Ladies and gentlemen, thank you for standing by. Welcome to the WellPoint Fourth Quarter 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, and welcome to WellPoint's First Quarter 2013 Earnings Call. This is Doug Simpson, Vice President of Investor Relations. Presenting today are Joe Swedish, Chief Executive Officer; and Wayne Deveydt, Executive Vice President and CFO. Joe will start the call today with an introduction and offer some of his views on WellPoint's positioning, near-term and longer-term, and also lay out some of his expectations as CEO. Wayne will then offer an update on the business and highlight progress against our operating goals. He will also review the quarterly financial highlights and our updated outlook. Q&A will follow Wayne's remarks. During the call, we will reference certain non-GAAP measures. Reconciliation 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. I will now turn the call over to Joe.

Good morning, and thank you for joining us today. This is my first in what I expect to be many discussions. And I look forward to meeting more of you at upcoming conferences and industry events. I expect to maintain an active dialogue and appreciate your interest in WellPoint. As Doug mentioned, this morning, I'm going to focus my remarks on 2 principal areas. I want to start with an overview of my decision to join WellPoint, and then discuss some of my expectations and how I'm approaching my responsibilities. I've worked with many health care enterprises over my 40 years in the industry. As I think about the evolution of the system over the next 10 years, I'm optimistic about the prospects for WellPoint and the opportunity to deliver value to our customers, members, associates and shareholders. I'm encouraged by the recent operating momentum, as demonstrated by this quarter's performance, which builds upon the improved operating trends seen in the second half of 2012. I would like to take a minute to thank John Cannon for his efforts during the interim period and stabilizing the company for 2013. There's much to be done with exchanges coming quickly and the market backdrop constantly evolving. It is helpful to start the year on a strong note, as shown by our strong bottom line, strong cash flow and expense controls in the first quarter. I've now been here for a month, and my immersion has been constructive and supports my due diligence prior to accepting the opportunity. Joining WellPoint was a major personal and professional decision for me, one that I did not take lightly. I was intrigued by the opportunity as it became apparent to me that our board was looking for someone to position the company for the next decade…

Thank you, Joe, and good morning to those joining the call. My comments today will focus on the key financial highlights from the quarter. Additional details are included in this morning's press release. I will also provide some business line commentary and then close with the discussion of our outlook for the balance of 2013. Please note that Amerigroup was included in our consolidated operations for the entire first quarter of 2013, and therefore, impacts both the quarter-over-quarter and sequential comparisons. Overall, first 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 EPS of $2.89, which included $0.05 per share of net investment losses. Excluding these losses, our adjusted EPS was $2.94 or an increase of over 25% from the first quarter of last year. Our quarterly results were comfortably ahead of our plan, both at the operating gain level and below the line, where we benefited from some favorable tax planning strategies. Our results were supported by strong operating cash flow and a sequential increase in the DCP metric when adjusting for the impact of Amerigroup. As Joe mentioned, we have modestly raised our full year EPS outlook as a reflection of our performance but are still being prudent as many of the uncertainties inherent in our original guidance still exist. Medical enrollment declined by 321,000 members or less than 1% on a sequential basis. The decline occurred almost entirely in fully insured business, as we commenced our transition toward HMO product offerings in the Medicare Advantage market and experienced modest attrition in our Local Group, State Sponsored and Individual businesses. While fully insured enrollment ended the quarter about where we expected, our ASO enrollment is trending favorably relative…

Thanks, Wayne. With that, operator, please open the queue for questions.

[Operator Instructions] Your first question comes from the line of Justin Lake from JPMorgan. Justin Lake - JP Morgan Chase & Co, Research Division: First question on Medicare Advantage. Can you talk through your thoughts on final rates and specifically, what you think the impact is of the new risk score model on 2014 rates?

