Centene Corp (CNC) 2012 Q4 法說會逐字稿

Good morning and welcome to the Centene Corporation fourth-quarter and year-end 2012 financial results conference call.

All participants will be in listen-only mode.

(Operator Instructions).

After today's presentation there will be an opportunity to ask questions.

(Operator Instructions).

Please note this event is being recorded.

I would now like to turn the conference over to Mr. Ed Kroll, Senior Vice President of Finance and Investor Relations.

Please go ahead, sir.

Thank you, Operator, and good morning, everyone.

Thank you for joining us on today's call.

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

The call is expected to last about 45 minutes and may also be accessed through our website at Centene.com.

A replay will be available shortly after this call's completion also on our website at Centene.com or by dialing 877-344-7529 in the US and Canada or in other countries by dialing 412-317-0088.

The playback number for both of those calls is 1002-3301.

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 23, 2012 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 2013 earnings release dates on our website in the Investor Relations section.

Also, our next Investor Day is June 17, 2013 in New York City.

Please mark your calendars.

With that, I would 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 2012 earnings call.

In general fourth-quarter results were consistent with our guidance provided at the December 14 Investor Day when excluding higher than expected flu costs.

I will provide more color on the flu epidemic shortly.

My comments today will include an update on the key issues and other topics discussed at our Investor Day.

I will also talk about our recently announced acquisition, Acaria, a strategically important Specialty Pharmacy organization.

I will then turn the call over to Bill for details on the fourth-quarter and full-year 2012 financial results.

At our December Investor Day we noted higher than expected medical costs associated with a much earlier than normal and more intense flu season, particularly in Texas which is our largest market.

At that time we took down our 2012 guidance by approximately $0.15 to $0.18 per share to account for additional flu costs.

However, the flu hit even harder in the fourth quarter than originally anticipated.

The fourth quarter included an incremental $0.30 flu cost compared to the fourth quarter of 2011.

That was $0.11 above our expectations.

Our initial read of January indicates that flu costs are similar to the levels experienced in December 2012.

Our original planning anticipated higher flu costs in the first quarter of 2013 compared to the fourth quarter of 2012.

Flu-related costs are just one component of our total medical costs.

Additionally, the most recent CDC data suggests that the flu season peaked in mid-January.

Recognizing this we have not changed our annual guidance.

Next, Kentucky -- we believe the state's Medicaid program is not sustainable in its current form due to structural and policy flaws.

The Kentucky loss was $1.71 per share in 2012.

In October of 2012 Centene notified the Kentucky Cabinet for Health & Family Services that it was exercising a contractual right that it believes allows the Company to terminate its Medicaid managed care contract effective July 5, 2013.

Centene has also filed a formal dispute with the Cabinet for damages incurred under the contract.

That dispute is currently on appeal to the Finance & Administration Cabinet.

In addition, Centene has filed a lawsuit in Franklin Circuit Court against the Commonwealth of Kentucky seeking declaratory relief.

On January 23, 2013 the Franklin Circuit Court denied the Commonwealth's motion to dismiss the case and retained jurisdiction of the lawsuit.

The court stayed the proceedings pending a formal written determination by the Finance & Administration Cabinet which is expected in late March.

Recognizing that this case is in administrative appeal and litigation we will make no further comments.

Now on to Texas -- as we discussed at our December Investor Day, we experienced higher than expected medical costs in the fourth quarter in Texas.

This was related to the off cycle transfer of high acuity members in the Hidalgo service area from another health plan.

In addition, we experienced higher than anticipated utilization in the inpatient category in the rural service area.

The 4% statewide rate increase effective September 1 did not reflect the impact of these two issues.

The Texas legislature is currently in session and supplemental funding for the Medicaid program is expected to be passed in the first quarter.

We continue to work with the state to obtain and ensure premium adequacy.

I will now discuss Centene's new business and growth outlook.

The Mississippi managed-care program expanded from approximately 50,000 members to 150,000 members effective December 1, 2012.

Centene is one of two managed-care vendors in the state.

At year-end we increased our membership to 77,200.

The state also notified us that we will be the sole source vendor for a foster care program that will commence during 2013.

On January 1 our Kansas health brand began operation under a state wide contract covering TANF, ABD duals and non-duals, foster care, long-term care and CHIP beneficiaries.

The state has indicated they are pleased with the initial development of the program.

Our membership is currently 119,000 lives and reflects approximately 33% share of market.

In Illinois we expected to commence an expanded managed-care service area during the second quarter.

In addition, we were selected to serve dual eligible members in the greater Chicago area.

This program is expected to begin in the fourth quarter of 2013.

We are also exploring further expansion opportunities in Illinois.

We currently expect to commence operations in New Hampshire in mid-2013.

New Hampshire will represent Centene's 18th state with health plan operations.

Our successful re-procurement and expansion in Ohio takes effect July of 2013.

We were also selected to serve members in the state's dual eligible demonstration program in three regions.

This program is expected to commence in the fourth quarter of 2013.

Our Florida subsidiary was notified last month that it has been recommended for a contract award in 10 of the 11 regions of the state's Medicaid long-term care program.

Enrollment will be rolled out by region beginning in August of 2013 and continuing through March of 2014.

On the M&A front we recently announced a definitive agreement to acquire AcariaHealth, a comprehensive specialty pharmacy organization, for $152 million.

