Amerigroup's CEO Discusses Q1 2012 Results - Earnings Call Transcript

May. 2.12 | About: Anthem, Inc. (ANTM)

Amerigroup Corp. (AGP) Q1 2012 Earnings Call May 2, 2012 8:00 AM ET

Executives

Julie Loftus Trudell - SVP, IR

Jim Carlson - Chairman and CEO

Jim Truess - EVP and CFO

Dick Zoretic - EVP and COO

John Littel - EVP, Government Relations

Analysts

Scott Fidel - Deutsche Bank

Matt Borsch - Goldman Sachs

Carl McDonald - Citigroup

Josh Raskin - Barclays

Scott Green - Bank of America

Peter Costa - Wells Fargo Securities

Melissa McGinnis - Morgan Stanley

Dave Windley - Jefferies & Company

Operator

Welcome to Amerigroup Corporation’s First Quarter Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After management’s presentation, you will be invited to participate in a question-and-answer session. (Operator Instructions). As a reminder, this conference call is being recorded today, Wednesday, May 2, 2012.

I’d now turn the conference call over to Julie Loftus Trudell, Senior Vice President of Investor Relations at Amerigroup. Please go ahead.

Julie Loftus Trudell

Good morning, and thank you for joining Amerigroup’s first quarter 2012 conference call and webcast. With me this morning are Amerigroup’s Chairman and CEO, Jim Carlson; and Chief Financial Officer, Jim Truess. In addition, Dick Zoretic, our Chief Operating Officer; and John Littel, our Executive Vice President of External Relations will be available for questions.

The press release announcing our first quarter earnings was distributed this morning. A replay of this call will be available shortly after the conclusion of the call through Wednesday, May 9, 2012. The numbers to access this replay are in the earnings press release. The conference call will also be available through the Investors’ page of the company’s website approximately two hours following the conclusion of this live broadcast for 30 days. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, May 2, 2012, and have not been updated subsequent to the initial earnings call.

During this call we will make forward-looking statements including statements relating to our growth prospects including the State of Washington, contract award, the dual eligible opportunity, and our 2012 outlook. Listeners are cautioned that these statements are subject to certain risks and uncertainties many of which are difficult to predict and generally beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations and we advice listeners to review the risk factors discussed in our press release this morning as well as other SEC documents that have been furnished or filed with the SEC.

I would now like to turn the call over to our Chairman and Chief Executive Officer, Jim Carlson. Jim?

Jim Carlson

Thank you, Julie, and thank you all for joining us for our first quarter earnings call. This morning, I will provide you with a quick summary of the quarter and then update you on our new market implementation. Following that I will make some comments about the transformative environment in which we are participating particularly as it relates to growth opportunities and the dual eligibles. Then I will turn it over to Jim who will provide additional details on the quarter, our balance sheet and our outlook parameters for 2012.

We are pleased with our start to the year. This morning we reported first quarter net income of $33 million or $0.64 per share. Total revenues for the quarter were $1.8 billion. As expected, we recorded higher medical costs for new business and our SG&A reflected the expenses associated with business development efforts in new market start ups.

Looking back at the fourth quarter of last year we determined that medical costs trends were more favorable than originally estimated. As a result, earnings benefited from favorable development.

Last quarter we discussed our 2012 earnings progression and described the year as the tale of two halfs. The expectation was that our net income margin was going to be lower in the first half of the year than in the second half due primarily to all the new business and start up activities. While it is early our expectations for the year remain the same.

So, let's discuss those new business start up businesses. In 2012, we expect revenues to grow approximately 40% so the effective implementation of new business is critically important. We bring an enterprise wide focus to the execution of new business implementation and our track record of more than 80 successful implantations gives us the expertise, organization and best practices to ensure that current and future implementations are successful.

Let me take a minute to talk about each market. We went live with the Texas on March 1 and our membership there has increased by over 70,000 members compared to Q4. as a reminder, not only did we expand geographically but the state carved in additional benefits including inpatient services for STAR+PLUS and pharmacy benefits. Consistent with what we have seen in the past we expect to ramp up of members in Texas rural region over multiple months. Additional 50,000 increase in membership in April brought us to 754,000 members and is evidence of this ramp.

In Louisiana, you will recall that the state's Medicaid redesign included a three-phase rollout of almost 900,000 the first of which the New Orleans region went live on February 1. the second phase of the rollout began on April 1 with the Baton Rouge region. After implementing the second region, we served 96,000 members in the State of Louisiana as of April 1st. The third region, the Freeport area is expected to go live on June 1st.

The redesign of the carefully thought out plan with the support of the governor and state legislature. We are pleased with the interaction we have had with our state customer, medical providers, and new members. We look forward to the third phase and believe that we have ample opportunities to grow in the state in the coming years as well.

Yesterday, we announced the closing of the Health Plus acquisition, which includes over 320,000 members. With Health Plus, we believe that we will be better positioned to take advantage of future growth opportunities in this dynamic marketplace. We have a well-crafted comprehensive plan to merge Health Plus with our legacy business in New York, and we expect the transaction will be neutral to earnings per share in 2012.

We are continuing our work with the State of Washington on the upcoming start of their expanded Medicaid Managed Care program on July 1st. We have a growing team in place in the State and are finalizing our provider networks and other readiness activities.

In early April, the State of Ohio announced RFP awards for the core population. While we would have liked to expand of 56,000 member plan, unfortunately we were not selected. Ohio used an unique, quantitative procurement model, and the instructions in scoring caused inconsistency in interpretations and questions, resulting in meaningfully different answers and scores. We, and several others, have filed a protest with the State of Ohio.