Thanks, Justin. This is Joe. Let me briefly comment on that. As you may recall, the advanced notice occurred in January, which projected a cut of about 8%. And the final rule came out on the heels of my arrival in late March, and it stated that it would improve to about a negative 3%. We've looked at that very carefully and, in particular, related to the new risk adjustment model, which we believe on average will impact our rates by an additional negative 2%. So the risk adjustment change will have an even greater impact on those plans serving the most frail elderly. So we've kind of looked at it related to our strategy. And let me just share with you that we are evaluating this part of our business portfolio in front of our June bids. We're also looking at our $150 million investment that we have made public. And I think Wayne has commented on that in his remarks. We believe that, that investment is flexible as we're taking some time to more closely examine where we might better spend the $150 million within that space. The risk coding change probably has less impact on our Blue business, which accounts roughly 90% of our MA book. This is clearly one example of how the funding challenges can impact access and quality and ties back to my earlier comments about the need to address affordability across all markets. One additional maybe a little kind of reflection I can give you that I've keyed in on is that I recall back in January, we did share with you that we accounted for the sequestration exposure, which I believe is something on the order of about a less than $50 million amount that has been baked into our '13 performance. And so we believe we're fully accounted for there. And so we continue to examine this very carefully and believe we can create some accommodations to adjust accordingly. Justin Lake - JP Morgan Chase & Co, Research Division: And you mentioned the Blue business has less of an impact from the risk scores. And one would think CareMore might have more significant impact, given the structure of that business. Can you give us an idea what the CareMore headwind might be to rates? Is it -- clearly, I would think it's more than 2%, but is it 3 or 5 or 10?

Well, first of all, it's certainly going to have an impact at a greater rate than the rest of the book. Our expectation is probably approaching in excess of the 5% hit. So I don't know, Wayne, you may want to talk on a specific level about that.

Yes, Justin, the one item that we're still evaluating is how we could respond to the impact of the hit. Obviously, there's been a lot of initiatives even when the final rule came out to see if there was still some opportunities to influence that rating environment. We think, at this point in time, any changes would be more of a reflection of the rate environment in 2015, not what we're going to deal within '14. So I think as Joe said, I think many individuals are viewing the industry cut as closer to 3. But when you think about risk coding, the average cut is going to be closer to 5. And then when you look at those organizations that really focus on the most frail members with the most chronic conditions, we think it's well north of that, so -- and meaningfully north of that. So from our perspective, I guess the good news is it's only 10% of our book, but it's a real challenge to those members that really need this care management more than anybody else. And it's on the backs of the largest cuts that we're going to see out there. So we'll adjust our model accordingly. I think, as Joe said, the $150 million was a combination of how to invest more into this frail management model, as well as other ways to start the growth model engine and get it reinvigorated. And we're going to have to look at that in light of those larger cuts. Justin Lake - JP Morgan Chase & Co, Research Division: Then just my last question is on looking ahead, obviously, on 2014, a ton of focus. So Medicare Advantage you thought would be a tailwind with all the investments. Can you give us an update there? One of your peers said they expect to see exchanges not have-- generate significant disruption. So can you walk us through the 2014 headwinds, tailwinds? Just an update. And specifically, if you want, if you could give us some color as to whether you think you can grow EPS, obviously we're all certainly, kind of focus there?

Yes, thank you. Well, as I've said, I like our chances to win in the new market. It's probably too early to comment on '14, as I've been in the process of reviewing the businesses and there are a lot of moving parts over the next year as we move into '14. We'll refine our views and internal targets as the year progresses. And we're focusing on positioning the company for long term and making those right investments, that I think we've already spoken to. Specific to headwinds and tailwinds, a couple of observations that I've picked up on since I arrived. We currently expect a manageable headwind related to the commercial EBIT, primarily resulting from the expected loss of small group customers who may discontinue offering health insurance coverage to their employees when exchange options become available. Realistically, the timing of that really remains uncertain. We're also currently evaluating the outlook for our Medicare business and our investments in that area as well, particularly in light of what we've already commented on, which is the risk coding changes. The effective tax rate will rise with the continued implementation of ACA, including the introduction of the insurer fee. Maybe flipping the other side of the coin, key tailwinds look something like this. New business is coming into the individual markets from the introduction of the exchanges, certainly brings some opportunity for us to really focus heavily on that tailwind. Operating margins on the exchanges would definitely vary by state. But we currently believe that they will be in the low to mid single-digit range across our markets over time. The timing and magnitude of those kinds of gains are tough to peg accurately at this point. In Medicaid, we expect to grow primarily from the eligibility expansion as well as some of our recent contract wins. This group may be -- excuse me, this growth may be partially offset by start-up costs related to the dual expansion in California and potentially other states. Key to our Medicaid performance will be the ultimate rates we received in those markets and from those members. Specialty continues to perform well and should continue to grow. Increasing accretion from the Amerigroup transaction is certainly something we're examining. And below-the-line should continue to benefit from our share repurchase activity. Wayne, do you want to comment on the last point of the question?