The Acaria acquisition is consistent with Centene's strategy of expanding the breadth of our in-house specialty company offerings.

Acaria's experience with high cost specialty drugs will allow us to better serve the needs of our high acuity members.

It will also enable our PBM to offer integrated pharmacy solutions to our customers.

Acaria provides a national platform and experienced management team, which bring strong relationships with pharmaceutical companies as well as expanded access to limited distribution high cost drugs.

Specialty Pharmacy is a very important cost category for Centene.

We expect to increase Specialty Pharmacy spend to approximately $300 million in 2013 and believe this will continue to increase going forward.

We anticipate that this transaction will close in the fourth quarter of 2013.

Excluding one-time transaction costs we expect this deal to be neutral to EPS for the first 12 months of operation.

Now let's discuss the growth opportunities for 2014 and above.

Our future pipeline remains extremely robust at more than $250 -- $250 billion, excuse me, through 2016.

Approximately $100 billion of this is within our existing geographic footprint.

We view the Medicaid expansion as a natural extension of our core business.

While not every state will go through the expansion, we estimate that there is an approximately $20 billion opportunity across our existing markets.

Centene's experience specialty needs brands and other high acuity populations supports the Company's ability to compete for the $30 billion dual eligible opportunity within our existing markets.

As I previously mentioned, we have already won two dual eligible contracts.

Our advanced medical management and predictive bargaining tools are key advantages for us in lowering costs with this high acuity population.

The exchange market represents the largest growth opportunity for Centene over the next several years estimated at $52 billion in our existing markets.

Our experience with the exchange market gives Centene a very competitive advantage.

We are already participating in hybrid programs in Indiana and Texas as well as the Massachusetts connector.

This allows us to move beyond traditional Medicaid and serve the uninsured and the under insured populations.

In summary, while 2012 represented challenges in certain markets, we believe we have the necessary steps taken to put us in a strong position of optimal growth in 2013 and beyond.

And with that I will turn the call over to Bill.

Thank you, Michael, and good morning.

For the fourth quarter of 2012 premium and service revenues were $2.3 billion, an increase of 58% over the last year's fourth quarter.

For the year ended December 31, 2012 premium and service revenues were over $8.2 billion, an increase of 59% year over year.

The increase in premium and service revenues in 2012 is driven by several factors.

First, the addition of five new states during the last two years -- Illinois, Kentucky, Louisiana, Missouri and Washington.

Second, expansions in three states during the last two years -- in Texas, effective February 2011 and March 2012; in Arizona long-term care effective October 2011; in the Ohio pharmacy carve-in effective October 2011.

And then also in the fourth quarter of this year pharmacy benefits were carved in for Louisiana effective November 1 and the Mississippi managed-care program was expanded to cover additional membership categories December 1.

Premium taxes grew significantly to $429 million in 2012 from $160 million in 2011.

This is the result of certain states significantly expanding their hospital and provider tax assessments.

We are paid these amounts and then immediately pass through the payments to specified providers.

Our health benefits ratio was 91.3% for the fourth quarter compared to 85.9% in the fourth quarter of 2011.

As we previewed during our guidance meeting on December 14, we have experienced a high level of flu-related costs, particularly in Texas, during the fourth quarter.

Flu costs more than doubled in December over November and the increase in flu costs between years is estimated at $0.30 per share fourth quarter over fourth quarter.

During the third quarter we recorded a premium deficiency reserve related to our Kentucky health plan.

And in the fourth quarter we experienced a higher level of claims receipts for older dates of service and recorded an additional expense of approximately $10 million related to Kentucky.

We believe the increased level of claims receipts was due to the one year timely filing period starting to take effect and due to our announcement that we've initiated actions to exit the Kentucky market.

Excluding the Kentucky health plan operations the fourth-quarter HBR was 90.7%.

In Texas, as Michael indicated, we continue work with the state to obtain appropriate rate adjustments for certain products or geographic areas.

We expect this process to be finalized in the first quarter.

For the year ended December 31, 2012 our consolidated HBR was 91.6% compared to 85.2% in 2011.

Excluding the Kentucky operations our HBR for 2012 was 89.6%.

As we discussed at our Investor Day in December, we have presented the impact of new business and existing business in our press release today.

For the fourth quarter approximately 35% of our revenues come from new business, those in operations less than a full 12 months, and our HBR for new business was 96.7% in Q4 compared to 88.5% for the existing business.

And based on existing known business we expect the percentage of revenue for new business to decline in the third and fourth quarter.

Our general and administrative expense ratio was 8.4% for the fourth quarter compared to 11.0% in the fourth quarter of 2011.

The decrease in the G&A ratio reflects the benefit of our additional scale and a lower level of performance-based compensation expense which lowered our ratio by 60 basis points.

And we incurred approximately $0.11 in business expansion costs in Q4.

For similar reasons our full-year 2012 G&A ratio decreased 8.6% compared to 11.3% in 2011.

Investment and other income was $3.4 million in the fourth quarter this year compared to $4.0 million in last year's fourth quarter, reflecting the continued low level of interest rates.

For the year investment and other income was $36 million in 2012 compared to $13.4 million in 2011.

The increase between the years primarily relates to the $19 million in gains recorded in the third quarter of this year.

Interest expense was $6.1 million in the fourth quarter compared to $4.8 million last year.

