Good morning, ladies and gentlemen, and welcome to the Centene Corporation Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. At this time, I would like to turn the conference over to Mr. Ed Kroll, Senior Vice President of Finance and Investor Relations. Please go ahead, sir.

Thank you, Denise, and good morning, everyone. Thank you for joining us on our 2018 third quarter earnings results conference call. Michael Neidorff, Chairman and Chief Executive Officer of Centene; and Jeff Schwaneke, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call, which can 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 code number for both dial-ins is 10123967. 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, October 23, 2018, and our Form 10-K dated February 20, 2018, 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. The call will also refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our third quarter 2018 press release, which is also available on our website at centene.com under the Investors section. Finally, a reminder that our next Investor Day will be held on Friday, December 14, in New York City. 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 third quarter 2018 earnings call. During the course of this call, we will discuss third quarter financial results and provide update on Centene's markets and products. We will also bring you up to date on the integration of Fidelis. Let me begin with Fidelis. The third quarter was our first full quarter with Fidelis operating as our New York State Healthcare. The integration is going very well progressing as expected. We will further enhance the quality of care and current capabilities of Fidelis, as we add case management and clinical programs and incorporate our data analytics tools. We are on track to achieve the synergy and increasing targets. On a run-rate basis, we expect Fidelis to add approximately $11.5 billion in revenue and over $500 million in adjusted EBITDA including net synergies. Now on to the third quarter financial results. We are pleased to report another solid quarter marked by significant top and adjusted bottom-line growth. It is important to clarify that the operating metrics in the quarter were strong as this may have been obscured by three offsetting adjustments booked in the quarter. Two of the adjustments relate to the contracts that have expired. These were $140 million benefit related to the California IHSS program reconciliation and a $110 million charge related to the expiration of our Veterans Affairs contract. The third adjustment related to a $30 million contribution to our charitable foundation. Membership at quarter-end was 14.4 million recipients. This represents an increase of approximately 2.1 million beneficiaries over the third quarter of 2017. This growth is in part a result of the acquisition of Fidelis which closed effective July 1. Third quarter revenues increased 36% year-over-year to $16.2 billion. The HBR decreased 170 basis points…

Thank you, Michael, and good morning. This morning we reported strong third quarter results with total revenues of $16.2 billion an increase of 36% over 2017 and adjusted diluted earnings per share of $1.79 an increase of 33% over last year. Earnings for the quarter were driven by the completion of the Fidelis acquisition and the continued strong performance of the marketplace business. Additionally the third quarter results include the following items which in aggregate had no effect on diluted earnings per share. First, during the third quarter we received cost reconciliation information from the State of California associated with the IHSS program which ended last year. The information allowed us to estimate the effect of the reconciliation and we recorded a pretax benefit of $140 million during the quarter. Second, the Veteran Affairs contract expired this quarter. In connection with the conclusion of the contract, we recorded a pretax charge of $110 million for negotiated settlement in severance costs. Lastly, as an offset to the first two items, we recorded a pretax charge of $30 million associated with the contribution commitment to the company's charitable foundation to continue to support the communities that we serve. Let me provide some more details for the quarter. Total revenues grew by approximately $4.3 billion year-over-year primarily as a result of the acquisition of Fidelis Care, growth in the health insurance marketplace business, expansion in new programs in many of our states including the Illinois contract expansion, and the Pennsylvania LTSS program, other acquisitions including MHM, CMG, and Foundation Care, and the return of the health insurer fee in 2018. This growth was partially offset by lower revenues in California associated with the removal of the IHSS program for managed care which took effect January 2018 and lower membership and revenue in the…

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. And your first question will be from Kevin Fischbeck of Bank of America Merrill Lynch. Please go ahead.

Great. Thanks. I wanted to ask about the exchanges and how you thought about 2019, I guess you mentioned that the competitive landscape hasn't really changed that much but it does seem like that there's a number of counties that last year only had one option and this year at least have two and you guys often stepped in there to be that one option, I wanted I think initially the market was concerned that being the only one there was going to be a bad thing, you guys have really outperformed wondering now whether there's potential risk on the other side if a new competitor comes and that potentially change the risk pool for you in that market?

No, no, no, as far as, Kevin, I don't see a change in the risk pool we have had last two, three years 80% of the enrolment of our membership. So we expect that to continue, it's a great deal of satisfaction with it and we continue to focus on the subsidized market and some of the others are coming in and higher levels than that, so I don't really see any material changes within the marketplace.

