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Centene Corp. (NYSE:CNC)

Q3 2008 Earnings Call

October 28, 2008 08:30 am ET

Executives

Ed Kroll - Senior VP, Finance and Investor Relations

Michael Neidorff - Chairman and CEO

Eric Slusser - Executive VP and CFO

Bill Scheffel - Executive VP, Specialty Business Unit

Mark Eggert - Executive VP, Health Plans

Jesse Hunter - Executive VP, Corporate Development

Analysts

Josh Raskin - Barclays Capital

Brian Wright - Banc of America

Tom Carroll - Stifel Nicolaus

Greg Nersessian - Credit Suisse

Carl McDonald - Oppenheimer

Scott Fidel - Deutsche Bank

John Rex - JPMorgan

Daryn Miller - Goldman Sachs

Tom Carroll - Stifel Nicolaus

Operator

My name is Patrick and I will be your conference operator today. At this time, I would like to welcome everyone to the Centene Corporation, Q3, 2008 conference call.

All lines have placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions). Thank you. I would now like to turn the call over to Ed Kroll.

Ed Kroll

Thank you, Patrick. I am Ed Kroll, Senior Vice President, Finance and Investor Relations at Centene Corporation. Thank you for joining our earnings call this morning.

You should have a copy of the press release we issued this morning. If you’ve not received it, please call Libby Abelt at 212-759-5665 and a copy will be sent to you immediately.

Michael Neidorff, Chairman and Chief Executive Officer and Eric Slusser, Executive Vice President and Chief Financial Officer of Centene Corporation will host this morning's call. The call is expected to last approximately 45 minutes and may also be accessed through our website at www.centene.com.

A replay will be available shortly after the call's completion, also on www.centene.com or by dialing 800-642-1687 in the United States and Canada or 706-645-9291 from abroad. The access code is 6347-1844.

Any remarks that Centene may make about future expectations, plans and prospect, 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 Form 10-Q dated October 28th, 2008, today 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.

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

Michael Neidorff

Thank you, Ed. Thank you for joining this morning’s call. The start time of our earnings call today is back to our usual time of 8.30 am Eastern Time.

Our reporting date will remain in our historic pattern of the fourth Tuesday of the month, following the end of the quarter, except for the year-end call. We have posted these future Centene reporting dates on our website for your convenience and to avoid future conflicts.

Before I comment on what we believe was a very solid quarter, I would like to offer some perspective on the US economy, financial system and state budgets. And how Centene's business model and long-term financial prospects will be affected by both. These are certainly extraordinary times that our nation is going through. Financial markets have been roiled to a degree unheard of for almost 80 years.

The bursting of the housing bubble that has caused disruptions in our financial system, now seems to be pushing out our entire economy into a recession. State budgets have already been feeling the pressure of lower tax revenues in tougher times. What does this mean for a Medicaid-focused health plan company like Centene?

In times like these, we can add the most value to our state partners by managing benefits and services effectively and efficiently. It means that our state customers need us more than ever to help stretch their budget dollars further. We are a lifeline, a safety net to insure the disadvantaged people and there will be more of these in a recession. Also entails access to quality healthcare services in the most efficient cost-effective manner.

This is especially true in hard times. Our team is dedicated to providing better health outcomes at lower costs. This is not just a slogan. It is our mission statement. So we are rolling up our sleeves and we will continue to work to fulfill our mission by helping our state partners meet their healthcare obligations to their citizens with innovative new products like Foster Care among others.

At the same time, we will make the case where appropriate and actuarially sound rates that along with good medical management and G&A efficiencies will enable us to produce consistent and adequate returns to our investors.

As Eric will indicate in his comments shortly, our balance sheet is strong, our cash flow robust and we are well capitalized. Economic slowdowns are never fun, but our business model is build to grow in good and bad economic times and we expect to do so in 2009 and beyond.

Now back to our third quarter results. We are pleased with the continued progress that our results show this quarter in terms of better medical management that drove an improved HBR and our operating cash flow, which continues to be robust with essentially all measures of earnings, quality favorable.

