Elevance Health Inc (ELV) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the WellPoint conference call.

At this time, all lines are in a listen-only mode.

Later, there will be a question-and-answer session.

Instructions will be given at that time.

(Operator Instructions).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to the Company's management.

Good morning, and welcome to WellPoint's third-quarter earnings conference call.

I am Michael Kleinman, Vice President of Investor Relations.

With me this morning are Angela Braly, our Chair, President and Chief Executive Officer and Wayne DeVeydt, Executive Vice President and Chief Financial Officer.

Angela will begin this morning's call with an overview of our third-quarter results, actions, and accomplishments.

Wayne will then offer a detailed review of our third-quarter financial performance, capital management and current guidance, which will be followed by a question-and-answer session.

Ken Goulet, Executive Vice President and President of our Commercial Business and Brian Sassi, Executive Vice President and President of our Consumer Business, are available to participate in the Q&A session.

During this call, we will reference certain non-GAAP measures.

A reconciliation of these non-GAAP measures to the most directly comparable measures calculated in accordance with GAAP is available on the investor information page of our Company website at www.WellPoint.com.

We will also be making some forward-looking statements on this call.

Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of WellPoint.

These risks and uncertainties can cause actual results to differ materially from our current expectations.

We advise listeners to review the risk factors discussed in our press release this morning, and in our quarterly and annual filings with the SEC.

I will now turn the call over to Angela.

Thank you, Michael, and good morning.

Today, we are pleased to report strong results for the third quarter of 2010.

Earnings per share totaled $1.84 on a GAAP basis, which included net investment gains of approximately $0.10 per share.

Earnings per share in the third quarter of 2009 totaled $1.53 and included $0.03 per share of net investment gains and an impairment charge of $0.28 per share.

Excluding the items noted in each period, our adjusted EPS was $1.74 for the third quarter of 2010 compared to adjusted EPS of $1.78 in the same period of last year.

Our quarterly performance exceeded our forecast, primarily due to higher than anticipated favorable reserve development and disciplined administrative expense control.

Based on our third-quarter results, we have increased our full-year 2010 GAAP EPS guidance to at least $6.60, which includes year-to-date net investment gains of approximately $0.18 per share and an impairment charge from the first quarter totaling $0.03 per share.

On an adjusted basis, or excluding the items noted, we have raised our full-year EPS guidance by $0.20 to at least $6.45.

Medical enrollment was stable in the third quarter, totaling 33.5 million members as of September 30, 2010.

While we experienced minor in-group attrition during the quarter, the level of attrition moderated and we ended the quarter with approximately 200,000 more members than we expected.

Both fully insured and self-funded enrollment results were better than our prior forecast.

The unfavorable employment trends, which have impacted our Commercial Business over the past two years, appear to be stabilizing, and we therefore raised our year-end 2010 medical enrollment outlook by 200,000 to 33.3 million members.

We continue to provide excellent value for our customers in this difficult economy, as evidenced by the positive membership results we have achieved this year and our Blue-branded businesses.

As we have discussed previously, we made the strategic decision at the end of 2009 to exit the commercial marketplace in Texas and Illinois, which has driven a year-to-date reduction of 527,000 members in our non-Blue Commercial and Individual enrollment.

This decline in non-Blue membership has masked growth of 330,000 members or 1% that we have experienced in our Blue-branded and government-sponsored businesses.

Specifically, Blue-branded Commercial and Individual membership has grown by 208,000 members, despite an employment rate that remains near 10% across our 14 Blue states.

Enrollment in the federal employee program has increased by 62,000 and we have grown by 41,000 and 19,000 members, respectively, in our Senior and State Sponsored programs through September 30, 2010.

We expect the success in attracting customers in our corporate businesses will continue as we move forward, and currently project that overall membership will increase slightly in 2011.

While we do not expect a meaningful increase in employment next year, which likely will continue to place pressure on fully insured enrollment, we are expecting additional market share gains in National accounts and modest growth in the State Sponsored and Senior businesses.

We just completed another very strong year of sales in National accounts.

Our broad and cost-effective provider network, which includes 80% of our nation's physicians and more than 90% of all hospitals, continues to distinguish WellPoint in this marketplace.

We supplement this strong provider network with leading disease and care management programs, innovative health and wellness initiatives, excellent customer service, and competitively low administrative costs, resulting in a value proposition that we believe is second to none in the industry.

We expect net additions of more than 300,000 National account members effective January 1, 2011, which will make 2011 the tenth consecutive year that our National enrollment will have grown significantly.

In the State Sponsored business, we began providing services to additional beneficiaries of Wisconsin's BadgerCare Plus Program this September.

And we will be phasing in new membership through 2011.

We also expect growth from the Medi-Cal SPD, or Seniors and Persons with Disabilities program, next year, and likely growth in some of our other existing state programs given the current state of the economy.

State Sponsored business represents a significant membership growth opportunity for WellPoint with an estimated 20 million individuals expected to enroll in Medicaid or related state programs over the next decade as a result of changes in eligibility levels for those programs.

Additional states are also evaluating the benefits that managed care can bring to under penetrated areas within their Medicaid programs, including the aged, blind and disabled population.

WellPoint is one of the nation's largest Medicaid Managed Care plans, with 1.8 million members across 10 states.

And we will continue to participate in these programs where we can provide long-term value for the beneficiaries while obtaining actuarially sound rates.

We also expect enrollment growth in the Senior business in 2011, which will be the first year that Medicare Advantage private fee-for-service products need to meet specified network requirements.

Given our core strength and success in network-based products, we expect to capitalize on this shift in the marketplace over time.

We are currently marketing products for 2011 and believe we are well positioned for the open enrollment period that begins later this month.

2011 will also mark the beginning of the baby boomer age-in to Medicare, a demographic shift that should create significant long-term revenue growth opportunities for our industry.

