Centene Corporation (CNC) Q2 2015 Earnings Report, Transcript and Summary

Good morning, and welcome to the Centene Corporation Second Quarter 2015 Financial Results Conference Call. All participants will be in a listen-only mode. [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 U.S. 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 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. 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 and 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 18th 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 details of our second quarter results I would like to comment on Centene's recently announced acquisitions of Health Net. The 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 additional $75 million by the end of year two. Please note these synergies are on top of any synergies contemplated by Health Net in their current and anticipated relationship with us. 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 in government sponsored healthcare segment. Let me begin with Medicaid, this combination creates a leading managed Medicaid health plan operator providing coverage to almost 6 million Medicaid beneficiaries. Health Net will increase and enhanced Centene's position in the California Medicaid program, the largest in the country. We will also become a participant in the state 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 program, Health Net Medicare advantage focus has been on providing high quality affordable healthcare to low income recipients. This is an important strategic point as over 65% of Medicare eligible individuals were at or under 400% of the Federal poverty levels. The low income Medicare opportunity across Centene's existing markets is the next step for $160 billion. Additionally about 75% of Health Net Medicare advantage members are in four star rated plans indicative of their commitment to quality. Medicare star ratings are increasingly important to maximize reimbursement and enrolment growth. Next health insurance marketplaces, 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 submission of 500,000. Now commercial, Health Net's commercial business is strategically important in their market. Centene remained committed to Health Net's existing commercial business while maintaining our strategic focus on the significant growth opportunity in the government sponsored healthcare space. Lastly, additional opportunities include the integration of Centene’s specialty company across the entire enterprise. Participation in TRICARE and VA program and innovative provider contracting capability, Health Net was an early adaptor of value based contracting and is a leader in performance based provider contract. We will have the opportunity as a group to apply this expertise across our markets and process. We remain on track to close the deal in early 2016 and are moving forward with the necessary filing. The appropriate heart Hart-Scott-Rodino filing has already been made. With that, today’s call is about second quarter results and outlook. I ask that you please limit your question to second quarter results for which I will now thank you in advance. Now on the 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 HBR for 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 strength. We reported second quarter diluted earnings per share of $0.72 or $0.73 when exceeding $0.01 cost via 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 would expect solutions Medicaid type. Indiana during the second quarter we began serving ABD beneficiaries in Indiana under the state’s Foster [ph] care connect program. A launch is proceeding as expected. At the end of the second quarter we had 3900 ABD lives in the states. We anticipate adding over 15,000 ABD lives in Indiana in the third quarter with auto assignments again. Florida, in May Centene’s Florida subsidiary Sunshine Health was tentatively recommended for a state wide contract award under the Florida Healthy Kids program where we will manage healthcare services to children and adolescent ages 5 to 18. This award expands Centene’s participation in this program from one region to all 11 regions in this 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 mark 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 the Pacific [ph] beginning in the fourth quarter 2015. Louisiana, second quarter was the first full quarter of operations of our expanded contracts in Louisiana which included conversion of non-U.S. clients. This contract is performing in line with our trajectories. Additionally Louisiana will begin carving in behavioral services in Centene's contracts with states which 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 dual, at June 30, we served 19,700 members across our dual demonstration contracts in Ohio, South Carolina, Texas, and Michigan. We anticipated additional growth throughout the third quarter 2015. Next Centurion, in July Centurion commenced its fifth correctional contract in Mississippi. Shifting gears our rate adjustment, we continue to project a 2015 composite rate adjustment flat to 1%. In conclusion, second quarter results offered continued evidence of Centene's financial strength and operating capability. Centene's high priorities 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 markets. 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 continued 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 it on Investor Day, our updated guidance numbers reflecting 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. It is $0.73 excluding the $0.01 of merger related cost. 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 have experienced significant membership increases in Florida, Illinois, Louisiana, and Mississippi and also significant revenue growth in Ohio and Texas year-over-year through the implementation of the new MMP and other programs. I also want to discuss the variability in the level of premium tax amount 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 payment received in the second quarter which we pass through as payments to the hospitals in accordance with the state construction. These amounts can vary from quarter-to-quarter and we expect the amount of premium tax revenue we received to continue to be lower in the second half of 2015, slightly less than $300 million in each of the third and fourth quarter. Correspondingly we expect to have a lower level of premium tax expense in the third and fourth quarter which offsets the revenue reduction, 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 state. 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 cost versus the 80% previously covered. The impact of this change was a $3 million growth increase in our reinsurance receivable but after considering the affect 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 cost 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 borrowings. 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 the health insurer fee. Diluted shares outstanding were 123 million shares compared to 119.4 million shares last year. As of June 30th, 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 30th, including $150 million of borrowings under our revolving credit agreement. Our debt to capital ratio was 35.7% excluding our $69 million non-recourse mortgage note. Medical claims liabilities totaled 2.1 billion at June 30th, 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 benefit ratio 89.1% to 89.5%, general and administrative expense ratio 8.0% to 8.4%, the effective income tax rate 48% to 50%, and diluted shares outstanding a 123 million to 124 million shares. Our guidance numbers do not include any merger related cost expected to be incurred with the Health Net transaction which we expect to close in early 2016. For 2015 we expect to incur cost of $0.10 to $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 cost. 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]. Our first question is from Josh Raskin of Barclays. Please go ahead.