Okay. And then I guess a question on the MA side, it looks like you don't expect now to have the parent rating back for 2020, how did you think about the 2019 pricing for Stars and picking out some of the new contracts, you have this issue where you fell off on the Star ratings for 2019, but you expected to show improvement going forward, did you kind of think about it in price to the actual Star ratings that you had in 2019 or did you kind of take a longer-term view that it's better to grow the business and we may see some margin impact in 2019 but then getting back?

I may ask Kevin to join in, but last year I said we're committed to growing the business, so I'd let Kevin split that up.

Hi, Kevin. I just would win to state what Michael had said, our position has been to take the longer-term view, I think when you look at both our expansion strategies, the states we focused on, the potential Ascension alliance, I think it all reflects that.

The next question will be from Josh Raskin of Nephron Research. Please go ahead.

Good morning, Michael. First question just on the exchangers and sort of just how you guys think about the bidding process and resetting your plans. We've talked about a margin I guess above 5% this year, as you think about 2019 is there a reset to your bid margin or do you think sort of where you are sustainable and again you've been sort of a sole operator in a lot of counties, so my guess is there's no need to make a majorization there but just how are you thinking about long-term margins and is there any reset we should expect for 2019?

Yes, I'll let Jeff and some others comment, but as I said in my previous answer, we see our position in the marketplace is not changing but relative to Jeff has alluded.

Yes, yes. Not to get to too much details about 2019 but we are certainly not planning for margin reset in 2019 that's certainly not our view.

Okay, that's perfect and then just on North Carolina as they released the set of bidders, I was actually surprised with only eight plans that were listed and so I don't know how to think about that, is that hey there is a little bit of fear around the ability to earn a reasonable return on that contract and it's a big contract, so there's risk or is it no but just such a large contract that there's only a few plans that couldn't realistically win this. I guess I'm just curious on your perspective from the competitive landscape in North Carolina?

Hi, it’s Kevin. I think one potential factor, contributing factor to what you've just said is that the -- as you probably know is that it was a complicated bid and one looks at the requirements on an MCO with respect to care management requirements and network and such, the mix between top provider organizations would be implemented as well as outside MCOs. It was -- it is a complicated bid, so again we're very excited about our bid. We believe we have a strong one but that may be a contributing factor.

As I would just add to it, I think when you look at the scale, the size, the expectations, the technology required to do it, a lot of people who initially get excited about sit back and say, I think maybe I mean I have to sit this one out and so we'll come through acquisition, our partnership and think again we expect to do well with that.

Okay. And just to clarify, there was nothing in the bid or the RFP that came out that changed your view on the ability to earn a reasonable return, nothing around rates or continuity of care or anything like that that's going to make it onerous in the early period?

I think no, I don’t think so. I think you always look to have bifurcated how many member how many plans they have in a particular region. But I think when you look at it in total, I think it's refined, you always have your first year where you are educating people and we have plan for that accordingly and we've always said new plans, you want to go through three, four quarters. So that has same material supplies we are planning accordingly.

The next question will be from Steven Valiquette of Barclays. Please go ahead.

Just quickly for the California IHSS payment, I think you guys mentioned this at your Analyst meeting back in June, so it seems like it was included in guidance but just to clarify it was $140 million is it still subject to any material adjustments depending on minimum MLR calculations in California for those prior periods and also are these California risk orders are they all finalized now, just want to get more clarity around all that? Thanks.

Yes, a couple of things. This was not in guidance, so it's never been in guidance but the real issue here is they are reconciling the program from the beginning its inception all the way back to 2014 and this is really the first quarter that we had cost and I would say member eligibility information from the state in order to perform the reconciliation. So the state has the data not the MCO, so obviously this is the first time we had a look at it, it is not done. I think in the press release you'll find that it says that we expect the 2014 through 2016 information to potentially get reconciled late this year or early next year and then there's still the 2017 year which would come later maybe in 2019. So what I will tell you is that it could get adjusted and if it does, we would disclose it accordingly.

As far as the breakdown of $140 million how much of it relates to 2014 to 2016 versus 2017, is there any rough breakdown of it that way just to help us get a sense of the magnitude for how much it could be adjusted?