It is gratifying to see the operating traction that our team has gained over the past two quarters and we are working hard to ensure these positive momentums will be maintained in 2009 and beyond. Our revenue growth was once again solid in Q3 at almost 20%; year-over-year and was mainly driven by full-risk enrollment growth that exceeded 10% on a year-over-year basis.

Our Celtic acquisition and rate increases across our book of business added to this. On the subject of rate increases, we now have a fully-executed amended contract with the state of Georgia that is approved by CMS and is retroactive to July 1, 2008. So unlike last year, we will be able to fully recognize the first benefit of the first six months of the rate increases associated with the amended contract in the year it was intended for, in this case, 2008.

Our consolidated HBR improved both on a sequential and year-over-year basis to 82.4%. In addition to the improved medical management I just mentioned, in Ohio we completed previously announced appropriate steps to improve our margins there.

On July 1, we exited the Northwest region and we also streamlined our network in the Northeast by terminating a high unit cost provider. In addition, we have been rationalizing our provider network and we remain committed to serving a health access and management needs of our customers. But we are also committed to doing so in a manner within markets and with products that produce consistent and adequate returns for our investors.

Next, I’ll comment on our recent Celtic acquisition. After realizing an upstream dividend of just over $30 million concurrent with the July 1 close of the acquisition. Centene’s net cash outlay for Celtic was approximately $50 million versus the originally announced $80 million purchase price. Our first quarter with Celtic as part of the Centene family is going smoothly and as expected.

We continue to believe that this strategic acquisition, positions us to be a leader in stake-linked individual insurance program. Celtic gives us the ability to assist states with designing coverage solutions for individuals and families who will qualify for government-sponsored programs outside the traditional Medicaid system.

To put this in perspective, while about 20% of the 47 million uninsured are Medicaid eligible, 80% or 38 million are not. Celtic completes our universal coverage solutions and provides Centene with the products and capabilities to address the full continuum of the uninsured regardless of income disparities. Celtic complements our existing Medicaid health system very nicely and offers new opportunities for our specialty businesses.

Now, I'll briefly discuss Texas Foster Care. The second quarter of operation for our innovative Foster Care program is going quite well with enrollments slightly above our projections. We continue to book this program at a 90% HBR and our objectives are being met as we anticipate continued performance within our expectations.

We're proud to have partnered with the State of Texas in creating this new operating model and its high-tech health passport, which allows providers and caseworkers to follow a child's medical care to a secure community health record. We foresee our Texas Foster Care effort as a template for possible future launches in other states.

Our new Arizona contract commenced October 1 on schedule. The early status reports are consistent with our expectations. Before I turn the call over to Eric, let me revisit some important points about strategic fundamentals, I made at our Investment Day back in June.

Centene's corporate strategy is based on a disciplined and sustainable approach. We remain focused and committed to enhancing profit margins to move back into our long-term target range of 4% to 6% on a pre-tax basis. We want to continue to diversify our markets and products and grow both, organically and through selective acquisitions.

We will continue to provide guidance in a manner that minimizes volatility and enhances visibility. We appreciate your support and interest in our company. With that, I'll turn it over to Eric.

Eric Slusser

Thank you, Michael.. In summary, we're pleased with this quarter's financial performance largely driven by continued company-wide discipline, new business and HBR improvement. While we still have work to do to get our consolidated profit margin firmly within our 4% to 6% target range, we believe that we're starting to gain traction on achieving our margin goals.

The groundwork we've laid in terms of better controls, new management additions and greater efficiencies are giving us confidence that we will achieve our margin goals and produce a more predictable profit stream going forward.

Revenue, net of premium taxes, grew to $873.5 million, which represents 19.8% growth compared to the third quarter of 2007. This increase was driven by several factors. First, 2008 includes revenues from the April 1, 2008 startup of our Texas Foster Care contract; second, premium rate increases received in our health plans; third, membership growth in our Texas and Indiana markets; and finally, the recent acquisition and inclusion of Celtic in our financial statements. Celtic, which closed on July 1, 2008, is included in our Specialty Services segment.

Revenue for the 2008 third quarter also benefited from a September 1 rate increase in Texas. Centene received a gross rate increase in Texas of approximately 4.85%. However, the majority of the rate increase was for State Fee Schedule changes. Centene's effective annual rate increase after State Fee Schedule changes was less than 1% across all products.