Hi, thanks, good morning.

Good morning

Good morning Michael. The first question, just wanted to make sure, the merger cost so, you incurred $0.01 in the second quarter so that's not included in guidance but your guidance includes the $0.73 second quarter, is that right?

Correct, basically I would use $0.73 for Q2 because for the year we are seeing our guidance numbers do not include any of the merger related expenses.

Okay, that is good enough. And then just the Healthy Kids contract in Florida, could you remind us if there is potential opportunity in terms of membership size?

Josh, it is Jesse. So, I think probably the best way to think about this is it is a separate contract in Florida so it really strengthens our broader Florida footprint. As we mentioned in the comments it takes us from what has been historically a very small participation in that contract. I would say deminimus amount of membership to a state wide presence. So, it is going to be as a more important as diversification in the market than it is from an absolute kind of membership -- absolute membership perspective. So I think if we want to give aggregate number of members but I think it is less than 50,000 members.

In terms of the overall market or your potential opportunity?

Yeah, that would be our potential so, go like if you want to narrow the range you would say between 20,000 and 30,000 something along those lines.

Okay, perfect. And then just on the MA side, there is some larger transactions obviously in the market, there could be some divestitures of MA plans, I am just curious Michael your perspectives on growing Medicare advantage, would you look at some of these potential divestitures and will they have to be in your existing markets, how should we think about the Medicare strategy?

I think obviously if there is some narrowing in good markets and there are good books of business we would be willing to look at them and be clearly responsive fairly quickly. Obviously if it is in existing market it is a lot easier to make that decision because it is a tuck in. If it is a new market it has to be -- has to be big in size and scale to make it worthwhile setting up an organization for it. So, it is going to be a case by case basis but we would clearly be willing to look at that.

Okay, that makes sense. Perfect, thanks.

Thank you.

Our next question is from Peter Costa of Wells Fargo. Please go ahead.

Good morning.

Good morning

My question relates to the loss ratio on the Medicaid, CHIP, Foster Care, and health insurance marketplace businesses rated by 90 basis points, is that tied to the two states that you referenced, simply describe which two states that was and exactly what is going on with that loss ratio there?

Sure thing, the main thing is that we have got -- it happens from time to time. New programs start up with higher HBRs and so we have new programs in Illinois and the Florida MMA program. MMA program for example we still run high and it has been much discussed.

So, are those the two states that you called out earlier?

Yes.

And it is all brought really in that line item, not so much of a Florida LTC business which is in the ABD though?

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 has business improved?

We are in constant discussions, we will exchange the information. Our actuaries are talking and so we did work with them and we always found Florida to be very responsive and we believe we will work it out. Rone, anything you would add to that.

No, it is exactly as you said Michael. We have continued to work with the state and they have been a good partner in the past and we believe that will manifest itself here again.

Okay, thank you very much.

Our next question is from Kevin Fischbeck of Bank of America. Please go ahead.

Hi, great, thanks. Can you talk a little about the duals, I guess obviously you are adding another state soon but we’ve seen lot of mission enrolment out of the duals and in almost every state and then there tends to be kind of a plateau and actually a little bit of a pullback. Can you give a little bit of a color on your relations with the states to how kind of 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 kind of 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 deeper 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 partner. So we are actively engaged and marketing to the provider community as well.

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

Okay and then I guess 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 are prepared to get into 2016 yet at this point. I think what I said back in June and still say today is we felt that it was a more even distribution for Q2, Q3, and Q4 of 2015 and in December we can talk maybe a little bit more about the seasonality for 2016.

Okay and then I guess last question I don’t know if you can answer it but, as going to back to my question before about Florida’s rate negotiations, I guess is there any way to think about the 0% to 1% thus far is how you are thinking about Florida and I guess Georgia, how dependent are those two states as far as hitting that range?

I think the 0% 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 are seeing in Georgia as well.

Which will be more than 0% to 1%.

Yes.

Okay, great. Thanks.

Our next question is from A. J. Rice of UBS. Please go ahead.

Hi, everybody. Thanks for the question. Looks like you had another strong quarter and your service revenue is 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 now have the Chicago County Care contract included in our results that started July 1, 2014. So it’s on the revenue side and then from a performance standpoint I think we just had near 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, well also been 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 a favorable performance that I mentioned in several of the units to makeup the service revenue component.

Okay and then I might just 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 of America seems to be the one of the trade associations seems to be expressing some concern, almost seems like it’s more a question just whether they think CMS should be promulgated to rule as opposed to specifics but I wondered if there is any update and you are thinking on that whole situation?

I think our response to this one in yesterday so I don’t want to front run the CMS on it. But on balance we are still very comfortable with what we are doing. Now we can see some balance regulations here and we particularly like the actuarial soundness being reaffirmed and by rates but we think that’s a very constructive important change. So unbalanced I am going to leave it at that until we get our full reports but we agree with most of what's there.

Okay, great. Thanks a lot.

The next question is from Dave Windley of Jefferies. Please go ahead.

Good morning, it is Dave Styblo in for Windley. First question just kind of 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 sight were growing to $24 billion plus, so I think that translates into something like mid to high teens top line growth. I am wondering about the bottom line or EPS growth, do you guys think that you can grow faster than that as business matures from next 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 will start and Bill will add to it. It is going to be a matter of product mix, timing, and different factors. Obviously as the business matures we would expect to see some margin expansion in existing businesses. But it is once again the mix of new products coming in. Anything you want to add.

Well 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 till will get 2016 guidance on that. But clearly we would expect to have a reasonable percentage growth in earnings that were going over at the top line.

Sure, okay. And then just kind of taking a look at the DC peak here, I know it is flat sequentially but just as I look at the claims or payables tier you are up 7% sequentially. Premiums were up 9%, it could be the influence of what happened so, can you give us little bit more insight as to why the premiums are growing a little bit slower than the -- little bit slower than the payables there?

I think there is nothing particularly special there. At any point in time at the end of any quarter there is certain amount that is in transition set to pay or just pay things like that. So, I wouldn’t draw any particular conclusions in those relationships.

Okay, thanks.

Our next question is from Sarah James of Wedbush Securities. Please go ahead.

Thank you. SG&A came in better than I had expected, can you talk a little bit about what helped you in the quarter and then as you look forward if we take out the $0.05 business expansion cost 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 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 cost being in the $0.50 range a year, of $0.25 range now that is presplit. 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 cost as we incurred a lot of cost prior to the time we start the revenue generation particularly in de-novos and new states. So, that is 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 we showed I think some of the components of that also at our Investor Day to show that 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 will reach sort of 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 is anything, any unusual items in the quarter from that regard.

And last question here, as we think about RSPs 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 slow [ph] ruling before deciding whether or not to move forward and I am just wondering now that we are past so does Centene's discussion for the state there was a sense of whether or not conversion to managed care was still on the table and what type of time frames we could see some movement?

Jesse, you are closest to it.

Yes, Sarah this is Jesse. I think that we talked a little bit at Investor Day about kind of we haven’t got the range of stages of participation. Various states are thinking about Medicaid managed care. I think we had a reference to North Carolina as one of the states that is in the earlier stages. So, I think that's why I would continue to have characterized it. So I think there is, we do believe there is kind of longer term opportunity there but there is a lot of pieces that need to come into place in order for that -- opportunity really come to fruition. But as you said it is a meaningful opportunity and one that is still is high on our radar.

Thank you.

Our next question is from Brian Wright of Sterne Agee CRT. Please go ahead.

Thanks, good morning. Two real quick questions, just to clarify so the premium taxes in the first quarter were elevated because of the hospital assessment pass our payments, is that right?

Yes, they were higher in the first quarter by 48 million compared to the second quarter, those are all pass throughs.

And then just lastly on your -- when you guys report your 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 to help insurer fee is essentially expensed on day one in the statutory financials i.e. January 1 and then revenue was 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.

Thank you Brian.

Our next question is from Chris Rigg of Susquehanna Financial Group. Please go ahead.

Good morning, just wanted to follow up on a question from earlier with regard to the duals, when you guys talk about pressure from providers or the beneficiaries to opt out of the Medicare side, are we really talking about post the Q providers and if that’s the case is it primarily nursing homes or home holder, how do we think about where the pressure is coming from?

I think some of the whole series and any of the providers you can find at different times providing that pressure. And I think that’s why we are working so hard on the education side to let them know that we really are going to make things better and easier and less complicated for them because of what we do. We have – our case and other systems that are really model medical management system that can serve them very well and that’s the approach we are taking. And I think in Ohio our opt out rates were around 32%.

Right around that a little bit north of that.

It is coming down a little bit so we’ll continue to work at it and it’s a long process, it’s not an instant fix.

Okay and well just around the duals, maybe this is obvious when I look at the 19,700 enrollees is that net of the opt out or is the opt out a component of 19,700.

That’s net.

Okay and then just on the MTR 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 felt that was appropriate.

And when you do like it, you try to give your best off at that point in time.

Okay, alright. Great, get it. Thanks a lot.

Our next question is from Gary Taylor of J.P. Morgan. Please go ahead. Mr. Taylor your line is open.

I am sorry. Can you hear me?

Yes.

Okay, great, thanks. Just a few quick questions; first, I wanted to see if you were still expecting the Iowa contract awards to come out either this week or next?

Jesse?

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

Okay, middle of August, okay.

But we have already seen enough that now these dates are movable fees to time.

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 ratios was really low, look kind of outlier low, out of trend even with respect to where 2014 was running. So I am assuming there were some unusual revenue in the segment maybe that was driving that, is there a quick explanation for that?

I think in some of our businesses there were two things, one our individual health business historical consult to get favorable results in that period and we also had some favorable adjustments in one of our Arizona businesses.

Okay and then last question maybe for Michael, just 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 am just wondering if there is 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 took things very well. Anything you want to add to me.

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

Okay, thank you.

Thank you.

Our next question is from Andy Schenker of Morgan Stanley. Please go ahead.

Thanks, good morning. So just following up on the low HBR guidance. At the Analyst Day you suggested you saw some 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 update outlook now assume 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 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 are not necessarily expecting it to be much lower given what the second quarter is usually our more favorable quarter. But we’ll wait and see at this point.

Okay and then maybe just following up on your other comments and services revenue, it’s safe to assume that 490 is a good run rate for the second half of the year or 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 -– that could cause them to accelerate in these levels of things?

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 memberships at times in some of those businesses. So I wouldn’t totally use that as my predictor.

Okay and just one last one real quick on the number of employees, they jump by another thousand people this quarter. Is that tied just to membership growth in general or is that maybe the Agate and Fidelis acquisitions or staffing ahead of Health Net, any clue there would be helpful? Thank you.

It’s really just -- Agate has its employees and we’ll continue to support that as appropriate. But the way that business is growing we said it was up 39%, 38% so you can expect the employment pace 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.

Okay, thank you.

The next question is from Ana Gupte of Leerink Partners. Please go ahead.

Yes, thanks, good morning. Following up on the Florida rates yesterday Magellan has said that they are including it in the guidance and it’s just my understanding and I could be wrong that they were eluding to a broader rate increase in the mid single digits and then for there – mainly population in low to mid but doesn’t sound like you are baking in anything or expecting anything. Am I misunderstanding something that they are saying because we are clearly including our ratings based on that guidance?

Our guidance includes expected rate increase in Florida for September 1, which is -- it is greater than 0 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 then might be some upside based on your discussion, is that how relations need it?

I mean we are not going to say something that we can forecast downside on but we try to put realistic numbers in our guidance and what we have in now we think is a realistic expectation and I agree not paid attention what others really like.

Okay, alright. That’s helpful and secondly on Georgia can you give us an update on when that contract award is expected and one of the parties sitting has said that essentially they are 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 contemplated?

Hi Ana, it is Jesse. So I don’t think we can comment on 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 sometime I think August is probably the best window that we would communicate at this point for anticipated award.

Okay, thanks. That’s helpful and finally just following up on Andy’s question on trend, any comments on what type of utilization you are seeing in your general population as far as the maturity and so on and how that compares to whatever degree you do service -- and exchanges?

I said in my prepared remarks that we anticipate the trends to remain stable.

Okay, so no change at all, alright. And how is that compared to public exchanges and expansion, any color at all?

I think we just look at across the whole book of business and we see it as a stable business, they were trend.

Alright, thanks so much. Appreciate it.

Our next question is from Christopher Benassi of Goldman Sachs. Please go ahead.

Hey, it’s actually sorry it’s Matt Borsch. Just a question at a very high level what’s your outlook for the potential for more states to join the ACA Medicaid expansion between now and the November 2015 election?

I think a lot of states look at it. It’s really a political thing between the governors and their legislators and I think trying to hazard how many are going to do would be a little foolhardy going into a national election on the 16th.

Fair enough and just 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 consolidated level for those time periods. My understanding from a little bit of guidance from you guys have said 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?

It’s a combination with the management fees in there and that has a lot to do with we’ve talked about historically.

Okay, thank you.

That concludes today’s question-and-answer session. I would like to turn the conference back over to Mr. Neidorff for any closing remarks.

Well, thank you. We appreciate your interest and look forward to talking to you at the end of Q3. Thank you.