I think there were rate changes in the program in the later years. So I think a significant piece of that relates to 2014, 2015 time periods with a little bit less in 2017. So I would say it probably starts larger at the beginning and gets smaller as the years go on.

The next question will be from Ralph Giacobbe of Citi. Please go ahead.

Thanks, good morning. Obviously a lot more in parts in MLR and SG&A, any reason why you weren’t excluding some of those sort of one-time items from the adjusted figures?

Well, we have never historically done a, if you will an adjusted HBR, an adjusted SG&A ratio, so but I think our preference in general is to disclose and not have an adjustment such in this very long, in the filing, I think that makes it confusing and so I think our view was this was a much more easier way to just disclose the information.

I just want to add to that. I think what really important as we change lenses to a $60 billion company versus where a lot of people remember as historically you're going to have a lot of adjustments that come through in a given quarter. That's just the nature of the business and we were -- what we did this time, we wanted to ensure that we have the offsets and ensure that there was no income taken into it, we took the $30 million and put in the foundation because weren't really even allowed. And so -- as we -- and with Jeff obviously we decided to keep the adjustment simple, so people understand it and we believe that most people when we say here is a one-time change one way or the other tend to discount. I'm used to an environment where they say no that's to be expected in a business's size, in any given quarter, any given time there's going to be adjustments that is good and bad but you have to treat them just as one-time events and not part of the ongoing, where I'm pleased with in this quarter is the ongoing business is performing well and consistent with our expectations.

Okay. All right, fair enough. And then just a follow-up, the administrations out yesterday sort of more flexibility states around waivers and the like, any initial thoughts around that and maybe implications to that, whether it's even a consideration for 2019 as opposed to maybe 2020, thanks.

Kevin?

Yes, it's a good question. I just finished reading the guidance last night. Clearly, I think we support the ability for states to have additional flexibility. I think it plays well into both our business model and also our strategy. With respect to some of the nuances and the guidance, I think we're all still studying that.

The next question will be from Steve Tanal of Goldman Sachs. Please go ahead.

I wanted to just follow-up on the couple of the ratios, specifically first the HBR at 87.3% I mean just looking at typical and that's kind of ex the IHSS item, the typical seasonality and thinking through kind of the impact of Fidelis really trying to understand I guess the question would be what was the impact of Fidelis if you could spike that out because I think this HBR look pretty decent access.

I want to comment but as we go forward, we've always had the policy, we look at consolidated business versus bifurcating it because it gets too confused in the next quarter what about this or that, so. We want to look at in totality, again some kind of directional.

Yes, yes, I think you are exactly right, obviously you have two things. One has been here the whole year right, the HIF, the health insurer fee pulls down the HBR, if you're comparing to last year right because last year there was no health insurer fee and then you have the IHSS adjustment, so those two I would kind of put in a separate category and then you're correct you do have an increase for the Fidelis business because it does run a higher HBR and that was predominately offset by the marketplace because a lot of the growth, organic growth this year has been in the marketplace business. So the increase in volume of that business as a percentage of the total company pulls down the HBR.

Okay. And that qualify Fidelis and I guess just on the SG&A side, came in a bit higher than we were thinking and I guess one thing that I heard in the call so far was just the increased business expansion costs and that's I guess stepped up about $0.02 or so, was that in the third quarter or is that to come in the fourth quarter and just a step back on that like should we think about that $0.32 number as kind of a run rate number at this point?

Some of that is in the third quarter related to our as Michael mentioned in his script related to the open enrollment period and so what you have to remember is in order what we do the business expansion costs are incremental so incremental to the prior year when you look at for example the marketplace business. so I would say it's a pretty good run rate but it can be lumpy from time to time depending on Medicaid RFPs because a lot of times if for example if we had a one-one start day we would have a lot of start-up costs in fourth quarter for that. So I would say it's a pretty good run rate, I think that's where we've been in that range for the last several years but obviously depending on the timing of awards and how many awards are in a specific year, it could change.

The next question will be from Sarah James of Piper Jaffray. Please go ahead.

Thank you. I was hoping that you could walk us through capital deployment priorities as we think about the business model going forward, are there certain areas that what makes sense for us to continue to add assets or expand their exposure?

