Centene Corp (CNC) 2011 Q4 法說會逐字稿

Good morning and welcome to the Centene Corporation fourth quarter and year-end financial results conference call.

All participants will be in a listen-only mode.

(Operator Instructions) After today's presentation, there will be an opportunity to ask questions.

Please note this event is being recorded.

I would now like to turn the conference over to Ed Kroll, please go ahead.

Thank you and good morning, everyone, I'm Ed Kroll, Senior Vice President Finance and Investor Relations at Centene Corporation.

Michael Neidorff, Centene's Chairman, Chief Executive Officer; and Bill Scheffel, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call.

The call is expected to last approximately 45 minutes and may be accessed through our website at www.centene.com.

A replay will be available shortly after the call's completion also at www.centene.com or by dialing 877-344-7529 in the US and Canada or 412-317-0088 from other countries with the playback number, for both phone numbers, 10008192.

Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor Provision under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in Centene's most recently filed Form 10-Q dated October 25, 2011 and other public SEC filings.

Centene anticipates that subsequent events and developments will cause its estimates to change.

While the Company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so.

As a reminder, you can find our 2012 earnings release dates on our website in the Investor Relations section.

Another reminder that our next Investor Day is June 14, 2012 in New York City, please mark your calendars.

With that, I'd like to turn the call over to our Chairman and CEO, Michael Neidorff.

Michael?

Thank you, Ed, good morning, everyone, and thank you for joining Centene's fourth quarter and full year 2011 earnings call.

2011 was a very successful year for Centene.

I plan to be relatively brief as I believe the results speak for themselves.

We delivered another strong financial performance marked by Premium and Service revenue growth in excess of 20% and earnings per share growth of 23% excluding the $0.10 charge related to debt extinguishment costs.

We also significantly expanded our geographic footprint in 2011.

We commenced operations in three new states.

On January 1, we began serving ABD and Foster Care recipients in Mississippi.

In May, we initiated operations in Illinois serving ABD lives across six counties.

On November 1, we commenced operations in Kentucky providing services to the states TANF, CHIP, ABD, and Foster Care populations.

All three new states are transitioning well and performing in line with financial and operational expectations.

We had a successful $250 million bond offering with a 5.75% coupon which is currently trading at 102% of par.

We opened a state-of-the-art data center that will support tripling the size of our business.

We continue to hire Senior Management talent to strengthen the organization at both the health plan and corporate levels.

We won six out of six health plan RFPs that we bid for in 2011.

These include new states such as Kentucky, Louisiana, as well as contract renewals and expansions to existing states, Texas, Massachusetts and Arizona.

We ended the year with 181,000 lives in Kentucky as a result of that 90-day selection period where members could choose a different plan.

We expect first quarter 2012 membership to decline somewhere between 135,000 and 145,000 lives.

The decline is a result of our product benefit design which is driven by our HBR and margin objectives.

This disciplined strategy is consistent with our stated objective of being a low-cost producer.

This membership level is included in the 2012 financial guidelines.

On January 1, 2012, our Nurtur subsidiary commenced operations providing disease management services to state employees in Louisiana.

On February 1, we commenced Medicaid operations in Louisiana where we are serving the state's TANF, CHIP, ABD and Foster Care beneficiaries as part of the Bayou Health Program.

2012 is off to a good start.

Centene was selected to contract with the Washington Healthcare Authority to serve Medicaid beneficiaries in that state.

This program includes 700,000 TANF and SCHIP recipients as well a 100,000 non-dual SSI beneficiaries and 40,000 low income adults.

This later population provides an opportunity for us to manage some of these low cost, low income adults under which we would be our fifth hybrid product.

We anticipate finalizing our Washington contract by the end of February.

Operations are expected to commence in the third quarter of 2012.

We plan to provide financial guidance on Washington on or before our first quarter 2012 earnings call.

With the addition of Washington, Centene will operate health plans and our hybrid programs in 15 states.

The 2012 RFP pipeline remains strong.

It is our policy not to comment on which RFPs we are pursuing.

However, I will say that we are currently assessing numerous opportunities in various stages of development.

For example, Ohio recently issued a request for application.

The state will rebid its existing managed care population and an expanded portion of their ABD population.

We have a strong relationship in that state and expect to continue providing our services in Ohio's existing and expanded populations.

Two of our other existing states, Georgia and Florida, are contemplating a re-procurement and expansions that could lead to incremental business in 2013 and 2014.

States with RFPs that are pending include New Hampshire, Kansas, Massachusetts and Missouri.

We will adhere to our prudent evaluation process as we compete for a potential RFP pipeline worth roughly $45 billion.

Now, on to some other topics of interest.

First, the rate environment.

As previously communicated, Centene's composite full year 2011 rate adjustment was minus 1, within our guided range.

Final approval from CMS was received for the rate increase in Georgia and Florida.

The Georgia rate was retroactive to July 1 and the Florida rate was retroactive to September 1.

For our March 1 service area expansion in Texas, we have a generally -- a general agreement for actuarially sound rates that is pending final CMS approval.

Bill will comment further on 2012 guidance.

2011 was a tight year for reimbursement, yet a year in which we essentially maintained our margins.

