Centene Corp (CNC) 2015 Q1 法說會逐字稿

Good morning, and welcome to the Centene Corporation first-quarter 2015 financial results conference call.

(Operator Instructions)

Please note this event is being recorded.

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

Please go ahead, sir.

Thank you, Denise, and good morning, everyone.

I'm Ed Kroll, SVP of IR for Centene Corporation.

Thank you for joining our first quarter of 2015 earnings call.

Michael Neidorff, Centene's Chairman and 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 about 45 minutes and may also be accessed through our website at Centene.com.

A replay will be available shortly after the call's completion also 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 10061838.

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 today, April 28, 2015, and our 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, our next investor day is Friday, June 12, 2015, in New York City.

Please mark your calendars.

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

Michael?

Thank you, Ed.

Good morning, everyone, and thank you for joining Centene's first-quarter 2015 earnings call.

We were pleased to have started 2015 with another successful quarterly performance, marked by exceptional top and bottom-line growth.

We expect this momentum to continue throughout the year, and are raising our 2015 financial guidance accordingly.

Bill will provide details on our enhanced outlook.

During the course of this morning's call, we will discuss our strong first-quarter results and provide updates on Centene's markets and progress.

I will begin with first-quarter highlights.

We added 1.4 million members compared to the first quarter of 2014.

This represents a 44% increase to 4.4 million beneficiaries.

First-quarter premium and service revenues grew 42% year over year to $4.8 billion.

The HBR increased 50 basis points year over year to 89.8%.

This reflects an increase in the higher acuity membership as well as a higher flu cost compared to last year's relatively mild flu season.

Importantly, this fell within our planning assumptions and guidance.

We will deliver further HBR detail including new and existing business mix.

Overall, we continue to see, as well as anticipate, stable medical cost trends.

We reported first-quarter diluted earnings per share of $0.52 compared to $0.29 in last year's first quarter.

I would like to note that the ACA health [insurance] had no impact on the first-quarter 2015 earnings as we had a security agreement with our states for 100% of the fee on a gross [sub] basis.

Now on to market and product updates.

First we will discuss recent Medicaid activity.

Louisiana, we added over 200,000 full risk members in the first quarter as the state transitioned out of the shared savings ASO model.

At March 31, we had approximately 360,000 recipients in Louisiana.

This is above the high end of our prior guidance of 320,000 to 350,000.

Centene is now the largest Medicaid managed care organization in the state.

Indiana, in February we commenced operations under the state's new program, Healthy Indiana Plan 2.0.

This contract is proceeding according to plan.

We expect membership to continue to increase throughout 2015.

Separately in April, Centene began serving ABD beneficiaries in Indiana under the state's new Hoosier Care Connect Program.

Texas, in February we successfully resecured our exclusive foster care contract in Texas.

At March 31, Centene served approximately 30,000 children under this program.

Centene created this innovative product for Texas in 2008 to meet the specific healthcare needs of a vulnerable population.

Since that time, we have served over 100,000 foster care beneficiaries in the state.

Also this quarter, Texas began carving in nursing facilities benefits for its STAR+

PLUS program.

Missouri, in March, Centene was selected to continue serving Medicaid beneficiaries in Missouri as part of the state's [lead with] children process.

This contract is expected to begin in the third quarter.

At the end of the first quarter, we served over 75,000 members in Missouri.

Moving onto duals.

At March 31, we served 12,600 members across our dual demonstration contracts in Illinois, Ohio, South Carolina, and Texas.

We are now reporting our dual membership as individuals who receive both Medicare and Medicaid beneficiaries through a Centene health plan.

For year end 2014, we noted approximately 16,000 duals.

This included Ohio beneficiaries who receive Medicaid but not Medicare through a Centene health plan.

Overall, these contracts are performing in line with our projections.

By example, this includes an approximate 30% opt-out rate in Ohio.

We expect our Michigan dual program to begin in the second quarter.

Next, Centurion.

Last week Centurion was recommended for an award to provide correctional healthcare services to 17,000 individuals incarcerated in Mississippi.