Yes, so just in relative to are we targeting EPS growth? I think the answer is we're always targeting EPS growth. And I'd say we'd like to build plans that continue to target for EPS growth. But I think to Joe's comments, 2 things. One is how do we finish this year is very relevant. It's hard for me to say what we're targeting until I know how we finish this year. As you know, we started our quarter quite strong and are optimistic at this point but prudent in our outlook. And two is some of these unknowns that Joe just highlighted, we'd like to get a little more clarity before we put our stake in the ground. But I'd say, it's our goal to target growth but more to come.

Your next question comes from the line of Tom Carroll from Stifel. Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division: So just a question on Medicaid, since we have Amerigroup fully baked in now. Would you comment on perhaps any crosscurrents between, what I would call, legacy WellPoint Medicaid and the Amerigroup book? Have you identified any kind of new synergistic opportunities that might help you out? And then, secondly, related to that, maybe give us an update on your communications with the state of California in terms of the dual demo? And perhaps, if you are going to be expecting or do you anticipate any kind of similar deal that one of your California competitors received?

Let me take the Amerigroup inclusion for the first quarter. We're pleased with the first quarter performance from Amerigroup overall. And I've looked carefully at the synergies that were projected, and I'm really pleased to say that the synergies are on track with our plans to date. We continue to believe we'll deliver mid-single digit EPS accretion this year. The financial comparisons between Q '12 and -- for the first -- 1Q '12 versus 1Q '13 were impacted by Amerigroup, and we have highlighted those impacts throughout our press release. We remain comfortable with our previously communicated accretion targets for the Amerigroup transaction. Wayne?

Yes, thanks, Joe. To elaborate in on, so are we learning anything new? The short answer is yes. We did not bake into those orders that Joe quoted any assumption for improvement in the WellPoint book over time. And I think as Dick and the team got a chance to really dig in, one of the things we looked at is that the margins versus our Amerigroup brethren and versus our historical margins are significantly divergent from each other. And just a 1% improvement in margins for us is worth over $100 million of EBIT to our shareholders. And so one of the things we are doing is starting to reallocate some of the investment dollars we committed to this year to shift a few of those dollars to our Medicaid book to start those investments to drive that EBIT growth. So we were hopeful that will create a different tailwind for us to offset maybe some of the headwinds that Joe highlighted. The other thing I would highlight is on your question, Tom, regarding the dual rates and other items. We did receive rates last evening, after hours. And with that being said, we basically started looking at them this morning. So I don't have any comments on the adequacy of rates at this point, I -- beyond just that we've got them and we need some time to assess them and evaluate them. But we're hopeful that they'll be appropriate and adequate for a sustainable program for the long term. And then, relative to the broader Medicaid, Medi-Cal in particular, in California, we continue to work with them on not only the expansion and the rates needed within the expansion, but also talk to them about the ABD population, which is one specifically we're focused on, on ensuring that we get appropriate rate adequacy. But we have not, for lack of a better phrase, struck a deal yet. We're just trying to make sure that we create a long-term sustainable model for both the state, the beneficiaries of that program and WellPoint shareholders. Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division: So do you expect to have some kind of downside protection from the state? I mean, what's your guess there?

I'm cautiously optimistic, Tom. I think that Health Net had a similar announcement, that they've talked about publicly in their contracting. And I think for us, we'd like to ensure that we're mutually at risk for the performance of this book. We think ultimately, we have to be ready to serve this population. So...

Your next question comes from the line of A.J. Rice from UBS.

Just a couple of quick questions. First of all, we sort of talked around this a little bit. But I know you guys have been doing a lot of focus group studies and other investments to understand and get ready for the exchanges. As you sit here today and think about what sort of the biggest unknown or challenge to you, maybe 1 or 2, if there are, and putting that into place and making WellPoint successful on that, what -- as you sit here today, what remains uncertain for you in terms of the biggest item? And then, if there's an opportunity perhaps, and maybe is misunderstood, you think, in terms of WellPoint's opportunity on the exchanges?