During the fourth quarter we issued an additional $175 million of senior notes priced to yield 4.29%.

For all of 2012 our interest expense was $20.5 million compared to $20.3 million in 2011.

Our income tax expense for the fourth quarter of 2012 represented an effective tax rate excluding non-controlling interest of 38.8% compared to 36.5% in 2011.

Given the consolidated pre-tax loss from operations the effective rate for the whole year is not meaningful.

Diluted earnings per share for the fourth quarter were $0.17 compared to $0.57 for the prior year.

For the full year earnings per diluted share were $0.03 per share versus $2.12 in 2011.

I call your attention to the table in the press release detailing certain of the 2012 unusual items.

At December 31 we had cash and investments of $1.6 billion including $37 million held by unregulated entities.

We have estimated our risk-based capital percentage, excluding Kentucky, to be in excess of 350% of the authorized control level.

For Kentucky we expect to maintain the minimum required capital level through our July 5 exit date.

Our total debt at year end was $539 million, reflecting the additional $175 million in senior notes issued in the fourth quarter.

There were no borrowings under our revolver at December 31.

Our debt to capital ratio at December 31 was 32.7% excluding our nonrecourse mortgage note.

The medical claims liability totaled $926 million at year end.

Our days in claims payable was 41.1 days, a decrease of 1.7 days from September 30 and a reflection of a lower inventory level at December 31.

Our cash flow from operations was negative $29 million for the fourth quarter, but totaled $279 million for all of 2012.

For 2013 annual guidance we have maintained the guidance numbers provided on December 14 -- premium and service revenues $9.7 billion to $10 billion; diluted earnings per share $2.60 to $2.90; consolidated health benefits ratio 88% to 89%; general and administrative expense ratio 9.0% to 9.5%; and diluted shares outstanding of 54.8 million to 55.2 million shares.

Now there are a number of moving parts for 2013 which have not yet been incorporated into our guidance numbers.

We expect to close on the Acaria acquisition late in Q1 and we have not included any of their business in these numbers.

We currently expect to issue approximately 60% stock in consideration for the acquisition.

In addition, we would expect to incur about $0.06 in transition costs upon closing of the transaction.

The state of Florida has recently announced their recommendations for the long-term care program; this program will roll out from August of 2013 to March of 2014.

And we have not as yet included the revenue and medical costs related to this program.

However, we have included the start-up costs for this program in our estimate of total business expansion cost for 2013 which total $0.50 to $0.60.

Flu costs have continued to be high in January, similar to December levels.

Depending on how this plays out for the full quarter we could certainly see an impact of this in our first-quarter earnings.

But as noted, we are not changing our annual guidance.

With that, operator, you may now open up the line for questions.

(Operator Instructions).

Chris Rigg, Susquehanna Financial Group.

Just want to come back to the guidance for the year.

When we think about a fully baked outlook for 2013 including Florida long-term care, including Acaria, do you think that the $2.60 to $2.90 is flat, up or down?

Bill?

At this point I would say it is flat.

I think we said we didn't expect to have any particular level of accretion for Acaria in the first 12 months, there will be a few cents -- $0.06 we said for transaction costs.

In Florida long-term care the business expansion costs have already included the start-up costs for that and we would expect that the amount of revenue and medical costs we would have, particularly in the fourth quarter, would not be a meaningful adjustment.

Okay, and then I may have missed it, but did you disclose the Kentucky loss ratio in the quarter?

We have not specifically talked about what that is.

I think that it continues to be high.

As we said, we booked [an additional] $10 million, so it's well into the hundreds.

Okay.

It's over 100%.

Okay, and then last question, more of a big picture question.

You know, we all can kind of agree that the industry tax on the Medicaid side doesn't make a lot of sense.

But as of right now it's still scheduled to roll in the next year and you have a rate -- rate cycles obviously -- Georgia, Texas, Florida all come on in the second half of the year.

I guess is it your expectation that in the absence of adjustment that the rates that you will see will have some sort of pro rata adjustment to sort of make you whole on the industry tax?

Or do you actually think there is some margin erosion potential over the short-term rates will not reflect the industry tax that begins January 1 of next year?

I think there are a couple of factors -- one, we continue to work that issue in the House in Senate.

Obviously when they passed the bill there was no reconciliation between the two bills and everybody we talk to are well aware of it and the fact that it is one thing commercially, it is something else in government services, which have to be actuarially sound.

So, I believe that we will be able to work with the states on appropriate rates to keep them actuarially sound vis-a-vis that particular tax because we have no choice.

But we also have the states working with us and agreeing by and large of that something needs to change on in it.

Okay, great.

Thanks a lot.

Josh Raskin, Barclays.

Just wanted to make sure I understood, Bill, did you say -- I'm just curious what you said about the flu cost embedded in the first quarter.

Did you say you are anticipating a similar impact as you saw in the fourth quarter, meaning maybe an incremental $0.30?

Or were you saying you have a normal season and then the flu could be an issue again?

I just want to make sure I heard that right.

So, what we have seen so far is the month of January flu costs have been similar to the levels as seen in December.

And as I said, in the fourth quarter December's costs were twice as high or more than twice as high as November.

So we are coming into this year with an elevated level to start with, but we have seen more recent weeks where it started to decline.

So we had built in a larger amount for Q1 and, based on what we saw right now, we believe that the level of flu will be higher in than we originally anticipated.