Yes, I mean I think obviously you've seen a lot of the capital that we continue to deploy, and have deployed over a long period of time is really related to growth and adding capabilities and I think you've seen some of that this year with the addition of CMG, our investment RxAdvance Interpreta. So we've continued to add capabilities to the business as well as grow the business. So every new market requires statutory capital, that's capital deployment increasing the marketplace growth in that business. So I think it's a consistent strategy going forward, we are looking for ways to add capabilities that in the long-term will continue to grow the business successfully.

Okay. And can you talk about the rate outlook in a little bit more detail, you mentioned reiterating the 1% for 2018 but we've had a couple of updates recently that would put -- that were higher than that. So I’m just wondering as you’re looking for the rest of 2018 focusing on 4Q or kind of rolling out of the year, are you still thinking that 1% is accurate for 4Q or could the recent update provide some upside to that?

Yes, just I think we’ve been in -- I may get this a little bit off but I think we've been close to 1% for the last three years and just to give you the idea about what we're giving you as far as what the 1% it's the annualized effect of rate adjustments in this year, so it's not just as they occur, it's the annualized effect of those. And the other thing is it is a net -- it's a net rate adjustment, meaning if the state changes the fee schedule and provides a premium adjustment for that, we’ve excluded those, we've netted those together because typically those are a one to one. So we’re still comfortable with the 1%, we've been in the 1% range for the last several years and I think I wouldn't see anything different going forward at this point in time.

And I think what is important Sarah is to what Jeff said, the easiest thing that 5% increases certainly but if they've raised other fees comparable to that that's a mislead. So I think we were in interest of clarity we put the net number.

The next question will be from Matt Borsch of BMO Capital Markets. Please go ahead.

Can I just ask about the tax rate, the rate looked quite low in this quarter and I think you're maintaining your tax rate guidance for the full-year, is that implying something pretty high for the fourth quarter, I'm just wondering if you could talk to what's going on there and apologies if I missed something you've already said.

Yes, no Matt that's a good question. I think what's driving the tax rate obviously for the quarter is the significance of the adjustments related to the closing of the -- it's really the transaction costs associated with the Fidelis transaction. Those are deductible and a statutory tax rate that's roughly around 24%. So we've known about these costs for some time and our guidance has always included those. So again that's why you didn't see a revision to the tax rate range is for the full-year on a GAAP basis, we're going to get back to in between our guidance ranges that we've provided today.

Okay, okay, okay, got it.

That's also Matt a good example I said earlier in terms of in any given quarter you can have a particular effect that impact.

Yes, just to give you a little more detail, Matt, we've always had I would say a lower back half tax rate because of the addition of Fidelis because Fidelis is not subject to the health insurer fee this year, so their tax rate is much, much lower.

Right, got it.

Yes, but for the full-year, we're comfortable with our guidance range.

Got it. Got it and can I just ask you a question on if you look at the organic growth going into 2019 and you're above $69 billion. Am I correct that implies a high-single-digit range for organic growth if you sort of broad side of the barn adjust out for Fidelis.

I think we're once again for consistency; we have always when there is a partial year and something we have always had to adjust for the next year. So as you go year-over-year that's consistent, we don’t see consistency in how we do this. But anyway you look at it, I mean it's a lot of significant growth for that and that reflects to what the visibility we had last June and we will update it in more detail and give you more detail in December.

The next question will be from Peter Costa of Wells Fargo Securities. Please go ahead. Mr. Costa, your line is open. You may be muted on your side.

Hi, good morning, sorry about that.

Good morning.

Why did the guidance change or the metrics changing due to the performance at Fidelis being different than your expected and what things have you seen at Fidelis that's been different from your expectations either positive or negative?

I think it's been very consistent with our expectations in the reaffirmation of the revenue and the EBITDA I think reflects that, it's a well run company and we're really pleased with that. I mean we were really able to back out and tell about innovation day one they are on our general ledger. So I mean this is a company they act together and it's everything we could have expected.

And just as a follow-up, why was Fidelis's Care view of the individual mandate going away which caused them to initially seek much higher rates in the exchange business, so different from your view of the individual mandate going away, is New York somehow different and are you seeing what they initially saw now that you're seeing what's going on in New York?

Okay. So you're right, New York is different, New York has a basic health plan, so I think you're probably aware of it's one of two states that and Minnesota that have that. So just by definition they're going to have different underwriting issues and risk management issues and selection issues than States without the VHP.

So that's what caused them to seek much higher rates in New York than you’re seeking rate increases for next year?

Yes, if you are a state with the basic health plan like those two, there are definitely different underwriting issues, that one has versus state without that.