Great. Thanks, A.J. Well, let me emphasize. We continue to work very actively to prepare for that October 1 open enrollment period. As you noted, we've been in some very deep analysis of how it might roll out and then how to best develop our portfolio of products for the exchange market. So I think we're really ahead of the game, and I've been very impressed with the commitment that we've made to the analytics. We have substantially completed the exchange base product design and pricing development work. We've signed contracts with the majority of our providers across our markets. We feel very good about that. We continue to believe our brand name strength and unit cost advantages position us well to achieve meaningful growth related to the exchanges over time. And obviously, related to risk, the timing of the new growth and our related investments are going to be influenced by the pace in which the exchanges ultimately roll out in the underlying regulatory framework in each of the markets. We do believe that half the states are expected to use federal fallback exchange. Others are expected to use some form of state-based models. And so, basically, we continue to focus on competing the exchanges in all of our Blue markets, but obviously can't fully commit until we know the rates and regulations as they evolve, and particularly, as we get closer to implementation.

Okay, great. Let me just ask you real quick on Medicaid. Have you guys done an assessment of the expansion in the states that you're in that have said they're going do the expansion. How many incremental Medicaid beneficiaries will be up for grabs for you to potentially pick up? And do you have any early thoughts on the medical risk profile of those Medicaid beneficiaries versus legacy Medicaid beneficiaries?

It's too early to provide membership estimates for '14. It has a lot to do with the fluidity of state positioning on Medicaid expansion. We expect states to continue to evaluate the benefits of the expansion as we move throughout this year. So obviously, were looking very, very carefully for these signals. We believe we're very well-positioned to gain meaningful new Medicaid membership in '14 and beyond from eligibility expansion. I think it's worthwhile to note that states are going to have flexibility to participate in the expansion after 1/1/'14 should they choose to do so at a later date.

A.J., one thing I would add to Joe's comment too is that when you typically roll out a new program, you, in some cases for Medicaid, either breakeven or loss a little bit of money. But in the case of expansion, our upfront build out costs have already occurred. So in essence, we are able to leverage our current infrastructure and G&A structure. So we think there's a reasonable possibility that this membership will potentially be profitable on day 1, albeit at a lower margin than what we have because it's still going from a very unmanaged care environment to a managed care environment. But we also think the benefits of how we're positioned already and the G&A infrastructure that already exists actually gives us an offset to that adverse selection you get out of the gate until it becomes more managed.

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

I was hoping maybe, just so we're all on the same page, you could try to walk through, when you talk about the minus 5% on the MA rate, can you just give us your view of getting from the core trend update that included the doc fix of about positive 3% down to that figure? And if you can break out the component factors that get you there. I just want to make sure that you're looking at it in a way that's consistent with what we're hearing from others.

Yes, Matt. I'll take a stab at it. And it's quite complicated. And I don't mean that to be flippant in the response but simply to say that it very much differs based on plan and product design. And so please understand that our comments are really focused on our view of an industry impact and then a specific view of how we think that industry impact might play out for us. So when we look at the original cuts being in the 8% range, I think all of us, when we saw the final notice, were obviously a little more optimistic in where that would land. And ultimately, it landed in the minus 2% to 3% range, as Joe has commented on. But as we really got into the HCC coding model and what that meant, we saw that it actually would create, in our opinion, an impact of that change is about another 2% on top of that, final rules. And so I think it was a little bit of one item, and until you can get more due diligence on, it was hard to really understand the components. When we look at it relative to WellPoint specifically then, you're looking at a potential impact of around minus 5% for the industry. We think on our Blue MA book, as Joe mentioned, which is about 90% of our book, we think we're going to be a little less impacted versus that 5%. But we think the CareMore plan specifically, which really focuses on the more frail and elderly population, will be disproportionately impacted versus that broad average of around 5%. And granted, while it's only 10% of our book, what we're more focused on is the consumers that are impacted by it and what benefits can we continue to offer for such a steep cut. I hope that answers your question, Matt.

Yes, that will do. If I could just shift gears. I know you've elaborated at something like on the 2014 outlook and where we are now. I guess the question I would -- since you had said on the last call that it was your intention to grow earnings, and I think people took that to be, to some degree, a statement that you would target earnings growth for '14. Maybe putting it a little differently, aside from the MA rate factor, which I don't want to brush over, but for you, obviously, it's a smaller piece of your business, is there anything that has deteriorated in terms of your outlook for 2014 relative to the way you saw the world in late January?

Matt, this is Joe. My sense is that the answer is no, nothing has changed in terms of where we were in January, notwithstanding the MA dialogue we've just had with you. So I can give you, I guess, the quick response on that. I don't know, Wayne, if you want to add any color to that brief statement.