We expect the rate environment in 2012 to be similar to that of 2011 and continue to believe states will provide actuarially sound rates.

Next, healthcare reform.

Various aspects of the healthcare reform law are uncertain at this point in time.

Next month the Supreme Court is set to hear arguments that would impact the individual mandate and the Medicaid expansion.

It is particularly noteworthy that the court has scheduled three days for discussion of this matter compared to one hour allotted in most cases.

The Supreme Court is expected to issue a decision this summer.

While there is always some element of risk in a matter such as this, we do not believe the outcome of the reform law review will change the demand for our Managed Care Services.

Centene will continue to add value as we improve health outcomes and save states money.

While we are prepared for reform in 2014 and beyond, our main focus is on a successful 2012 and 2013.

Now onto medical cost trends and utilization.

Throughout 2011, utilization remained at the low end of the historic norms.

Nevertheless, we do expect utilization to return to more normal levels in 2012 and have factored that into our guidance.

Lastly, dual eligibles.

Clearly the movement of the dual eligible population in the Medicaid Managed Care has gained prominence.

While they may comprise less than 10% of the overall Medicare/Medicaid population, this group accounts for over one-third of the total annual spend on Medicare and Medicaid combined.

Over the last few years, Centene has strongly advocated for the movement of such high acuity populations into Managed Care.

In fact, we have more than doubled our ABD and Medicare membership in 2011.

The duals which are a component of this high acuity population represent significant growth opportunities going forward.

We are well positioned to help states care for duals.

Our advanced Medical Management and predictive modeling tools and real-time data are essential to the appropriate managers of this population.

Next, I'll briefly comment on our solid fourth quarter results.

Premium and Service revenues grew 29% year-over-year to $1.5 billion as our enrollment increased by more than 18%.

Our HBR was generally steady at the 84.9% level in the first two quarters of 2011.

As expected, the fourth quarter HBR increased sequentially, year-over-year due to the commencement of our Kentucky operation in November.

Our G&A ratio improved as we leverage our infrastructure despite an offset from additional business expansion costs.

While we will continue to make the necessary investments to ensure future growth improvements, and our G&A ratio remains a top priority for Centene.

Our diluted earnings per share in the fourth quarter grew 14% year-over-year due to the impact of our Kentucky start up.

In summary, 2011 was a very strong year across the entire Centene platform.

We are more focused than ever on fundamentals, execution and growth opportunities in 2012 and beyond.

I am very proud of our team and look forward to another strong year in 2012.

I will now, turn the call over to Bill who will provide fourth quarter and full year 2011 financial details.

Bill?

Thank you, Michael, and good morning.

For the fourth quarter of 2011, Premium and Service revenues were $1.46 billion compared to $1.13 billion in 2010, a 29% increase between years.

For the year ended December 31, 2011, Premium and Service revenues were $5.18 billion compared to $4.28 billion in 2010, representing a 20.9% increase between years.

The increase in our Premium and Service revenue for the fourth quarter and full year 2011 is due to the startup of operations in new states this year including Mississippi, Illinois and Kentucky; along with the continued expansion of our Florida business including the Citrus acquisition which closed in December 2010; the addition of the Dallas STAR+PLUS area in February 2011; and the expanded long-term care contract in Arizona effective October 1, 2011.

As we discussed during our presentation in December, we have reclassified certain cost to be more consistent with the NAIC definition of medical costs.

This reclassification had the effect of increasing our fourth quarter health benefits ratio by 190 basis points and lowering our G&A ratio by 180 basis points.

Reflecting the new classifications, our consolidated health benefits ratio was 85.9% for the fourth quarter of 2011, compared to 85.0% in the fourth quarter of 2010, and 85.0% in the third quarter of 2011.

The 90 basis point increase between years and sequentially, primarily reflects the inclusion of two months operations for the Kentucky Health Plan.

Consistent with our normal reserving practices for new plans, we have established reserves for Kentucky at a higher rate in the initial period of operations.

The full year 2011 health benefits ratio was 85.2% compared to 85.5% for the full year of 2010.

The 30 basis point year-over-year improvement was primarily due to the impact of lower utilization experienced throughout 2011, partially offset by the impact of the addition of the Kentucky Health Plan in the fourth quarter.

Our general and administrative expense ratio under this new basis was 11.0% for the fourth quarter of 2011, compared to 11.3% in the fourth quarter last year, and 11.3% in the third quarter of 2011.

The decrease in the fourth quarter G&A ratio over last year and sequentially, reflects the additional leverage from the start up of operations in Kentucky on November 1.

The general and administrative expense ratio for the full year 2011 was 11.3%, compared to 11.2% for the full year last year.

The 10 basis point increase in the G&A ratio reflects higher levels of business expansion costs mitigated by the leveraging of our expenses over higher revenues.

Our fourth quarter investment in other income was $4.0 million, an increase of $0.7 million from the prior year.

Our full year 2011 investment in other income was $13.4 million, a decline of $1.8 million year-over-year, reflecting the continued low level of interest rates.

Interest expense was $4.8 million in the fourth quarter of 2011, compared to $5.5 million for the fourth quarter of 2010.