Revenue for the 2008 third quarter does not include the effects of a planned Georgia rate increase that we had expected to be effective July 1st. The July 1st Georgia rate increase was approved subsequent to September 30 and, therefore, the associated revenue for the 2008 third and fourth quarters will be recorded in the fourth quarter of 2008. The amount of the annual rate increase after the effect of fee schedule changes was approximately 1.3%.

Our consolidated HBR was 82.4% for the third quarter of 2008 compared to 83.4% in the 2007 third quarter, and 83.3% for the 2008 second quarter. The 100 basis point improvement in HBR year-over-year in the third quarter resulted primarily from increased premium yield across all health plans, better medical management results in Georgia and Ohio, the exit from Ohio's Northwest ABD region as of July 1st and the first time inclusion of Celtic, which operates at a lower HBR than our other existing businesses.

The launch of Texas Foster Care adversely affected our year-over-year HBR comparison, as we book all new contracts at conservative HBR levels in their early stages. The April 1st launch of Texas Foster Care was very successful and it continued to perform in line with our expectations during the quarter. The Texas Foster Care program had approximately 34,100 members at the end of September 30, 2008, slightly above our expectations.

The HBR improved 90 basis points sequentially from 83.3% in the 2008 second quarter to 82.4% in the 2008 third quarter. The sequential decrease is consistent with the year-over-year drivers of improvement and that it reflects moderating medical cost trends, focused medical management efforts in Ohio, the exit from Ohio's Northwest ABD region on July 1 and the acquisition of Celtic.

In addition to the positive impacts from the exit of the Northwest ABD region in Ohio and the provider termination in the Northeast region, we're pleased that our medical management efforts have favorably impacted our HBR in Ohio in the third quarter.

We experienced moderation in our medical costs for the quarter with our overall Ohio HBR improving from the second quarter. This drop in HBR was aided by an increase in our Northeast region risk score, as we are the only ABD plan in that region.

We are in the process of working with the State in evaluating the proposed rate increases for January 1. We anticipate that we will be able to continue to operate effectively in Ohio.

Turning to general and administrative expenses. The G&A ratio for the third quarter of 2008 was 14% compared to 13.7% in the third quarter of 2007. This 30 basis point increase in the G&A ratio is primarily due to the first time inclusion of Celtic, which carries a significantly higher ratio as a consumer-focused health carrier and certain ramp-up costs for our new Arizona contract were included in the quarter. The G&A ratio increased 50 basis points sequentially due to the same factors.

Our third quarter investment and other income was $2.2 million, a decrease of $4.2 million over the 2007 third quarter and a decrease of $3.4 million sequentially. The sequential decrease in the third quarter was due to a loss on investments of $5.2 million.

As previously announced in an October 14, 2008, press release and 8-K filing, the loss on investments represented less than 1% of Centene's investment portfolio as of September 30, 2008, and were primarily related to investments in the Reserve Primary money market fund whose Net Asset Value fell below $1.00 per share due to its holdings of securities of Lehman Brothers Holdings Inc.

Redemptions from the Reserve Primary Fund have not been distributed, but we expect to recover approximately 95% of our Reserve Primary Fund investments and have more than adequate liquidity to fund operations in the meantime.

In addition to the $5.2 million loss on investments, the year-over-year decrease in investment income reflects overall declines in investment interest rates due to Federal Reserve actions offset by favorable earnings of unconsolidated subsidiaries resulting from our investment in Access and overall higher investment portfolio balances.

Our 2008 third quarter effective tax rate was 40.4%. The increased tax rate in the third quarter resulted from higher state taxes due to a change in the estimated benefit to be realized from certain state net operating loss carry forwards.

Earnings per diluted share from continuing operations were $0.41 for the 2008 third quarter compared to $0.37 in 2007, an increase of 10.8%. As we previously disclosed, the $0.41 was reduced by $0.07 due to the $5.2 million loss on investments recorded in the third quarter.

Balance sheet highlights at September 30, 2008 include cash and short-term investments of $435.7 million and long-term investments, including restricted deposits of $319.1 million.

At September 30, 2008, our holdings in the Reserve Primary Fund are classified as short-term investments. These holdings are spread across several of our regulated subsidiaries as part of each subsidiary's diversified portfolio, negating liquidity concerns in any one subsidiary.