Operations are expected to commence in the third quarter of 2015.

This is Centurion's fifth state correctional program.

Now, health insurance marketplace.

Marketplace membership doubled in the first quarter.

At March 31, we served approximately 162,000 members in select regions across 11 states.

Please note, this is the membership level at the conclusion of the open enrollment period.

Membership will likely diminish slightly throughout the course of 2015.

Over 90% of these beneficiaries were subsidy eligible consistent with Centene's marketplace strategy.

The demographics remain in line with our pricing.

A quick comment on international.

We are pleased with our investments in Spain and the UK.

Both are proceeding as expected.

We continue to look for additional international opportunities, particularly in Spain.

Shifting gears, our rate outlook.

We continue to project a 2015 composite rate adjustment of flat to 1%.

In conclusion, first-quarter results offer further evidence of Centene's financial strength and operating capabilities.

Centene's pipeline of future opportunities remains robust.

We continue to explore new growth in diversification prospects both domestically and internationally while maintaining a focus on margins.

We look forward to seeing you at our June 12 investor day in New York City.

Thank you for your interest in Centene.

Bill will now provide further details on our first-quarter financial results.

Bill?

Thank you, Michael, and good morning.

Our first-quarter results are consistent with the growth rate we have experienced over the last several years.

Membership increased 44% year over year, an increase of almost 1.4 million members.

Our premium and service revenues increased 42% year over year totaling $4.8 billion.

The revenue increase between years of $1.4 billion is a result of a full quarter's impact this year from expansions and new programs in 2014 in a number of states particularly Florida, Illinois, and Ohio.

We increased our full risk membership in Louisiana this quarter as a new contract began, which eliminated the shared savings program, and we converted 200,000 of these members to the at-risk program.

In the first quarter, we also began serving additional members in Indiana for the Healthy Indiana Plan 2.0 program, and we began covering of nursing facility benefits in Texas.

Service revenue increased 64% year over year primarily from our carrier health specialty pharmacy business.

During the quarter, we received an agreement in California for the full reimbursement of the health insurer fee on a grossed up basis for income taxes.

We now have agreements going forward in all of our states for reimbursement of the health insurer fee.

The consolidated health benefits ratio this quarter was 89.8%, an increase of 50 basis points over both last year's first quarter and the fourth quarter 2014.

The increase year over year is primarily due to the increase in higher acuity membership, which carries a higher health benefits ratio and a lower G&A ratio and higher flu costs this year when compared to a relatively our relatively mild season last year.

The increase from the fourth quarter is primarily seasonal as the first quarter is typically our highest HBR quarter.

In the first quarter, approximately 23% of our revenues were from new business compared to 20% in the first quarter of 2014.

The HBR for new business was 91% compared to 89.5% from existing business.

Our general and administrative expense ratio was 8.5% this quarter compared to 8.8% in Q1 of 2014 and 8.2% in Q4 of 2014.

The 30 basis point decrease year over year reflects additional scale this year and the incurrence of acquisition transaction costs for US medical management in Q1 of last year.

Business expansion costs, excluding the acquisition transaction costs, totaled $0.06 this year compared to $0.03 in last year's first quarter.

Investment income was $9 million for Q1 and interest expense was $10 million.

During the first quarter, we issued $200 million of additional 4.75% senior notes and simultaneously entered into $200 million of interest rate swap agreement which have an interest rate of 2.88% plus the three-month LIBOR.

The effective income tax rate was 49.2% in Q1 compared to 51.5% last year.

The relatively higher tax rates are due to the non-deductibility of the health insurer fee.

Diluted earnings per share from continuing operations was $0.52 this year compared to $0.29 last year.

Last year's number included an $0.11 impact from the health insurer fee and transaction costs.

Diluted shares outstanding were 122.6 million shares for this year compared to 118.7 million shares in Q1 last year.

Cash, investments and restricted deposits totaled $3 billion at March 31, including $97 million held by unregulated entities.

For risk-based capital, we continue to maintain capital in excess of 350% of the authorized control level excluding any interim statutory impact related to the health insurer fee.

Our medical claims liability was almost $2 billion at March 31 and represented 45.5 days in claims payable.

Our total debt was $1.1 billion at quarter end including $125 million of borrowings under our revolving credit agreement.

Our debt to capital ratio, excluding our $69 million non-recourse mortgage note, was 36.6% compared to 31.7% at year end.

Cash flow from operations was $45 million, which was 0.7 times net earnings.

This is a lower level than we have been running primarily as a result of one state changing the timing of their payment to us.

This resulted in our receiving only two monthly capitation payments during the quarter.

Going forward, we will receive three payments each quarter.

Our 2015 guidance numbers have been updated to reflect our first quarter performance.

For the full-year 2015, we expect premium and service revenues of $20.5 billion to $21 billion, diluted earnings per share $2.60 to $2.72, consolidated health benefits ratio of 89.2% to 89.6%, G&A expense ratio 8% to 8.4%, effective income tax rate of 48% to 50%, and diluted shares outstanding of 123 million to 124 million shares.

As has been our policy, our guidance numbers do not include any impact from acquisitions which have not yet closed.

Lastly, our business expansion costs are estimated to be between $0.22 to $0.25 per share for this year.

This concludes my remarks, and operator, you may now open the line for questions.

(Operator Instructions)

Joshua Raskin, Barclays.

Thanks.

Just to get into the Q, I just want to confirm.

It looks like there was a $10 million benefit from the Louisiana transaction, and then I saw $10 million for charitable contribution to the foundation.

Is it fair to say those were offsetting and no impact to the P&L together?

I think that's correct.

Okay.

Second question, on the commercial revenues, your health insurer's exchange membership came in a little bit stronger than we were looking for.

Are you guys still below the 2% threshold for the deductibility and compensation expense?

Yes.

We're still growing our plans forecast and our approach to [service] continually to be below 2%.

Okay, and maybe that's because you trail down through the rest of year.

Is that sort of fair to say?

Yes.

There's various ways that we approach it, and we are ensuring that we do stay below it.

Okay.

Thank you, Michael.

And then just last one on sort of RFP pipeline and any changes in guidance.

The revenues are up a couple hundred million bucks.

Is any of that a change your in your assumptions around your underlying business or is that just Centurion and things that you've announced?

I guess maybe juxtapose that with how the current RFP pipeline looks.

I think our guidance increase is generally reflecting the impact of several of the outstanding RFPs we had at the end of the year, with our rate procurements, those are all now baked into our guidance, Arizona, Missouri, and the Texas foster care and a few other changes that we've had and updates from that point in time.

So, I'll let Jesse speak to any open RFPs.

Yes, Josh, I would speak to just as it relates to the cycle, there are a number of RFPs that are in process right now.

Once those come to their natural conclusion, then we will reflect those in our results accordingly.

Okay, but you are assuming like existing business like Georgia that are I assume you've just gotten an assumption of reprocurements.

I'm curious if Iowa is in there or anything else.

So, Georgia would not really impact 2015.

I think that's a July 2016 effective date.

So I think that with respect to the remainder of the year, we're not anticipating any changes in terms of particular wins or losses in our guidance numbers.

If we go after a new state or something, we never include it until it's won or awarded and we don't comment on it until the state announces that a particular company is in or out of the process.

Okay.

All right.

Perfect.

Thanks.

Thank you.

Kevin Fischbeck, Bank of America.

This is actually Steve Baxter on for Kevin.

I was hoping you could talk about the performance of the Florida MMA and long-term care programs.

I guess can you talk about your progress in managing medical costs lower since the launch of these contracts, and I guess whether you see a path towards a stable margin in businesses without receiving a rate increase from the state.

Well, we continued -- I'll let Bill and others add to it, we continue working effectively with the state.

We are looking at the rate side as well, but obviously the guidance we continue to believe we will achieve our goals there in that market.

Anything you want to add, Bill?

We always anticipate a level of pressure with respect to the HBR in the initial year of a program and that's something that we expect.

We saw that with the LTC program and we saw working with the state getting to a more appropriate place with respect to the program.