The decrease between years reflects the lower rates we are paying on the $250 million of senior notes, after adjusting for our interest rate swap.

Interest expense for 2011 was $20.3 million versus $18.0 million in 2010.

The increase in interest expense for the full year reflects a higher level of borrowing and a full year of interest expense on the debt related to our headquarters building.

Interest was capitalized for the building during the construction period which ended June 30, 2010.

Excluding the amounts attributable to non-controlling interest, our fourth quarter tax rate was 36.5%, compared to 40% in the fourth quarter of 2010.

The fourth quarter of 2011 benefited from an increase in federal tax credits and lower state income taxes.

Our full year 2011 tax rate was 37.4%, compared to 39.7% in 2010.

Our effective tax rate in 2010 was higher primarily as a result of a write-off of certain deferred tax assets related to a tax law change in one of our states.

Diluted earnings per share for the fourth quarter was $0.57 compared to $0.50 a year ago.

For the year, our diluted earnings per share from continuing operations was $2.12 in 2011 compared to $1.80 in 2010.

Our 2011 results also, include the $0.10 charge related to debt extinguishment costs incurred in the second quarter.

At December 31, we had cash, investments and restricted deposits of over $1.2 billion, including $38 million held by unregulated entities.

We have estimated our risk based capital percentage to continue to be in excess of 350% of the authorized control level at December 31, 2011.

At year-end, our total debt was $352 million and our debt-to-capital ratio was 27.3%.

Excluding the non-recourse mortgage note, our debt-to-capital ratio was 22.6%.

Our Medical Claims liabilities totaled $608 million at December 31, 2011, representing 45.3 days in claims payable which is higher than our 39 to 44 targeted range discussed in December.

This reflects the impact of the addition of Kentucky effective November 1 and a higher level of claims than normal due to the year-end holiday schedule.

We ended the year with cash flow from operations of $262 million, which is 2.4 times earnings.

For the fourth quarter, our cash flow from operations was $172 million.

Our 2011 cash flow from operations was largely impacted by two offsetting items.

First, the amount of unearned revenue decreased by $107 million between years, as we did not have any states prepay the January capitation payment in December of 2011.

Second, we had an increase of $150 million in our Medical Claims liability year-over-year, reflecting the increase in our operations between years.

I remind everyone that our cash flow from operations can be impacted in any quarter based on changes to states payment patterns.

For example, one of our states is currently planning on holding payments for as much as $150 million during the first quarter and then catching up during the second quarter.

These are really just timing issues and have no impact on operations, income or quality of earnings in our opinion.

I would now like to reaffirm the 2012 financial guidance that we announced in December.

We expect Premium and Service revenues of $7.2 billion to $7.6 billion and earnings per diluted share of $2.60 to $2.80.

We are guiding the health benefits ratio to 87% to 88%, the consolidated G&A ratio to 9.5% to 10%, and diluted shares outstanding of approximately 53.4 million.

Our 2012 guidance assumes that the Texas expansion will begin on March 1, with required CMS approval including rates.

At this point, we have not updated our guidance to reflect the contract award in Washington.

We expect to finalize a contract later this month and will include the impact of the Washington contract in our first quarter guidance call.

As previously discussed, we expect to have a high level of business expansion costs in the first quarter amounting to $0.10 to $0.12 -- reflecting the February 1 start date for Louisiana, the March 1 start date for our Texas expansion, and the initial cost related to a July 1 start date in Washington.

Operator, you may now open up the line for questions.

Thank you, Bill.

We will now begin the question-and-answer session.

(Operator Instructions) Matt Borsch of Goldman Sachs

Yes, my first question is if you can talk at all to the experience that you've seen so far in your new Kentucky market?

And maybe related to that, any observations that you can give us on volumes as you ended of the year, we're just trying to get a sense on utilization trend coming into 2012?

And I guess a question that would drive that a little bit is if you're seeing any change in the birth rate?

Okay, I'll turn some of this over to Jesse in a moment, but obviously, with one month of operations, November, the second month it's still under development.

It's -- I would be -- it'd be difficult to trend that with any accuracy, it would be a guess, Matt, so we'll be careful of that.

Okay.

But Jesse can give you some sense of the membership and how we've been managing that.

Yes, Matt, it's Jesse Hunter.

So Michael referenced the membership and the disappointment we had both in entering the market we've maintained and both with respect to benefit design, network, et cetera.

So we are anticipating a reduction in the membership volumes as we go into the Q1 and more normalized level after membership choice, et cetera.

I think with respect to the broad utilization as Michael said we're not in a position now to have enough data and development to answer that in a meaningful way, just yet.

But we are [booking it] so the higher levels we're approaching 100% that type of thing, Matt, so to be very conservative.

And what about just your most recent look at utilization trend broadly across your markets and maybe related to that the birth rate, have you seen anything that gives you an indicator of whether it's running about the same, higher or lower?

Yes, I will comment, as I said in my script, we see it lower, we see it returning to normal.

And I'll ask Mary to comment in a minute, but things like the flu season when you have very cold winters we find the flu season is reduced.