At September 30, 2008, our investment portfolio consisted of approximately 53% high quality municipal securities; 19% money market funds; 12% of U.S. government or government-sponsored obligations; 11% investment-grade corporate fixed-income securities; and 5% of equity investments and insurance contracts.

As we previously announced on October 14th, our current exposure to securities of financial services entities, such as banks, broker-dealers and other non-bank financial firms is approximately $15 million. Of this amount, less than $2 million represents securities of financial sector names that are experiencing unusually high levels of stress, idiosyncratic risk and/or funding pressures in the current market. We continue to monitor these securities for divestiture or impairment.

At September 30, 2008, cash and investments held by our unregulated subsidiaries were $26.8 million. Our regulated cash and investments were $728 million. We have estimated our regulated capital and surplus to be at approximately 335% of risk-based capital or RBC requirements.

Our total debt was $250 million and debt-to-total capitalization was 34.4%. Our medical claims liabilities totaled $379.9 million, representing 49.6 days in claims payable, an increase of 1.1 days from 48.5 days at June 30, 2008, mainly due to the Celtic acquisition. For the quarter, cash flows generated from operating activities were $39.8 million, approximately 2.2 times net earnings from continuing operations.

That concludes my comments on our third quarter results. Before we open the call up for your questions, I’d like to update our 2008 full year guidance. Despite the effects of the loss on investments in the third quarter, we will not revise the lower-end of our previous 2008 EPS guidance range.

With one quarter of reporting left in 2008, we are tightening the previous EPS guidance range and we currently expect 2008 fully-diluted earnings per share to range from $1.87 to $1.92. We expect the revenue in the range of $3.39 to $3.41 billion net of premium taxes.

For 2008, we continue to expect the consolidated HBR to range from 82% to 84%. Finally, I want to make a couple of comments about 2009. We plan to provide our 2009 financial guidance in December consistent with last year. We will be scheduling the guidance release call at a later date.

I also want to remind everyone that the $20.8 million of premium revenue and $0.28 of diluted earnings per share that Centene realized in the 2008 first quarter from the 2007 Georgia retroactive rate increase should not be part of the 2008 earnings run rate that one would use as a starting point to develop 2009 financial estimates. And with that, we can open the call up to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Josh Raskin from Barclays Capital. Your line is open.

Josh Raskin - Barclays Capital

Hi, thanks. Good morning.

Michael Neidorff

Good morning.

Josh Raskin - Barclays Capital

I am sorry, Michael. Good morning. Eric, you mentioned the Georgia retro rate increase, so you are going to get two quarters of revenue in the fourth quarter. Obviously, that all pertains to this year. So, I would consider that run rate for the year, but what is the expected impact in terms of revenues and EPS for the fourth quarter?

Eric Slusser

I think on a gross basis, the per quarter revenue is around $3 million a quarter on a gross and remember in my discussion, I gave you the net impact. That equates to around $0.02 per quarter EPS.

Josh Raskin - Barclays Capital

Okay, perfect. I will figure out the math later. In terms of the Celtic acquisition, is there anyway to quantify some of the impact in the quarter in terms of maybe a revenue number? Obviously, an MLR would be great, even a pretax contribution and if it was accretive.

Eric Slusser

Yes, let me start with revenue. Revenue for the quarter was around $21 million. As we previously disclosed, we did not expect this thing to have a significant earnings impact. However, I will tell you it was profitable in the quarter. The MLR runs at a much different level in the 65% to 66% range in the individual business and as I indicated before, the G&A runs significantly higher primarily because they pay commissions, which are included in G&A.

Josh Raskin - Barclays Capital

Okay. Okay.

Michael Neidorff

See, I would say, Josh, it is meeting our expectations.

Josh Raskin - Barclays Capital

Okay, so everything is coming in line at this point?

Michael Neidorff

Yes.

Josh Raskin - Barclays Capital

Then just one last question on the investment portfolio; was there any unrealized loss position at the end of September, other than, obviously, the realized amount that you got?