Other procurements that we are tracking include Florida, Georgia, and New Mexico. As you will recall, Florida has a three-stage procurement process to expand its Medicaid managed care program. But first, the Florida Healthy Kids program was submitted in April and is expected to be awarded in June of this year. Later this summer, the long-term care procurement will be released and the extended core population will follow early next year.

In Georgia, we were proved by the Georgia Department of Community Health, for a statewide expansion beginning February 1st, and currently served members statewide. We continue to expect that Medicaid managed care RFP to be released this summer. We also believe that the state will transition the aged line and the stable population into managed care as part of the RFP.

New Mexico is working with CMS, have done some changes to its program that may result in a comprehensive procurement, which we believe, will offer an additional opportunity to expand.

The pipeline continues to grow. Several states we have begun work on long-term services and supports program, as well as additional products for geographic expansion. In our own interaction with State Medicaid officials, governors, legislators, and CMS, we see much interest in harnessing the value that managed care can bring to publicly financed healthcare programs, and to the individuals who depend upon them. Today, we have long-term services and supports programs in 5 of our 12 states. CMS is currently assisting more than two dozen states on potential LTSS waivers. We see great promise in working closely with these states to help them design programs that will go live in 2013, 2014, and 2015.

One of the most significant and compelling opportunities for growth is the demonstration program to integrate services for the dual eligible. Since so much has been discussed about this subject, I'm going to limit my comments to an update on our states and time. We are happy to answer questions about specifics in any of these markets or beyond.

There is a two-step comment period that is required by CMS. CMS, which is underway in a number of states. The first stage involves releasing the states proposal for 30-day comment period at the state level; this step precedes the next, submission of the state's plan to CMS for comment and then approval. Currently, among our markets, Texas, Virginia, and New York, are in the state level comment period. Ohio and Washington have submitted their plans to CMS for the additional 30-day period.

We spent a fair amount of time on Tennessee's plan on our last call. Part of the reason for that is because Tennessee is the model for other states using managed care to deliver long-term services and supports, an essential cornerstone of a dual eligible program.

Texas proposal is very similar to Tennessee model in that it will leverage existing Medicaid Star Plus vendors to serve dual eligible. Approximately, 214,000 dual eligibles across 10 service areas will be included for January 1st, 2014 start date.

New York has proposed two expansions for it's dual eligible population beginning in July. The first days of the expansion includes transitioning Medicaid benefits for it's long-term care population over to managed care, which we estimate to be about approximately a 120,000 members. Starting in January 2014, the second phase of New York's Medicaid expansion includes transitioning fully integrated Medicare and Medicaid benefits for the dual eligibles in the five New York City boroughs plus Westchester, Nassau and Suffolk counties over to managed care.

Washington's plan is to serve all 115,000 full benefit dual eligibles and we will have three different approaches. One will be a three way capitation financial model between State CMS and the Medicaid plans. In this strategy the state intends to build on the recent contracts signed by the winners of the Medicaid RFP and is now targeting a January 2014 the last day.

Virginia is proposing a regional approach and is currently developing additional details related to timing and enrollment. Recently, Ohio released its draft proposal for the duals. The states plan is to select to our competitor bidding process health plans that will manage a comprehensive benefit package. The proposal will enroll $115,000 of the state $182,000 dual eligibles with a go-live date of January, 2013.

With the exception of Ohio, all other states have proposed a January 2014 start date; this includes Tennessee, which had originally been targeting a 2013 start. We think the 2014 timeframe is wise given the significant data related to cost, utilization and geographic breakdown that must be analyzed before state and health plans make any commitments. This is especially true as it relates to premium build up and shared savings projections.

While the State Medicaid directors are actively leading the demonstration efforts, the majority of data has to come from the federal government. CMS expects that memoranda of understanding will be signed with the states in the third quarter of 2012 for the 2014 start date, so the states, plans and other interested parties will have a clear sense of what happened and to begin readiness activities. Our perspective from our discussions in Washington, D.C. and at the state level is that all of the parties are working together and with a great deal of momentum, but given the frailty of the population and the significant changes envisioned, we believe that it is more important to get this right than it is to get it done quickly.

We know this population and the medical and non-medical services that used and believe that we are prepared to handle this additional membership in 2013 and 2014.

In the past, we have talked about our view of what a transformative time this is for the healthcare industry. Every week brings additional evidence of that. While some of this has certainly caused a health reform, the speed to market and size of the new opportunities available to Medicaid managed care is very dramatic in nature. Some of that is due to the financial benefits we can offer state budgets, but the recognition of our total value proposition, increased access, better outcomes, more accountability and savings is creating more opportunities for experienced high performing managed care companies.

Fortunately, from an operational and reputation perspectives we believe our company has never been stronger, nor better positioned. For almost two decades we have proven that we can manage the tenant population and consistently achieve superior performance. We have been leading the effort to bring the value of managed care to pre-op seniors and people with disabilities as well as to those people who suffer the most from health austerities or a lack of access to care.

As we continue to work with states to design programs for those who utilize long term care services and supports, our relationships with advocates and community leaders help to ensure that are model to care appropriately address very specific individual needs. And as I have said before, we believe that we are very well positioned as the opportunity integrate services for the dual eligibles continues to emerge.

So with that I will turn the call over to Jim.

Jim Truess

Thanks, Jim. Good morning, everyone. For the first quarter net income was $33.1 million resulting in diluted earnings per share of $0.64. This compares to $32.8 million or $0.67 in the fourth quarter of 2011.

Premium revenue for the first quarter of 2011 increased 14.7% to $1.8 billion versus $1.5 billion in the fourth quarter of 2011. Sequentially, premium revenue increased $119 million or 7.3%. The sequential increase in premium revenue primarily reflects increased membership and expanded coverage services in several markets. This included one month of expanded geographic presence in Texas and the inclusion of pharmacy services for all products in Texas as well as hospital services for the STAR+PLUS program.

In addition, premium revenue was positively impacted by the February 1 entry into the first of three regions in the state of Louisiana and growth in our Medicaid advantage product. First quarter investment income and other revenues were $7.4 million compared to $4.7 million in the fourth quarter of 2011. The sequential increase is primarily due to realized gains on a sale of investments held by our Georgia health plan.

As I shared with you in our last earnings call, the state had indicated that premium payments would be delayed during the first quarter of 2012. Therefore, we liquidated part of our investment portfolio to increase the plan's cash position and realize gains in certain instances. Investment income also increased due to higher investment balances and higher yields.

Health benefits expense, as a percent of premium revenue, was 85.3% for the first quarter of 2011 versus 81.8% in the first quarter of 2011, and compared to 84.7% in the fourth quarter of 2011. This sequential increase in the health benefits ratio was primarily due to seasonality as well as the expected impact of higher medical costs for our new business.

During the first quarter, medical cost trends remained at moderate levels. With the benefit of more completed claims data we can see the medical cost in the second half of 2011, primarily the fourth quarter, were lower than previously estimated. Favorable reserve development, net of associated accruals for gain sharing arrangements with state customers, positively impacted the health benefits ratio in the first quarter by 200 basis points compared to 160 basis points in the fourth quarter at 2011.

Selling, general and administrative expenses were at 8.4% of total revenues for the first quarter of 2012 versus 7.6% in the first quarter of 2011, and compared 8.8% for the fourth quarter of 2011.

The SG&A ratio was elevated in the quarter by approximately 70 basis points to expenses associated with business development efforts, including new market startup, and transaction cost associated with the Health Plus acquisition.

First quarter interest expense was $12 million compared to $8 million in the fourth quarter of 2011. The sequential increase is due to additional interest on the $475 million in senior notes recently issued.

The first quarter tax rate was 37.3% as compared to 36.9% for the full year 2011. The increase in rate is due to an increase in expenses that are not deductible for tax purposes and a favorable audit settlement last year that lowered the rate.

Cash and investments at March 31st, 2012, totaled $2.3 billion, of which $824 million was unregulated compared to $725 million of unregulated cash and investments at December 31st, 2011. The sequential increase in unregulated cash and investments was primarily due to the receipt of proceeds from the issuance of $75 million of senior notes in January of 2012, as well as dividends received from regulated subsidiary.

We anticipate that unregulated cash will decline in subsequent quarters. We used $85 million to purchase Health Plus this month, we are going to use approximately $260 million to retire our convertible notes, which mature later in the month, and through the remainder of the year, we will be providing incremental net capital contributions to our Health Plans of approximately $165 million to increase statutory capital position commensurate with growth in the business.

The debt to total capital ratio increased to 35.5% as of March 31st, 2012, from 33.8% as of December 31st, 2011, as a result of the senior notes issued in January of 2012. Excluding our convertible notes, the pro forma debt to total capital ratio would have been 26.3%.

Medical claims stable as of March 31st, 2012, totaled $618 million compared to $573 million as of December 31st, 2011. Days in claims payable represented 37 days of health benefits expense compared to 38 days in the fourth quarter of 2011. The DCP was down sequentially due to the substantial amount of favorable reserve developments recognized in the quarter. We continue to expect that our DCP could remain within the range of 30 days to 40 days in future quarters.

Cash flow from operations was $31 million for the three months ended March 31st, 2012. First quarter cash flow from operations was positively impacted by an increase in unearned premium due to the timing of premium payments in several markets, as well as an increase in claims payable driven by growth in the business.

As we previewed on the last earnings call, cash flow was negatively impacted during the quarter by an increase in premium receivables due to the slowdown in premium payments from the State of Georgia. The impact during the quarter was somewhat smaller than we anticipated, but we expect the slowdown to continue through the second quarter. We are looking to the State to resolve this issue during the second half of the year.

Let's now turn to our outlook for 2012. We expect 2012 total revenues to increase approximately 40% on a year-over-year basis, which is unchanged from our previous estimate. The key drivers of revenue growth in 2012 include new business in Louisiana and Texas, expansion in existing markets, the Health Plus acquisition in New York, and entry into Washington, which is expected to begin operating in the third quarter.

We expect the full year health benefits ratio to fall within the range of 85.6% to 86.8% of premium revenue for the full year versus the previous estimate of 85.8% to 87.3%, which reflects a more favorable health benefits ratio in the first quarter, predominantly due to favorable reserve development.

We expect the full year SG&A ratio to be approximately 7.3% plus or minus 20 basis points versus the previous estimate of 7.2% due to slightly higher costs associated with new business, including the Washington new market expansion.

For the full year 2012, we expect the net income margins to be in the range of 1.5% to 2.5%. The full year 2012 net income margin range is depressed by approximately 45 basis points, a slight increase from our previous number, due to a few different one-time factors. First, we established actuarial margins for adverse deviation on top of our planned estimate for claims payable on new business. Second, we expect to incur elevated SG&A expenses associated with the implementation of new business to the development cost for future business and transaction and integration cost for the Health Plus acquisition.

The final higher talked item in 2012 is the increased interest expense prior to the maturity of a convertible notes in May.

We continue to expect that our net income margin will be higher in the second half of 2012 than in the first half, even though large volume of new business being implemented in the first half of the year. In light of a more favorable health benefits ratio reported in the first quarter, we now believe the probability of our full year 2012 net income margin finishing at the low-end of the range appears less likely. We expect fully diluted shares outstanding to be approximately 50.5 million unchanged from the previous estimate.

During the first quarter the diluted share count included 2.3 million shares from the convertible notes. This impact is fully hedged. With the convertible maturing this month, this dilution will fall away and a full quarter's impact of this reduction will be reflected in Q3.

One additional update I would like to provide relates to our expectation for investment income and other revenue for the remainder of 2012. Well, the first quarter benefited from the recognition of realized gains on the sale of investments, we do not expect this impact to repeat in subsequent quarters. But we do expect to see an increase in other revenue for the remainder of the year. As part of our Health Plus acquisition, we are going to provide run out claims processing and related services for the previous owner. This is somewhat analogous to an ASO relationship and we will receive an administrated fee. We expect these fees to keep our investment income and other revenue up around an average of $7 million per quarter for the remainder of the year.

Before we wrap up, let me provide some further color specifically on the progression of our key ratios and earnings into second quarter and through the second half of the year. There are a lot of unique factors this year associated with the large revenue growth, which makes a sequential progression more complex than usual. We expect that the second quarter will yield the most significant sequential increase in revenues during the year more than $400 million. We estimate a significant favorable sequential impact on medical costs due to the normal seasonal progression as we move from the first to the second quarter. This impact will eclipse on the dollar basis the benefit of favorable reserve development recorded in the first quarter.

As has been our practice, we do not assume we will record favorable reserve development in future quarters. However, we expect the health benefits ratio will rise sequentially. This is because the substantial amount of incremental revenue for new business in the second quarter will come on at higher loss ratios generally above 90%.

SG&A ratio is expected to decline in the second quarter due to growth in revenue outpacing increases at administrative costs.

Interest expense will come down slightly due to the maturity of a convertible note during this quarter.

As is always the case there are often a variety of deviation that can impact the bottom line and there is no reason to expect that the second quarter is any different. Therefore, our EPS expectations for the second quarter encompass a range. Our point estimate places EPS up sequentially, a modest amount, but a modest sequential decline would be within our range of expectations.

As we move into the third quarter, we anticipate further revenue growth, and additional favorable seasonal medical cost changes. The third quarter typically represents our lowest per member medical cost due to seasonality.

Health Plus is expected to be accretive in the third quarter, after being dilutive in the first half, due to transaction cost, and the buildup of actuarial margin for adverse deviation on the new claims liability. The new business in Texas and Louisiana is estimated to provide further accretion in the third quarter as those markets have also largely moved beyond the startup cost and actuarial margin still does pay.

As is the case in most years, we anticipate that earnings in the fourth quarter will decline somewhat from the third quarter due to the anticipated rise in the medical cost associated with the onset of the fall and winter season.

I hope these comments are helpful. There are quietly moving pieces this year impacting our quarterly earnings progression. As we first discussed last quarter, we expect a significant ramp on earnings during the year, with a more significant bias to the second half of the year than would normally be the case.

So, with that, let me conclude here, so we can preserve some time for questions. Thanks for your time and attention this morning. Operator, we would like to begin the question-and-answer session. We will ask that you limit yourself to one question and a follow-up so that we can accommodate as many questions as possible.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Scott Fidel with Deutsche Bank. Your line is open.

Scott Fidel - Deutsche Bank

Thanks. Good morning. Our first question just if you can give us an update on medical costs in Texas and particularly in March, Centene had highlighted seeing some respiratory related cost pressures in March and just wondering what you guys have been seeing down in Texas?

Jim Carlson

Yeah, thanks Scott. Good morning. I will just preface comments. Jim will make by pointing out that we're in different regions of Texas as well and maybe some differences there. Jim, what we are seeing in Texas, obviously we only have one month this expansion in March, but what would you like to say by the way of comment about that?

Jim Truess

Sure. Hi Scott, good morning. Maybe I'll take your question in two pieces. I think with regard to our core existing legacy business in Texas I think our costs were inline during the quarter and certainly we're comfortable with how they came out. And I think on the new business, as Jim mentioned, its only one month. We don’t have a tremendous amount of visibility but I don’t think we saw anything in that first month that was surprising. So overall I think we stayed inline.

Scott Fidel - Deutsche Bank

And then just on Washington, looks like that’s included in the top line guidance. Can you maybe flush out some expectations about how much enrolment maybe annualized revenue that you think you could generate in Washington at this point?

Jim Truess

Yeah, you're right. We have included Washington in our parameters now. That’s firming up. It's interesting Washington is going to be a little bit of different scenario since there's existing plans in the state and obviously there's new plans coming into the market. So, it’s a little hard to say exactly how that’s going to play out with a high level of precision.

I think at this point in time, we are not going to give specific membership parameters or revenue parameters in that state. It's relatively small part of our aggregate business and actually we want to avoid giving so many different parameters out there that we have to track and update it. So, its factored into our analysis, part of the 40% plus or minus that we are estimating. We are anxious and interested, looking forward to getting started in that state. I think its going to be a great program for us but I think we're going to at this point defer from giving any specific parameters on that state.

Jim Carlson

Yeah, just to follow up for a minute. I'll just say Washington is typical of a lot of such markets that we entered there's a good chance to get ramped up with one element of the population, but over time as did in our commentary about the duals indicate we think it’s a business that could grow in a number of ways over time. So, we're pretty excited by the impending start date in a couple of months.

Scott Fidel - Deutsche Bank

Okay, if I could just sneak one more quick one in. Interested in your thoughts just on the competitive environment right now in Medicaid, just relative to pricing, how are you thinking about at this point in terms of -- do you feel like all the competitors are behaving rationally or do you see some of the competitors out there that are just seem to take on business at what you view as unattractive rates? Thanks.