But given our current estimates, we believe that will be absorbed within our current range of our guidance estimate, $2.60 to $2.90.

But it doesn't mean that first-quarter results in and of themselves will not be slightly impacted by a higher level of flu costs.

Josh, it appears that the flu peaked earlier this year because of the earlier start in the fourth quarter of last year.

And our medical department, Mary Mason and others, say we have not seen twin peaks in the flu historically.

And as we said, we saw it starting to dissipate; the CDC did the second week in January.

Their experiences tracking with what we are seeing in our markets, [percent] -- Texas being the large one.

So at this point, as Bill said, it may have some -- it may have (technical difficulty).

And would you be surprised if your earnings were up year over year in the first quarter?

Should we interpret that to mean you would expect your earnings in the fourth first quarter to be down on a year-over-year basis?

I think that is a reasonable assumption right now.

Okay, okay.

It may (inaudible), but it doesn't mean that --.

The flu is so episodic that it becomes a little more difficult to project than other costs where you have more history -- or a different form of history.

And then just second question, I am a big fan of this new existing market, same-store versus new store metrics you guys are giving.

As I look at the metric in the fourth quarter, it looks like what I will call same-store MBR was up 390 basis points, but the new business was up 360.

And I certainly understand the new business is still at a higher level.

But I am just curious what drove the same-store?

Was that flu costs in Texas?

I am just trying to figure out what exactly is in new store?

Well, I think in new stores you've also got a pharmacy carve-in which has occurred in Texas and some other things which has a higher HBR in effect for that element of the cost.

And so, I think that what we see is for the existing stores are going to have an increase because we have higher mix and acuity levels in terms of the SSI type members we've added over time, and the new stores you're obviously impacted significantly by Texas and Kentucky.

I guess I was just surprised.

I thought Texas and Kentucky would have -- the new store numbers would have been up more significantly year over year than the existing.

I'm just trying to figure out what drove the 390 basis point existing same-store number up.

You are talking about for the existing or for new?

For existing, the 88.5%.

Right.

Again, I think a lot of that has to do with the fact of the type of members that we have been adding.

And you get rated at a higher HBR for example on an ABD book of business than you would be a TANF book.

And we have added a lot of higher acuity membership over time and that is what has caused the existing HBR to be higher.

All right, thanks, guys.

Ralph Giacobbe, Credit Suisse.

Just wanted to go to Texas.

You had previously talked about getting back to a normalized margin in 2013.

I guess is that still the goal?

Can you help us with the time line for resolution and whether it would be retro and maybe what guidance assumes?

I think we still anticipate the state, its membership normalizing during the course of the year.

We know the state recognizes the issue; they gave us that letter which we shared in the conference in December.

How they handle it, on a going forward basis or a retro basis, that is to be determined.

It is in the legislature now, they are working through it.

And as soon as we know something we will be glad to share.

In terms of the guidance assumptions for rate, have you guys talked about that?

We -- the guidance we've given annually anticipates appropriate action on the part of the state.

Okay, and then maybe you can provide some color on the Florida long-term care RFP?

I think one of your competitors noted that they felt that underwriting was tight in certain counties and that the target loss ratio was kind of 93% to 95% or something like that along those percentages.

Obviously you were awarded kind of 10 to 11 regions in the state.

Can you maybe talk about your comfort around underwriting in the state and your ability to sort of run these contracts profitably?

Thanks.

I think historically we have always said that we are not going out there with numbers that we don't believe are consistent with a well managed business and appropriate medical loss ratio.

We see it that way.

We went after the service areas we believed we could manage; we had a conference with the state.

We also think they had a very thorough process they went through.

So having went through that process we feel good about it.

And, Jesse, anything you want to add about the rating and how we looked at it actuarially?

No, just a couple thoughts, Ralph.

One is as you look, similar to the point that Bill just made with respect to ABD and some of the other populations, you've got much higher premiums associated with the Florida long-term care business.

So as a result the allocation between medical cost and administrative cost is different.

But that doesn't necessarily mean that the long-term margin expectations would be different.

So I think it's fair to say that the HBRs will be higher for our long-term care product, that doesn't necessarily mean that the margins would be lower over time.

Okay, great.

Thank you.

Justin Lake, JPMorgan.

First, in terms of the MLR guidance for the year, can you guys break out -- given that you are going to be reporting this new store same store number, can you give us what your guidance implies in terms of the new store, same store MLL -- MLR?

At this point we have not decided to give the guidance numbers on the same-store existing and new business MLRs.

I think our plan is to report that at each quarter, but not necessarily to give -- forward-looking information on that.

I think what we have said is that as a percentage of business we know that some of the new business will roll into the old business during 2013 such that we get to the end of 2013 second half we are closer to 15% to 20% of the revenues coming from new business versus 35% that we saw in Q4.

Is there any way to even just share with us then what you think the same-store MLR would be on a reasonable basis let's say for the year, even if you don't want to comment on the new store?

I think we said on Investor Day there was about a 500 basis point to 700 basis point differential in the MLRs between new and existing.

I think that relationship has been there for several years.

We would expect that to continue going forward, and that is about as much as I can say on it.

Okay, that is helpful.

And then on the acquisition, I apologize if I missed it, but net of all of the transaction costs and the stock issuance can you give us an idea of what you think the accretion is going to be on the deal?

