Centene Corp (CNC) 2015 Q2 法說會逐字稿

Good morning, and welcome to the Centene Corporation's second-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.

Thank you, Emily, and good morning, everyone.

Thank you for joining us on our second-quarter 2015 earnings call.

Michael Neidorff, 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 should last approximately 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 dial-ins is 10067851.

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, July 28, 2015, 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.

And, finally, today's earnings call does not constitute an offer to sell or a solicitation of an offer to buy any securities or solicitation of any vote or approval.

In connection with the proposed Health Net transaction, Centene will be filing with the SEC a registration statement on Form S-4 that will include a preliminary joint proxy statement of Health Net Inc.

and Centene Corporation that also constitutes a prospectus of Centene.

The registration statement is not complete and will be further amended.

After the registration statement has been declared effective by the SEC, the final joint proxy statement prospectus will be mailed to Health Net and Centene shareholders both.

You should review materials when they are filed with the SEC carefully as they will include important information about the proposed transaction, including information about Health Net and Centene, the respective directors, executive officers, and certain other members of management and employees who may be deemed to be participants in the solicitation of proxies in favor of the proposed transaction.

As a reminder, our next Investor Day is Friday, December 18, in New York City.

Please mark your calendars.

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

Michael?

Thank you, Ed.

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

Before I provide detail of our second-quarter results, I would like to comment on Centene's recently announced acquisition of Health Net, a cash and stock transaction valued at approximately $6.8 billion.

Uniting Centene and Health Net creates one of the largest government-sponsored healthcare providers in the country.

We estimate pro forma 2015 annual premium and service revenue of approximately $37 billion and adjusted EBITDA in excess of $1.5 billion.

We believe this transaction creates significant value for Centene and Health Net shareholders and other key stakeholders.

It is expected to be more than 10% accretive to GAAP earnings per share and over 20% accretive to adjusted earnings per share in the first full year following the close.

We anticipate pretax synergies of $75 million by the end of the first year and an additional $75 million by the end of year two.

Please note, these synergies are on top of any synergies contemplated by Health Net from their current and anticipated relationship with (inaudible).

Importantly, this acquisition enhances the sustainability of Centene's long-term growth rate that provides additional scale and diversification across both new and existing markets, products, and government-sponsored health care (inaudible).

Let me begin with Medicaid.

This combination creates a leading managed Medicaid health plan operator providing coverage in almost -- to almost 6 million Medicaid beneficiaries.

Health Net will increase and enhance Centene's position in the California Medicaid program, the largest in the country.

We will also become a participant in the state's dual-eligible demonstration program.

Centene will have a leadership position in three of the largest Medicaid markets in the country -- California, Texas, and Florida.

Second, Medicare.

Health Net provides the capabilities, scale, and quality profile needed to maximize opportunities in the Medicare space.

Adding Health Net expands Medicare pipeline beyond the duals.

Consistent with Centene's government-sponsored healthcare approach, Health Net's Medicare Advantage focus has been on providing high-quality affordable health care to low income seniors.

This is an important strategic point as over 65% of Medicare eligible individuals are at or under 400% of the federal poverty level.

The low-income Medicare opportunity across Centene's existing market is in excess of $150 billion.

Additionally, about 75% of Health Net's Medicare Advantage numbers are in four-star rated plans, indicative of their commitment to quality.

Medicare star ratings are increasingly important to maximize reimbursement and enrollment growth.

Next, health insurance marketplace.

Both companies have a successful track record of providing coverage to subsidy eligible individuals in marketplaces.

The addition of Health Net increases our marketplace presence to 14 states, with total membership approaching 500,000 lives.

Now, commercial.

Health Net's commercial business is strategically important in their market.

Centene remains committed to Health Net's existing commercial business while maintaining a strategic focus on the significant growth opportunities in the government-sponsored healthcare space.

Lastly, additional opportunities include the integration of Centene's specialty companies across the entire enterprise.