We plan to continue investing in our Senior business and addressing this important and growing segment of the population through a balanced portfolio of Medicare Advantage, Medicare Supplement, and Medicare Part D products.

Our benefit expense ratio was 83.8% in the third quarter of 2010, an increase of 170 basis points from the same period of last year, which was driven by the Senior and Individual Businesses.

The Senior benefit expense ratio increased primarily due to the reduction in federal reimbursement rates for the Medicare advantage program in 2010.

The ratio for Individual Business increased primarily as a result of the delay in implementing rate increases in California.

The increases in Senior and Individual were partially offset by the improvement in the benefit expense ratio for Local Group business.

We implemented pricing actions in the California Individual business effective October 1, 2010.

We will incur losses of approximately $150 million in the California Individual Business during 2010 due to the delay in necessary rate increases.

In the years ahead, we expect that appropriate rate increases will be approved and obtained in order to maintain a sustainable market for Individual members.

We are currently pricing all of our business based on the specific benefits being offered and considering both the varying competitive dynamics across our markets and the evolving regulatory framework.

As we all know, premiums reflect rising medical costs.

We are working diligently on behalf of our customers to help restrain the rate of increase in medical costs while optimizing the quality of care delivered.

Inpatient and outpatient hospital costs together comprise nearly half of our medical expenses, and they are the most significant driver of the underlying cost increases our members are experiencing.

Approximately one-third of our hospital contracts renew each year, and to date, we have successfully completed over 80% of our scheduled 2010 renewals.

These new contracts have yielded positive results for our customers as we preserve the broad choice of leading provider systems to which our members have been accustomed while also negotiating unit cost increases that are lower than those achieved in 2009.

As we recontract with our provider system partners, we are developing payment reform models that support and reward the delivery of high-quality cost-effective care.

One such model is our patient-centered medical home initiative that we expanded to the New York City area during the third quarter.

We implemented our first patient-centered medical home pilot in Colorado during May of 2009, and it has shown improved results in helping patients manage disease.

The initiative in New York City includes hundreds of physicians who practice care in a variety of settings from small individual practices to large medical groups, to academic practices affiliated with the hospital.

The project includes an updated pay-for-performance program that rewards physicians for meeting high quality-of-care standards and holding down costs in a number of ways, including reducing unnecessary hospital admissions and emergency room visits.

We will be studying the results of this program over the next few years through our HealthCore research subsidiary.

We're also driving value through our care management program, and our ability to deliver innovative programs that help improve member care is being nationally recognized.

Last month, three of our care management programs received accolades from URAC, an independent organization well known as a leader in promoting healthcare quality through its accreditation, education, and measurement programs.

Our benefits-based incentives and maternity outcomes program, which was conducted in partnership with the Commonwealth of Virginia, received a particularly high honor for demonstrating the impact incentive can have in increasing participation in a maternity management program and improving maternal and infant health.

We were also recently awarded three 2010 Best of Blue clinical innovation awards from the Blue Cross Blue Shield Association, through its Clinical Distinction Program that was developed in collaboration with Harvard Medical School.

These awards recognize plans that demonstrate innovation, efficiency, and potential for scale and included the quality Health First pay-for-performance program.

This program serves as our quality reporting tool for primary care physicians in the Indiana service area, and we received a top honor for this innovative and successful approach to improving access to high-quality, safe, and affordable health care for consumers.

Through programs like this, we are helping our members get the right care at the right time through improved outcomes and lower costs.

There is a responsibility among all participants within the healthcare system to become more efficient and effective in order to minimize future cost increases.

This includes a stringent focus on administrative expense improvement within our own organization.

Our SG&A expense ratio was 14.6% in the third quarter of 2010, declining by 30 basis points from the prior-year quarter.

We lowered total SG&A expense by $170 million or 7.5% over this time period.

While our SG&A expenses are down in part due to the sale of NextRx at the end of last year, we have also absorbed more than $100 million of costs so far during 2010 related to healthcare reform and regulatory compliance.

We have been able to meaningfully reduce our SG&A costs due to the process improvement initiatives we have implemented throughout the organization, and we have achieved this success while continuing to improve service and deliver new and innovative solutions for our members.

Last year, we introduced a Company-wide continuous improvement program that we call Build a Better WellPoint.

This program encompasses focused initiatives to improve performance and efficiency in a number of functional areas, including claims processing and call-center effectiveness; information technology delivery and support; utilization management; clinical review; and certain finance functions.

We've trained associates from each area in continuous improvement skills and this effort is becoming further and ingrained within our culture.

While WellPoint's SG&A expense ratio is currently at an industry-leading low level, we recognize the need to build upon our success and further improve our cost structure for 2011 and over the long term.

To fully capitalize on this opportunity, we recently announced the formation of a new organization within WellPoint called Enterprise Business Services.

This organization will encompass five core business support functions including information technology; information management; sourcing; service operations; and operational excellence.

The organization is being led by Lori Beer, who most recently served as our Chief Information Officer.

Lori's team will oversee our evolution to a higher-performing, more affordable operating model and continue to lead our implementation of healthcare reform requirements.

We believe this team will deliver improved service performance, enhance consumer experiences and incremental cost savings by focusing on our priorities and excelling at execution.

A key component of this strategy relates to our efforts to continue to streamline our information technology framework by migrating to fewer core claims processing systems.

We successfully moved 290,000 State Sponsored members to a preferred system over the last few months.

And we currently have a majority of our medical membership on one of our three core systems.

We will be eliminating one claim system in the fourth quarter of this year, and we anticipate retiring four more by the end of 2011.

We will also continue to streamline other non-core systems as we create standard enterprise capability to achieve further scale over our total membership.

Our execution scales and migrating to new platforms continue to improve and have resulted in successful transitions with minimal customer abrasion.