The initial year, it's breakeven -- neutral to earnings in the first 12 months.

Excluding the $0.06 in transaction costs that we would expect to record upon closing.

Okay, so that is ex the transaction cost, will actually be dilutive to $0.05 to $0.06 for the year?

Yes.

Okay, and then just lastly on the flu, can you tell us what your flu number was last year in the first quarter?

I think that last year was a very low season for flu and so that is not what we baked into our guidance.

So I think it was less than $10 million in Q1 last year for actual flu costs.

And what is baked in -- remind me, what's baked into the guidance this year?

Well, I think we -- our original guidance had a much higher level than that for Q1 and we have bumped that up even more given the results (technical difficulty) that we've seen for January.

Okay, great.

Thanks, guys.

Carl McDonald, Citigroup.

I just wanted to run through the premium deficiency reserve in Kentucky.

So if you ended third quarter with $63 million, you added $10 million in the fourth quarter that you had already disclosed, so that got you to $73 million, ended the year with $41.5 million.

It looks like you've applied $31.5 million in 4Q, is that the right interpretation?

I would agree to that math.

Yes, I think that we added an additional $10 million in the fourth quarter as we talked about for the additional claims cost that we had come in.

And we ended up at December 31 with $41 million which really covers the -- our estimate of the premium deficiency reserve from January 1 to July 5.

And they did change a few of their -- a policy relative to the --

The days eliminated or the -- retroactive assignment for SSI members, for example, is one change in the program.

Took it from other (multiple speakers), it's not quarter to quarter easy to compare.

So I guess -- I mean, that gets to my second question which is if the application was over $30 million in 4Q alone and you only have $41 million left on the premium deficiency reserve.

Are those changes that have been made big enough that $41 million will cover those losses or would you anticipate that we may see that the premium deficiency reserves have to be increased again?

I think right now that is our best estimate for 2013.

And I think, particularly when you compare 2012 to 2013, we would expect that Kentucky would have a minimal impact on 2013 after consideration and we've got the $41 million of premium efficiency reserve.

There could be $3 million or $4 million of exit costs and other things that crop up during the course of the year which we have estimated in our costs -- in our original guidance.

But if we are off you wouldn't expect it to be off a whole lot compared to -- as Michael said, I think our loss on Kentucky operations for 2012 was $1.71.

There are fewer members -- and Carl, when we see something that could impact the guidance or we have some information we have never been bashful about putting it out there and making the appropriate adjustments as we see it.

In terms of the Kentucky exit time line, I know you are not going to opine on likelihood, but I would just be interested in the milestones on some of the time line -- basically just want to understand if it is possible that you can get out by July?

So if the decision in late March is an example where to go against you can maybe just walk through next steps in terms of that time line.

Well, at that point we are back in court and we will work through the court expeditiously.

I won't say anything more except I'll emphasize that the court did retain the jurisdiction; they stayed any action on us versus dismissing it to start over.

So I think we have a judge that understands the issue in terms of timing and the impact.

So it is hard to say anymore beyond that.

Okay, thank you.

Peter Costa, Wells Fargo Securities.

Can you go through the capital requirements that you are expecting over the next year and a half or so as we get into 2014 and the premiums start to grow?

Do you think your capital position is good enough for that?

We have just taken a little hit to capital here this quarter; can we talk a little more about that.

I will start off and Bill can pick it up from there.

As we have indicated that we believe that we have adequate capital through our cash flows, positive cash flows and our revolver to cover our capital needs for the balance of the year.

I think as we have seen over the last year, year and a half, the growth that we have put on the books obviously requires funding at the subsidiary level for statutory capital.

That will continue in 2013 and, as we said, our cash flow for all of 2012 I think was $279 million, something like that.

And we would expect that in 2013 it will be even greater than that given the operations that we have.

So a lot of the capital requirements are met through internally generated funds.

And as we said, the revolver that we have is unused at 12-31 and it is a $350 million revolver expandable to $400 million.

So the acquisition that we talk about is funded quite a bit with stock, which will not really dilute our debt to capital ratio very much.

And other acquisitions that we talk about we also would look to include a meaningful portion of equity as part of those.

Do you foresee your internal cash flows generating all the capital requirements for the next year and a half?

Is that accurate?

I think we're particularly looking at 2013.

2014 is a little less clear given Medicaid expansion and exchanges and how things fall out there in terms of what the requirements are.

And so, I think we can probably be in a position to better update 2014 once we get into the second half of the year and have a better look at how things are going to progress in 2014.

You also had some high acuity long-term care things coming and which will have -- should have significant cash flow associated with it.

You didn't talk very much about Louisiana.

Can you give us a little update on the performance there?

I think Louisiana has rolled out in three phases beginning in February through June, and then it added the pharmacy carve-in effective November 1. So at this point in time it has been up and running for a reasonable period of operations and seems to be performing within our expectations.

It's performing okay.

Okay, thank you.

Scott Fidel, Deutsche Bank.

First question just if you can talk about how discussions are progressing on the primary care provider parity rules and it looks like WellCare gave an update that they had been negotiating a bit on that in Florida.

So maybe if you can update on Florida specifically and then more broadly how those discussions are proceeding.

And then whether you expect that the capitation rates that you'll receive for that will fully cover the costs of moving the provider rates up to in parity (technical difficulty) with Medicare.

I think the best comments on that -- it's a good question -- is we are in active discussions and working through those issues and it is best not to front run those situations.