Jim Carlson

Well, there's a lot in your question there that we could comment on. I think in many ways that competitors are much the same as we saw five years ago. I think that its important to think about such a compelling road to rise and so many different ways to grow your business. I think sort of the discipline of market selection and so forth is really critical at a time like this. We really don’t get hung up whether we are going grow at 39% or 41%, and we put a 40% number out there. But what we're pretty driven about is whether this growth comes on profitably and sometimes you take a path in a market that otherwise looks attractive because you can't really get comfortable with it all proceeds on. I know that I see people behave all that differently. Its clear though that people have figured out that you have to be strong in Medicaid to deliver growth in a peer-managed care company. And so, we like the way we're participating in that growth opportunity and we just keep doing what we've been doing.

Operator

Your next question comes from the line of Matt Borsch with Goldman Sachs. Your line is open.

Matt Borsch - Goldman Sachs

Can you just talk a little bit more in terms of what you're seeing on the medical cost trend utilization side broadly across your market as you compare that to the environment you see in 2011? What is the developing picture maybe maternity days, if you can comment on that as well?

Jim Carlson

Yeah, Jim will give you a more thorough answer but I think Matt, one of the things that we are encouraged by is that what we had thought 90 days ago was that the second half of the year was starting to get a little bit regress back to look a more attractive and stable environment. That played out with the payout of the claims in Q4. So Jim, how should we look back at 2011 within applies for trend and so forth.

Jim Truess

Well, I think you kind of hit on the key point which was towards the middle part of last year we saw trends come up and then but they really started to moderate as we get deeper into the third quarter. And I think particularly in the fourth quarter these even tended to be at a pretty find point. Even into December actually we saw a fair amount of moderation. So that was nice to see and I think the first quarter its been good. Obviously we don’t have a level of visibility but we will in 90 days. So far so good, looks to be a mild winter, a mild two season, the trend seem to be moderate. I think we are seeing at a macro level is probably pretty consistent with what I see out there in the boarder community which is the inpatient utilization cost continues to be real moderate flat. And so, where you're seeing effective trend its kind of coming from the outpatient side. So, overall, I think we feel like it continues to be a moderate environment and a good favorable environment.

With regard to the specific question you had on OB, its interesting. From our perspective, we continue to be in this multi-year sort of phase of reduction in the volume of births that come through. And as I think every knows in most cases we did extra revenue when we have a new born, and so we continue to actually generally see less of that volume year-over-year. And as fast as we continue to reduce our estimates in subsequent years we continue to actually in the first quarter have lower revenue from birth than we had expected. And so I think that is a macro trend and I think that is going on for a variety of reasons but that's what we are seeing on our book.

Matt Borsch - Goldman Sachs

Okay. That was great. So, just a little more on the rate side and if you can share with, what are the areas where you are going to be focused on in terms of the rate updates for this year that are most impact full for you guys?

Jim Truess

Well, as you can imagine, we usually first think a lot about our grade action in every state that we are of course particularly focused on those states that are some are some of the largest. But that is something we do think about and if certainly if something that were factoring into our thinking a bit this quarter right now is given the fact the medical cost trends were a bit more moderate last year but has some sort of flow through impact into the rate actions we expect to see later in the year. And I mean that is the way it is the actuarial process works and that is the way it should work. So when (inaudible) is good you rate increases are lower and medical cost trends are higher you expect the higher rate increase. And at the moment, we are in a sort of multi-year phase of pretty low cost trends by historical standards and I think that a matched stuff certainly in our experience last year of lower rates. And I think we continue to keep our expectations aligned between what that historical cost experience is and our rate expectations for the near term.

Operator

Your next question comes from the line of Carl McDonald with Citigroup. Your line is open.

Carl McDonald - Citigroup

Great. Thanks. So follow up a bit on that last question. Just sort of high-level understand and some of the other factors in the full year guidance. So it sounds like you are assuming as much of a rate increase as maybe would have thought of three months ago. Just any high-level comments on startup cost that you are assuming in the second half of the year? And then also, if you clarify the reserves that you have established in the first quarter, have those been established assuming cost trends pickup or have those been established assuming a continuation of the moderate trends that you thought is on the fourth quarter?

Jim Truess

Okay. Carl, good morning. Great question. Let me hope that you get all and again three questions let me see if I can cover them all. As far as I apologize give me your first question again.

Carl McDonald - Citigroup

Sorry, just in terms of the guidance your assumptions around startup cost and then what you established reserves at?

Julie Loftus Trudell

Yeah, a startup cost.

Jim Truess

In our for 2012 are much grater in the first half of the year, outside of Washington, which goes live on July 1st, the rest of the bulk of the growth is happening in the first half of the year, so we kind of move past that startup phase. The biggest issue that really affect the G&A ratio is in those months prior to actual operations before you see your first premium revenue dollar in a new market. You bring staff on, they are going to training, you are incurring cost, you have facilities and that sort of thing. So, that startup stays as most acute in those first months prior to going live so the bulk their presence in the first half of the year.

As far as our parameters and how we're reserved for the, at the end of the quarter, I do think as we talked about last quarter we generally are assuming normalized trends in the future with the exception that this year because of some unit cost changes that is putting a little bit of downward pressure on what underlying normal trends might be. So for example, we say long-term over many, many years we tend to think that these businesses is a sort of 3% to 5% macro cost trend business. Obviously, we have been lower in recent years. And for this year we expect to be a little bit below 3% but more due to that cost dynamic is going on wherein some cases unit costs are actually coming down in a few of our states. And there's a little bit a downward pressure on the effective trends in a year.

Carl McDonald - Citigroup

Okay. Then, if I look at the underlying loss ratio in the first quarter its looks a bit about the 87%. Can you comment on how that compares to what your expectations were coming into the quarter?

Jim Truess

Just a little bit better than our expectation. We are pleased to see the results in the quarter on an underlying basis and that is little better than our expectations.

Operator

Your next question comes from the line of Josh Raskin with Barclays. Your line is open.

Josh Raskin - Barclays

Morning. Just question Jim on the prior pay reserve development. And I am just curious, do you guys breakdown sort of that gross versus net discussion, is this just simply the reversal of sort of what you put up for moderately adverse conditions? Or is there sort of an extraordinary amount above and beyond that that was not replaced in your current reserves where it hit the income statement?

Jim Truess

Yeah, the 200 basis points, Josh, that we coated in our press release is really the net number and maybe to be real precise here, there is two components to that or two levels of netting, let's call it. So we had gross development that was larger than that impact but just as you described some of that is re-built in actuarial margin that comes back on and so the net number that is the P&L is always less than that gross number.

The second piece of netting is if you will allow, it comes about from we have gain sharing relationships with many of our states where you know our experience is favorable or more favorable than certain thresholds we relay premium. So to the extent you are having favorable development in a prior period that can drive increased rebate rules and so, the net 200 basis point number is also made of that affect. So that 200 basis points is kind of a true P&L effect only.

Josh Raskin - Barclays

Okay. So that's a fair number to say that was not anticipated that’s not part of what you would consider sort of a run rate number and that probably indicative of the comments you made saying this fourth quarter came at a little better than expected.

Jim Truess

That's right.

Josh Raskin - Barclays

Okay. Next question just on New York state I think Jim Carlson, Jim mentioned the long term care opportunity there, you know as you guys think about that ruling out, I know you have got relatively moderate share which seems to be a really highly fragmented set of current providers, is there a way to think about you know how the state can approach the allocation of that membership? Do you guys have a sort of preliminary thoughts on you know where your market share can go in that managed long term care program?

Jim Carlson

I'm going to give John and perhaps to Jim to comment on that, but I will start our share profile changed a little bit yesterday in New York as 320,000 members and I don’t know what the new table will look like, but it will be numbered, probably number two or three in market share in New York. And that was very much on our minds last summer when we you know, we are in the discussion with Lutheran Health Care System to purchase our health plus. So you know we are excited by putting the teams together and having our 400,000 members we are going to have over a billion dollars of revenue up there.

And the second part of the way that I would look at it is and not all of that I think 12 or 13 competitors are providing any participation in the long term care program today. So the share of the existing long term care efforts in the New York were modest as really borne by only a small number of plans. And I think that’s a great starting place for what's to come. And so now John I thought you got a few minutes to think about that would you like to say about --

John Littel

I will just quickly add that you know New York has traditionally rolled things that in a very methodical and slow process despite their size and it will kind of go really big in any time. So the rollout of managed long term care is really meant to proceed the duals and so it goes out over a couple of years, so it is kind of a small month to month but. And part of the reason for that is to make sure that all of the network requirements and all of the home and community based services are kind of build and available to the plans and for the members as go forward. I think that’s what you are seeing. And I think Jim is particularly right that they are limiting the number of plans that are focused on this and are really looking for plans that have experienced and understand home and community based services and things like that and so that that will really help leave them into their duals initiative in 2014.

Josh Raskin - Barclays

And I guess just more specifically my understanding with the state was going to rely on some of the current MLCC providers in the state of which you are one. I was looking at your share just typically in that market as sort of a low single digit I think we are at 3%. I don’t think how focused any long term member is currently. So is it your understanding that overall state membership share is going to actually drive some of that program?

Dick Zoretic

This is Dick. What I would to what Jim and John said is that as a participant in the Managed Marketing Care Program you will be eligible to proceed auto assignments. And those auto assignments won't necessarily be truly reflective of current share. So, we expect that share will actually change once those auto assignments begin to (inaudible). So, yeah, I mean in relationship to the current MLCC players we are a smaller player but that could change materially as the auto assignments rollout.

Josh Raskin - Barclays

Okay. So, you may have 3% share but you may get one in five or one in six members if they may just look at managed eligible?

Jim Carlson

I mean, I think at this point we can't really estimate what we will get is just likely that share will change.

Josh Raskin - Barclays

Okay. That's great. Perfect, thanks.

Operator

Your next question comes from the line of Scott Green with Bank of America. Your line is open.

Scott Green - Bank of America

Thanks for the question. And so I had a quick follow-up on New York. My understanding is that state identification to further long-term care program and for new counties and I didn't see that Amerigroup had applied anywhere outside of it's current home based in New York City is, is your strategy just the second New York City or just enter in other areas of the State?

Jim Carlson

At this point we're going to say pretty both.

Scott Green - Bank of America

Okay. And more broadly on the dual, any thoughts on how CMS made aside which the demonstration proposals to approve because I thought CMS originally targeted around $2 million lives in the dual pilot and obviously a lot more are covered in all the different state proposals or do you think CMS is just willing to go above and beyond the $2 million original guidance number?

Jim Carlson

I think that they're going slowly, and I think they're going carefully on it. So I don't think they are, and I think they've said recently that they're not going to be down by proven, you may recall a point, they are hoping to bring sort of $2 million in 2013 and that would, beginning of 2013 and the end of 2013.

So, as you kind of evaluate each state has a large population and a portion of that will probably be in the demonstration project. So I don't think they're focused on the numbers. I just think that you're going to see sort of fewer states in the beginning of the program in 2013, and part of that is due to they are really kind of crunching through the data that is just slowly coming from Medicare and I think that's, that's really critical. We want to make sure that the premiums are accurate just but the shared savings are appropriately calculated. So I think that's the right approach for CMS to stay.

Scott Green - Bank of America

Okay, and lastly for Truess, could you just tell us what the midpoint of your MLR guidance assumes for average midyear updates that are upcoming, is it like flattish at this point or modestly positive or what the midpoint assumes as we kind of check the boxes as we see what the rates are?

Jim Truess

Scott, when you say, update, you mean premium rates, premium rate increases?

Scott Green - Bank of America

Yeah, right, yeah.

Jim Truess

You know, at this point of time given that we're in dialogue with the States and all that, I could normally put a number out there, and we see, still the kind of work to be done here in conversing with the State and then it's a little tough, to put out an aggregate number when we're having confidential conversations. So, I appreciate the interest and need for that number but I think the interest the company gets the best outcome you can get, I don't want to put that number out.

Scott Green - Bank of America

Okay, I understand. Thank you.

Operator

Your next question comes from the line of Peter Costa with Wells Fargo Securities. Your line is open.

Peter Costa - Wells Fargo Securities

A little question about the Texas and membership. Was it a little bit below where you expected it to be and if it was did that impact your guidance for the Medical Loss Ratios as well? And then, can you talk a little bit about the excess efforts that you took in Texas from the government to on towards the providers? You talked about trying to do some of that before?

Jim Carlson

Well in terms of the fixed growth in Texas, I mean, I'll just start by saying we're pretty pleased with this expansion. And so, the dramatic leg-up on the business we've been building for 14 years, the carving up of prescription drugs and pages doing supporting to us. And we are surprised let's say we're all the area and particularly it's taken a little longer to unfold and report those numbers. That's why we try to give you a little bit of a peakest Q2 there within our prepared comments. Generally speaking, we're thinking about how Texas has ramped up and the relationship with the state. We are pleased with the reasons we are in and the people that we're serving. In terms of other parts of…

Jim Truess

Yeah, Pete, I would say on time is it having any impact on our HBR and I think particularly with what Jim said it's effect of the revenue ramping up of course in April, it is just not having a biggest impact on our HBR.

Peter Costa - Wells Fargo Securities

And what about your efforts to carry some of the cuts that you have to take downwards towards the providers?

Jim Truess

Yeah, I would say our team in Texas has performed at a very high level since last fall with respect to the rate cutter out there. We recontracted with a number of hospital systems at very high value. We began our contracts with a large percentage of our physicians across our network, and there was a small amount of passthrough that we benefited from that went directly into our provider reimbursement as well. So, when you add all that up, it's pretty significant, and we will get about that right now.

Peter Costa - Wells Fargo Securities

Anyway for you to quantify that magnitude?

Jim Carlson

I don't think we are going to quantifying that.

Peter Costa - Wells Fargo Securities

Okay. Thanks very much.

Operator

Your next question comes from the line of Melissa McGinnis with Morgan Stanley. Your line is open.

Melissa McGinnis - Morgan Stanley

Thank you. Thanks for all the detail this morning. I believe in Q4, you highlighted line of sight on an ability to triple, AGP's top-line going forward recognizing you have any sort of time period over which that might occur? But just given everything about the pipeline opportunities how would that outlook potentially change in the event that the Supreme Court actually does decide to strike down health reform sometime early this summer?

Jim Carlson

Well I think I'm going to be living with that quote for a longtime. But I do say that when we sort of look at sensitivity analysis of our long-term economic projections we will stand by the comment. I think obviously we're, in the worst case scenario that Medicaid expansion not to go forward that would change in terms of the out years, might take a little longer to get there. But what I found is that against sort of emerging feasibility on the dual eligible opportunity and we made, by purpose, believe we made some comments about the long-term services and the supports opportunity the fact that a couple dozen states are engaged with CMS right now, labor discussions on what I think is a, what we think I should say is a very critical component of success for serving the two eligibles and represents a segment of the market where we're inarguably a leader in 5 of our 12 markets already doing business there.

In many ways this is exciting to us as the very opportunity to serve the duals as well. I think we probably gotten a little bit more infused about that within the last couple of quarters as we see more of this activity between the States and the CMF. So we continue to look at the company is having a tremendous growth horizon. We think about being selective in new business opportunities and making sure the growth that we bring on comes on profitably that we manage our balance sheet so that we can receive this growth appropriately and we couldn't be more enthusiastic about the future that we see for ourselves.

Melissa McGinnis - Morgan Stanley

Okay great. And then maybe you can focus a little bit on the next RFP opportunity I think in focus might be the Kansas decision, which AGP has to get along with four other people and Kansas is a price competitive bid. I guess given some of the noise we have had throughout the quarter around another market there was a highly price competitive market. If we see a headline across AGP actually has won the Kansas business, how should investors get comfortable as that process hasn't also played out very, very competitively and a way that may challenge margins?

Jim Carlson

Well, I think it's a great question and ordinarily we don't comment about things that we or may not have bid on but I'm not going to duck your question. In that there is some of our bids like Texas, which don't have an economic component. They just, they are purely based on capabilities, track record, competency, and so forth. And then many, in fact quite more than half pioneers in economic component. But I think there is a wide spectrum of what an economic component means. And so in some situations you might have something that might be seen as sort of a reverse option to the point where there is no sort of floor to what the states expectations are. We are going to be very hesitant to get involved in situations like this and frankly if we end up with a, sort of final discussion in any market with the economics just don't project well for us we won't go forward with it.

So I think the way that the shorter answer to your question is, where we to have been in Kansas and we need to be offered contract acting, we need to be accept it, we would be doing so, because we think it makes good sense. We don't expect these things to be immediately profitable. We know it take a little work often one to two years, couple of times maybe as the rate table and so forth. But when I kind of deliver, we get into a business that we think can't make money in the short run, particularly if there aren't vehicles like the ability to recast the rates if we're wrong and things like that. So I would just expect any announcement that we make hopefully in our track record would indicate the people think we've taken a very disciplined look at it. We are not growing for growth sake. We are growing strategically to be in markets that we think we would be successful in both short and long-term, but what's recognizing is it takes a little while we grant some of these up.

Melissa McGinnis - Morgan Stanley

Okay, great. Thank you very much.

Operator

Your next question comes from the line of Dave Windley with Jefferies & Company. Your line is open.

Dave Windley - Jefferies & Company

Why don't you come back to SG&A? You called out 70 basis points of business development expense in the first quarter. And from your comments about the progression through the year I would read from that that you expect that to decline over the course of the year. I appreciate if you could confirm that for me and then broadening now to your preparations and readiness for the dual eligible opportunity, I'm wondering if your comments take costs for that into account for the balance of this year and then if you could help us to understand how that rolls out maybe over the next two years, that would be very helpful? Thank you.

Jim Carlson

Yeah, so I think lot of things I would before handing it off to Jim here for a second, I think I would like to commend him for taking time to go through the detail to help people understand the quarterly progression this year because we do think we've thrown a lot of variables into the discussion this year because of all the growth and the maturation of the converts and the interest expense accompanying those, the way we build margin and so forth.

But let me just say that, every quarter we reforecast our future based upon emerging information whether it's medical cost trends, SG&A, rate visibility and so forth. And that's basically what informs the updates that we give you. So you're absolutely right to expect a significant sort of stealing of the company with all this growth. We talked about that frankly last year and yesterday we gave a pretty strong preview of that. And as we've got a closer look of things over the last 90 days and factoring things like the progression of the duals into the equation and so forth we're pretty comfortable with what we've said here. But Jim you want to put finer point on that.

Jim Truess

Yeah, just to say you are comment is correct. That's our expectation that G&A ratio is going to decline pretty significantly, sequentially each quarter in fact, by the fourth quarter, we expect the ratio to be materially below our full year point estimate, which of course represents an average or full year value, but it's going to be on a managed downward slide throughout the year. And I think just for a little bit longer-term look on that question. That really is consistent with what we've seen over the last four or five years. We've been able to take the G&A ratio down from double-digit level down into this low seven sort of range for this full year. And we continue to be optimistic for the future that we can continue to gain incremental efficiencies and see that ratio decline further in the future. We think that's critical success factor as well. So we put a lot of focus on that and fortunately we're having a lot of success with that.

Dave Windley - Jefferies & Company

Okay. That's very helpful. Thank you. And on the dual piece of that would you expect your investments and readiness for duals to be up like steady flow of investments over, you kind of talked about the big chunk of duals coming on in 01/01/14. So we're looking at a kind of a seven quarter horizon here, I'm just curious about whether there is a point where that kind of spikes up or is it a pretty steady application of pressure there?

Jim Truess

Yeah I think at this phase of the game I think it's pretty steady. I think uncertainly we look back I think both in 2012, then I would imagine in 2013, our underlying administrative costs are going to be higher than they otherwise would have been because we had a significant business development and readiness sort of activities in both years, given that run very substantial revenue ramp. And 2012 obviously is a very substantial revenue growth year for ourselves and as we lookout into the work we'll do in 2013 and preparation for, at the moment looks to be like another substantial revenue growth year over the next couple. There will always be something in there. I just think that the good thing is we're continuing to have an effect on efficiency that in spite of the fact we're having to spend an incremental money to bring new business on we're still able to put some downward pressure on the aggregate ratio and that's why long-term is so, cost start to come out of the cost structure, it does give us the ability on sort of a run rate or steady stage base continue to push that percentage down in subsequent years.

Dave Windley - Jefferies & Company

Okay that's great and if I could ask you a quick one on capital. You talked about injecting some capital into the subs this year. Is it possible to quantify that and I suppose also tell us whether you think your available capital will be adequate to satisfy those needs or if you'll have external needs for capital beyond that you issued in the first quarter?

Jim Truess

Sure as I mentioned in my prepared remarks for the remainder of the year we're expecting to put down on a net basis $165 million in capital contributions to our health plan. So that's exactly is a combination of we will see -- we will collect some dividends from some of the other health plans that are in more the steady state mode and then those health plans that are growing dramatically particularly Texas and New York. They're going to be net receivers of funds.

So we plan for that I think steps we took last year and the way we built our long-term plan, I think this is all fully anticipated. What we're not planning on accessing external capital this year. We're very well positioned and actually feel very good about our long-term prospects as well. I think here we've spent a certain amount of time on our, at Investor Days, we have some more time to dig in to some of these topics to be able to get deeper and explaining our long-term strategy and plan around our capital. And I think that's, one of the things that's really nice and exciting about our business is we're able to put ourselves on this significant and growth trajectory and be able to fund this while keeping our leverage ratios low and really being able to mange our capital effectively. And that's probably back to what Jim was talking about earlier. This does come from being disciplined about the markets you enter into. When your business is running well, you're generating good cash flow, you could fund the next phase of growth. And so that certainly is something that we think about whether or not we consider what markets we do or don't want to participate in.

Dave Windley - Jefferies & Company

Thank you very much.

Jim Truess

Thank you.

Operator

I will now turn the call back to Mr. Carlson.

Jim Carlson

Well, thank you all for joining us this morning. We are obviously pleased with the start to your year. I think and some of our colleagues listen to these calls as well. I want to give them a due credit for fairly being focused on some important execution to deliver both this year for us. We are really excited about the future that we see. We think that there are plenty ways to grow the business profitability as we go forward. And it's just 90 days we got more work to do. And we will talk to you in other 90 days. Thanks.

Operator

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

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