Okay, thank you.

And we of course could not get involved in any discussions on their rate adjustments until after closing that would have been inappropriate.

The next question will be from Michael Newshel of Evercore ISI. Please go ahead.

Really looking at the RFP pipeline, is there any update on expected timing of the starship and Star Plus contracts in Texas after the cancellation and repost of the RFP a few weeks ago?

I think it a moving -- it's a movable piece, Chris what's the best.

I will give you my best shot Michael. Right now, it looks like the -- as you know both of the RFPs have been reissued and are due in mid-November, we expect that the awards are going to come Q2, Q3 of 2019 and right now the projected start dates for both of these are Star Plus will be 6/1 of 2020 and the Chip and Star RFP will be 9/1 of 2020.

Okay, great. And how about -- and also what's the latest on Pennsylvania whether the Health Choices contract will go through another bidding process and at the course vacated that?

We haven't -- I haven’t heard anything. I mean it's been very silent and it was a deal focused on long-term territory and a great job there in the East any way that we made up and that's going well but I've decided that's something I’m just going to wait during the call and say it's time to try a third time. We have done well twice so we see what happens this time.

And existing business continue in the meantime?

Well actually I'm unsure of it, yes. There is not a mean data they need the help they wanted. And there's a -- you have the Election coming up, the new Governor will be in place potentially. So let's wait and see what happens there. And I'm not forecasting the Election term for various reasons, so but there is a lot of variable. So we had so much going on now that if they want to wait a little bit that is okay, we have a full fight.

The next question will be from Lance Wilkes of Sanford Bernstein. Please go ahead.

Just a quick question on the days in claims payable and the timing issue more predominantly on the non-Fidelis, was that related to any particular products or if you could just give a little more color on that that would be helpful?

Yes, no nothing specific. I mean when you look at the days in claims payable, some of this depends on which day of the month the actual quarter ends on and when our checks around are scheduled. Obviously we’re fairly large so we're making a lot of payments every single day. So it just depends on that, that's what most of the timing items are related to. And I think I was pretty clear in my script that long-term we think in the mid-40s as a good proxy for where we're going to be with the addition of Fidelis.

Okay. And then on RxAdvance, so you made additional investment in convertible preferred and you talked a little bit about the rollout in 2018, if you could talk a little more about both how you are thinking about rolling out that capability, how it replaces existing capabilities and what would be the impact to states kind of pricing model as a result of this, is it you frequently have like separate capitation rates related to pharmacy and this is going to transfer to more transparent pricing or maybe just some more color around that.

Yes, what I'm going to do is Jesse has been leading that and so I'm going to ask him to be able to speak out.

Yes, I think good combination questions there related to RxAdvance, so I think as Michael referenced in his comments I think the important starting point here is they were really investing in the future kind of more transparent version of the PBM model, so that includes making investments in the technology platform which is really where RxAdvance is today. So we're rolling that out on a market-by-market basis as we reference that rollout, has been in process since the initial investments and will initiate in the end of 2018 and continue to occur market-by-market through 2019. In conjunction with those new -- the new implementation of the platform yes we will be moving to a different operating model which is built around transparency and yes more focused on cost sharing for total cost of care so integration of pharmacy cost with the more comprehensive total medical cost and we do believe that over time delivering those services more efficiently will provide both higher quality and lower costs for all of our customers including states.

Yes, this going to be a game changer.

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

Hi, thanks for taking my question and look to us that you added something like 110 counties in Medicare Advantage for 2019 you got the Centene's J.V. the stars that were discussed earlier in the call Michael I'm just interested in your kind of longer-term view aspiration for Medicare Advantage in the business mix for Centene?

Yes, as I said that when we talk about our growth and I view the Medicare Advantage product is continue to fuel our growth into the next decade and we've been using last year a little bit this year as the learning process and gradually expanding and I keep telling you it's not how fast, it's how well get the fundamentals right and that's what we're doing but I see it as a very important part of what we're doing and you'll continue to see it and we've built systems capability for it. And I think that's also a very important whether it be the RxAdvance the Interpreta things that help improve outcomes, so we see it as a very important part going forward.

Thank you. And then at the top of the call you talked about Fidelis and the adding of case management and clinical programs and things like that I think you've been fairly transparent about targeting there -- there HBR as your synergy target how quickly can those things happen and do you think the benefits of those things are fully captured in the synergy targets that you glade out or can those be exceeded over time?