Other than, we expect those to be neutral to us at the end of the day and we will accommodate whatever needs to happen from an individual state's perspective.

But we really don't expect it to have a net impact to us.

But we are very conscious of it, it is all considered in everything we are doing and the plans are working through it very appropriately, methodically.

Okay, and then just a second question just taking together some of the comments that you have made so far on the flu costs in 1Q and what is incorporated into the outlook.

Is it fair to say that it sounds like you are still comfortable with your range of guidance, but that does have a pretty wide range to it?

So if the flu kept up with the level that we have seen a bit in January that you are comfortable with guidance but likely more towards the lower end of that $2.60 to $2.90 range?

I think what we said is that we saw an earlier more intense start in Q4 with the flu.

We saw it continuing in January, but we've also seen it start to tail off in the second and third week of January, which is an earlier tail off than we have historically seen.

And that we feel that we are appropriately funded on the year.

And I'm not commenting or giving any consideration to the range.

It's within the full range.

I'm not saying it is at the bottom or the higher end.

It is within the range and all the facts -- we have not seen a double peak historically, a twin peak in flu development, as Mary Mason, our Chief Medical Officer, will tell you.

And so, we are comfortable with the guidance we have to this point and if we thought it was something else we would tell you that.

There are a number of moving parts within the year for the whole year's guidance.

And at this point in time based on everything we see we are comfortable maintaining that guidance at this point.

I mean, as Bill commented, you see the same store/new store, the new store going from 35% as we sit here today and tailing off toward the end of the year at 15% with improvement in the MLR.

We gave you some guidance 500 -- around 500 basis point swings in MLR between old and new.

So all these things have been considered and we put the range out there to reflect the moving parts.

Okay.

And then just had a follow-up question on the Florida long-term care contracts and just first, what are the initial lengths of the initial contracts that you are in discussions regarding Florida LTC?

And then if the pricing does not prove to be sufficient, and just given some of the commentary that we have heard from your peers on this front, what would be the process through which potentially you would then have an opportunity to renegotiate pricing?

So basically, how long is the initial term for the pricing and then how long is the overall initial term for the contracts?

Thanks.

Jesse?

Yes, so we've got -- I mean, as you expect in a lot of these contracts, you have -- the duration of the contract is multi-year, and so this generates some flexibility on that front.

But the pricing is annual pricing.

So unlike what we have seen in Kentucky, for example, this would be an annual pricing kind of process that would be reflective and going through the actuarial assessment and determining actuarial soundness based on the performance of the program and that could be both at an aggregate level and at the individual company level.

We are in this product already in Florida and so -- and in other states, so we have some comfort level with it and we have been operating in Florida for several years working with the rate environment and the issue of moving members to stay in a home in a community-based setting versus in a facility is the objective in these types of programs.

And so, we are comfortable that, particularly given if we participate in 10 regions, we have scale with this program within the state of Florida which allows us a little more room to maneuver.

And I will also just add -- I mean going back to when we first won the first bidding on RFP on Georgia and when the two plans (inaudible) that won, everyone said they did it on price; they can't do well on it.

And there are other instances in -- that connect to where they said it is so low and we ended up giving the state back money the first year because of the surplus that was there.

So there is a certain parity when people don't win they talk about the ones that won did it on price.

And I think there is enough history there to say that we are conservative and reasonable and experienced when it comes to that.

Okay, thank you.

Brian Wright, Monness, Crespi & Hardt.

Could you give us a little more detail on the process of the I guess supplemental rate increase discussion at the state legislature in Texas?

Once again, Brian, we have had very constructive discussions, it goes back to them realizing what occurred in Q4 and how it occurred and their concerns about it.

They have worked with us, they have put the numbers forward to the state and it is a wise man that stays out of the middle of those discussions.

And I would not want you to think we are not being wise about it.

And I appreciate what you are trying to do and I respect that.

But when legislation is involved, the best thing I can do is sit back and let the state who needs the funding deal with the legislatures and not try and express opinions on it.

I'm sure you understand that.

Yes.

No, no, absolutely.

I just wanted to make sure -- does the guidance assume any supplemental increase in Hidalgo?

Yes, we have confidence that the state recognizes it and it does assume appropriate supplemental funding for Hidalgo and appropriate action in the rural markets as well.

And just one last one if I can.

When does the legislature finish the -- like when do they normally adjourn for the (technical difficulty)?

It's the last week in March.

Last week in March, okay.

Thank you.

I just want to remind people, if they pass it then the state has to work through and figure out by service area, by cell.

And we would hope that they are able to get that information and the amendments and contracts and things to us before the end of the quarter.

What's important is that they have -- they will have dealt with it in an appropriate fashion.

It all starts there.

Thank you.

Scott Green, Bank of America-Merrill Lynch.

First just a follow-up on Florida.

Looking at the RFP scores it looked like the technical scores for Centene were about average, but then you kind of leapfrogged some of your competitors during the invitation to negotiate process, which potentially implied that you were pricing lower.

So I know in other markets you have explicitly talked about some utilization savings that were assumed.

So is there any number like that you could give us for what utilization savings you assumed in Florida or how you might have been able to use your incumbent claims data to underwrite there just to get us more comfortable with the process?

Jesse, you want to start off?

Yes, I think one of the things that is important here; obviously we are still relatively early with respect to the announcement.