Eric Slusser

Yes. Well, there is actually unrealized loss and we have a net unrealized gain. We actually disclosed this in our Form 10-Q this time in the footnotes given the sensitivity around this area. So, you will find a full disclosure in there.

Josh Raskin - Barclays Capital

Got you.

Eric Slusser

With the unrealized gains, unrealized losses, they net to about $0.5 million positive, unrealized gains.

Josh Raskin - Barclays Capital

Well, okay. Okay, that is very helpful. Okay, thanks.

Operator

Your next question comes from the line of Brian Wright from Banc of America.

Brian Wright - Banc of America

Thanks. Good morning. Could you update us on the number of Celtic members?

Eric Slusser

Yes, it is right at around 30,000.

Brian Wright - Banc of America

Great and then I have just one quick question on the premium taxes in the quarter. Why is it higher in the medical cost side than on the revenue side?

Eric Slusser

Yes, that actually has to do with Celtic also. Celtic, because they are not funded by a state, they do not have premium tax revenue. However, they do pay a premium tax expense. So, with the inclusion in Celtic in our financials now, you are always going to have a slightly different amount on the expense side.

Brian Wright - Banc of America

Okay, great.

Michael Neidorff

Brian, in the interest of transparency with Celtic in these economic times, you will find that the membership is constant and growing, but they are selling less expensive products. So, that is why you will see where the membership can grow, but the revenue will be impacted.

Brian Wright - Banc of America

So the PMPMs will probably be coming down then?

Michael Neidorff

Well, I think they have to the level that there will be, but in terms of creating the expectation, its membership is solid, but the product mix changes based on the economic times.

Brian Wright - Banc of America

Okay. All right. Thank you.

Operator

Your next question comes from the line of Tom Carroll from Stifel Nicolaus. Your line is open.

Tom Carroll - Stifel Nicolaus

Hi, good morning. A couple of quick questions. Could you tell us what your starting point in terms of enrollment is in your new Arizona business? Secondly, as we start to think about next year, what is the status of the Texas EPO business that you have had for a couple of years? Do you have a sense of what Texas wants to do with that into next year?

Michael Neidorff

Yes, I will talk about the membership. It is about 14,000 lives is the starting point. The EPO is out, an RFP is required. It will be our business through 2009 and they are talking about an effective date for the new contract, probably Q2 of '10. They are talking about, possibly two participants as opposed to one, but that is still yet to be determined.

So we are responding to the RFP. We have a strong history having done well there with providers in the state and we are confident we will continue to be a strong participant, Tom, beyond 2009.

Tom Carroll - Stifel Nicolaus

Thank you.

Operator

Your next question comes from the line of Greg Nersessian from Credit Suisse.

Greg Nersessian - Credit Suisse

Hi, good morning.

Michael Neidorff

Morning.

Greg Nersessian - Credit Suisse

My first question was actually on US Script. The cost of services line this quarter declined sequentially to 71%. I usually look at this as a percentage of the service fees. It was 78% in the prior quarter, but there was a decline in the third quarter last year as well. Just wondering, is there a seasonality to that ratio and on that business, what is an appropriate run rate for maybe pretax contribution from US Script going forward?

Michael Neidorff

Why do not you ask Bill Scheffel on that?

Bill Scheffel

Yes, I do not think we really give numbers on the pretax contributions by subsidiary, but the basic difference in the cost of services between quarters is a slight decrease in the external customer's revenue and there is some seasonality to that, but some of that is just the loss of a few customers.

Greg Nersessian - Credit Suisse

The actual ratio declined significantly, sequentially. So does that mean you are losing some of the higher cost customers or is that a seasonal effect?

Bill Scheffel

There could be seasonality to what the margins are by quarter and it is the brand and generic splits.

Greg Nersessian - Credit Suisse

Okay. Then it looks like you have maybe a little under $70 million of debt out on your revolver. It sounds from your press release that maybe you are more inclined to use the excess capital to buy back stock. Could you talk of maybe a little bit of capital deployment and your thought process between buying stock or paying down some of your debt?

Eric Slusser

Yes. Well first, the comment about the outstanding revolver is approximately $40 million. You have our bonds and our debt portfolio of 175. We have some small real estate loans.

Greg Nersessian - Credit Suisse

Okay.