Well I think one we will be implementing them as we speak. And it's something that we've got ready for during the extended period before we could close so those are the kinds of things we could talk about and did. So I think it will and we're careful from the standpoint of GAAP reporting and how we do things that from a conservative standpoint has been consistent with appropriate GAAP accounting. I would always hope that we can under promise and over deliver a little bit and so we want to keep the expectations real and the timing real. But we're very hopeful on the benefits of all these as they are, and I know they were looking forward to our systems and our capabilities. So and as things we're learning from them, so it's so easy to put two things something together right there.

The next question will be from Zack Sopcak of Morgan Stanley. Please go ahead.

Hey good morning. Thank you for the question. I wanted to ask first about just your turn around in MA Stars and from your perspective what really drove the improvement and were there any incremental investments involved to get you up for 2020?

Well, I'll ask Kevin to jump in. But that's something that's a priority and we've been focusing on it and we're not satisfied with where we are, we're going to keep pushing it, the increase it and make it better and that's just when it, we are happy we got involved with it. We made the priority to make the investments to get there and then we caught a few breaks along the way as well, so Kevin you want to take?

I think Michael said it. It is clearly a priority. Michael's made a pretty clear to us what his expectations are. We've got a strong team that's focused in on Stars as well as RA and other quality activities. So it’s about execution.

Thank you. And then just to clarify on your charitable contribution, so if I look back a year 2017 and 2016 numbers you excluded them from adjusted net earnings and but now you are including in adjusted net earnings. Going forward should I just consider your charitable contributions to be included into it in adjusted net earnings?

Yes, I think this goes back to what Michael had mentioned earlier was this is really the offset for the other two items. So to the extent that you see one like this, I think it would be disclosed similarly to what we did this quarter.

The next question will be from Justin Lake of Wolfe Research. Please go ahead.

Thanks, good morning. Just wanted to come back on the tax rate. First of all, is there you're saying that the one-time cost from Fidelis were deductible in the adjusted number?

No, they are deductible on your tax return, right. They are deductible on your tax return at their effectively their statutory rate which is around 23 and change, I guess is what I would say. So I mean those are actual costs that we burden that when we file our tax return we will take a deduction form.

Right. So I guess what I'm just a little bit confused by if I'm understand this correctly is you one-time the cost of the Fidelis integration right, those are not included in the adjusted, right?

In the adjusted earnings right, that's exactly right, so we had the cost that we are effectively backing those out at the applicable tax rate at which they will be on our federal tax return.

Right. Did you also one-time the tax benefit or the tax yield or you think you ramped that out?

Yes, if you look at the press release, the tax is actually they are combined, the tax benefit of those deductions is disclosed in the press release but it's aggregated into one line, right.

Right. That's what I thought so.

Yes, the 65 it's the amortization and the transaction cost, the tax benefit of both of those are aggregated into one-line in the press release, yes I think it was $110 million I think for the quarter, right.

Okay, so the adjusted tax rate when we look at adjusted pretax income and then adjusted aftertax income and look at the tax rate, that tax rate doesn't see the benefit, it just look somewhat low, low impacted and it kind of implies the fourth quarter is going to be pretty meaningful given the guidance so a little bit confused?

Yes, it’s the magnitude to some extent because GAAP net earnings were so low but I mean we are guiding to a GAAP number, right. So if you look at the GAAP number for the quarter is roughly 33%. I know it has a small amount of earnings because of the significance of the adjustment, right of the transaction cost but we’re guiding to a GAAP range which is that's why we didn't -- we didn't actually change the range because we're going to get to that GAAP range. So recalculate your math on the GAAP financial statements and that will give you what you're looking for.

Got it. So maybe if I could just follow-up the adjusted tax rate we should be thinking about for the year maybe that's the right way to think about it?

Well, we don't really give an adjusted tax rate, right. I mean what I could tell you is those items specifically on the tax return are deductible at a statutory rate which by the way the difference between the statutory rate and the rate that you see on our financials has a large piece of it associated with the health insurer fee. The non-deductibility of the health insurer, yes. So that is playing into the calculation which is why the math is challenging to understand the way you're trying to do it.

