventive healthcare and 
appropriate use of specialty and hospital services. Additionally, our contracts 
with states require actuarially sound premiums that include healthcare cost 
trend.

While we currently believe our strategies to mitigate healthcare cost inflation 
will continue to be successful, competitive pressures, new healthcare and 
pharmaceutical product introductions, demands from healthcare providers and 
customers, applicable regulations, an increase in the expected rate of 
inflation for healthcare costs or other factors may affect our ability to 
control the impact of healthcare cost increases.