Eric Slusser

Then the revolver is right at $40 million.

Greg Nersessian - Credit Suisse

Okay.

Eric Slusser

Deployment of capital in this environment, we talked about how we are deploying capital at our Investor Day and how we are continuing to monitor. As we said there, we believe we have sufficient cash flow to fund all of our internal capital requirements and any small acquisitions that we might make. There has really been no change in that plan. We believe we have access to funds through our revolver as needed and again sufficient cash flow for operating purposes moving forward in this environment.

Greg Nersessian - Credit Suisse

Okay. Looking at the claims inventory data that you provide, it looks like the average inventory increased significantly on a sequential basis. The period-end inventory actually declined. So, was there a significant paydown of Celtic claims during the quarter and how might that have impacted cash flow?

Eric Slusser

There has been no significant paydown per se of Celtic claims. It fluctuates quarterly, but really nothing specific. We have had no reduction of claims reserves as we talked about in the days claims payable. Celtic does run a much higher days claims payable, upwards of around 90 which is what drives the impact in the days.

Greg Nersessian - Credit Suisse

Okay. Okay. Thank you.

Operator

Your next question comes from the line of Carl McDonald from Oppenheimer.

Carl McDonald - Oppenheimer

Thank you. First question was just around the capital in terms of what you expect from subsidiary dividends in 2009 and what you think you will actually have to use from a deployment perspective, net of what needs to stay in the sets for the enrollment growth.

Eric Slusser

Yes, as far as 2009, we have not made any decisions around dividends. In 2008, we had basically two dividends, a $17 million dividend from Wisconsin and then the dividend that Michael referred to from Celtic post-closing of approximately $31 million. Again, we do not necessarily anticipate them at this point for '09, but we will look at activity across the business and make those determinations as necessary next year.

Carl McDonald - Oppenheimer

Then second question concerns an update on the systems. I will call it a conversion exactly, but where do we stand there?

Eric Slusser

Yes and I talked about this at the Investor Day. So, let me set the framework of that. At that time, we talked about really three operating systems projects that we had either started or were getting ready to start. The first of those was a new provider contracting system which was underway and was being essentially implemented at the time in the first market, first one of our business markets.

The second system was a new provider data management system, which was really just in the early planning stages at that time. The third is our MSS, what we call upgrade and conversion of multiple versions down to a single version, which at the time was in the very, very early starting phases.

Initially, when we looked at these, had talked about a completion somewhere around mid-2009. As we have gotten into this and we have looked at it, especially around the MSS upgrade project and look at how these three big projects intersect with each other, how they impact the business in order to ensure a successful implementation of all of these and minimize the risk on the business. We have pushed the timeline out for the MSS upgrade where some of the smaller markets will now be pushed out to the first half of 2010.

Carl McDonald - Oppenheimer

Of those 14 systems that you started with, where are you at this point?

Eric Slusser

Well, the MSS is still in the planning phase. We started that, the literally the planning which involves a lot of different components of this project and so that was just started at around the Investor. So, we still in the planning and design. There have been no implementations at this point.

Michael Neidorff

It was important, Carl. We learned a long time ago it is not how fast, but how well, and we are going to do it market-by-market as opposed to try and do a full, one-time system. Some of you will remember when some other companies tried that. They threw the switch and the lights dimmed. So, we are being very cautious and being fairly upfront. So, it may take an extra six months, but we are confident it will be done that much better.

Carl McDonald - Oppenheimer

Great. Thank you.

Michael Neidorff

Yes.

Operator

Your next question comes from the line of Scott Fidel from Deutsche Bank.

Scott Fidel - Deutsche Bank

Thanks and good morning.

Michael Neidorff

Hi.

Scott Fidel - Deutsche Bank

First question, it just looks like Indiana enrollment showed a pretty nice spike sequentially, up around 7%. Any particular factors driving the enrollment increase there and have you essentially completed the corrective action plan that you had around some of the provider re-contracting in that market?

Michael Neidorff

I will ask Mark Eggert to respond to that.

Mark Eggert

Yes, we have made a concerted push for membership growth in Indiana and it is primarily driven by reaching out to additional primary care providers and contracting with them.

Scott Fidel - Deutsche Bank

Was that in any particular regions of the state or pretty much across the state?