All right, I will take a harder look at it; I know there is a lot of moving parts in this quarter. And then just lastly on the services business when I look back at the third quarter last year obviously it looks like a pretty kind of strong margin in the quarter on the services business in 3Q 2017, obviously it looks like it's normalizing more than anything maybe in third quarter 2018, is there a way to think about this services margin as we go forward, is this a good kind of run rate just kind of low-80s kind of cost of services?

Yes, I think I'll just give you a couple of pieces here, Justin. I think the services line continues to change specifically with some of the deals that we've done last year but the services margin that you see in the financials, it would have been a little bit lower because of the VA, the VA adjustments that we took this quarter. So if you exclude those, it would have been lower and more consistent with last year and that's because the third quarter has a lower cost of services ratio because that's typically when we get the information on the U.S. and the ACO programs and we have the reconciliation and that reconciliation is favorable to us and it was favorable to us by a similar amount last year third quarter. So it’s kind of being masked by a couple of things, the wind down of the VA program that was not work was at full speed until September 30 that wound down throughout the quarter and then these VA adjustments that we've mentioned also inflate the cost of service ratio a little bit. So I would say the mix in that line continues to change but I would say mid to low 80s is probably a good estimate and that could fluctuate by quarter depending on when we have reconciliations in a lot of these programs.

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

Okay, thanks for taking the question. Couple of questions, the first one was as you think about your margins going forward, do you see any reason you couldn't expand margins, you are mix shifting to exchanges and MA looks like trend is weak, you have a better STAR rating 2020 investments in comp could go up with interest rates, so what would your normalized margin expectations be?

Well as I think we will talk more about margins in 2019 in December but where we have clearly stated we are demonstrating our interest in expanding margins, we think that's appropriate the scale, the size, the activities we have going the technology we are trying to improve medical costs over time all will tend and give us the ability to expand margins, and we can be more specific on our December call.

Okay, great. Thanks, thanks for that, that's what I would have thought. The second was on exchanges for 2019, what are you expecting given on the subsidized book of business overall I mean just for the exchanges what types of assumptions are you all making and is your growth likely to come from secular growth or are you thinking of it more from just your geographic expansion and share shifting within your existing markets or a bit of both?

Well I'm going to ask to kind of stick with us in terms of not getting too granular on 2019 until December that's a pattern that we have well established over lot of years. I will say that from the standpoint our focus continues to be on the supplements and that portion that has the premium supplement and we see that continuing going into 2019. So it's one of the business is usual for us and we’re comfortable with the attrition we had this year relative to previous years, the reenrollment we had everything says it's very much business as usual and I thought -- I think you’ve heard Jeff comment earlier that from a margin standpoint the business we see maintaining that. So it’s a business we understand and we have developed systems to continue to build it and maintain it.

Okay. Great, thanks. One final one, any update at all on the Texas RFP? I believe they announced they were --

I think Chris you just give a little detail, you want to repeat that?

Sure, I would be happy Michael. Both of the RFPs that were cancelled have been reassured and are due in mid November, the awards will be announced, we believe in Q2 and Q3 of 2019 projected start dates for STAR Plus will be 6/1 of 2020 and CHIP and STAR RFP our start date will be 9/1 of 2020.

The next question will be from Gary Taylor of J.P. Morgan. Please go ahead.

Hi, good morning. Just a couple of questions and just sorry to go back to the tax rate again, I think there is a perception that the quarter did benefit materially from a lower tax rate and I followed your discussion but the non-deductible -- excuse me non-deductibility of the HIF actually serves to increase the effective tax rate, right. So 8 over 24 on a GAAP basis is 33 but including non-deductibility of the HIF 8 over the 202 number like a 4% number, so it does look like there was a tax benefit in the quarter different from what you've seen in the first half, in Fidelis which is a few hundred basis points I think, so you follow where I'm going and where am I wrong on looking at that?

Yes, I mean I can understand your -- I can understand where you're coming from, I guess what I would say is this is nothing different than what we've already had in our guidance from when we had these costs associated with Fidelis transaction. So yes, Fidelis lower tax rate not subject to the health insurer fee you're pulling one item and/or two items putting them down below the line and then you're pulling them out at a statutory rate versus your annual effective rate which includes the non-deductibility of the health insurer fee. So I think it's more complicated than that but we certainly don't view that there was any tax benefit in the quarter. This has been our guidance for -- we're guiding to an adjusted number on a full-year basis and we don't see any tax benefit to core the way we’ve seen it since these costs associated with the regulatory undertakings were known.