Participation in TRICARE and VA programs and innovative provider contracting capability, Health Net was an early adapter of value-based contracting and is a leader in performance-based provider contracts.

We will have the opportunity as appropriate to apply this expertise across our markets and [products].

We remain on track to close the deal in early 2016 and are moving forward with necessary filing.

The appropriate Hart-Scott-Rodino filing has already made.

With that, today's call is about second-quarter results and outlook.

I ask that you please limit your questions to second-quarter results, for which I will now thank you in advance.

Now onto second-quarter financial highlights.

We are pleased to report another strong quarterly performance.

We added 1.3 million members compared to the second quarter of 2014.

This represents a 38% increase, to 4.6 million beneficiaries.

Second-quarter premium and service revenues grew 39% year over year, to $5.2 billion.

The HBR increased 20 basis points year over year, to 89.1%.

This reflects higher HBRs with the new programs in two of our states.

On a sequential basis, the HBR improved 70 basis points due to normal seasonality.

Bill will provide further HBR detail, including new and existing business mix.

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

We reported second-quarter diluted earnings per share of $0.72, or $0.73 when excluding $0.01 cost related to the Health Net acquisition.

This compares to $0.39 in last year's second quarter, or $0.47 when excluding the $0.08 impact of the health insurer.

Next, market and product updates.

First we will discuss recent Medicaid activity.

Indiana -- during the second quarter we began serving ABD beneficiaries in Indiana under the state's Hoosier Care Connect program.

The launch is proceeding as expected.

At the end of the second quarter, we had 3,900 ABD lives in the state.

We anticipate adding over 15,000 ABD lives in Indiana in the third quarter when [auto-assignment] is in.

Florida -- in May, Centene's Florida subsidiary, Sunshine Health, was tentatively recommended for a statewide contract award under the Florida Healthy Kids program, where we will manage healthcare services for children and adolescents ages 5 to 18.

This award expands Centene's participation in this program from 1 region to all 11 regions in the state.

We expect this new contract to commence in the fourth quarter of 2015.

Oregon -- Centene recently received the necessary approval to close our pending acquisition of Agate Resources, Inc.

We are on track to close the transaction in the third quarter of 2015.

The entry into Oregon marks Centene's 23rd state of operation.

Mississippi -- Centene's Mississippi membership grew by more than 100,000 beneficiaries over the first quarter of 2015.

This was mainly driven by growth in the MississippiCAN program.

We anticipate additional growth in the third quarter of 2015.

In addition, we will begin managing inpatient services in Mississippi beginning in the fourth quarter of 2015.

Louisiana -- second quarter was the first full quarter of operations of our expanded contracts in Louisiana, which included a conversion of non-risk lives.

This contract is performing in line with our prediction.

Additionally, Louisiana will begin carving in behavioral services in Centene's contract in the state.

This is expected to commence in the fourth quarter of 2015.

Michigan -- in May, we completed the acquisition of Fidelis SecureCare of Michigan and began providing healthcare services to Medicare and dual-eligible members in the state.

The contract is proceeding as planned.

Moving on to the duals.

At June 30, we served 19,700 members to across our dual demonstration contracts in Ohio, South Carolina, Texas, and Michigan.

We anticipate additional growth throughout the third quarter of 2015.

Next, Centurion.

In July, Centurion commenced its fifth directional contract.

Shifting gears, our rate (inaudible).

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

In conclusion, second-quarter results offer continued evidence of Centene's financial strength and operating capability.

Centene's pipeline of growth opportunities remains robust.

We are optimistic about our future and the leading role Centene will be able to play in the evolving healthcare market.

Thank you for your interest in Centene.

Bill will now provide further detail on our second quarter.

Thank you, Michael, and good morning.

Our second-quarter results continue to reflect strong operating performance in 2015.

In connection with our Investor Day in June, we raised our earnings guidance by $0.10.

And as I indicated at our Investor Day, our updated guidance numbers reflect a more even quarterly distribution of earnings for each of the last three quarters of the year.