Mark Eggert

Across the state, a little more in the South, but across the state.

Scott Fidel - Deutsche Bank

Okay. Then just on the capital position. Eric, do you have the actual absolute numbers in terms of where your total capital stands and then relative to that minimum statutory requirement? Just to clarify; concerning the 335% of minimum RBC; was that at the end of the third quarter or is that your expectation for the end of the year?

Eric Slusser

No, that was at the end of the third quarter measured at September 30.

Scott Fidel - Deutsche Bank

Okay. Then any color on the absolute numbers?

Eric Slusser

The actual numbers were $368 million.

Scott Fidel - Deutsche Bank

Of total capital or excess?

Eric Slusser

Statutory capital.

Scott Fidel - Deutsche Bank

Okay. Okay and then just a question, on '09 you are not giving guidance yet. Do you have any visibility into essentially how many of your member months or your states, at this point have established the rates for 2009?

Eric Slusser

At this point, as I mentioned in my script, the only ones that we are having early discussion with at this point is Ohio given the circumstances there. Beyond that, we have no visibility into any other '09 rates at this time.

Scott Fidel - Deutsche Bank

Then, just one last question around Ohio sticking in the Northeast ABD market. Have you had a chance to look at essentially how your membership profile in that market compared to WellPoint and WellCare were both exiting, do you expect any real shifts in the demographics of the members or do you think all three of those books look pretty similar?

Michael Neidorff

I think, let Mark add to this, but as per the remaining plan, they now have fee for service and ourselves right, Mark?

Mark Eggert

Correct, that is correct.

Michael Neidorff

So, that a lot of that membership probably shifted to the fee-for-service, which is fine.

Scott Fidel - Deutsche Bank

Okay. Thank you.

Operator

Your next question comes from the line of John Rex from JPMorgan.

John Rex - JPMorgan

Good morning. Just thinking about the '08 run rate again. So your comments on Georgia retroactivity, are there any other items that you would spike out in terms of headwinds, tailwinds and thinking about the appropriate run rate for '08. So that has become maybe a drag from Texas or Arizona startup systems integrations. Anything that you would spike out there?

Eric Slusser

No, everything is assumed in the guidance range that we have revised. I would think if you would look at third quarter, obviously, you have got the $0.07 you are going to add back. I think this one-time tax NOL would come out of a run rate type of calculation.

Then obviously, the shifting of the impact of Georgia from Q3 to Q4, you would take that into account. Then finally, then you have got to take in seasonality of the fourth quarter against that run rate number.

John Rex - JPMorgan

Would you pull out any drag from Texas or Arizona startup for '08?

Eric Slusser

Yes, Arizona was so insignificant and Texas has been started, so it is just not a significant impact.

John Rex - JPMorgan

Okay. Great.

Michael Neidorff

As we have talked about, John in the past, the smaller opportunities we are building into our planning process and we have heard what people said. So, within our numbers, it is planned and it is there.

Eric Slusser

I just want to make one other comment. I have seen some of the items this morning and I understand in some of the comments, my revised guidance was $1.87 to $1.92. Given the $0.07 impact people have taken and added $0.07 to that, I understand how they got there.

I just want to remind everyone that when we post year-end results, if you keep those upper guidance ranges that have added $0.07 to my number, you will need to add that $0.07 to my annual results to compare to your range.

John Rex - JPMorgan

All right. Okay and so given what you have said and how you have guided for the 4Q, we should be thinking about your run rate for the '08 as around $1.70 or so. Does that sound about right?

Eric Slusser

That would probably include the $0.07. You have got to take the $0.07 out I think. I guided to $1.87 to $1.92 all in.

John Rex - JPMorgan

Okay and I am pulling out the Georgia retroactivity.

Eric Slusser

Yes, I understand.

John Rex - JPMorgan

Okay. Okay and then if you think about opportunities for '09 that you are looking at, maybe I would actually appreciate just a little color on some of the things you are seeing for '09. Then in light of the current economic environment, are you still comfortable with your 15% to 20% long-term growth outlook?

Michael Neidorff

I will ask Jesse to respond to that. Jesse?