We're seeing similar pressure in the MMA program and it's something that's actively being discussed among all the plans in Florida and the State of Florida, as well.

We're optimistic.

We have had a long history in Florida.

They've been a good partner to work with, as road indicated, long-term care was resolved last year, particularly in the fourth quarter, and we would expect in 2015 to have similar changes impacting the MMA program.

Okay, that makes sense.

I guess has there been any update on the discussion around the formulary in Florida because it seems like that would be a potentially painless way for the state to come up with a fix without necessarily having to budget more?

We talk about it but as was the case last year, our guidance and budgeting includes the formulary as it is today.

And if we effect any changes, we can reflect that but as it is, [and service] and appropriate to not plan on one at this time.

Okay, thanks.

And then I guess in terms of the composite rate update of 0% to 1%, is there an assumption in there for Florida?

It's a mix of all the plans into what amounts.

We've not anticipated in the guidance numbers any significant change in the MMA program for 2015.

We've included in our guidance where we are right now, and so we'll wait and see how that progresses during the course of the year.

Okay.

Thank you very much.

Brian Wright, Sterne, Agee.

Thanks, good morning.

I apologize if I missed this, but did you quantify the impact of flu on the quarter?

We didn't put specific dollars in there.

I think that from our perspective, you really have last year, the 2013-2014 season, was a relatively mild season.

We anticipated in our guidance that we would have a more average flu season, and I think what we probably had was slightly above average but within our range of expectations and estimates that we had for flu during the course of this current year.

So I think from our standpoint we don't really want to quantify specific numbers other than to say it was within our range of expectations.

Okay, and then so how do we think about historically [boring] product mix?

Historically, the second quarter has been a better quarter than the first quarter.

Is that -- is it -- I would expect given what flu was this year that that trend would continue.

Is there any reason to not think that that would occur?

Typically, the first quarter is our highest cost quarter, and so we see that year after year.

Okay, and then just one last follow-up if I can.

Did the sequential increase in the services revenue, how much of that was -- you told us primarily the year-over-year increase in services was at carrier.

Was most of the sequential increase at carrier as well?

Yes.

Great, thank you.

Sarah James, Wedbush Securities.

Thank you.

As some of the complex care contracts anniversary and move into the existing business line, how should we take about what an appropriate existing MLR looks like in 2015, 2016?

I think that the first year obviously has been running higher.

We think that it's going to run closer to our longer-term expectations by the time you get into the second year.

But the complex care products are rated generally at a higher HBR, up into the low 90%s in most cases.

So we would expect that we would have that normal progression.

We give you our health benefits ratio guidance of 89.2% to 89.6%.

We feel that's a good number for the whole year on a blended basis without trying to break that into complex care and everything else.

But we do expect as we've added more complex care, some of it will start rolling over into the existing business, but it won't have a dramatic impact in our overall HBR other than what we show in our guidance.

Got it.

And one of your peers lowered their Medicaid revenue guidance based on duals opt-outs trending higher than expected.

Can you speak to how opt-out levels are trending in your markets and how that compares to your expectations?

Bill, do want take a comment on that?

Opt-out has affected us in our dual demonstration programs, really in Ohio at this point, and as Michael mentioned, our opt-out rate in his opening comments, our opt-out rate was 30%, which was -- approximately 30%, which was very much in line with our expectation.

So our experience with opt-out has been very much in accordance with what our projections were at this point.

Great, thank you.

Andy Schenker, Morgan Stanley.

Thanks, good morning.

Maybe if you could just talk about obviously you gave the flat to 1% but within that, any views on the price declines for expansion rates.

Granted, you guys have less exposure than maybe some of your peers to expansion.

Yes, I think that could be recognized in that there's ongoing discussions with a lot of states.

It's probably prudent to not get too specific.

I don't want to say or indicate what our expectations are.

I think the one thing I would mention is on the Medicaid expansion business, in many of the states that started out with relatively high rates but had a minimum HBR, so what's happened, and we had to accrue for the minimum, so to the extent that they reduced rates it also will reduce the amount that we have to pay back to the states for the minimum, so I don't think overall it's going to have much of an impact on our overall rate increase number because we were already accruing for that payback.