And there is not -- there's a lot of activity, I don't think there is total visibility on the technical scores on the why.

But, so we will continue to evaluate those things as we go through, as everybody else will I'm sure.

But you really -- the process that the state went through I think is important here and Michael referenced the diligence that ACA went through and the state of Florida went through in this process.

So there was the technical response, but there is also on a region specific basis oral presentations.

And that is I think candidly the best way for us to represent our experience in serving this population.

And I think that was ultimately reflective in the outcome of the scoring process, so there is both technical and then there are oral presentations where we think we did quite well.

And then there is a pricing component.

And I think just to reinforce what you already know, Scott, this was not bid rates; there was a range that the state had provided.

And so the state had set the actual range and there is really questions of where people came out within that range that was set by the state.

And you kind of also said up front in asking the question that we have experience in the market, that we have been able to demonstrate to say what we can do in that market specifically.

I think they have an appreciation of our systems and the capacity we have.

We are managing higher acuity members.

And so all those things came into play and I think we had the -- well, (inaudible) was the right outcome.

Okay, that's helpful.

And separately, could you tell us what the status is of the Georgia Medicaid contract?

I thought the state might have been working to add a couple optional extension years, but I'm not sure.

How long is that supposed to -- goes to the Georgia Medicaid contract?

I don't know that they have disclosed anything to us specifically in terms of any extensions.

And the people -- Rob and others -- who manage the existing market health plans or figurehead, that they have not disclosed anything beyond what we know now.

It appears to be another year or two out still.

It has been that way for a couple years.

There is a fundamental that all states really don't like to do (inaudible) if they don't have to.

Particularly if they have a program that is working, saving money, they are getting the quality outcomes they want -- all those things that -- they tend to not want to do it unless there is some procurement law that makes them.

There are some states that recognize the savings and have decided to expand it, as we see, very aggressively -- Texas and others and we are willing and glad to participate in that.

As it relates to Georgia, it's kind of stay tuned and you will probably know the same time as we do.

Okay, so for now you are not expecting an RFP there in the very near term?

The honest answer is I am not expecting one, but I am not not expecting one.

I expect that the state could change its mind and do something based on its budgetary issues and their fiscal year starts in July.

So as they look at it they can make appropriate decisions.

We will encourage them every chance we get to expand what they cover.

Okay, and lastly, looking at the fourth-quarter MLR if you exclude flu in Kentucky and it looks like it would be a little bit above your 2013 guidance range.

So maybe you could just walk us through the main drivers to get you from where you are in the fourth quarter 2012 to the midpoint of your guidance, which is 88.5% for 2013.

I think of the primary thing is that the rates in 2013 should be improved in Texas.

As our largest market that has a pretty big impact.

And just in general where we've had rate increases it will be applicable in either the second half of 2012 rolling into 2013, the whole year.

And the fact that some of the older -- the newer markets will start to mature and where we've had original margin build up and other things like that that will no longer be necessary.

So we expect those to be more normalized margins.

We were starting to see some normalization until those 6,000 plus members moved from another plan to us off cycle.

And so --

9,000.

9,000 -- excuse me, thank you, Bill.

In that state.

9,000 in that state.

And the state is well aware of that, as we told you, and they are evaluating appropriate rates and responses to it.

So there were some moving parts their relative to that, Scott, that made it a little more difficult to get a straight comparison.

Okay, thank you.

Melissa McGinnis, Morgan Stanley.

I know we spent a lot of time on the Texas rates today, but maybe just to ask the question a different way -- help us get comfortable with your guidance range, which is a range.

How many months could you sustain receiving the current rate you are receiving and not put at risk your current guidance range?

So, you are saying how many months would it be without any adjustment --?

Could you go through March with nothing -- could you go through July with no update?

At what (multiple speakers) point would it become true risk to your guidance if there is that much of a delay in the legislature?

Melissa, when you're in the middle of negotiating rates with the state and legislature, to say anything other than we need them as soon as possible, I would not want to go beyond that.

I mean, we have asked from the states what we need in a responsible timing and way.

And so, we obviously will always work to minimize expense with the states, save them as much money as we can, do all the things they expect us to do.

But to sit here and say, well, no, don't worry about it if you don't give us rates until June or July.

I mean that is not the case.

We obviously are working with the states because we need the rates approved now.

Great, thanks for the --.

And we -- by the way, they also recognize that and we fully expect them and the legislature to provide that rate adjustment, there is no reason to believe it won't happen.

Okay, great.

And then maybe a longer-term question.

We are 11 months out now from the implementation of health reform.

And Michael, from your perspective or your conversations with the state, do you think that on 1-1-14 there is going to be an orderly enough process whereby new Medicaid eligibles are all enrolled or enrolled in a very short period of time?

Or is this something that is going to be more like an eight quarter or 12 quarter roll out to full implementation across like the newly eligible (inaudible)?

I think that the people managing this process have to presume that it will be ready to go 1-1-14.

I don't think -- they may delay some of the steps along the way when we have had our internal discussions, but we expect that and have to work against and plan to be there for 1-1.

I think to not do that would be foolhardy.

So we fully expect a 1-1 implementation.

We are working very hard against it with the states and -- because I mean the states are anticipating the reduced savings that they will get through the funding from the federal government at 100% for that membership.

So they have every reason to push it as fast and as hard as they can.