The actual results for our second-quarter are consistent with our expectations incorporated into the updated guidance numbers from June with year-over-year membership up 38%, premium and service revenues up by 39%, and diluted earnings per share of $0.72, and $0.73 excluding the $0.01 of merger-related costs.

The 39% increase in premium and service revenues, to $5.2 billion, reflect program expansions between years in many of our states.

For example, we've experienced significant membership increases in Florida, Illinois, Louisiana, and Mississippi, and also significant revenue growth in Ohio and Texas year over year due to the implementation of the new MMP and other program.

I also want to discuss the variability in the level of premium tax amounts we receive and record as revenue.

Premium tax and health insurer fee revenue decreased from $370 million in the first quarter to $322 million in the second quarter as a result of a decrease of $48 million in hospital assessment payments received in the second quarter, which we passed through as payments to hospitals in accordance with the states' instructions.

These amounts can vary from quarter to quarter, and we expect the amount of premium tax revenue we receive to continue to be lower in the second half of 2015, likely less than $300 million in each of the third and fourth quarters.

Correspondingly, we expect to have a lower level of premium tax expense in the third and fourth quarter, which offsets the revenue reduction with no impact on earnings.

That is why we focus our discussion on premium and service revenues, as these are more predictable and better subject to estimation.

Our consolidated health benefits ratio was 89.1% this quarter, compared to 88.9% in the second quarter of 2014 and 89.8% in the first quarter of 2015.

The 20-basis-point increase from last year primarily reflects higher health benefit ratios on new programs in two of our states.

Sequentially, the 70-basis-point reduction from our first-quarter HBR is due to seasonality as the first quarter is normally our highest HBR quarter and the second quarter is typically one of our lowest HBR quarters.

And, for the second quarter, 22% of our premium and service revenues came from new business and 78% from existing business.

The HBR for our new business was 91.3%, and 88.5% for our existing business.

During the second quarter, we updated our analysis of the three Rs related to the health insurance marketplace for 2014 and 2015 as additional information became available from CMS.

Overall, we continue to be in a net payable position with amounts payable for the risk quarter, risk adjustment, and minimum loss ratio components.

The marketplace business continues to perform ahead of our original expectations and the adjustments recorded in the second quarter were relatively minor.

As an example, CMS announced the change to the reinsurance provisions for 2014 to now pay 100% of the costs versus the 80% previously covered.

The impact of this change was a $3-million gross increase in our reinsurance receivables.

But after considering the effect on the calculations for the risk corridor and the minimum loss ratio, the net impact to us was only a positive $200,000.

Our general and administrative expense ratio was 8.5% this quarter, compared to 8.6% last year and 8.5% in the first quarter.

The decrease from last year is a result of our increased scale.

And business expansion costs totaled $0.05 in the second quarter, not including the merger-related expenses, compared to $0.06 last year.

Investment income was $10 million in the second quarter, compared to $7 million in the second quarter of 2014 and $9 million in the first quarter.

The increase between years results from our higher level of invested balances.

Interest expense was $11 million this quarter, compared to $9 million last year and $10 million in the first quarter, reflecting our higher level of borrowing.

Our effective tax rate was 48.8% in the second quarter, compared to 49.5% last year and 49.2% in Q1.

Our diluted earnings per share from continuing operations was $0.72 this year compared to $0.39 last year, which was $0.47 adjusted for an $0.08 impact related to health insurer fee.

Diluted shares outstanding were 123 million shares, compared to 119.4 million shares last year.

As of June 30, we had $3.7 billion of cash, investments, and restricted deposits, including $82 million held by unregulated entities.

Our risk-based capital continues to be in excess of 350% of the authorized control level.

Total debt was $1.1 billion at June 30, including $150 million of borrowings under our revolving credit agreement.

Our debt-to-capital ratio was 35.7%, excluding our $69-million nonrecourse mortgage note.

Medical claims liabilities totaled $2.1 billion at June 30 and represented 45.5 days in claims payable.