Okay, that's helpful.

Maybe change direction here.

Centurion announced another win in that program here.

Maybe if you could just talk to us a little bit more about how we should think about that business longer term here, the type the margin potential, and it sounds like our RFP is coming to market at a faster rate versus maybe your original expectations, or how should we think about those opportunities coming to market.

Thank you.

So, thanks for the question.

Obviously, we're excited about the momentum on the correctional space and with our fifth contract, and we've -- one of the things that we've looked at the beginning is in the context of our broadening our offerings for our state customers.

So I think Mississippi is a good example of that where we already have a strong presence in that market.

But there are -- I think the reason we were going after this -- these opportunities, there's a number of states that either have correctional programs that are coming up for bid or these services are changing or states on current Departments of Corrections that are moving in that general direction.

So we are seeing what I would call strong momentum in that area.

That's a subset of the pipeline that is a quite active at this point and we are fortunate to be successful in that.

To your other question, these are going to be relatively smaller.

It's not going to be the same size as say our health plan contracts, by example.

But we do think that there are some of the pricing dynamics that we've talked more generally about our 3% to 5% pre-tax margin objectives.

We have reason to believe in our initial experience that we can achieve that in the correctional space as well.

And just a quick follow up on that.

How do you guys consider this business?

Is it government business, commercial business, and does it apply to the de minimus rule?

We definitely consider this to be government.

Okay, thank you.

Peter Costa, Wells Fargo Securities.

I'd just like to get a little more clarity on the $11 per member per month drop in revenue sequentially from fourth quarter to the first quarter.

You'd think with the higher acuity business that would be going higher or was there some one-time items in either the fourth quarter or the first quarter that caused that caused that to drop.

I'd say it's a couple things.

In the fourth quarter, we received some additional revenue in Florida on long-term care and a few other things, which sort of raised the PMPM number in the fourth quarter.

And in Q1, we also added a large membership in Louisiana for two months, which ends up showing a lower PMPM when you do that calculation.

So there's nothing unusual in there.

It's a timing mix.

And then rate had no impact on that really.

The 0% to 1% rate is relatively true for the first quarter here?

Yes.

Okay, and any updates on Kentucky and what's going on there, if you don't mind?

As we've said many times, we don't comment on litigation, so it continues to wind its way through the various courts and as promised, it's going to take some time.

Okay, thanks.

I might add we're still optimistic.

Matt Borsch, Goldman Sachs.

Might have missed this earlier in the call, but can you talk about the three Rs, and I realize it's not a big business for you but how you finished.

It looked like from the state insurance reports you did actually quite well on the exchanges in terms of underwriting results at least based on Celtic.

So can you address that and then how you're treating the three Rs as you come into 2015?

Sure, I think that with respect to 2014, we did finish out better probably than we anticipated we'd do and based on the information that we have, and our estimations on risk-adjustment for example, we estimate that we'll be a payer and we'll have to pay back in.

Same thing on the risk corridor, and there is a footnote in our 10-Q on the amounts that we have as receivables and payables for December 31 and March 31, and so you can look there for additional detail.

So we think that in 2015, it's early to have any solid predictions for the year.

But we right now, based on our current estimates, we're assuming will be in a similar position on risk-adjustment given we have a similar membership and the characteristics of the membership that we've added in these states are the same.

And those numbers have been improved.

As a footnote, all these numbers have improved so there's no impact on the quarterly earnings.

Got it.

And maybe on a separate level, can you give some sense of how many of your states you're running up against or for -- I should say for full-year 2014, you were running up against points where you needed to pay back rebates, and I'm sorry if you disclosed this information already.

I don't think we get into the level of detail by state, but generally I would say most if not all.

Okay.

It's been pretty consistent, Matt.

All right.

Thank you.

Ana Gupte, Leerink Partners.

Thanks, good morning.

The first question is about your G&A.

You came in at 8.8 but you're reiterating 8.8% to 8.4%.