And the states we are in absent one understand what's sound policy and what's a sustainable program and we think that those states will continue, as they have historically, to work with us in a very responsible way.

Great.

Sorry, I might have been a little bit unclear in what I was asking.

Setting aside the risk that all of reform is delayed in some way at of state, what I really meant is like inside of Medicaid programs sometimes people who are eligible don't realize they are eligible sometimes until there is a medical event or something and they are in the ER and they get signed up for Medicaid.

Do you think there is going to be enough public outreach to get the majority of eligibles enrolled assuming we have a 1-1-14 go live that they are in day one?

Or is this going to be something that like (multiple speakers) the enrollment as they realize it over a period of two to three years?

I will let Jesse and others add to it.

But obviously I think the last time I saw it was 12 million or more eligibles that are not enrolled in this country.

So there will always be an element of that.

But, Jesse, what do you want to add in terms of --?

No, I think it is a fair question and obviously no (technical difficulty) great visibility on it at the moment, Melissa.

But I think it is a reasonable expectation that given the amount of awareness and kind of more focused communication that will happen between now and 1-1-14 on a state specific basis, I think there would be a higher kind of take-up rate, if you will, out of the gate.

But as Michael said, it is certainly not going to be 100% out of the gate.

So those things will continue to take hold over time as people become more aware of the programs and the moving parts associated with the programs and how it affects them personally.

Great, thanks for all the detail today.

David [Sagalov], Jefferies.

Thanks for taking my questions; I am just filling in for Windley while he is traveling.

I had a follow-up kind of in terms of the guidance.

It sounds like your updated guidance reflects incremental costs for both the flu and of course the Florida long-term care business expansion costs.

So, I'm curious about what that suggests for the underlying guidance?

Are you suggesting that the core business is improving enough to absorb those costs or is it more of a factor that that guidance might be a little bit more biased to the low end of that range?

I think that when we talked about guidance on December 14 there were questions about how much conservatism was built into our guidance numbers.

And I think that is part of the issue here, that we have a range for guidance and we've allowed for an estimate of $0.50 to $0.60, for example, for business expansion costs and the long-term care program expansion costs are included into that number now.

And we do believe that the basic underlying businesses are sound and performing well.

Flu, we've got some visibility to that right now for Q1 and feel comfortable with maintaining our guidance given what we know at this point in time.

And we feel for the whole year that the guidance numbers we gave are still the appropriate amounts to retain and the level of conservatism that we have built in I think allows us to retain that guidance.

I think this is kind of answering the same thing in a slightly different way.

On the flu we have given you the substantiation of why we believe it is adequately planned to this point in time because of the fact that it has peaked and this is data that we can all look at.

We did anticipate in December winning some of the long-term care in Florida where we currently operate, have a current operation and we plan the $0.60 expense to bring it up because long-term care does have more nurses, more case managers and things.

We have the experience to know what that is and we plan for it.

So I would say that guidance as is out there reflects what we thought then and we see no reason to change it at this point in time.

Does that help?

Okay, yes, so you are saying -- when you gave your mid-December guidance that you had contemplated some potential built out for the Florida long-term care even though it wasn't announced at that point?

Right.

Okay.

I mean, you have to make certain assumptions and we were much more comfortable doing that than coming in.

Okay.

And then just circling back -- I'm sorry, go ahead.

As we just said, the $0.50 to $0.60 we had for business expansion costs included a number of known things, it also included placeholders for a couple of other things we were in process and a little bit of the unknown to be determined.

Got it, okay, that helps.

If we could just circle back to the quarterly progressions, especially kind of looking at the first quarter and thinking obviously higher flu costs this year.

But is there some easing in some way on Kentucky or are there other factors to help offset that or just to help directionally?

Are we certainly looking at something that should be down year over year?

Are there any other offsets that would help get that closer to perhaps being flat year over year?

Of course it is our policy to give annual guidance as opposed to quarterly.

And so, the -- our help to this extent -- and Bill, if there is anything as you can add to it, but I'm going to say we have said that we are maintaining annual guidance, we're saying that there are some -- there were some incremental expenses in Q1 that we believe will be offset during the course of the year.

And that's -- I think that kind of summarizes what you have already said.

Right, and I think that Q1 has a number of open factors with respect to like when Texas' rates are going to be impacted, so that is probably the biggest question of just timing.

We believe it will be there for the full year, but how much is recorded in Q1 will depend on the actions taken and how everything is tied up there.

It goes back to that issue of they can approve it and everything else, but it has to be signed, sealed and delivered for revenue recognition purposes.

So we anticipate the state understands that, will do all they can to achieve it.

But in the interest of candor you can see something swinging from quarter to quarter, but on the full year we expect it will be there.

I hope that helps.

Sure, very good.

Thank you very much.

Ladies and gentlemen, that will conclude our question-and-answer session.

I would like it to turn the conference back over to Mr. Michael Neidorff for his closing remarks.

I thank you and, as I've said, -- as I said at the Investor Day, 2012 is behind us, it was from a growth standpoint and positioning us for 2013 -- will prove to be a very good year from that perspective.

And we are really looking forward to reporting and I believe we are well positioned for 2013.

So we will talk to you in another three months or so.

Take care, thank you.

Thank you, sir.

The conference has now concluded.

We thank you for attending today's presentation.

You may now disconnect your lines.