So I'm -- there's still a risk that the flu could pick up in this first quarter because we have this unusually warm weather and circumstances that can contribute to that.

But then I'll ask Mary to --

Yes, good morning.

Really our medical trends as Michael said have really been generally flat and stable.

As far as the birth rate, obviously, that's something that we continue to watch closely.

We have seen some very slight decrease trends if you look quarter to quarter and year over year.

But really, really nothing that has been a major issue.

Okay, thank you.

Josh Raskin of Barclays.

Hi, thanks, good morning.

Just a quick clarification on Kentucky.

You guys said MLR -- MBR was up 90 basis points year over year, most of that was Kentucky.

If I assume something just south of $100 million of revenues for those two months and trend that at like 90% I get about 30 basis points, so where there other states or were you guys being even more conservative with Kentucky to start?

Bill, do you want to comment on that?

I think as it relates particularly just to the fourth quarter, we see almost the entire increase in the HBR attributable to Kentucky, so I'm not sure but your math, but that's what our math is.

I think that other than Kentucky, we saw a fairly steady utilization in Q4 compared to the prior three quarters, nothing really changed there dramatically and so the delta in our mind has been all in Kentucky.

I think, Josh, with the size of the market it came in with the having been an unmanaged market we're trying to bring an abundance of conservatism to -- the couple months as we will in Q1 of this year.

We're going to be very cautious and be conservative when we're managing through it and believe we have the team [in] the place that will help normalize the medical loss ratio over the next few quarters.

Got you.

Would $95 million of Kentucky revenues and a 90% MLR, would that be close to the ballpark for the fourth quarter?

Well, the revenue, Bill, what do we book -- roughly --

It's probably a little -- the revenue is probably a little higher and the HBR is probably a little higher.

Yes, I think -- well as I think I've said on conferences and things, I anticipate booking it close to the 100% level in Kentucky.

Okay that makes sense.

And then just a second question more broadly speaking.

You guys have certainly hired a lot of people, I think your headcount is up 25% year over year.

You're adding obviously significant -- significantly to the top line.

I'm just curious in terms of needs for capital, your RBC obviously ratios are still very strong.

As you think about some of these RFPs and activities are you thinking about capital needs, and if so, do you have a preference of debt versus equity or converts?

I think one I -- but Bill will explain that we really don't see any short-term needs for capital relative to the growth and I'll just respond, we'll always look at the cost of the capital, and with that being where it is won't have to consider that.

Bill?

Yes, we've been looking as part of our 2012 guidance and planning and we knew obviously with the expansions that we -- were occurring in a lot of our markets plus some of the additional RFPs that were out there we've taken a pretty good look at that.

And based on our current assessment, we believe that we're well within our boundaries of our $350 million revolver which was unused at 12/31 this year end that we have appropriate levels of capital that we need to fund the growth for the foreseeable future particularly into 2012 into 2013 with the opportunities that we're pursuing.

So at this point in time we think what we have will suffice.

And that could include some M&A activity if we find something appropriate as well within those numbers.

Right, okay.

All right, thanks, guys.

Tom Carroll, Stifel Nicolaus.

Hello, good morning.

I have a question on Washington state.

It sounds like you don't have any enhanced clarity on it at this point in time.

But let me ask it this way, is it possible that Centene has allocated a block of business in Washington that is too small causing you perhaps not to sign the contract?

Jesse, I mean we don't see -- do you want to comment?

Yes, I mean I think just generally, Tom, we're not -- we're in discussions with the state right now so I think it's premature for us to provide a lot of comment, but I think it's unlikely that we would be in a situation where there's membership that would be insufficient for us --

Yes, I understand that, I mean I think the insight we have in to it says that clearly there'll be sufficient membership for us to not just have a good anchor but continue to grow from.

Just remind us, what is the critical mass of membership or premium or however you want to define it, what percent -- [medical market]?

Well you can't say into a market, it's going to vary from market to market.

If you take the whole state of Texas, it's different than if you look at the State of Washington, look at where the geographic centers are, there's a whole series of things.

Jesse, anything you want to add?

Yes, I mean I think it's as Michael said, it's not any one thing but obviously a number of members is one variable, the categories of members I think -- so types of products, if you will, is particularly important.

So you look at a market like Washington where you've got the TANF and CHIP populations, you've got the ABD, SSI population and you've got a hybrid population.

I think that adds additional scale and diversity opportunities that we would take into consideration.

Al right, just one last follow up related to Josh's question on capital needs.

So RBC at 350% plus, in your view and given your state footprint, how easy or not easy is it to maybe move some of that around as you see new opportunities in markets that are coming up in front of you?

Well over the years we have been able to take dividends out of certain operations that particularly are more mature and then we obviously have the needs to add capital in new states or in expansion states like a Texas.

So all of our dividends are subject to regulatory approval and we go through those processes and we regularly attempt to make sure that we've got the capital efficiently deployed.

And as we said, when we've looked at the outlook for 2012 and the capital contributions that are needed to fund our new growth, we feel fairly confident between the cash that we generate from our operations and the availability on our revolver that we're in -- we have plenty of capacity at this point in time.