Cash flow from operations was $350 million in the second quarter, representing 4 times net earnings.

Our updated 2015 full-year guidance numbers are: premium and service revenues, $20.8 billion to $21.2 billion; diluted earnings per share, $2.74 to $2.82; consolidated health benefits ratio, 89.1% to 89.5%; general and administrative expense ratio, 8% to 8.4%; the effective income tax rate, 48% to 50%; and diluted shares outstanding, 123 million to 124 million shares.

Our guidance numbers do not include any merger-related costs expected to be incurred with the Health Net transaction which we expect to close in early 2016.

For 2015, we expect to incur costs of $0.10 of $0.15 per share.

Additionally, we have not included any impact from acquisitions which have not yet closed, such as Oregon.

Business expansion costs are estimated to be between $0.23 and $0.27 per share for the year, excluding any Health Net-related merger costs.

This concludes my remarks and, as a reminder, the purpose of today's call is to discuss our second quarter and we ask that you keep your questions focused on our results.

Thank you for your cooperation and, operator, you may now open the line for questions.

(Operator Instructions)

Josh Raskin, Barclays.

The first question, just want to make sure, the merger costs.

So you incurred $0.01 in the second quarter, so that's not included in guidance, so your guidance includes a $0.73 second quarter, is that right?

Correct.

Basically I would use $0.73 for Q2 because for the year we're saying our guidance numbers do not include any of the merger-related expenses.

Okay, that's easy enough.

And then a Healthy Kids contract in Florida, what -- could you remind us the potential opportunity in terms of membership size?

Yes Josh, it's Jesse.

So I think that probably the best way to think about this, it's a separate contract in Florida so really it strengthens our broader Florida footprint.

As we mentioned in the comments, it takes us from what has been historically very small participation in that contract.

I'd say de minimus amount of membership to a state-wide presence.

So it's going to be I'd say more important as a diversification in the market than it is from an absolute and a membership -- absolute membership perspective.

So I don't know if we want to give aggregate number of members, but I think it's less than 50,000 members.

In terms of the overall market or your potential opportunity?

Yes, that would be our potential.

So call it, if you want to narrow the range you'd say between 20,000 and 30,000, something along those lines.

Okay, perfect.

And then on the M&A side, there's some larger transactions obviously in the market, there could be some divestitures of MA plans.

I'm curious Michael your perspectives on growing Medicare Advantage, would you look at some of these potential divestitures and would they have to be in your existing markets?

How should we think about the Medicare strategy?

I think obviously if there's some there and they're in good markets and they're good books of business we'd be willing to look at them and be fairly responsive fairly quickly.

Obviously if it's an existing market it's a lot easier to make that decision because it's a tuck-in.

If it's a new market it would have to be -- have significant size and scale to make it worthwhile set up an organization for it.

So it's going to be a case-by-case basis, but we would clearly be willing to look at that.

Okay, that makes sense.

Perfect, thanks.

Peter Costa, Wells Fargo.

The question relates to the loss ratio on the Medicaid CHIP, Foster Care and health insurance marketplace businesses curated by 90 basis points.

Is that tied to the two states that you referenced?

Can you describe which two states that was and exactly what's going on with that loss ratio there?

Sure thing.

The main thing is that we've got, as happens from time to time, new programs start up with higher HBRs and so we have new programs in Illinois and the Florida M&A program for example we still run high and has been much discussed.

Are those the two states that you called out earlier?

Yes.

And it's all really in that line item not so much the Florida LTC business which is in the ABD and LTC?

Correct.

The Florida LTC has improved year over year as that was more or less rate adjustments were made in the fourth quarter of 2014.

Right, can you tell me where that stands in terms of getting the Florida rates and business improved from --

We're in constant discussions, we're exchanging information.

Our actuaries and theirs are talking and so we continue to work with them and we've always found Florida to be very responsive.

And we believe we'll work it out.

Bill, anything you would add to that?

No it's exactly as you said, Michael, we continue to work with the state and they've been a good partner in the past and we believe that will manifest itself here again.

Great, thank you very much.

Kevin Fischbeck, Bank of America.

Could you talk a little bit about the duals, obviously you're adding another state soon.

But we've seen a lot of initial enrollment out of the duals in almost every state and then there tends to be a plateauing and actually a little bit of a pullback.

Can you give a little bit of color on your conversations with the states about how to make this program a little bit more sustainable and one that can actually grow?

Well we do have discussions with the states on how to counteract that trend.

But equally, one of the biggest drivers of it is the attitude of the provider community about moving people into managed care programs versus fee-for-service Medicare.

And that's something that we're aggressively attacking also by pointing out, as we do in many other situations, why managed care is beneficial overall for members, providers and for the state and government partners.

So we're actively engaged in marketing to the provider community as well.

I think they really need to understand the case management capabilities we have and how it's really very supportive of the providers versus detracting.

Okay and then Bill, you mentioned the seasonality this year being more even.

Is that what we should be expecting next year as well or how do we think about normal seasonality in 2016 and beyond?

I don't think we're prepared to get into 2016 yet at this point.

I think what I said back in June and still say today is we felt it was a more even distribution for Q2, Q3, Q4 2015 and in December we can talk maybe a little bit more about the seasonality for 2016.

Okay and maybe last question, I don't know if you can answer it, but going back to that question before about Florida's rate negotiations, is there any way to think about the zero to 1% as far as how you're thinking about Florida and I guess George?

How dependent are those two states as far as hitting that range?

I think the zero to 1% is an aggregate number and it encompasses the range of what we think the outcomes are going to be in Florida and what we're seeing in Georgia as well.

Which would be more than zero to 1%.

Yes.

Okay, great, thanks.

A.J. Rice, UBS.

It looks like you had another strong quarter in your service revenues, up 20% year to year and $30 million sequentially.

Can you talk a little bit more about what the drivers behind that growth were in the quarter?

Sure.

Two things I would say is year over year we've now have the Chicago County Care contract included in our results, that started July 1 of 2014.

So that's on the revenue side.

And then from a performance standpoint, I think we just had favorable performance from several of our units that are included in the service revenue component.

Okay and then looking at the cost of services for that business as well, also good improvement, 400 basis points year to year and 180 sequentially.

Is that just the leverage on the revenues or anything else worth highlighting there?

I would just say that's the favorable performance that I mentioned in several of the units that make up the service revenue component.

Okay and then I might finally say on the proposed rule out of CMS related to Medicaid Managed Care, I know you guys have generally been supportive of that.

We did note that Medicaid health plans seems -- of America, seems to be one of the trade association seems to be expressing some concern, almost seems like it's more a question of whether they think CMS should be promulgated the role as opposed to specifics.

But I wondered if there's any update in your thinking on that whole situation?

We -- I think our response just went in yesterday, so I don't want to front run the CMS on it.

But on balance we feel very comfortable with what they're doing.

And we think there's some balance regulations there and we particularly like the actuarial soundness being reaffirmed and by rate [sales].

We think that's a very constructive important change.

So on balance I'm going to leave it at that until we get our full report filed.

But we agree with most of what's there.

Okay, great.

Thanks a lot.

Dave Windley, Jefferies.

Good morning it's Dave Styblo in for Windley.

First question, wanted to take a step back and go back to your Investor Day, I think you guys spoke to premium service revenue at that time your line of sights were growing to $24 billion plus, so I think that translates into something like mid to high teens top line growth.

I'm wondering about the bottom line or EPS growth.

Do you guys think that you can grow faster than that as business matures from this year and you gain more scale or are there going to be some other mitigating factors or offsets that might take that EPS growth more in line or even slower than the top line?

I think I'll start and Bill and others can add to it.

It's going to be a matter of product mix, timing and different factors.

Obviously, as a business matures we would expect to see some margin expansion in existing businesses, but it's once again the mix of new products coming in.

Anything you want to add?

Typically at our Investor Day in June we try to give some idea about the visibility we have on growth for 2016 on the premium service revenue line level.

We don't really get into the earnings per share numbers at that point in time, we try to wait until we give 2016 guidance on that.

But clearly we would expect to have a reasonable percentage growth in earnings if we're going to have it at the top line.

Sure, okay.

And then taking a look at the DCP here, I know it was flat sequentially but just as I look at the claims or payables here you're up 7% sequentially, premiums are up 9%.

That's a little bit inverse of what happens.

So can you give us a little bit more insight as to why the premiums are growing a little bit slower than -- or a little bit slower than the payables there?

I think that there's nothing particularly special there in any point time.

At the end of any quarter there's a certain amount that's in transition set to pay or just paid or things like that.

So I wouldn't draw any particular conclusions in those relationships.

Okay, thanks.

Sarah James, Wedbush Securities.

SG&A came in better than I'd expected, can you talk a little bit about what helped you in the quarter?

And then as we look forward, if we take out the $0.05 business expansion costs, so maybe SG&A would have been closer to [7.3%], how does that compare to how you view Centene's long-term opportunity given the fixed cost leverage as you grow your revenue?

I think that's the G&A ratio for the quarter was 8.5% which was consistent with the first quarter, consistent with our expectations.

I think we talked at the Investor Day about the business expansion costs being in the $0.50 range a year -- $0.25 range now, that's (inaudible).

But as a percentage of our revenue it was continuing to decrease.

We had a slide on that.

We believe that that's a necessary element of our growth and would continue forever so to speak in the sense of having those business expansion costs as we incur a lot of cost prior to the time we start the revenue generation particularly in de novos and new states.

So that's just an ongoing part of the business we would expect to have.

We do expect that as we continue to grow our G&A, the scale will be that the G&A ratio will fall and as we showed I think some of the components of that also at our Investor day show that we'll call the core G&A has continued to fall over the last several years and we believe that will continue to some level.

It will tail off at some point because you'll reach the limitations there.

And in the quarter, was there anything specific that helped you on SG&A in the second quarter?

No I don't think there's anything -- any usual items in the quarter from that regard.

And last question here is as we think about RFPs on the horizon, North Carolina was one of the largest [$10 billion] we were estimating and I know that the state was waiting for the SCOTUS ruling before deciding whether or not to move forward.

And I'm wondering now that we're past SCOTUS if in Centene's discussions with the state there was a sense of whether or not conversion to managed care was still on the table and what type of time frame we could see movement on that?

Jesse, your closest to it so --

Yes, Sarah it's Jesse.

No I think that we talked a little bit at Investor Day about what I would call the range of stages of participation, various stages they're thinking about Medicaid, managed Care.

I think we had reference North Carolina as one of the states that's in the earlier stages, so I think that's how I would continue to characterize it.

So I think there is -- we do believe there is longer term opportunity there, but there's a lot of pieces that need to come into place in order for that opportunity to really come to fruition.

But as you said, it's a meaningful opportunity and one that's still -- is high on our radar.

Thank you.

Brian Wright, Sterne, Agee CRT.

Two real quick questions.

To clarify, so the premium taxes in the first quarter were elevated because of the hospital assessment passer payment, is that the right --

Yes, they were higher in the first quarter by $48 million compared to the second quarter.

And those were all pass-throughs.

And then lastly on your -- when you guys report you're statutory results, you have a profit load from the corporate parent that you push down to the statutory sub.

Is that right?

We have a management fee which is used at the statutory level.

But one other thing too I think when people look at statutory financials, I think they need to also be thinking about how the statutory accounting works for the health insurer fee in these years now.

In particular for statutory purposes, the health insurer fee is essentially expensed on day one in the statutory financials by January 1. And then the revenue is recognized ratably through the quarters.

So there is that mismatch on an interim basis on the statutory financials that I think people should take into consideration.

Great, thank you.

Chris Rigg, Susquehanna Financial Group.

Wanted to follow up on a question from earlier with regard to the duals.

When you guys talk about pressure from providers for the beneficiaries to opt out of the Medicare side, are we really talking about post acute providers?

And if that's the case, is there -- is it primarily nursing homes or home health or how do we think about where the pressure is coming from?

I think it's on the whole series.

Any other providers either find at different times providing that pressure.

And I think that's why we're working so hard on the education side to let them know that we're really going to make things better and easier and less complicated for them because of what we do.

And we have cased in other systems that are really model medical management systems that can serve them very well, and that's the approach we're taking.

And I think in Ohio our opt out rates were around 30%, 32%, Rone?

Right around that, a little bit more north of that, yes.

It's coming down a little bit and so we'll continue to work at it and it's a long process.

It's not a instant fix.

Okay and while we're on the duals.

Maybe this is obvious, but when I look at the 19,700 enrollees, is that net of the opt out or is the opt out is a component of the 19,700?

No, that's net.

Okay and then on the MBR guidance, I know it wasn't a major tweak but it's still not crystal clear why you took it down 10 basis points.

Can you elaborate on that a little bit?

Thanks a lot.

Sure.

We lowered our HBR guidance ratio by 10 basis points on each end as our estimates for the HBR for the year are a little lower than they were maybe at the beginning of the year and thought that was appropriate.

When you do that you try to give your best thoughts at that point in time.

Okay, all right great.

Get it, thanks a lot.

Gary Taylor, JPMorgan.

First, I wanted to see if you were still expecting the Iowa contract awards to come out either this week or next?

Jesse?

(multiple speakers)

Yes, our understanding, again based on any of the publicly available information, is that the state would intend to make an award in the middle of August.

Middle of August?

Okay.

We've all seen enough to know that these dates are a movable feast at times.

Okay, fair enough.

I had a quick question since I wasn't following you a year ago.

When we look at the second quarter of 2014, the specialty services health benefit ratio was really low.

Looked kind of outlier low out of trend even with respect to where 2014 was running, so I'm assuming there was some unusual revenue in the segment maybe that was driving that.

Is there a quick explanation for that?

Yes, I think in some of our businesses there were two things.

One, our individual health business historical from Celtic had favorable result in that period and we also had some favorable adjustments in our Arizona businesses.

Okay and then last question maybe for Michael, try to slide something in here.

At Investor day you had talked about feeling you were at a point of decisive scale to pursue international expansion.

I'm wondering if there's any change in the thinking there given the size of the pending Health Net acquisition?

We continue down the track of our international expansion in a very methodical, responsible way and it's serving us very well.

Anything you want to add Cynthia?

No, I would just say that we're continuing as planned and we continue to look for opportunities that make sense for us and that's what our current plan is.

Yes, thank you.

Andy Schenker, Morgan Stanley.

Following up on the lower HBR guidance, at the Analyst Day you suggested you saw favorable medical cost trends in the second quarter and you weren't assuming those would carry over into the second half of the year.

Does the updated outlook now assume that utilization benefit does carry forward or is that still potential upside in the second half of the year?

And one month into the third quarter have you seen that utilization remain at lower levels?

Well our guidance numbers are expected HBR for the whole year, for 12 months.

And so what we've seen in the first half is the normal seasonality first quarter you have flu, second quarter absence of flu and lower cost.

Second half of the year we would expect to be in the range that we provided.

I think that we're not necessarily expecting it to be much lower given that the second quarter is usually our more favorable quarter.

So we'll wait and see at this point.

Okay and then following up on your earlier comments on services revenue, is it safe to assume the [490] is a good run rate for the second half of the year?

Is there any seasonality of that business?

And then thinking about it going forward, should it really be growing in line with membership at this point or are there other callous that could cause it to accelerate from these levels?

That's a reasonable level for the second half of the year.

It can be a little choppy from quarter to quarter depending on a couple of different things.

But I think that that's the normal run rate.

There is less correlation between total membership at times in some of those businesses, so I wouldn't totally use that as my predictor.

Okay and then one last one here real quick.

On the number of employees, they jump by another 1,000 people this quarter.

Is that tied to membership growth in general or is that maybe the Agate and Fidelis acquisitions or (inaudible) any color would be helpful.

Thank you.

No, I think it's really that Agate has its employees and we'll continue to support that as appropriate.

But we -- the business is growing.

We said it was up 39%, 38% so you can expect the employment base to grow.

I think that increase is relatively consistent from quarter to quarter.

We provide the last five quarters in our press release in terms of employees and you can see a steady increase every quarter.

Thank you.

Ana Gupte, Leerink Partners.

So following up on the Florida rate.

Yesterday Magellan had said that they are including it in the guidance.

And it's my understanding, and I could be wrong, that they were eluding to a broader rate increase in the mid-single digits.

And then for their serious mentally ill population in the low to mid.

But it doesn't sound like you're baking in anything or expecting anything.

Am I misunderstanding something that they're saying because they're clearly including a rate increase in the guidance?

Our guidance includes expected rate increase in Florida for September 1 which is significant -- it's greater than the zero to 1% average for the whole Company.

But still that's still in discussion stage on several fronts, so we don't want to give specific numbers.

So there might be some upside based on your discussions, is that how I should view it?

Well it could be -- we're not going to put something in there we can forecast downside on.

But we try to put realistic numbers in our guidance, and what we have in there now we think is a realistic expectation.

And I really have not paid attention to what others are doing.

Okay, all right, that's helpful.

And secondly on Georgia, can you give us an update on when that contract award is expected and when one of the parties sitting has said that potentially they're negotiating for the fourth potential add to get more than just the [auto] assigned membership.

Is there any change in how the RFP has been concentrated?

Yes, Ana, this is Jesse.

So I -- there -- I don't think we can comment of what other people are talking about with respect to other people trying to enter the market.

I think we continue to be -- standby our performance in that contract over the last number of years and the quality of our response.

And I think on the first part, the timing is always a little bit open, but we do expect some time I think August is probably the best window that we would communicate at this point for an anticipated award.

Okay, thanks, that's helpful.

And finally following up on Andy's question on trends.

Any comments on what type of utilization you're seeing in your general (inaudible) population as far as the maternity and so on and the how that compares to whatever degree you do (inaudible) and exchanges?

I said in my prepared remarks that we anticipate the trend remaining stable.

Okay, so no change at all, all right.

And how is that compared to public exchanges and expansion, any color at all?

No, I think we just look at it across the whole book of business and we see it as a stable business, stable trend.

All right, thanks so much, appreciate it.

Christopher Benassi, Goldman Sachs.

It's actually -- sorry, it's Matt Borsch.

A question at the very high level.

What's your outlook for the potential for more states to join the ACA Medicaid expansion between now and the November 2016 election?

I think there are a lot of states looking at it.

It's really a political thing between the Governors and their Legislators.

I think trying to hazard how many are going to do what will be a little foolhardy going into a national election in 2016.

Fair enough.

And secondly, you got a question earlier, and I appreciate your comment on the timing for the statutory financials on expensing of the insurer fee, but when we look back at full year 2014 and I think 2013 as well, was we aggregate all the statutory subs we come up to an aggregate loss versus obviously profit that you report at the consolidated level for those time periods.

My understanding from a little bit I've gotten from you guys is that a lot of it relates to the specialty subs are the ones capturing that profit.

Is that the right way to look at it or is it really more the management fee?

No, it's a combination with the management fees in there and that has a lot to do as we've talked about historically.

Okay, thank you.

That concludes today's question-and-answer session.

I'd like to turn the conference over to Mr. Neidorff for any closing remarks.

Well thank you.

Know we appreciate your interest and look forward to talking to you at the end of Q3.

Thank you.

The conference has now concluded.

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