I'm curious about how the synergies are playing out with your CHS transaction in Louisiana, and if that's the driver of your guidance reiteration.

And then going beyond that, with OpEx leverage as your growing membership in existing states and shifting mix to lower G&A products, what is your normalized G&A likely to be and when might you get there?

Sure.

I think for the first quarter our G&A rate was 8.5% and our guidance for the whole year is 8% to 8.4%.

So I think typically what happens in the first quarter, we're making our normal estimates for the whole year, i.e., one-fourth of the estimates for a lot items.

In the fourth quarter, those are trued up to actual when you get to the end of the year.

So I think we're probably a little more conservative in the first quarter on the G&A that we might -- which will play out during the course of the year.

And I think that we've also additional revenues coming on during the course of the year having the membership, for example, in Louisiana was only there for two months in the first quarter as opposed to the whole quarter, and so that will have an impact, slight impact to the rest of the year also.

Okay, thanks.

So it sounds like you make 8.2% but is 8.2% your floor or can you get below that going forward on a midpoint basis?

There's a lot of different things that go into that in terms of additions in other types of business that we have.

So that the mix can be an important element of that.

But generally, when we peel back some of the nonrecurring items, let's say, we are seeing a definite improvement in our G&A ratio and a reduction as we've gained leverage with the additional revenue growth.

Okay, thanks.

A second question, I'm hearing again that any day this federal regulation is due for managed Medicaid, and you've talk about the rates in context of MLR floors in many states.

And I think one of your competitors has been talking about cross subsidization of over earning with under earning segments.

What might you be expecting going forward and what are companies like you lobbying for with CMS?

I think we expect minimum MLRs.

Our Washington office is actively engaged on those regulations and working through it, and we're comfortable that the regulations that will come out as best we can estimate it to this point in time will be consistent with our expectations and guidance.

Okay, thanks.

And then last one on Georgia.

Any update on that as far as the current RFP and then the likelihood of ABD being privatized as well?

I guess what I'll just -- the RFP will continue to respond to it, and have really confidence on that -- are confident on that, I shouldn't equivocate on that.

We are very confident on it.

As far as the additional products that have been none included in the RFP at this point in time, and until they do we presume they are not.

Anything to add, Jesse?

No, no I think that's -- we've certainly been preparing for reprocurement in Georgia for a long time.

We're strong believers in our performance, and we're doing everything we can to retain that contract and put ourselves in a position that if the programs do expand, we'll be able to participate in them.

Great, thanks so much.

Very helpful.

Chris Rigg, Susquehanna Financial.

Good morning.

I apologize if you already provided some color on this stuff but the HBR for the traditional Medicaid CHIP foster care line, where you give the detail did go up pretty meaningfully year to year, and that looks like a slightly different trend than what we saw at the end of 2014.

Is there anything going on there that's notable?

I would say that mix comes into play in the growth that we have in some of those areas, like we added in Louisiana several hundred thousand members and so we're relatively conservative in the initial estimates for a new block of business, and so that continues.

Nothing I would say of any great consequence.

There's true-ups in the fourth quarter sometimes, but the MMA business in Florida still running a little higher than what the original actuarial targeted rate would be that the state set that causes some increase.

There is no underlying major increase in trend.

We added 200,000 in Louisiana and that -- we always book, as you know, new membership at a higher MLR for the first few quarters.

Okay.

And then just a follow up on one of the earlier questions related to the RFP pipeline, and clearly understand sensitivities when you're actually involved in a process and not wanting to predict the outcome.

But right now, we sort of have visibility that Iowa is coming down the pike, and I think some more smaller chunks in maybe Louisiana, but are there any notable RFPs out there that we, the street, might not be aware of that are worth highlighting to people just to get a sense for what might be coming next year (technical difficulty) decent visibility on something that's known to you guys but not to us?

I would say the answer is yes, that's part of our job.

Our job obviously is to create some of these opportunities that we have visibility before we can communicate those things more broadly, both for you and for our competitors and others.

So I think I would say we continue to be very active on that front and optimistic that we'll maintain momentum to create opportunities in new markets and additional opportunities in our existing markets.

Okay.

All right.

I'll leave it at that.

Thanks a lot, guys.

Thank you.

Dave Windley, Jefferies.

Good morning.

It's Dave Styblo for Windley.

A couple questions.

I just want to start out with your capital structure, that the cap is up now to 37% and steadily rising over the last several years.

Just curious where you guys see that shaking out in the long term and your appetite for continuing to put on more debt versus when you might need to tap into the equity markets, if ever?

I think that the reason that it's up in the first quarter is we had I think about $188 million of capital contributions into our subs in the first quarter, so that's a higher proportion in the first quarter than the whole -- I think the whole year is around $550 million, so we put more than the proportion, one-fourth of it in the first quarter for a number of reasons, and so as a result it's a little higher now.

We would expect it to trend downward for the rest of the calendar year.

And I think as we say, we have been doing some of the acquisitions we've been doing, we include equity as a meaningful part of the consideration, one way or the other, and I think we have still as a practice that we want to continue to follow.

So, I think we are comfortable with where we are in the debt-to-cap ratio, in the mid-30s.

We expect to continue to be there given the interest rates that make sense to be there, and so that's our plan.

Okay.

And then at a conference last month, you had mentioned that your 2% to 3% net income margin, long-term margin, was partially dependent on interest rates ticking up and getting some sort of benefit from that.

I'm curious, how much of an impact from your call it 1.5% level this year would be baked into that 2% to 3% goal?

I think what we've said we're looking to be in the 2% to 3%, a little above 3% over time from operations.

And that additional upside beyond that will be a function of interest income.

Okay, so the 2% to 3% doesn't -- you don't need any benefit from the interest income.

We may get some from it while we're moving through the operations side improving operations margins, but that 2% to 3% should be from operations.

None of that's baked into 2015.

We're not -- we're considering flat rates for the year in our guidance calculations.

Okay, and then lastly just on the business expansion costs that you've reiterated, curious how do we think about these evolving over time?

At some point do you -- is there some sort of leverage where you're able to possibly pull that number on down or is that sort of a sustained level that's needed as to continue to reprocure business or go after new business?

A lot of it's going to be a size of the particular deal that we do.

And so, it's going to -- there's many factors as we get larger.

Obviously, we expect more than can be absorbed, but we are also looking at other capabilities and other deals that may be larger at some point in time.

I think we've seen the market expand over the last several years as indicated by our revenue growth so we're a key participant in that, and so I would not expect our business expansion costs to go down.

I would expect they would continue to go up, and that's what drives such a large revenue increase so I would say more of the same.

Sure, okay.

Thank you very much.

Scott Fidel, Deutsche Bank.

Thanks.

First question, and sorry if this has already been addressed in the prepared remarks, but were you paid yet for the Texas industry fee that you had accrued for at the end of the year?

And if not in the first quarter, when you expecting to receive that payment?

I think the plans in Texas are to pay that in the second quarter, and so everything is on target for that, I believe.

Okay.

And then just a second question, just on the existing MLR.

It looked like that increased year over year.

Was that really just a function of increased flu pressure or were there some other factors worth spiking out?

And then also, is Florida MMA, is that included within existing business or is that included within new business in the first quarter?

MMA is in both because we had some -- we already had existing business, Medicaid TANF business in Florida market before they expanded the whole state.

I think our increase year over year in our HBR is really driven, we said earlier, by the mix.

We continue to have higher acuity membership which drives that.

And then when you're comparing first quarter this year to first quarter last year, last year was a relatively mild flu season.

This year we said was a more normal average or slightly above average season, but it was within our expectations and guidance forecast.

So nothing unusual in that regard and typical first quarter has the higher -- seasonally is the highest HBR quarter for us.

Okay, thank you.

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

I would like to hand the conference back over to Michael Neidorff for his closing remarks.

We thank you for joining us.

We look forward to seeing you June 12 in New York for our investor day, and take care.

Thank you, sir.

Ladies and gentlemen, the conference has now concluded.

We thank you for attending today's presentation.

You may now disconnect your lines.