Jesse Hunter

Yes and I think I will take the second one first. We talked at the Investor Day about our long term view of 15% plus growth and we have continued to spend a good amount of time focusing on that. I think we have talked before about where we are with respect to that target based on the things that we know today. So, we continue to be targeting 15% growth and that is true in '09 and we will continue to target that thereafter.

In terms of opportunities, I think Michael alluded to some of this in his opening comments. On the development side, we certainly see this as an opportunity. I think the pain that states our feeling on the economic side today is going to, I think create more demand for our products and services going forward.

So, I think some of those things will have a little bit longer time horizon on them. I think we certainly are continuing to pursue discussions with our existing state customers and potential new state customers based on the broad array of products and services that we can provide. We are excited about the prospects that they can provide. Not necessarily how we get there, but I think we are excited about where we could end up.

John Rex - JPMorgan

Okay, thanks.

Operator

(Operator Instructions). Your next question comes from the line of Daryn Miller from Goldman Sachs.

Daryn Miller - Goldman Sachs

Good morning.

Michael Neidorff

Good morning.

Daryn Miller - Goldman Sachs

Eric, question for you. I know we saw improvement in Ohio. Can you provide a little bit of color just in terms of sequentially how much MCR improvement we saw?

Eric Slusser

Yes, give me a minute here. I will give you a little bit of color on that. On a HBR percentage, we are down. We saw a fairly significant improvement from Q2, around 300 basis points.

Daryn Miller - Goldman Sachs

Great. Then, can you provide any updated expectations in terms of enrollment in South Carolina and Florida for year end?

Mark Eggert

Yes, I think for Florida, we are still in the discussions with the states and not prepared to comment on that given the status of those discussions with respect to year end. South Carolina, we are just under 27,000 at-risk, full-risk lives.

In the third quarter, we expect to continue to see modest, consistent growth on that number going forward. I think we have talked before about long-term targets in South Carolina, 10% to 15% of market and I think we continue to be comfortable with those long-term targets.

Daryn Miller - Goldman Sachs

Would the actual enrollment number be at 10% to 15%?

Mark Eggert

Well, the total market there is approximately 650,000.

Daryn Miller - Goldman Sachs

Okay. Jesse, another question just as we look at some of the opportunities you see maybe with existing state customers or new states. Can you spike out some of the more interesting or likely opportunities you see one to two years out?

Jesse Hunter

Not anything that would wet your appetite. I think the one thing that I would continue to say, consistent with what we have talked about at Investor Day, the demand that we see from our state customers is more focused around the higher cost populations.

So, I think we continue to see opportunities on the managed ABD and long term care side. That is an opportunity in a number of our existing markets and I think we are seeing that in new potential markets as well.

Daryn Miller - Goldman Sachs

Do you think we are more likely to see that in your existing states?

Jesse Hunter

I think that is a pretty broad demand that we are seeing at this point.

Ed Kroll

This will be the last one, operator.

Operator

All right, your last question comes from the line of Tom Carroll from Stifel Nicolaus.

Tom Carroll - Stifel Nicolaus

Hi, just a quick follow up on Greg's question. I think it was on the claims inventory. If I look back to 2007 and look at the trend from second into third quarter, your average inventory of claims rose sizably last year as well as it did this year.

So, could you chat about what seasonally is creating that increase in the average inventory? Is it an average dollar size per claim that maybe hits a certain threshold that causes you to pend it to evaluate them a little further or something like that?

Eric Slusser

Well, I can speak to this year. Certainly, growth of business and membership drives this, but we did see a spike in pends this quarter. With the implementation of the NPI process, we saw a significant number of providers that had challenges filing claims under the new NPI process that went into effect in the late part of the second quarter.

As a result of that, we saw a significant spikes in pends and pend activity. So, that is attributable to the issue here in this quarter along, well like I said with just general increases because of membership increases.

Tom Carroll - Stifel Nicolaus

Okay. So, you would not suggest that the average dollar value per claim has gone up by some unusually large percent?

Eric Slusser

No.

Michael Neidorff

No, we would not.

Tom Carroll - Stifel Nicolaus

Okay, thank you.

Michael Neidorff

Thank you, everyone for participating and your interest and we will see you on the first weekend of February on our year end call. First Tuesday. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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