While we remain focused on enhancing our competitive position through continued cost structure improvement, we are investing strategically for the future.

The industry changes coming as a result of healthcare reform, previously mandated regulations such as ICD 10 coding requirements and constantly evolving customer demands are requiring an increasing level of investment on behalf of health plans each year.

In 2010 alone, we project that our healthcare reform and regulatory compliance-related expenses will exceed $150 million.

This spending is incremental to our ongoing portfolio of strategic projects that we expect to drive future growth and enhance performance for our customers and shareholders.

For example, some important investment milestones we announced just in the past few months include furthering our investment into the consumer aspect of healthcare by launching an enhanced and redesigned consumer website and a new online store for our Senior products.

Over 0.75 of 1 million members have registered on the new consumer website, and our online store has already processed thousands of applications, even prior to the Medicare open enrollment period next week.

We continue to ensure a continued smooth migration of pharmacy services from NextRx to Express Scripts systems, with 14 million or 90% of members now transitioned.

We're also supporting the efforts to promote the adoption of meaningful use of health information technology, including a commitment of financing for rural critical-access hospitals serving underserved communities.

And we are investing in our brand name through advertising in key geographies and through our new website, ThinkWellPoint.com, which is keeping our constituents and thought leaders informed and up-to-date about our work and the value we add to the healthcare system.

With the nation's largest membership base, we're able to make key strategic investments and implement regulatory mandates in a cost-effective and customer-focused manner.

We expect these expenditures to create further differentiation for WellPoint in the marketplace and drive higher enrollment in our products and services over time.

Looking ahead, we are refining our business strategies for 2011 and beyond.

This includes a detailed evaluation of our capital allocation practices to ensure we have appropriate alignment with our operational objectives as we move into the post-reform environment.

We will continue investing internally to support future growth, recognizing that the risks and opportunities within our various businesses will be impacted by yet undefined regulatory guidelines.

We're in a sound capital position today, and value the financial flexibility we have within an industry that is likely to undergo further consolidation in the years ahead.

We also plan to return capital to shareholders, and our Board of Directors recently approved an additional $500 million of share repurchase authorization.

We will continue to review capital allocation strategies with our Board as we finalize our future business plans.

In summary, I am pleased with our operating performance in 2010, which has exceeded the expectations we had coming into the year in most areas of the Company.

We are seeing signs of stabilization in our Local Group enrollment trends, and we expect continued membership growth in the National, State Sponsored and Senior business lines.

We're implementing process improvements that are delivering superior service levels while driving administrative cost savings, and we will be expanding these programs as we move forward while investing in key strategic areas.

We're implementing the initial aspects of healthcare reform throughout the organization and positioning WellPoint for continued success in 2011 and over the long term.

I will now turn the call over to Wayne to discuss our third-quarter results, capital management, and current guidance in more detail.

Wayne?

Thank you, Angela, and good morning.

Premium income was $13.4 billion in the quarter, a decrease of $704 million or 5% from the third quarter of 2009.

Approximately half of this decline related to the conversion of a large municipal account to a self-funded arrangement in the second quarter of 2010.

The remaining reduction was primarily attributable to lower fully insured membership resulting from economic conditions, and the strategic transfer of UniCare business in Texas and Illinois.

While premiums declined from the prior-year quarter, they increased by $110 million or nearly 1% on a sequential basis as the attrition in our fully insured membership has moderated.

This represented the first sequential increase in premium revenue since the fourth quarter of 2008.

Administrative fees were $963 million in the third quarter, down just $6 million or less than 1% in the same period of last year.

This was due primarily to a reduction in certain PBM-related revenues earned in 2009, which offset an increase in our commercial ASO fee revenue.

Other revenue, which historically consisted almost entirely of revenue associated with the sale of mail-order drugs by NextRx, declined by $163 million from the third quarter of last year, reflecting the sale of NextRx in December 2009.

The benefit expense ratio for the third quarter of 2010 was 83.8%, an increase of 170 basis points from the third quarter of 2009.

This was driven by an increase in the benefit expense ratios for the Senior and Individual Businesses, partially offset by a decline in the ratio for Local Group business.

In the third quarter of 2010, we recognized an estimated $110 million of higher than anticipated favorable prior-year reserve development, which is comparable to the estimated $112 million of higher than anticipated reserve development that was recognized in the third quarter of 2009.

Therefore, the comparisons to prior year's quarter's benefit expense ratio was not impacted by changes in net favorable prior-year reserve development.

We now expect that our benefit expense ratio will be approximately 83.7% for the full year of 2010.

This is lower than our prior forecast, due primarily to the level of positive reserve development we experienced during the third quarter.

We expect the benefit expense ratio to increase sequentially in the fourth quarter due primarily to the seasonality of our Commercial and Individual product design.

Additionally, while we experienced higher-than-expected favorable development during the third quarter, our guidance assumes that we do not have additional net favorable reserve releases in the fourth quarter.

We currently project that underlying Local Group medical cost trends will be in the range of 7% plus or minus 50 basis points for the full year of 2010.

Medical trend continues to be driven predominantly by unit cost increases, while underlying utilization has been lower than expected in 2010.

Inpatient hospital trend is in the low double-digit range, and is almost entirely unit cost driven.

Current unit cost trends are not sustainable, especially for hospital services, and we're working to lower cost trends as we negotiate with hospitals and health systems.

We continue to have success with the majority of the systems we partner with, and we remain committed to altering our networks as needed to address a handful of providers that do not comprehend the cost pressures faced by our customers.

We're also enhancing our reviews of certain procedures such as spinal fusions.

We apply evidence-based clinical criteria to promote access to appropriate procedures that provide quality outcomes for our members.

Outpatient trend is now in the high single digit range and is 85% unit cost driven and 15% utilization driven.

Utilization of cardiac imaging procedures has increased in recent years, contributing to higher outpatient diagnostic costs.

Our American Imaging Management subsidiary recently introduced a program to ensure that this diagnostic procedure is appropriately utilized.

In addition, to address emergency room utilization, we recently launched a new online tool that improves the consumer's ability to search for nearby alternatives to the emergency room, such as retail clinics, urgent care centers, and physician offices that take unscheduled walk-in patients.

The average cost of an ER visit is -- in one of our states is $441 compared with $98 for urgent care centers and $52 for clinics inside stores.

Physician services trend is in the mid-single digit range and is 55% unit cost driven and 45% utilization driven.

We believe that improved care coordination can improve patient satisfaction and reduce cost of care.

We will continue to explore opportunities to develop new payment models that will reward greater coronation of care, including patient-centered medical homes, accountable care organizations, funneled payments and enhanced fee-for-service programs, including pay-for-performance and steerage.

Pharmacy trend is now in the mid-single digit range and is 75% unit cost related and 25% utilization driven.

We expect our contractual relationship with Express Scripts to help hold down future cost increases for our customers' prescription drugs.

Overall, medical cost trends are running below our original expectations for 2010, which we attribute to a variety of factors, including a less intense flu season, stabilizing COBRA costs, our hospital contracting and medical management initiatives, and the generally weak economy.

Our full-year 2010 medical cost trend projection includes an expectation for seasonally higher utilization during the fourth quarter, although this could be impacted by the severity of the fall flu season and the economy.

We currently expect underlying medical trend to increase in 2011, and we are reflecting this assumption in our pricing.

As Angela noted, we are making pricing decisions that reflect competitive dynamics as well as the regulatory uncertainties that remain in the marketplace.

The majority of our fully insured enrollment that renews on January 1 is large group business, which is a market that we expect to be less impacted by medical loss ratio requirements than the Individual and small group markets.

We will continue to evaluate our Individual and small-group pricing and competitive strategies as regulations are promulgated concerning the MLR requirements taking effect next year to insure our compliance with the laws and regulations.

Turning to our reportable segments, Commercial operating revenue was $8.5 billion in the third quarter of 2010, a $799 million or 9% reduction from the third quarter of 2009.

This was driven by the municipal account conversion in the second quarter of 2010, as well as fully insured membership declines due to the economy and the UniCare member transition.

Operating gain was $761 million in the third quarter of 2010, an increase of $133 million or 21% in the prior-year quarter.

The increase was driven by operating improvements in the Local Group business and included an estimated $75 million of higher than anticipated favorable reserve development recognized in the current-year quarter.

Approximately $64 million of higher than anticipated favorable development was recognized in the Commercial segment during the third quarter of last year.

Our Consumer segment operating revenue totaled approximately $4 billion in the third quarter of 2010, declining by $51 million or 1% from third quarter of 2009.

This was due to a decline in Medicare Part D auto-assign membership for 2010, lower individual enrollment, and a change in the providers of pharmacy benefits from the Indiana Medicaid program in 2010, partially offset by growth in the Medicare Advantage program.

Operating gain for the Consumer Business segment was $262 million from the third quarter of 2010, a decrease of $258 million or 50% compared with the same period of last year.

The decline in operating gain was driven by lower performance in the Senior and Individual Businesses.

Results in Medicare Advantage products declined primarily as a result of the reduction in federal reimbursement rates and lower risk score settlement revenue in 2010.

Individual Business performance decreased due to the delay in implementing rate increases in California, and the recognition of premium credits being issued to certain policyholders in Colorado during the fourth quarter of 2010.

We recognized an estimated $35 million of higher than anticipated reserve development in the Consumer segment during the third quarter of 2010 compared with approximately $48 million in the same period of 2009.

Operating gain in the Other segment totaled $17 million for the third quarter of 2010, which represented a decline of $116 million from the third quarter of 2009 due to the sale of NextRx.

Net investment income totaled $205 million in the third quarter, up $9 million or 4% from 3Q 2009, due primarily to a $25 million dividend associated with the cost method investment in Puerto Rico.

This was partially offset by lower yields earned on short-term and fixed maturity investments in 2010.

Interest expense was $106 million in the third quarter of 2010, down $4 million or 4% due to lower average debt balances and lower short-term rates on floating rate debt in the current-year quarter.

We issued $1 billion of senior notes during the third quarter and retired approximately $400 million of term debt that was scheduled to mature in 2011.

We also successfully negotiated a new $2 billion three-year credit facility at the end of September.

We recognized net investment gains during the quarter totaling $58 million pretax, consisting of net realized gains from sales of securities totaling just over $61 million, partially offset by $3 million of other-than-temporary impairments.

As of September 30, 2010, the portfolio's net unrealized gain position was $1.2 billion, consisting of net unrealized gains on fixed maturity and equity securities totaling $917 million and $251 million, respectively.

Medical claims payable totaled just under $5 billion as of September 30, 2010, a decrease of $494 million or 9% from December 31, 2009, primarily due to the conversion of certain large groups accounts of self-funding arrangements, and the favorable prior-year reserve development we've experienced this year.

Included in our press release is a reconciliation and roll-forward of the medical claims payable balance.

This disclosure is comparable to the reconciliation provided in our fourth-quarter 2009 press release.

We report prior-year redundancies in order to demonstrate the adequacy of our prior-year reserves.

Medical claims reserves established at December 31, 2009, continue to develop favorably, and for the nine months ended September 30, 2010, we had significant positive prior-year reserve development of $705 million.

This is slightly lower than the $752 million of favorable development we experienced during the same period of 2009.

In the third quarter of 2010, we recognized an estimated $110 million of higher than anticipated reserve development that was not reestablished in our September 30, 2010 balance sheet.

On a year-to-date basis, we estimate that we have recognized $210 million of higher than anticipated development.

We continue to believe our balance sheet is conservatively stated and it is possible that additional reserves could be released during the fourth quarter of 2010.

However, this potential has not been reflected on our current financial guidance, and if it does materialize, we will separately identify it for the investment community.

As of September 30, 2010, days in claims payable was 40.7 days, a decrease of 1.4 days from 42.1 days at June 30, 2010.

Approximately 0.9 days of the reduction related to higher than anticipated favorable reserve development, while 0.5 days of the decline was driven by the conversion of certain large group accounts to self-funding arrangements.

Turning now to cash flow and capital deployment, for the nine months ended September 30, 2010, operating cash flow totaled $830 million.

This result was impacted significantly by $1.2 billion of tax payments we made during the first quarter related to the 2009 sale of NextRx.

Operating cash flow totaled $897 million for the third quarter of 2010 or 1.2 times net income, while claims inventories were relatively flat, indicating higher earnings quality in the quarter.

We continue to utilize our capital to reinvest in our businesses and enhance returns for our shareholders.

During the first three quarters of 2010, we repurchased nearly 59 million shares of our common stock or over 13% of the shares we had outstanding at 12/31/2009 for approximately $3.3 billion.

As of September 30, 2010, we had approximately $539 million of Board-approved repurchase authorization remaining, and our share repurchase authority was increased by an additional $500 million last week.

We expect to complete more than $4 billion of share repurchases in 2010, representing a significant return of capital to our stockholders following the sale of NextRx last year.

As of September 30, 2010, we had $2.9 billion of cash and investments at the parent company and available for general corporate use.

We expect to receive at least $1.1 billion of ordinary dividends from our subsidiaries during the fourth quarter of 2010.

We now have authorization for approximately $1 billion in share repurchases available for deployment in the fourth quarter, subject to market and industry conditions, and have other projected net uses of the parent cash in the quarter totaling $200 million, which includes over $100 million for a voluntary contribution to our pension plan.

This would leave us with an estimated $2.8 billion of cash and investments at the parent at year end 2010.

Please recall that of this projected year-end balance, we plan to utilize $700 million for debt repayment in January 2011.

Our debt to total capital ratio ended September at 27%, up 60 basis points from 26.4% at June 30, 2010, due to our third-quarter debt issuance.

We remain near the low end of our targeted range of 25% to 35% and continue to have significant financial flexibility, which we value in light of the current economy and the changing health benefits marketplace.

We are currently evaluating our capital strategies in conjunction with the development of our 2011 and longer-term business plans.

We expect to continue returning capital to our shareholders and will provide more information about our plans in the near future.

In terms of our updated outlook for 2010, we raised our full-year guidance for membership and earnings per share based on our overall performance.

Specifically, net income is now expected to be at least $6.60 per share, including net investment gains of approximately $0.18 per share recorded during the first three quarters of 2010, partially offset by the first quarter intangible asset impairment charge of $0.03 per share.

This outlook includes no net investment gains or losses or asset impairment charges beyond those recorded during the first three quarters of 2010.

On an adjusted basis, or excluding the net investment gains and the intangible asset impairment charge, we now expect net income to be at least $6.45 per share for full year 2010.

We now expect that year-end medical enrollment will be 33.3 million, consisting of 19.6 million self-funded members and 13.7 million fully insured members.

We continue to expect operating revenue to reach approximately $58 billion for the full year 2010.

The benefit expense ratio is now expected to be approximately 83.7%.

The SG&A expense ratio is now expected to be approximately 14.9%.

Operating cash flow is expected to exceed $1.2 billion, and this includes the unfavorable impact of the $1.2 billion of first-quarter tax payments for NextRx.

Our full-year effective tax rate is projected to be approximately 35.1%.

And our diluted share count is now expected to be approximately 418 million shares for the full year.

With respect to our current view of 2011, while it is too early to provide earnings per share guidance due to the need for further clarity around certain healthcare reform regulations, we can discuss the major headwinds and tailwinds we are evaluating as we refine our business plans.

The most significant headwind is the minimum MLR requirements which have not yet been finalized by the Department of Health and Human Services, or HHS.

These new requirements will negatively impact our run rate operating gain.

We've also recognized an estimated $210 million of higher than anticipated favorable reserve development this year, which we do not expect to recur in 2011.

Additionally, State Sponsored business has been a solid performer this year.

However, federal matching provisions are scheduled to decline next year, and considering the fiscal situations in many states, this could place pressure on the funding for certain State Sponsored programs.

We also expect lower net investment income in 2011, given the continued low interest rate environment and the anticipated non-recurrence of the dividend we received this quarter from our Puerto Rico investment.

We continue to view the economy as a net neutral impact for next year.

Unemployment has leveled off.

We were not expecting a significant improvement in employment levels next year.

In terms of tailwinds, first and foremost, we have plans to lower certain distribution and administrative costs next year, and are currently targeting savings that will offset at least a portion of the operating gain impact we expect for minimum MLR requirements in other areas.

In California, as Angela noted, we implemented premium increases in the Individual market effective October 1, 2010.

This should improve our results in the California Individual Business, and we expect that appropriate rate increases will be approved in the future in order to maintain a sustainable market for Individual members in California.

In the Senior market, we currently expect to modestly grow membership in 2011 while maintaining steady margins, despite the changes impacting the prior fee-for-service program.

We're also projecting another strong year of growth in our National accounts business.

And finally, we anticipate that our diluted share count will be lower in 2011, given the repurchase activity that has taken place this year.

As you can see, there are a number of positive and negative items currently impacting our outlook for 2011.

We plan to provide more information about our strategy for 2011 and longer term during a conference call to be scheduled after final medical loss ratio regulations are released by HHS and on our fourth-quarter 2010 earnings call, scheduled for January 26, 2011.

I will now turn the conference call back over to Angela to lead the question-and-answer session.

Operator, please open the queue for questions.

(Operator Instructions).

John Rex, JPMorgan.

I wonder if we could just -- a little more focus on the 2011; in particular, as you think about med costs, the lower cost run rate this year, what you are building into 2011 for your expectation for a full-year cost trend.

And what components might look different?

In particular, Angela, I think you mentioned, if you could size for us kind of the lower unit cost that you are getting from hospitals?

Thanks, John.

I appreciate your question.

With respect to 2011, we are expecting a little bit of a rebound in the trend in 2011.

We expect a more normal flu season.

We expect some rebound in our pharmacy costs.

We've had some improvement from our initial year Express Scripts.

We expect Express Scripts to have discounts that continue to repeat but not necessarily incrementally.

We're going to work with them, obviously, very diligently on programs to further penetrate around mail order and get the generic rates to continue to improve.

We also know that there will be some impact from healthcare reform that could add to costs throughout the delivery system.

Now, that's going to be offset somewhat by the COBRA having rolled off a little bit that we will expect less COBRA in 2011.

So, we are taking all of these -- the potential for rebound, John, into our pricing and being disciplined, we believe.

And we think the market is being disciplined and rational in terms of pricing overall.

And then, of course, we can't predict what the impact of the MLR definitions are at this point.

So if you are at 7% this year, is it fair to say you are thinking something like 8% next year?

Yes, John, I think at this point, we don't want to give guidance on 2011, but I don't think it's unreasonable to assume a fairly reasonable rebound such as those levels.

Justin Lake, UBS Investment Bank.

Thanks.

Good morning.

A couple questions, first, in terms of the results in the quarter and year to date, a number of your peers have already reported; they've spiked out a significant amount of intra-year development in both the third quarter as well as the second quarter.

While it doesn't appear that you have seen that same benefit, given that you've talked to your cost trend being down 100 basis points, roughly, versus your initial guidance.

I'm just wondering if you have any thoughts as to why that hasn't happened, or maybe it has and you just haven't spiked it out to the same extent.

Yes, hey, Justin.

Thanks for the question this morning.

You know, one of the things that's a little bit unique is, regarding intra-year development, we have continued to reserve at the same consistent and conservative level of high single-digits explicit margin.

And so we have not adjusted that, at least as of 9/30.

And so for that reason, what we have been spiking out to date has been all of that that's been above and beyond what I would call that consistent conservative level.

Clearly, as we mentioned in our previous comments that we have not reflected any further adjustments that could occur which would be intra-year in the fourth quarter, even within our guidance yet.

And so I would anticipate that there will be an adjustment, but the difference will be -- or most likely be intra-year in the fourth quarter versus what you've seen in the first nine months.

The second comment I want to make is that if you consider the 1% decline in trend, I think it's a reasonable assumption to assume then that you would see an equal amount of positive impact on the bottom line.

The thing to recognize is that that's the commercial trend only with the vast majority of that, almost two-thirds of that being offset by California alone.

The losses now are up in the $150 million level, and if you recall, we actually assumed that we would actually make money in California, which I don't think was an unreasonable assumption, and it was low single digits that we had assumed.

So when you consider the low single digits --

And that's the California Individual market specifically.

Yes.

So when you consider the profits that we had assumed that we would make, coupled with the actual losses and that, that is actually what is eating up the majority of the improved utilization trends that we have seen in the commercial book.

That's helpful.

Thanks for the color there.

And then just the second question on -- you laid out these headwinds, tailwinds.

And I know you don't want to talk about 2011 guidance, but just as far as directionally, are you thinking about up, down, flat?

Is there any thought processes to the -- you talked about SG&A, for instance, being able to [off] costs, offsetting a portion of the MLR.

I know you don't have the regs out yet, but is there any -- is there any early view as to whether you might be able to grow operating income or even grow EPS in 2011 given the headwinds?

You know, Justin, for the reasons you stated, we can't really get into 2011 at this point, and we don't have the MLR.

But what we can tell you about is what we are doing, which is, I will speak to the overall SG&A.

We're being very disciplined.

We're being very customer focused.

We understand that our customers have an affordability challenge, and we have to address that both through reducing our G&A; and Brian and Ken are focused -- we want to partner with brokers and agents and consultants.

We have meaningful relationship there, but we also have been working with them on shared responsibility, which I think will be important in terms of the whole system working more efficiently, and that will obviously be happening in 2011 and beyond.

Doug Simpson, Morgan Stanley.

Wayne, just touching on your comments on the balance sheet, and it sounds like you guys are thinking through that now and you're going to come back to us, but just, what specifically -- obviously we've got the MLR rules; we're all waiting for clarity on that.

What would you like to see before thinking about taking leverage up to something more at least towards the center of the historical range that you've talked about?

Thanks, Doug.

I think from a leverage perspective, the one thing right now is, as you know, we have more than enough capital at the parent right now.

So for levering up for the sake of levering up, we don't see a lot of value in that.

We are very much enjoying the lower interest rate environment that we're seeing from a debt perspective, although it hurts our organization and others on the investment income side.

I think right now though, Doug, we do expect there to be more consolidation in the industry.

This will be a very cost-effective -- or costly program to implement -- healthcare reform -- you've heard some of the numbers we've thrown out, and we think scale is going to matter.

And so I think we have like having that powder available for a sizable acquisition if one becomes available or even smaller acquisitions as they become available.

But I don't think you will see us necessarily lever up until we get a little more clarity around these final rules and regulations and what impact that will have ultimately on consolidation in the industry.

Okay.

And if we think about ending the year with, I think you threw out the $2.8 billion number, and assuming you want to keep -- I think you've talked about $1 billion at the parent, that leaves you $1.8 billion of dry powder; and if we look at the last couple of years of free cash flow, you've run generally $2.5 billion to $3.5 billion.

I mean should we be -- what should we be thinking about that cash doing next year?

Is it -- maybe give us your thoughts on potential for a dividend.

And then just how much that would -- would you pull it out into buybacks?

How comfortable are you just with sitting that -- that's a pretty big cash balance to just leave it sitting there.

Yes, Doug.

I think your numbers are right on when you consider the fact that we would probably need to keep about $1 billion at the parent as part of our liquidity framework to enable us to pay both short-term and 12 months of principal and interest in the event of a financial crisis like we saw in 2008.

So we like maintaining that level of conservatism.

That still leaves, as you said, about $1.8 billion.

It's important to recognize that about $700 million of that will go away in January.

We have about $700 million of debt that is coming due, and so we're paying that down in early January.

That does leave us roughly $1 billion.

We will be visiting with our Board later this quarter our 2011 plans, and part of that plan will be evaluating that additional $1 billion along with 2011 cash flow we expect to generate.

And we are exploring with them a number of capital deployment alternatives.

Josh Raskin, Barclays Capital.

Thanks.

Good morning.

The two pressures on the MLR, the Individual rate in California that got pushed back, and then the Medicare Advantage MLR compression -- could you quantify, maybe even on a year-to-date basis, what that's been on the MLR?

And maybe remind us around the regulations in California.

I thought you could kind of put through focal rate increases periodically.

So I guess what I'm asking is when the next time you could put through another rate increase, understanding that you just got one last month.

Hey, Brian, do you want to take that one?

Sure.

Hi, Josh.

In terms of California, current legislation is that carriers can only take a rate increase a minimum of every six months.

So, we just got a 10/1 rate increase, so the earliest that we could get would be 4/1/2011.

And then, in terms of quantification from a loss ratio, I don't have that in hand, but as we previously mentioned, it was about $150 million impact.

That's the full-year impact?

Yes, Josh, that's the full-year impact, is the $150 million.

An important part to recognize though is that we do have rate increases effective October 1, so the vast majority of that $150 million, maybe in the $120 million range, is what you are seeing for the first nine months of the year.

The delta runs for the back half of the year.

And remember, that's just the loss; that assumes then that we are planning not to make any.

And as you've heard already, we did assume a low single-digit margin, so the actual total impact on the year exceeds the $200 million mark.

Okay, okay.

And then Medicare Advantage?

Why don't you repeat your question, Josh?

Just a quantification of what the impact on MLR overall from M.A.

is.

The 2010 impact, I think was just a very low single-digit impact.

From a dollar perspective, Josh, we were looking at roughly $100 million headwind, though, when we came into this year, and that's about panning out as expected on M.A.

Charles Boorady, Credit Suisse.

Thanks.

On your guidance points of headwinds and tailwinds, can you give us the same rundown for the fourth quarter, in particular your assumptions around medical trends for 4Q and how you quantified the expectations for the flu and COBRA rolloff, as well as higher -- high deductible health plan adoption?

Hi, Charles.

Yes, for fourth quarter, a couple items.

One is, we are assuming a normal flu season for the fourth quarter.

Obviously, we recognize the first nine months have not reflected a normal flu season, but all that being said, we believe it's better to plan for a normal flu season despite what we see in the first nine months.

In addition, we do believe that the seasonality will increase quite a bit for both the Commercial and the Individual products, because buy-downs have continued to grow over the last several years, so historical MLR patterns are not reflected necessarily, but we have seen in the more recent period.

So we do think you will see a little more pronounced seasonality.

And again, we've assumed a little bit more of a normal seasonality, so to the extent that trends continue like we've seen in the first nine months, that would be a slightly better-than-expected result that we are at least forecasting at this point in time.

So, and then, in terms of child-only and other programs, it really is a de minimis impact in the fourth quarter.

So we have that assumption baked in, but it's not that big of a headwind for purposes of fourth quarter.

My second question for Angela, the Blues enroll a third of the country.

WellPoint is about a third of the Blue lives.

I'm wondering if you can share with us any emerging trends or responses of the Association to reform, and also now, with elections being a day behind us -- in terms of things like plan conversions, you see more Blues more likely or less likely to convert?

Can we expect to see some -- looking to become public shared services?

You've talked in the past about how your administrative efficiencies could serve well the interest of other Blue plans by expanding in shared services.

Haven't seen a lot of that today.

Any other trends you can share with us on the Association plans?

Yes, Charles, I think that's a good question and good topic.

You know, the Blues have really come together more over the last couple of years than ever in history I think.

And we are focused with them on a lot of -- creating a lot of consistency.

We've had so much success in our National accounts market, and it's a reflection of our ability to create a seamless network and seamless services.

An example of that was, we took our Anthem care comparison tool, which is our transparency tool, and it shows our members, procedures and what the relative cost is in hospitals in their geography with their episode of cost, and give some quality data.

And that was adopted by the Blue Cross Association as the transparency tool that is now being rolled out across not only our Blue plans, but all the other blue plans as well.

And you know, this idea of shared services, while you haven't heard much about it, we co-own a number of our systems across the Blue Cross Association.

There are a number of Blue plans on the resulting core systems that we are going to, and have more than a majority of our membership on.

And so, there is real scale beyond WellPoint, but into the Blues in terms of those opportunities.

In terms of continuing opportunities for consolidation, we believe that, particularly given the need for scale, size and scale is a real opportunity for growth and value, and so we think over time, there will be unique opportunities for WellPoint to have further consolidation with the Blues.

It really -- there are a lot of facts and circumstances that go into whether or not a Blue plan is really ready for that, or it's appropriate under the circumstances.

And we think we can approach it in a variety of ways.

Did I answer all of your questions, Charles?

I know you were --

You did, Angela.

Thanks.

And, you haven't had an investor day for a while, but have you set a date for when you might plan to host one?

Charles, we have not set the date yet.

We may end up doing something a little sooner depending on when final regulations come up, but right now, we're planning for a date more in February.

And tentatively, we're looking at around the 23rd or so though.

So but again, we may address some of this on our investor call.

We'll either do a full day or we will do more of a call like we did this past year.

Scott Fidel, Deutsche Bank.

Thanks.

First question just on the California ABD expansion and just if you have an estimate for how much enrollment you think you might be able to add from that; and some details as they have developed so far around estimated PMPM yields on that type of membership; and how you think margins can look in that type of business.

I'll turn it over to Brian to answer that question, but I have to say the team in our State Sponsored business has really done a great job, both operationally, migrating our systems, really preparing for growth for the future.

So I think we're really positioned well to take on the ABD populations in a variety of different states.

Brian, do you want to talk about California?

Sure.

Hi, Scott.

I think you are aware, the population in California is based on how the state is changing the program, so the current participants in the state, as they load the SPD population into managed care, we will be getting our fair share.

We are anticipating that fair share to come in, probably in the middle of the year, and in the 20,000 member range.

And I think at this point, it's too early to tell a PMPM yield.

Okay.

And then just had a follow-up question, Angela, maybe if you could just give us an update on the Connecticut rate situation and just whether you expect there will be any delays in implementing the rates that you had had approved, but obviously Blumenthal had some challenges to those.

So maybe just an update on Connecticut.

You know, Brian may have some more specifics on Connecticut, but you know, we expect in this environment, this regulatory scrutiny and we're really very focused on being transparent about what our rate increases are and whether that's through hearings or whatever, talking about what rates are necessary.

Our California experience is a reflection of the fact that rising medical costs and other variables in the pool of insured really can impact the need for these rate increases.

And so Brian, do you want to talk about Connecticut specifically?

Sure.

A lot of the noise of late had to do with some of the PPACA of filings that were effective 9/23 in Connecticut.

Those were approved, and those have been implemented.

We are in the process of filing our 2011 rates, and preparing for the public hearing process that has been previously announced.

That's not unusual necessarily in Connecticut.

We went through that process last year, and we are preparing to go through it again this year.

Matthew Borsch, Goldman Sachs.

Can you hear me?

Just a high-level question, could you characterize the Commercial pricing that you are setting for 2011 as about the same or a bit higher than it was a year ago going into 2010?

Ken, do you want to talk about the Commercial marketplace and where you think our pricing is relative to last year and the marketplace too?

The marketplace itself is rational across the board.

And I think last quarter, we identified that in the West it had become more rational from some of our competitors, so that was a good benefit for us.

Going into 2011, we are expecting medical costs to increase a little, which is felt in our rates.

And overall, our rate increases are about the same, but slightly higher than a year ago.

And part of that is related to the benefit changes that we have in place related to PPACA and then including the anticipated medical cost rebound as well.

And just a follow-up question, what gives you confidence, if you have that, that the prior-period reserve development won't recur in 2011?

I mean I realize that's a conservative assumption, but how do you think about that?

Well, I think Matt, consistent with our past practice, to the extent that we have additional conservatism that evolves and develops, we will clearly spike that out.

I think one of our goals is to try to get to as transparent of a run rate as we see in our underlying book.

And one of the benefits we've had of our stabilized inventories, or higher adjudication rates, is enabling us to finally get even a better view than we have had over the last couple years.

And it's one of the reasons I think you are seeing so much prior-period reserve development continue to come through.

I do anticipate that we may have more in the fourth quarter, but until we see more around October, November, December, result is very difficult to pull that out and actually spike that out at this point in time, which is why we have not included and consistently not included that in our guidance.

Could we have more next year?

It's possible, but I think it's important for us to get as close on a regular, consistent margin that we put in for adverse development, month in and month out, quarter in and quarter out.

I think it's the only way for you as investors to really understand what's happening in the core run rate.

So, if we do better next year, we will spike it out.

But right now, I think we're getting to a point where we're getting pretty tight on that explicit margin.

Our numbers are coming in pretty close to that each month now.

Carl McDonald, Citigroup.

Thanks.

One of the big headwinds that you had for 2010 was the drop in the Commercial risk enrollment; it didn't sound like you spiked that out as either a headwind or a tailwind for 2011.

So, is it right to assume you are expecting the commercial risk business to be relatively stable next year?

Ken, do you want to take that?

Yes, we -- the Commercial Business has stabilized nicely going into this year.

So going year over year, there is still a slight headwind year over year because of losses earlier this year.

But, has moderated and it should be something that we can overcome through all the other triggers we have available to us.

You know, Carl, I think we're doing fine in the marketplace.

Ken and his team have been very focused on the right disciplined pricing but growth in the marketplace.

We think in this environment, we have opportunity, but as we're looking kind of at unemployment overall, we have seen it level off at some point, but we are expecting it to be fairly flat in 2011, not a significant increase.

Hopefully we will see better than that, but that's our expectation right now.

Great.

Thank you.

And I'll turn the call back to Angela Braly with the Company's closing comments.

Thank you.

Thank you all for your questions.

In closing, I would like to reiterate that we are performing well in most areas of the Company and we remain confident in the future.

We are working diligently to implement the initial requirements of healthcare reform while continuing to deliver strong value and excellent service to our customers.

We're also taking actions to make the organization even more operationally efficient and effective while investing for future growth and incremental differentiation in the marketplace.

We believe we are well positioned to drive increased value for our current and future customers and our shareholders.

I want to thank everybody for participating on this call this morning.

Operator, please provide the call replay instructions.

Certainly.

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It starts today at 10 AM Eastern Time, will last until November 17 at midnight.

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(Operator Instructions).

That does conclude your conference for today.

Thank you for your participation.

You may now disconnect.