Sure. Maybe another way to sort of look at the quarter, if we look at pretax earnings were up $252 million in the first quarter, $89 million in the second quarter, adjusted pretax earnings up about $110 million this quarter, but Fidelis if it ran a 4% margin would have been over $100 million of that, so it does look like the pretax earnings growth from the rest of Centene's low this quarter? Is that something that you would acknowledge? Does that make sense?

So you're adding back the -- which pieces are you adding back, the merger costs and the amortization or just the merger costs or --?

Yes, both it looks like the adjusted pretax was $490 million which is up like $110 million versus the prior year. So I think it was --

The piece you may be missing is the exchange business and how the profitability of the exchange business works, right. Remember it, it makes yes -- it makes a lot and the other thing is that remember the enrollment days were accelerated this year, so the exchange business profile is actually a lot different and it's more meaningful piece of the business.

That makes some sense. Last question the specialty operating income was $51 million loss is a $102 million year-over-year, you called out the VA termination costs as the major factor there but it still would have been about $40 million of OI versus the $102 million and you said other Federal contracts and then some carve in of behavioral, is there any more color you could tell us on just the specialty operating income and where there might be some margin pressure?

Yes, actually I think some of this is related to the integration of the physical and behavioral health, so some of those behavioral health revenues and margin is now embedded within our health plans because we moved to an integrated approach.

The next question will be from A. J. Rice of Credit Suisse. Please go ahead.

Hi everybody. First of all maybe a numbers question and one other broader question, in the MLR when you ex out for the unusual items, your ops improved 70 basis points year-to-year and I think in the prepared remarks you said a lot of that was due to the HICs and the health insurance exchanges. I just wondered I mean say I may be wrong but four major things, your core Medicaid, your Fidelis, your HICs and then the health impact, anyway to sort of parse out where you're seeing improvement year-to-year in MVR and where is, if there is any place where there's pressure?

Yes, I mean I think those are the items that we mentioned. I mean as we look at the business, I think the Medicaid business was pretty consistent, that's why we didn't highlight it is a driver of the HBR metrics, that's why we highlighted obviously Fidelis coming in would be an increase to the HBR and the marketplace besides the business is a decrease on a year-over-year basis, so we highlighted kind of the -- what I would call the drivers for the quarter. Year-over-year by the way, I was just making sure.

Yes your HICs HBR was significantly better this year than last year?

No, I think it was in line with our expectations. I think its volume, the magnitude of the business obviously a lot -- it's a lot larger.

Right, okay. So it's mainly just the growth as opposed to the actual absolute ratio?

Yes, it's the growth on the business.

Okay. And then my bigger picture question is obviously with Fidelis now done your balance sheet still sort of within the range that you guys historically have targeted I would say and acquisitions have been a big part of the growth story for the last couple of years even bigger acquisitions. What's the appetite of the company to look in additional deals, do you need sometime or you selling in with Fidelis or you've done a couple of big ones in pretty rapid discussion are you open to other things?

Well, I think Fidelis integration is well I mean or put in this context, we know that the closing got delayed which gives us a lot of time to prepare for a very effective integration, so it is where needs to be and it's appropriate, so it's an opportunity came along, there is no reason for this not to do, we have a strong balance sheet, we have lot of capability and we’re in a position to do it but perhaps it is the right time and the right place and first financially effective and strategically.

Would it be reasonable to think that Medicare given your focus on growing that is a primary place to look or there other areas you would highlight?

I think, I mean, I would look -- we look it at very broadly, I mean you've seen us with a focus on technology and some really effective technology that's going to be provided a lot of significant dividends and already are, our technology committee meeting yesterday demonstrated that we're moving more and more to a leadership position there, so there's a lot of very good opportunities there that stay tuned.

And ladies and gentlemen, that will conclude our question-and-answer session. I would like to hand the conference back over to Mr. Neidorff for his closing remarks. End of Q&A

I want to thank you for all your questions, I hope it clarified some of the outstanding issues because we I believe we had a strong quarter and the metrics were right and what people refer to as noise in puts and takes that normal course of business in a company of our size and what's important to us is that the fundamentals are strong, it's heading in a right way and we're looking forward to the fourth quarter and we're looking forward to the December we can tell you how strong 2019 will be. So we thank you very much for your time, attention and great questions. Have a good day.

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect.