Douglas Simpson John Cannon - Interim Chief Executive Officer and Interim President Wayne S. Deveydt - Chief Financial Officer and Executive Vice President Kenneth R. Goulet - Executive Vice President, Chief Executive Officer of Commercial & Individual Business and President of Commercial & Individual Business Richard C. Zoretic - Executive Vice President and President of Medicaid Programs Leeba Lessin - Executive Vice President of Medicare Programs

Matthew Borsch - Goldman Sachs Group Inc., Research Division Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division Melissa McGinnis - Morgan Stanley, Research Division Justin Lake - JP Morgan Chase & Co, Research Division Justin Lake - UBS Investment Bank, Research Division Christine Arnold - Cowen and Company, LLC, Research Division Christian Rigg - Susquehanna Financial Group, LLLP, Research Division Joshua R. Raskin - Barclays Capital, Research Division Scott J. Fidel - Deutsche Bank AG, Research Division Kevin M. Fischbeck - BofA Merrill Lynch, Research Division David H. Windley - Jefferies & Company, Inc., Research Division

Ladies and gentlemen, thank you for standing by. Welcome to the WellPoint Inc. Fourth Quarter Results Conference Call. [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, everyone, and welcome to WellPoint's Fourth Quarter 2012 Earnings Call. This is Doug Simpson, Vice President of Investor Relations. Presenting today are John Cannon, Interim President and CEO; and Wayne Deveydt, Executive Vice President and CFO. Also available for Q&A are Ken Goulet, President and CEO of our Commercial, Individual and Exchange businesses; Leeba Lessin, Head of our Medicare programs; and Dick Zoretic, who is leading our Medicaid operations. John will start with an update on the business and highlight progress against our goals which we laid out last September. He will then offer commentary around fourth quarter results and perspective on the year ahead, including investment and preparation for the coming implementation of health insurance exchanges. Wayne will then review the quarterly and full year financial highlights and offer our 2013 outlook. Q&A will follow Wayne's remarks. During the call, we will reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our 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 today's press release and in our quarterly and annual filings with the SEC. Finally, as you are aware, we completed our acquisition of Amerigroup on December 24, 2012. As a result, closing and prefinancing costs related to the transaction, as well as the 8 days of Amerigroup's operating activity, are included in WellPoint's fourth quarter 2012 GAAP financial results. We have excluded these items from our adjusted EPS calculations. I will now turn the call over to John.

Thank you, Doug, and good morning, everyone. As Doug mentioned, this morning, I'm going to focus my remarks on 3 principal areas: First, I'll provide a progress report on our second half 2012 operational and financial goals; I'll also give you an update on the business changes underlying our improved performance; And finally, I'll comment on our 2013 outlook with some broader thoughts on our longer term positioning. So let me start with an update on where we stand versus the objectives we laid out in September. Our goals in the second half of 2012 were to: first, close the Amerigroup transaction; second, improve execution against our operational and financial targets; and third, develop our 2013 plan and continue to move the company forward during this interim period. We've met these objectives, but we know that we have more work to do over the next 12 to 18 months to prepare WellPoint to capitalize on future growth opportunities, particularly in government-sponsored business. So to review our progress. We closed on the Amerigroup acquisition in the fourth quarter, which was earlier than we originally anticipated. With Amerigroup, we now serve more than 36 million medical members. We have a Medicaid presence in 20 states, which is the largest footprint in the industry, covering over 4.5 million members of various state-sponsored programs. The Amerigroup acquisition fits well with our strategic plan to position ourselves for a significant shift towards government-sponsored business. Notably, we now have a Medicaid presence in 8 of our 14 Blue states. We look forward to working with policymakers at the state and federal level to help people access the health care system in the most effective and efficient means possible. We will continue to work in a constructive and collaborative way with state and federal decision-makers to make…

Thank you, John, and good morning. My comments today will focus on the key financial highlights from the fourth quarter and full year 2012. Additional details are included in this morning's press release. I'll also provide some business line commentary and then close with a discussion of our 2013 guidance. I will highlight the impact of Amerigroup throughout my discussion as appropriate. Overall, fourth quarter results were stronger than we expected, driven by a combination of improved core operating performance and favorability in the capital management areas. On a GAAP basis, we reported fourth quarter EPS of $1.51 and full year EPS of $8.18. Both of these results were higher than we expected due to favorable operating results and net positive contributions of $0.48 in the fourth quarter related to the settlement of certain tax issues and net realized investment gains, partially offset by costs related to the Amerigroup acquisition. On Amerigroup specifically, our fourth quarter GAAP results included approximately $73 million of pretax expense, consisting of closing costs and incremental financing costs as we prefinanced the transaction with debt issuances in the fall, partially offset by a small amount of earnings in the 8 days of Amerigroup operating activity. Exclude the items, our fourth quarter adjusted EPS was $1.03, an increase of 4% from $0.99 in the fourth quarter 2011. Full year 2012 adjusted EPS was $7.56, an increase of 8% from $7 in 2011 and above the $7.30 to $7.40 range we previously forecasted. As you recall, last quarter, we said that our outlook for 2012 could reflect some measure of conservatism if the favorable trends we experienced in Q3 were to run through year end. This played out, and we feel good about where we finished the year operationally. Our fourth quarter results reflected lower-than-anticipated commercial medical…

Thanks, Wayne. Before we get to Q&A, I just want to address the CEO search process briefly. Our board continues to move thoughtfully and as quickly as possible with the process, and we continue to believe we'll have a decision within the first quarter, hopefully sooner rather than later. Beyond that, we're not commenting on the process or potential candidates, as we've said previously. We remain focused on operating the company during this interim period, and we're pleased with the contributions of all of our associates in driving our improved results over the last 6 months. With that, operator, please open the queue for questions.

[Operator Instructions] Your first question comes from the line of Matthew Borsch from Goldman Sachs.

Could you just talk a little bit more about your outlook on medical cost trend? I'm curious if the flu season comes into the picture at all in your -- maybe your noncommercial outlook and if you're seeing anything at this point that would justify what is now a slightly elevated view of trend for this year versus what you experienced in 2012?

Matt, our outlook does assume that the flu does have an elevated impact to us over normal expectations at this point, primarily on the AGP business, the Medicaid business. In the [ph] commercial front, we haven't seen much of an impact. We said earlier at the JPMorgan conference, about $0.02 impact to our earnings in the fourth quarter, and it panned out because of that $0.02 impact in terms of above normal. So in general, I would say that our outlook does reflect that, and our medical cost trend does reflect that as well.

Okay. And just one follow-up on the commercial front. You -- and I may have missed your reference to factors driving the 650,000 to 750,000 member attrition. Is that partly on your own pricing discipline relative to the market? And if it is, I'm just trying to juxtapose that against your comments that you're seeing hardening in the pricing discipline. And I'm wondering if you're seeing competitors fully put through -- if you can see this, fully put through some of the financial obligations related to health reform in their pricing?

Yes, Matt. I would say that of the membership decline that we're forecasting for the year, about 1/2 of it is in the ASO. I'm going to let Ken comment on that in just a minute of what we're seeing there. And the other half in the fully-insured book, and I wouldn't say that, that half does reflect our pricing discipline around our Small Group business that we expect to maintain. It also does reflect the fact that we do expect minimal sales in the back half of the year in the individual book, as people prepare themselves for the exchanges. We think that's a prudent position to take both in pricing and assumptions around exchange behaviors at this point in time. And it may prove to be conservative, but again, we believe it's prudent. Ken is going to comment on the ASO activity because that affects us on 1/1 [ph].

Matthew, I'll just say that similar to the first half of the year, the market is competitive but rational overall. The -- on the ASO front, we had some legacy pricing decisions from 2011, and we went into this year saying that we would have a negative impact because of groups that decide [ph] that far back. In the second half of the year, we had a very strong value prop on total health management, our current and future savings, our consumer engagement and future vision. And we actually had a pretty good sales season, but we went in with a headwind that was pretty large on the national ASO. I would also highlight on the fully-insured, a part of it is still that the final exit of a number of products in the New York marketplace which had a fairly substantial impact this year and will have a 50,000-or-so fully-insured life impact in 2013.

Your next question comes from the line of Tom Carroll from Stifel. Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division: Yes. So I wanted to just get a sense of, again, maybe have you repeat what's going on to add conservatism to the outlook for this year? And I think you highlighted 3 things. You said you did not incorporate fourth quarter outperformance in your '13 guidance. You've got AGP integration costs that are dragging things a bit. And you also have SG&A investments that are dragging things a bit. I wonder if you would just maybe go through each of those 3 components and give us -- quantify as best as you can or give us some sense of the impact such that we can kind of try to quantify the way we do the conservatism that you've built in?

Tom, let me start off with a few items that I can give you at least some quantifications for. First of all, as you did hear in the call, that is correct. The positive underlying operational results we've seen in the back half of the year, we have not reflected that trend continuing into 2013. We hope that proves to be a cautious and conservative view, similar to what we saw in the third quarter, which panned out in the fourth quarter. But for now, that has not been baked in, in terms of the starting point. In terms of Amerigroup, what we would say is we have between $0.20 and $0.25 headwind for integration costs still to occur in 2013. So for modeling purposes, split the difference. But that's about the range we're looking at, in the $0.20 to $0.25 range, that is embedded in our guidance for 2013. We do have $300 million of incremental investments above our normal run rate baked in for both improvements in our Senior business, as well as preparation for the exchanges. And relative to other headwinds which we haven't quantified but we have baked in to our guidance, we have both an impact from what we think an elevated flu would look like. We've baked in an impact for sequestration. And I would say that with the fiscal cliff still looming, we like the opportunity to have as much cash available at our parent. We think opportunities arise if something was to happen and provide a unique M&A opportunities for us in the future. And for that reason, we have back-end loaded our buyback assumptions regarding the capital we plan to deploy primarily to the back half of the year with a majority of that occurring versus historically, as you know, we've done that more straight line or heavier on the front end. So those are the key data points that are fully embedded in our outlook. Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division: And just as a follow-up, in terms of your outperformance coming off of fourth quarter, would you call that $0.05 a quarter? I mean, is that in the neighborhood?

Tom, again, I wouldn't site -- I really don't feel comfortable sizing it now. I do want to see these trends continue. I do think it's fair to say though that core underlying earnings in the quarter were even much stronger than reported on a GAAP basis because of the significant amount of onetime items that we covered but have not separately broken out, including severance, the acceleration of some deferred acquisition costs that we believe will go away as part of the Affordable Care Act and other charges. And those have all hit the consumer segment. So you can get a pretty good gauge as to the volume of items that we cover by looking at the Consumer segment performance.

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

Maybe now that AGP is a part of the story and part of the growth story, Dick, can you provide some commentary on AGP's recent performance on the Florida long-term care RFP? And then also update us on the growth opportunities around TANF and duals that you're most excited about as we head towards 2014.

Sure. Well, thanks for the question. We're actually pretty pleased with the results in Florida on the long-term care rebid. We won 2 counties, but we only bid 3. And the reason why we only bid 3 counties is because the -- we thought the underwriting was fairly tight that the state and their actuary provided. The target loss ratio on the underwriting was in the neighborhood of 93% to 95%, depending on the region that we were looking at, and there were 11 regions, as you may know. And in looking at the regions, we identified 3 regions where we thought we could make a modest margin. And principally, it was because we already had assets on the ground in the number of those regions, and we felt like the underwriting was not quite as tight in those regions. We certainly felt had we bid more regions, that we could have been successful in a larger number of regions. But quite frankly, we were concerned that if we bid all 11 regions in 1, the majority of what we bid, we would end up with a large book of revenue. And we were a little bit concerned that if that revenue or that business rather didn't run well, that, that could produce material losses, so we bid conservatively intentionally. We felt that we can make money in the regions that we bid. And if by chance those regions did not perform well, that it wouldn't result in large losses for the organization. So all in all, we took a disciplined approach to bid. We bid conservatively, and we were pleased with what we won. Relative to the longer range opportunities, we think there's still very significant in Medicaid. We expect a number of our larger states to be rebid…

Great. Maybe just one follow-up on 2014 Medicaid margins. In your conversations with the states to date, what do you think they're going to do about the industry excise tax, especially as it relates to a lot of your rate renewals actually happen in the back half of '12 and carry into the first half of '13 or into the first half of '14. How do you think they're going to deal with the tax around rate increases?

Well, in general, we believe that the tax will ultimately make its way into the rating process. It is a legitimate expense. The rates need to be actuarially sound. Certainly, the industry's position is that the tax needs to be accounted for in the rating process. And so overall, I would say, that is our expectation. What exactly results state to state, I think we're just going to have to wait and see. So I don't think it's -- I think it would be premature to declare victory on that issue just yet. But overall, I think we're cautiously optimistic.

Your next question comes from line of Justin Lake from JPMorgan. Justin Lake - JP Morgan Chase & Co, Research Division: First question, John, you talked about having confidence in sustained operating income growth over the next several years. Should we take that to mean that your early view on 2014 is that operating earnings should be up year-over-year?

Thanks for the question, Justin. And obviously, it's premature to project into 2014. I would say that at this point, certainly, our intention is to grow, and we are positioning the company to do that and I've outlined a number of those initiatives for you today as well as previously. But overall, I would say that growth is our objective. Justin Lake - JP Morgan Chase & Co, Research Division: And just to follow up there, I mean, I know there's a ton of uncertainty on exchanges and you've done a great job of kind of outlining your risks, the exposure there, I guess, I should say. Is there any other business segment whether it's large group, ASO, Medicare, Medicaid, where you don't think you'll have earnings growth year-over-year or there's some question as to whether you'll have earnings growth year-over-year, for instance, Medicare Advantage with the cuts coming through?

Justin, this is Wayne. I think at this point, again, we're not giving '14 guidance. But clearly, we would expect to see growth in the Medicaid expansion happening in '14, as you heard Dick say, not only the expansion, but the new bids that are going to occur, coupled with the margin improvements we see both in the AGP and probably more importantly, in the WellPoint book of Medicaid. So I think that's clearly an area for growth. The investments we're making in the Senior business are being made with the intention of driving growth in the HMO market and improve star ratings. Again, we did indicate that we think that's about 2 years before we start seeing the full benefits of that, but we may see some of that next year. And obviously, the exchange is an area we fully expect to grow and that's why we're making the investments this year. And in addition, you won't have all the integration costs that we spiked out for you. The $0.20 to $0.25 that we're going to incur in '13 will not occur in '14. So I think there's many areas that we would expect to grow across all of our businesses. The one area that we see as a potential headwind right now is the small group margin and how that actually migrates to exchanges. And we've got a number of strategies to try to maintain that business within the small group, but are also very comfortable moving to the exchanges as we think we're going to have a very good product offering.

That's great. Just one last numbers question. On Medicare Advantage specifically, I apologize if I missed this, but what is the expectation for Medicare Advantage membership and also Commercial risk membership this year?

Yes. Justin, I'll let Leeba respond to that.

For Medicare Advantage, we did expect a decline in membership as a result of the reductions in service areas. As we mentioned, we have unexpected growth in our Medicare supplement business that was in part driven by those exits. We'll be providing full membership guidance at the upcoming Investor conference. But the reductions are consistent with the targeted reductions that we had from our service area exits.

And then, Justin, to your broader question, as we indicated, about half of the decline in membership is going to be ASO and half fully insured. So the half that's ASO is all Commercial; and then on the half that's fully insured, it's a combination of disciplined pricing in small group that we're going to maintain throughout the year. And then Medicare will be a component of that, with a little bit of some Individual in there as well.

Your next question comes from the line of Christine Arnold from Cowen.

A couple of questions. On AGP, you gave us a lot of good detail there. Are you still on target for $50 million in synergies? And I think when you announced the transaction, consensus expectations for AGP's 2013 EBITDA was $470 million. Do those seem like reasonable numbers to you?

Christine, yes, what I would tell you is relative to our original expectations, and I'll give some broad parameters what we spoken about before and then try to update those for you. So when we initially announced the transaction, we expected it to be in the mid-teens accretive, including all onetime costs. This stub period, the 8 days, so if you said, so what was the impact for this 8-day period, all in, for all the onetime costs and other items is roughly $0.08. So if you look at it as mid-teens before, you should expect roughly $0.08 better into next year because that was obviously baked in the mid-teens. We still are confident in the mid-teens. We are taking a more cautious view for flu right now, which is why we haven't raised the mid-teens. We are still fully expecting the synergies of at least $50 million. We believe that is very achievable. We think we have line of sight on the full $50 million and hopefully then some, based on what we've seen to date. So I'd say from that perspective, we're feeling very positive. Relative to our assumptions when we announced the transaction, I'd say the top line is coming in better than we had expected, both in membership and in revenue. I'd say our synergies are better than we expected at this point, and our below-the-line debt cost is slightly better than we had modeled. The big item right now is what's the flu going to impact us by, and that's why we're still confident with the at least mid-teen range, but hopefully could do better.

Great. And then on Medicare Advantage, it's been a challenge and I think a big part of your longer-term plan is to really turn around those losses that you had in the Medicare Advantage operating line. How much do you think you can get back in 2013 of the $600 million you've kind of lost over the last 3 years, given that maybe you're exiting some PPO markets that were unprofitable and that gives you an immediate help?

Yes. So Christine, one thing I would say is, I would like to wait till February at our IR day when we give a little more detail here. But what I would say is, you will start seeing improvement immediately in the margins for Medicare this year and substantial improvement. But it's important to recognize that we wanted to invest for the long-term strategy for both the STAR ratings and the HMO positioning. And with that, we're investing $150 million of those earnings incrementally this year. So what you may see in the segment reporting as we go forward is not as much earnings growth. But please keep in mind, we are covering that $150 million of incremental investments. So if you look at that on a run-rate basis, the core earnings are going to improve this year, but then be offset primarily by the investments for this year, but to drive growth beginning really in '14 and '15.

Okay. Probably pretty stable overall earnings from the operations?

Stable is an appropriate way to look at it.

Yes. And Christine, I would just emphasize that, and we said this before, our Medicare turnaround plan is a multiyear strategy. As Wayne indicated, we do expect margin improvement during first phase of this with enrollment growth coming later.

Your next question comes from line of Chris Rigg from Susquehanna.

I just want to help you -- can you help me better understand the $0.20 to $0.25 from Amerigroup? Those are onetime in nature and not likely to repeat in 2014?

No, Chris. Let me clarify. So the portion of that cost is going to repeat. It's the debt on the AGP earnings. So I'm sorry, I'm sorry, I was referring to what happened in '12. You're referring to '13. In that $0.20 to $0.25 for '13 range, those are the integration costs. We expect those to fade away after '13. As we mentioned when we announced the transaction, at least mid-teens accretion in '13. With those costs going away, you will get growth from that beginning in '14, and then we expected at least $1 accretion by 2015.

Okay. And then -- so when you guys report results over the course of this year, are you likely to report the adjusted number like you just did in the fourth quarter so the $0.20 to $0.25 is broken out separately?

No, we will plan to include as part of our normal course of business now. So all of our numbers will include those integration costs being embedded in our numbers.

Okay, okay. And then just on the AB 97 and the provider cuts that seem like they have at least court approval to move forward, at least from the Circuit Court of Appeals, how does that impact, if at all, your results this year?

In terms of AB 97?

Yes, yes, I mean, is that -- what are you guys assuming in the guidance?

What I would assume is, we believe we have appropriately reserved for whatever exposures we could have regarding AB 97 at this point in time. We are optimistic that we will get that implemented in an appropriate manner, very similar to governor's proposal, which is more prospectively, but we recognize that we need to take a prudent position around what exposures could exist in terms of how that maybe put forward [ph]. We think our guidance does have that prudent position baked into it.

Okay. And so, if that's not retroactive and it does move forward, is there a cash impact from a cash flow perspective? Or is it -- there's no impact?

Not a cash flow perspective because again, in theory, a lot of the cash has already exchanged hands, so what you really just have is whether -- if it's retroactive, we'll have a negative cash flow impact because we'll ultimately have to impact whether those rates get back. I doubt we'll be writing a check. I think it'll be more reflected in the future rates though, so -- but in essence, if it's prospective, we believe we had a prudent posture on this, and there would be potential positive development for us.

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

Just wanted to understand a little bit more about the guidance and process and sort of what's come together the last couple of weeks. It sounded like 2 weeks ago, you guys were suggesting relatively flat net income and understanding that the fourth quarter came in better. But if I use the midpoint of your updated share count guidance, you're implying a decline of about 6.5%. So I just want to understand, is that sort of consistent with what you were seeing? Or has something changed in the last couple of weeks? And then, I'm also curious if the process by which you're setting guidance is different than what you've used in the years before. I don't know if that's impacted by the CEO search, or if you guys are thinking more conservatively due to the uncertainty in '13.

Yes. So Josh, let me take a stab at this. First of all, in our 8-K that we filed right before the JPMorgan Conference, we specifically stated off a base of $7.30 to $7.40 that we expect relatively stable adjusted net income for 2013. Obviously, we've outperformed that $7.30 to $7.40, and as John indicated earlier, have not reflected that in our updated guidance. Clearly, if those trends continue, that would prove to be a conservative view. With that in mind, though, we thought it was prudent in light of the elevated flu we're seeing to bake that in. We also thought it was prudent to bake in some level for sequestration, as well as moving the buybacks to be feathered in much slower on the front end of the year, much heavier in the back half of the year because, again, we like the advantages of having dry powder if the fiscal cliff causes a broader concern for the markets and for companies that would be cash constrained, and it gives us unique opportunity. So I would say, our positioning hasn't changed. We've really just come off a stronger base, and I think we've baked in some other items that we think give us a prudent view of things that could go wrong. But hopefully, similar to third quarter, if those don't occur, we could have better-than-expected results.

So Wayne, the same sort of process by which you build your guidance that you've used in prior years?

Yes, yes.

Okay. And then, just a second question then, some of your peers have broken it out. Is there a way for you to help us understand, in terms of exposure, how much of your actual EBITDA is expected to come from either the Individual or the small group or both segments?

I would say at this point, Josh, we'll give more details in February around our business segments. The one thing I would highlight, though, is that the impact for Individual regarding exchanges, we don't expect that to have a negative impact for us. We actually expect that to be a net positive impact. It's important to recognize with the 85% MLR for small -- for large group and the 80% for Individual and small group, relative to the Individual business, our margins are already in the 3% to 5% range for Individual. So we're not pushing high-end margins in that book already because of those MLRs. So we don't see a migration from the current Individual books of the exchanges being a headwind at all. In fact, it should be a net tailwind for us. Relative to the small group business, we have said that we would expect for our roughly 2 million members that we would see some margin headwind as those migrate. But I'll let Ken comment on a few of the things we're doing to at least position ourselves for the exchanges and how we're trying to address our small group business.

Josh, when we look at the business going forward, there'll be some margin reduction on the small group business, as Wayne stated, but we see this as a very good opportunity as well and an opportunity for top line growth. We do -- we've done a tremendous amount of consumer research on exchanges and are working with their regulators in all 14 states. While we feel that, really, the underlying economic constructs and the structure in each state will drive our decision, whether we participate or not, we're going in with a very positive attitude and feel that we have some great assets to be able to grow our business when we get into 2014. So we do see small group, as Wayne said, will be the area that will have the challenge. And we do feel that, over time, it will be more than offset with the opportunities we have in the exchanges and the growth, both top line and overall EBITDA growth, that we'll have as we grow our overall base.

The only thing I would add, Josh, and we said this publicly is that if you were to look in our entire small group business and model that over a 5-year period, what kind of margin attraction could have. And we said if you were to cut it roughly in half, you could build a headwind of about $400 million. So if you assume the entire business was to migrate and you assumed all margins were to go in half over a 5-year window, that's about the size of the headwinds you would have. Obviously, that would be substantially offset, though, by the exchange buildup that would occur there and the tailwinds we would get from all that new growth.

Got you. Okay. So -- and as you guys are saying offsetting in the long term, is that -- are you by definition saying in year '14, for Blues market you'll participate in both exchanges, so sort of all 28 of those exchanges?

We're going in with the assumption that we'll participate in anywhere it economically makes sense. So we are preparing. We're working with our regulators in each market. It ultimately does come down to a decision on how we work with our regulators, but we do anticipate using our advantages in all markets.

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

Actually, just wanted to continue that discussion on small group and just sort of be interested in how you think the pricing dynamics might play out over the course of the rest of the year in small group. Do you think that we're going to see some additional firming as you see carriers pricing in some of the ACA taxes and costs? Or do you think there could be some additional competition as you see folks trying to retain certain levels of market share in small group ahead of exchange implementation in 2014?

It's -- so far, it's been rational. And the impact to the Affordable Care Act, including the insurer fee, comes into play more as we head into the second half of the year, as the pricing the membership carries more into 2014 and therefore, has to be covered. It's probably important to say that our pricing for 2013 is about 75% baked right now, meaning the vast majority of the member months are already priced for. So there is -- we do feel that in most states, we've seen our -- the market as a whole price the ACA fee in because it's appropriate. It has not created a competitive disadvantage or a disjoint at this point, but it will be a market-by-market, region-by-region area. But I would go back to over 3/4 of our member months, pricing is already baked in for 2013.

Okay. And then just had a follow-up question just on Amerigroup, and maybe if you can comment a bit on how the performance of Amerigroup tracked in terms of margins in the fourth quarter? And then you did sort of reaffirm your views on the synergies in the accretion. So should we assume from that, that you're still assuming that AGP can produce net margins? I think, Wayne, you had mentioned previously that you were assuming sort of a 2% to 3% net margin sort of run rate for AGP post the acquisition, so just an update on expectations around AGP's margins.

Scott, I'll let Dick comment on the details of it. But again, I would say that the book of business is growing better-than-expected. The premium is better. We're being strategic in the markets we go after. As you've heard in Florida, I think there's a couple of counties that we're focused on but typical with new business coming in. But all in all, I think those margins are still reasonable, and I'll let Dick comment on what we're seeing right now.

Yes, not to go too much beyond that, but as you know, we had a lot of new business in 2012. I think our revenue as an independent company grew by something like 40%. A lot of that new business came from Texas. We entered the new State of Louisiana, a much smaller new state in the middle of the year at Washington and our loss ratio in some portions of Texas, principally the rural market as well as El Paso, was elevated and continues to be elevated, and our loss ratio in Louisiana is elevated from our original expectations as well. So overall, our MLR as a business is somewhat above where we thought it would be this time last year. But that's not uncommon. I mean, new business often comes in a little hotter than expected. We're doing usual things that you would expect that we always did in the past in terms of re-contracting and medical management initiatives, and we're also engaged in pretty heavy dialogue with the states relative to rate adequacy. We think a lot of this new business was underwritten pretty aggressively by the states. And so in the long run, we're optimistic this business is going to run as our business ran historically, but it's going to take a little time. We've got to let our initiatives take hold, and ultimately, we're going to have to get some help from the states in terms of rates. But we're confident in the end we'll get that. We've got to -- in particular, we have a strong track record in Texas, not only in terms of executing well as a team, but also in terms of the state being responsive from a rating standpoint. So it's going to take a little longer than we thought. We're probably going to feel some of that impact in 2013, but I think we'll get there eventually.

Your next question comes from the line of Sarah James from Wedbush Securities. And Sarah James disconnected. We'll go to the line of Kevin Fischbeck from Bank of America Merrill Lynch.

Okay, great. I just wanted to clarify something quick before I ask the follow-up question. You mentioned before that sequestration was a headwind to your numbers potentially for 2013. How does that flow through? Did you not price for that? And what's the relative size for sequestration?

Kevin, thanks. We did consider the potential impact of sequestration cuts as part of the bidding process. We do have plans to help mitigate the impact of cuts, should they take place. Our markets are, obviously, as you know, very competitive, and we would need to make some adjustments to provide our payments to compensate for sequestration cuts, but in an actuarially sound manner. So I would say yes, we have, to answer your question, the short answer is yes, we've taken that into account.

And we're not quantifying at this point in time. I think it's just important to recognize that while we believe we can implement many of these actions, we do believe that a lot of these actions will take some time as we have to do it on a contract-by-contract basis, and we plan to honor our contracts with our providers as written. And so, I think it's not a full-year baked impact. It's more the impact of the time that would take for us to implement all the actions that we would want to put forward.

And this is -- the potential impact of this is another reason for the prudent stance we've taken with respect to our initial 2013 financial guidance.

Okay. And then, as far as, I guess, a couple of things in California. Do you have -- are you -- what are you assuming as far as the dual rollout for 2013? And then Health Net obviously has a contract with California that's, at least, right now is somewhat unique. Is there an opportunity for you to do something similar in California?

Well, we were disappointed with the 3-month delay with the dual projects there, but we are looking forward, obviously, to serving this new population. However, if the delay will improve the state's rating-ness [ph] and increase the chance of success for the overall program, then we think it was a prudent move. We do plan to participate in 3 counties, as you probably know, Santa Clara, Alameda and directly and as a subcontractor to L.A. Care and L.A. County. So these programs are now scheduled to begin in September of 2013. But L.A. will be phased in over 18 months, which is, I believe, supposed to smooth the enrollment transition. We've not seen final rates here for the program. We are cautiously optimistic that they'll be adequately funded. We will maintain the option not to participate in the event that the funding is not sound.

The only thing I would add, Kevin, to your question is similar to Health Net's transaction, we're having our ongoing discussions with the state. We would expect, just as the state has committed to Health Net, that we would have actuarially sound rates with appropriate margins over time. And we just -- we would prefer to keep those discussions for now with us in the state as we move forward.

Okay. But you're not factoring anything in your guidance? Or is there something in there?

No, we had the build-out for the duals, though, in California and we've got, obviously, the delay baked in, so it has a slight negative impact in our guidance because it's been delayed by 3 months because the build-out costs don't go away. They maintained and yet now, the revenues start 3 months later. So we have a slight delay in our guidance -- a slight delay in the rollout, and that puts a slight impact on our earnings. But it wasn't expected to have a huge earnings impact in the current year anyway since the build-out costs occur regardless of the start date.

And your final question today comes from the line of David Windley from Jefferies. David H. Windley - Jefferies & Company, Inc., Research Division: So a question on the SG&A investment spending above normal, the $300 million. Would you expect some amount of that also to carry forward into 2014?

At this point, I think it's premature to be able to answer that. I think it will important at the IR Day in February that you can see the details of these investments and why we're investing where we're investing. But clearly, I think we would say, we would expect some of that to not recur. I think that's a very fair statement and provide some tailwinds to us. At the same time, though, depending on the pace of the duals and how those rollout, depending on the role the state would like us to play on exchanges and we're hoping it will play a bigger role with our states. I mean, there could be other items, but if there are other items, we will need to show you the revenue and the growth attributed to those investments. So for now, I would expect some of it, though, to be non-run rate and that we would get some of that back. But if it is spent, we'll give you line of sight at least around why we're investing and where. David H. Windley - Jefferies & Company, Inc., Research Division: Okay. And then a follow-up on -- just a broader question on your research on Individual and small group exchange actions and perhaps even broader than that. But I guess I'm just curious given the simulations and research that you have been doing, what your views are on employer dumping into exchanges? What -- do you expect that to be modest and slow? Or do you expect that to be more of a kind of an avalanche early on?

David, it's Ken. We don't think it will be an avalanche early on. We think that it will be moderate changes. It will primarily start in the small group market, and we feel that there'll be groups going on both that have coverage and will be transitioning to move over, and then there'll be a very significant portion of the market right now that isn't covered. As you know, the offer rates in small group are below 50% right now, so there'll be a lot of others adopting in just additional growth. But we see it in small group, in the lower income groups that would see the subsidies being an advantage. And right now, I think the market is assessing and evaluating on a state-by-state basis. A lot will depend on the marketing efforts by the states for their marketplaces and how we tie into it. But I'm not -- it will not be an avalanche. It will not grow very fast in the large group, and it will just transition over time, as Wayne said.

Thank you, everyone, for your questions. In closing, let me just say again, we are pleased with our fourth quarter results and are taking steps to ensure our company is well-positioned for increasing growth and success in the future. We're motivated by the opportunity to be a key part of the solution regarding the challenges of rising health care costs and access. We do look forward to sharing more information about our investment plan's outlook and longer-term strategies with you in the coming months. And let me say again that we will be hosting an Investor Day on February the 28 in New York City. We plan to expand on our strategies to drive future growth and provide you with an opportunity to become better acquainted with our leadership team. The logistical information is available on our website, and so we do look forward to seeing you all there. Finally, I'd like to say thanks to all of the WellPoint associates. We've done a lot in the last 6 months to improve our ability to execute in growth areas, and the results are showing through. I know the change can be difficult, so I appreciate all of your efforts and I'm confident that your hard work will drive even better results in the years ahead. I want to thank everybody for participating on our call this morning. And operator, would you please provide the call replay instructions?

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