I think when you look at our bond offerings and things, we've structured the Company to -- in a very, very responsible, and I emphasize that, way to provide for free cash flow.

And I mean that's part of anticipating and managing the business.

Great, thanks, guys.

Charles Boorady of Credit Suisse

Thanks, good morning.

First question on utilization, you mentioned that you expected to rebound to normal levels in 2012 or at least that's what's baked into your guidance.

I'm wondering if you can quantify that for us in terms of how much higher utilization you would expect in 2012 versus 2011 based on the guidance that you have?

I think if you look at our guidance number for HBR it's 87% to 88%.

That is reflective of new markets that we've entered which where we have higher, usually have higher rates.

So that would include markets like Kentucky, Louisiana and the Texas expansion.

So obviously it's account -- that increase between years is a combination of reserving at higher rates for some of these new markets plus an expected uptick in utilization.

We have not bifurcated that between those two pieces, but all of those factors are built in.

Yes, and when you say you expect utilization to rebound to normal levels in 2012, how many basis points higher is that than the utilization you saw in 2011?

Again, we haven't really quantified that, it's built into our guidance number that we've given for the 2012 guidance of 87% to 88%.

Okay, got it.

Maybe another way to get at this is if utilization does not rebound to normal levels, what is the sensitivity to your earnings to that in 2012?

Well, obviously, we would expect that if we have favorable trends in HBR that will manifest itself in better earnings than what we've got included.

But we'll wait til that occurs.

Okay, let me just switch obvious to Kentucky, because I'm not sure if I quite caught your comments on that.

Are there -- am I right, there's about 40,000 lives fewer in Kentucky that you're walking away from, so is it 140,000 instead of 180,000, or did I get that wrong?

Yes, that's close.

And the reason for that?

Was it more cost structure related or that the premiums weren't going to be sufficient?

Jesse?

No, I think -- I mean the premiums were consistent with what we had bid originally.

I think part of our entry into the market was to be as Michael talked about, the total low-cost producer.

And in that we had certain assumptions that we made with respect to benefit design and network costs, unit cost components, taking all those things into consideration, and we've maintained discipline with respect to that strategy.

And so what we've seen is you've got in all the markets -- our markets, Kentucky included, you've got a member choice period.

So during that member choice period, we saw some shift of membership away from the Kentucky Spirit plan which results in as Michael said this 135,000 to 145,000 expected normalized membership level.

Okay, so this is a member choice move as opposed to a Centene move that caused that reduction?

Well it's a combination.

Sorry, Jesse, go ahead.

No, I mean I think that's right.

I mean we -- yes, we said our -- that the product design and network composition and all of those things in place is inconsistent with how we bid the contract.

Okay, great.

Thank you.

And I would say we're not disappointed, I want to make it very clear, that the design and everything that we've done we believe is consistent with where we would want to be.

Maureen McEnroe of MAC Healthcare Consulting.

Maureen McEnroe, you're line is live.

(Operator Instructions) Melissa McGinnis of Morgan Stanley

Hi, good morning, thanks for the question.

Going back to Kentucky a little bit and looking at your segment level MLR results, it actually looks like you saw a meaningful year-over-year improvements in the TANF and ABD MLRs, and then that was offset by a 790 basis point deterioration in the Specialty MLR.

I guess I'm just having a little trouble footing those segment trends with your commentary that the new Kentucky health plan MLR drove the increase in the consolidated metric, can you help me understand the other moving parts?

Bill?

Sure, I think that the -- when you look at it year over year and quarter over quarter, the weighting that's given to those individual components can totally -- the mix change can totally be different.

So when you look in our detail, we've shown for the fourth quarter over the fourth quarter, we're down slightly in Medicaid and we're down slightly in ABD.

But overall this had a trend up during the year because when we gave the numbers through three quarters, we were doing more -- as a more favorable operation.

We've added significant ABD population in 2011 with Illinois, Mississippi and now Kentucky.

And so all of those both being in the initial period of operations and the experience result in that higher mix change.

So from our standpoint, some of that stuff starts to even out over time.

For example Mississippi has now been in there for 12 months, Illinois has been in there for at least six months by the end of the year and so we expect that to be returning to say normalcy for 2012.

But Kentucky in the fourth quarter, we certainly reserved at a higher level than the average of our book of business and that rate is -- we expect to continue into the first quarter.

So, again, when we do the analysis, most of the rest of the book, our book of business evens out and continues at the lower levels that we've experienced during the first three quarters, but Kentucky is booking near 100% certainly adds in -- results in the 90 basis point increase.

Okay, great.

And then just another thing, if you look at your roll forward table, it looks like you actually saw a pretty nice step up in prior period redundancies from the end of Q3 to Q4.

And I know it's a bit tough given that you do rolling 12 months, but can you provide any color on what if any of that represents net development that may have rolled through the Health segment MLR?

Well I think that what we're showing in the Medical Claims roll forward is at this point, the reserves at December 31, 2010, how they developed over the 12-month period ended December 31, '11.

For that it was a $65 million favorable development.

I think if we look at the prior year's, which would have been 12/31/09 that we reported last year, it was about $68 million of favorable development.

So we believe that year over year our development has been relatively stable and it's obviously never going to be perfect because we're estimating what the ultimate reserve amount will end up being and we also collected in some recoveries from a coordination of benefits and other things like that, that come in after the fact that we have to estimate.

So we really don't think there's been much impact as a result of changes in the amount of prior period development.

If you recall at the end of the third quarter, it was a little lower at the end of the third quarter then some normal years, but again that would have been the reserve levels for 9/30/2010 that were being analyzed at that point in time.

I think what's important, and the reason I think it's more meaningful, to look today and say that at the end of the year last year, we had reserved at a consistent way and have maintained that consistency.

Because all during the year if we try to talk about reserves this quarter versus other it's -- there is still a lot of estimating in there.

This after the end of a full 12 months, gives you a good view on a rolling 12 that says, yes they've been consistent, they've been conservative and they've been relatively accurate.

Okay, great, thanks.

Chris Rigg of Susquehanna

Good morning, thanks for taking my question.

Just wanted to follow up on the first quarter comments in the $0.10 to $0.12 startup cost headwind, is that the all-in headwind that you guys expect for the quarter or does that not reflect conservative reserving in Louisiana and Texas?

The $0.10 to $0.12 we talk about is really just at the G&A line level, which includes the cost to build networks, hire the people prior to starting operations and training them, and so particularly with Louisiana going live on February 1, Texas March 1, we've got a large amount of those expenditures are coming in, in Q1 which where the revenue starts February 1 and March 1.

And then we are planning on starting to spend money in Washington, also, I would add.

Okay, I know you guys don't normally give guidance on a quarterly basis, but is it possible to sort of -- given the number of moving parts and the significant number of lives coming on in the quarter, give us sort of a sense for the type of sequential trend we should expect on a net margin basis?

Yes, you're right we don't want to do it quarter to quarter, but I mean at various conferences I've said that we -- year over year our flat would be good recognizing the new business, recognizing the start up costs.

And the other thing I want people to continue to think about is what I said earlier, just kind of as a hint so to speak, that while we're sitting here and it's -- we're in the second week of February, let's not presume that there won't be some pick up in the flu season.

Because we have a -- we have tended to look over the years that when it's really cold, you don't have the environment where people are out and flu growth, so we're also anticipating somewhat that it could be a little pick up there as well in the last few weeks of February early March.

So that's about as much as I think we can safely say without getting into a specific Q1 guidance.

Sure.

Can you remind us how are you going to treat the new Texas lives, as if you were entering a new state or will your reserve policy be slightly different for the new business coming online in Texas?

No, we're going to be very conservative on that, specifically these are new virgin areas and we have to go at it in that fashion.

So it's not a small inconsequential add either, so as we looked at.

Yes, I think it's important to understand that for Texas there's a number of moving parts and additions that will occur.

One is pharmacy, which is added in which is very substantial.

That is not subject -- as much subject to estimation because we know those real dollar costs on a real-time basis.

We're carving an inpatient, which is again something that we use the inventory method to estimate for purposes of reserving -- our reserving.

And then you've got the new service areas, and the new service areas are the ones where we tend to be conservative in recording the higher reserve levels because we're still trying to make sure we've got a good handle on what the true run rate will be for the level of HBR.

Okay, thanks a lot.

Scott Fidel of Deutsche Bank

Thanks.

Wanted to just follow up on Kentucky and was wondering if you were able to do any analysis on the 40,000 or so leavers as compared to the 140,000 stayers in terms of their demographic or acuity profile?

I'm just wondering whether you think that you lost some of the higher utilizer or potentially more favorable members relative to the ones you're staying?

I'll let Jesse add to it, but I think, Scott, if you think about how short a period of time we've had those members to try and come to any rational conclusion would be difficult.

Yes, I agree.

I think it's -- obviously we're working through that process now as we go through our predictive modeling and risk award analysis all those things, but ultimately we won't have great visibility on that until we see the claims development over time.

I think when you think about our -- what's going to be interesting over the next three or four quarters whatever it is, when we look at our benefit design there versus the membership we retained, will probably be some learning for us going forward into other new markets.

So there is some real benefits to this, the way we've done is.

I guess one way to other put it is if there were any type of geographic dynamics or urban versus rural with which membership left that helps you think about that or is it just simply too hard to tell?

Well we have -- so it's really hard to tell.

It's mix across the area and you have to get into one of the specialties of a particular hospital or group of doctors you have or don't have.

So I mean I think you really have to wait, look at the larger number.

So we'll still have a 140,000 lives in the second third quarter, fourth quarter, let's see what the benefit design we have, who finds it of interest.

Okay, and then just a follow-up question just on the Specialty cost ratio, it looked like that popped around 900 basis points sequentially and was up significantly year over year.

Any particular product lines that affected that or any new business that you entered into that you're assuming higher cost on, just assuming what's driving the lower margins in the Specialty business there in the fourth quarter?

Yes, I think the primary item there is our individual health business.

We did have an uptick in the fourth quarter in our HBR in that line and that's really the primary cause of that increase.

Okay, was that due to the minimal MLR accruals or did you see higher utilization in that line of business?

That's a smaller book of business for us, but it's generally a little higher utilization, plus as you know the deductibles are used up early in the year and so by the time you get to the end of the year, there's more heavier utilization's as people try to get that in before the end of the year.

Okay.

And then just one last question, just going back to the duals opportunity and there's some of the health plans out there including one of the larger Medicare MCOs that was discussing the thoughts on the duals yesterday and were talking about interest in potentially partnering with Medicaid MCOs if they don't have the TANF platforms in particular states.

And just interested in your view on whether you would find it interesting to partner with Medicare MCOs and approach this jointly or whether you think the opportunity is better just doing this all on your own?

Yes, I think one, we have -- we have built the capability to do it.

I mean what we're very sensitive to is the systems, the predictive models, the real time because that's where we've been successful with the SSI have been moved.

So we have the capabilities to do it.

And relative to what we're going to do, we've historically always talked about what we've done rather than try and trade on futures.

And so I think historically you've seen we had the capability.

We've commented that the ABD, the related type products, the long-term care all of that, we've had significant growth in 2011, we have a demonstrated capability in it.

And who we would work with or not work with on various products, let's wait and see.

I mean we don't say no until we have the information to evaluate it, so let's talk about what we have done.

I'm not trying to be coy but that's just always been our mentally.

It's too easy to say well we're going to do this in '13, '14, well let's talk about the growth we're seeing right now.

Sure, but it sounds like would your bias be that you've spent the time to build out all the infrastructure to approach the duals internally, so I guess returns wise would the opportunity be more significant just doing this on your own or essentially if there's markets where you can partner with others?

Yes, we have the capability to do it on our own and I mean very strong capability.

If there's some particular market we're working with others, I'm not going to say no, but, again, we have to look at it market by market.

But we're not dependent on somebody any more than we are on the individual in the hybrid because we have that capability in [Celtic], which is why we did it, to do individual brands through to do the co-payments, to do the deductibles, all the system thing that I have -- we have learned, a lot of us in this room historically, you don't develop very quickly internally which is why we did the acquisition we did seeing where things were going.

So we have the capabilities, but so we're not dependent and hoping to be able to cut a deal with somebody else.

But if it made sense to do so in a particular market, we would.

Okay, thanks.

(Operator Instructions) Peter Costa of Wells Fargo Securities.

On the Specialty Services MLR, was that all external related or did you have a similar issue on the internal MLR, the internal business there?

The individual health business is all external and so it'd all be external.

So you didn't see that rise for the internal side as well?

No, on the internal side, I mean it's a normal fluctuations from coming and coming but overall is consistent utilization and HVR levels.

And the Louisiana membership you're expecting to gain on February 1, is there a change period on that business the way there is in the Kentucky business or would that all come on right away and stay with you?

Yes, so kind of two components here.

For each there are three phases of the implementation, this is a staged rollout.

So phase 1, for [GSAA] was February 1, then we have corresponding rollouts in two month increments, so those will be upcoming.

But in each of those individual sessions, there is a member choice period.

Thank you.

And then the last question, the Ohio pharmacy carve in, looked like it had a fairly big impact on days claims payable, can you sort of help us size the impact of that overall carve in, in terms of your revenues and expenses and your margins as well?

Well, we don't really get into specifics, I mean it was carved in October 1, so it was in for the full fourth quarter and obviously as a contributor both the revenue and earnings.

And -- but nothing there that was -- it was previously in so it was carved out for a while, and then it was carved back in, and nothing that we want to comment on I think in terms of any lower level of specificity.

Okay, thank you.

Scott Green of BofA Merrill Lynch.

Hi, thanks for the questions.

First, Bill, at Investor Day, you suggested that 2012 guidance assumes underlying 3% cost trends, but a net cost trend of around zero after Medical Management initiatives and contracting, could you tell us how much of those 300 basis points has been achieved to date?

Well again, I think that's our number for the year and at this point in time, there's nothing really that's changed that we'd give a different number.

I think what we've said is we expect the rate to be relatively flat, I think we said plus or minus 1% as you go through market by market.

And then we do think it's incumbent upon us through our Medical Managed initiatives to attempt to reduce the level of increases as a result of the work that we do in the management activities.

Particularly we'll see that in the new markets that are going from unmanaged care to managed care and will benefit from the results of our efforts.

So at this point, I would say it's the same as what we talked about in December.

Okay, but is there a way to say that we've accomplished half of that so far based on the contracts we've already resigned, we have perfect visibility into half of that or could you venture some estimate?

I think with respect to unit cost and contracting costs, we're on schedule to do the things that we've thought we were going to do.

I think with respect to Medical Management initiatives, that's always -- you have 11 months to go right now into the year, so it's hard to say.

We have a percentage of success with respect to those efforts but they're all ongoing and we believe those are part of our regular programs.

Okay.

And then second question, I'm not sure if I missed this or not, but on the DCP roll forward it says there was a 0.7 increase related to the timing of claims payments, and given your commentary over the last year about faster claims cycle times, lowering DCPs over time, I was curious if that wasn't an unique issue or if that is some reversal of any trend you've experienced over the last year?

I think that's more of a factor that we had four -- two, four day weekends around the end of the year, one over Christmas and one over New Year.

So there was just less throughput at that point in time than we would have in a normal quarter end.

So I think that DCP is a little higher than we would have normally expected it to be at any -- say at the end of Q1 or Q2 just because of the holiday schedule.

Okay, all right, that's helpful.

And last topic on Kentucky, in your July Press Release when you won the contract, you said that we expect 180,000 members.

So it appears that something might have changed versus your original expectations.

So I was just curious if something has changed since you won the award versus your membership expectations or if all along you expected to have some member attrition?

Yes so, I think I mean obviously when we put our initial estimates together that was based on an equal distribution of the membership across the competitors in the selected regions.

And so that was what we had inspected -- expected at that point in time.

But what we've seen is some differences with respect to the things that Michael talked about, benefit design, network comparison and things along those lines which has resulted in the membership estimate that we're currently contemplating.

Yes, I mean I think, Scott, the thing I want to be very clear is where would we like to be on that membership.

At this point in time in relation to the benefit design and that's what we put together and I think it's going to give us some very significant learning over the next three, four quarters which will benefit us greatly as we go forward into other new markets.

Okay and is your -- does your analysis suggest that the attrition is just due to broadly a leaner benefit design versus peers or are you seeing any types of members TANF or ABD or what have you leave to other plans?

Yes, I think as we've said before, Scott, it's early, so we don't have perfect information to go through those things.

But I think that's -- we would expect that to be a component of it, yes.

Okay.

All right, thank you.

Carl McDonald of Citigroup

Great, thanks.

How much of an earnings cushion does it give you with the loss of membership in Kentucky?

So I'm assuming for the fourth quarter if you're booking to 100% loss ratio, your combined ratio is probably 108% or 110% and losing that membership in Kentucky would be something in the vicinity of $150 million.

So does that free up basically $15 million in earnings offset by a little bit of fixed cost deleveraging, is that the right way to think about that?

I'm not sure I follow your math, Carl, but in general, we were booking the -- in the fourth quarter for the two months of operation, we booked that at a higher HVR and 98% to 100% range let's say, not at 108% or 110% or whatever you were quoting.

Right, but including the SG&A component your combined ratio would have been 108% or 110% so if you --

Right, but we also get benefits from some of the other Specialty Services that we provide in Kentucky, too, so there's some offsetting impacts there.

So as the membership fell off into January and February, I don't think we expect to have much of an impact on earnings at the end of the day certainly not at the level that you expressed.

So the actual --

Yes, just the only thing I would add is -- I mean it's in our guidance; our membership expectation for Kentucky is what's built into our guidance.

Exactly.

Yes, all right I guess I'm just a little confused because I'm not sure you would have known about the lower membership back in mid-December when you originally gave the guidance.

Well I think we -- I think we had some insight as to where it was going in December when we did that, that's why we [kept on saying] it's in the guidance.

Okay.

We were well aware of our strategies and what that impact might be on the option period that the members had and where that might go.

And so that's been our guidance all along.

Okay, I just had -- I thought you'd guided 180 back in mid-December.

But second question --

That was the end of the -- that was December's guidance, or December's membership, it wasn't our guidance number.

Okay.

And then separate question, if you could just talk about the environment in Louisiana particularly around the member selection, it seems like the two non-risk plans have been picking up a disproportionate amount of the membership that's actually chosen a plan, and just wondering if you have a sense of why that's happening?

Yes, I think it's -- so, Carl, it's Jesse, I think it was new information obviously as we're going through the first rollout.

I think it's -- so not again perfect information with respect to member choice.

We're doing -- you're conducting some of our work in terms of talking to our members about the ones that chose and why.

So there are variables and differences between the programs, not the least of which is a -- when you've got options between a -- kind of a full managed care program and a managed care light program, there can be differences with respect to the provider community and their appetite for one program versus the other.

But I would say, when we look at where things are right now, I mean where we are in line with our expectations from a membership perspective and for the first rollout in Louisiana.

Okay, thank you.

Tom Carroll of Stifel Nicolaus.

Hi, yes thanks for taking the follow up here.

Bill, you mentioned that one of your states had about a $150 million hold back that's going to be paid in second quarter.

Would you suggest that, that might be a trend across all of your markets?

I think if we think back to the old days, that's what states to do to manage difficult fiscal times.

I don't know if I would call it a trend.

It's really one state who's managing their own fiscal issues and they've indicated that they're going to not make some payments in Q1 but expect to fully catch up in Q2.

Obviously, we'll have to see how that works out But we've not seen anything from other states along those lines.

I think, Tom, we've said previously in various meetings, that state revenues have been increasing, quoting all of the studies that are done out there.

So I don't think there's any basis to say one state makes a trend any more than one spring -- one swallow makes a spring.

No I'm not suggesting that, just seeing -- looking for some more insight from you guys.

But thank you very much.

Yes, thank you.

This concludes our question-and-answer session, I would now like to turn the conference back over to Mr.

Neidorff for any closing remarks.

Thank you, and I thank you all for joining us and we'll see you at the end of Q1.

Thank you.

The conference has now concluded.

Thank you for attending today's presentation, you may now disconnect.