No, I think Joe's comment is it. The short answer is no. I mean, short of the MA, which we need to evaluate, nothing else has really changed from our view. I think we're walking through all the details with Joe, but we remain optimistic on the tailwinds we highlighted. But we've got to manage this. The only thing would be what's the timing of duals. Maybe that might be one item, too. Duals keep getting pushed back a little bit more each time. So that would be something that could change a little bit. But other than that, Matt, no.

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

A question back on MA, and sorry to beat the dead horse here. But just want to understand the repositioning better. It sounds like it's a product -- I want to make sure I understand that it's a product repositioning. I think you've got just over 50% of your MA lives in HMO. The other half is split between regional and local PPO. I would have thought the regional PPOs would have seen a bigger decline than the locals. But it seems different this year. I guess, ultimately, what does that product mix look like? And then the second part of the question is there were some geographies that popped up in the CMS data, the Wisconsin, Connecticut, Georgia, Colorado. Those look like significant reductions. And I'm just curious, is there also a geographic overlap where certain markets are not sustainable going forward?

I'll try to hit all the questions, a number of them there. Let me start with the geographical one first. I think it's fair to say that we're trying to be focused on our investments where we can drive the greatest value for both the members and our shareholders and leveraging the assets that exists where they're at. So I don't want to give any broad strategy comments away about what markets we're more focused on than others but would simply state that it's important for us to leverage where we believe we can create an advantage to begin to grow in this membership and expand margins. And that has both a product focus as well as a geographic focus for us. Relative to the broader comments on the -- our assessment, again, when we looked at our PPO book, and I think this is really important in the comments, we're trying to give some broad views of what we think can happen. But again, it is going to be so plan and company-specific that you really should not take any commentary from us beyond the WellPoint commentary because that's all we can really speak to. But on the WellPoint specific, looking at our book, looking at how the final codings work on that, we actually think the impact to us on 90% of our book, even though it's heavily on the PPO side, is actually less of an impact than what we'd assumed the average to be for the industry. So from that perspective, I think, logically, it would make sense, Josh, to think about it the way you're thinking about it. But I think it's so specific to your product designs that until you can get to that level of detail, it's hard to have that conclusion ultimately.

So Wayne, would you say there'd be less -- just from a pure membership, total numbers of members, not profits or anything like that, but number of lives, would there be less pruning to do with '14 than what you did in '13?

I would think so. I would think so. But again, it's also going to be relative to how we position our products for these markets going forward. But yes, Matt, I think that's a fair assessment.

Maybe I can step to a higher altitude, looking at this from a strategic perspective. As we've said, we believe there's a significant improvement and opportunity in our Medicare business over the next 5 years, which reflects potential improvement in the Blue MA business, as well as the maturation of our CareMore expansion. We're in the process of reexamining that outlook for sure as we prepare for the upcoming bid submissions in June. And so while the absolute opportunity may not be as robust at this stage, given some of the comments that have just been delivered, we continue to believe there's a potential to both increase volume and improve our MA margins over time, particularly as we continue to emphasize our HMO products.

Okay. And then just last question on the exchanges. How are you thinking about competition? Do you think you're going to see a significant number of competitors on the exchanges in your Blue markets, or would you expect it to be less robust in terms of other plans offering?

Let me take a shot at it. Obviously, since I arrived, I've been spending a lot of time with the team, and they've been at it for quite a long period of time. What has struck me and certainly all of you commented on, it's a significant part of our book regarding the individuals and small group. And so as I look at it, I really reflect on the reality that I think our performance is kind of we represent somewhat of a bell cow in terms of the leadership that we'll probably administer in this space. In terms of competition, I think we're focused on our own product and portfolio of development. My sense is, as I said earlier, I really like our chances, especially given the analytics we've gone through over recent months and our continued positioning going into later this year, as regs and rates become clear in the markets that we're going to compete in. One other observation, I may have said it earlier, we certainly have desire to be in all of our Blue markets. However, we're definitely looking very carefully at that as the markets evolve, and we're going to reserve judgment as to exactly how, where and how much that may occur based on those characteristics market by market.

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

Joe, just to come back to a comment you had made earlier when you were talking about the headwinds and tailwinds related to next year and you mentioned the EBIT headwind in the small group market. Obviously, this is sort of a key variable to the way investors think about earnings next year. Can you give us a sense for your latest thinking as to what type of attrition would seem reasonable in your minds for small group to individual conversion?

I think it's a little too early to opine on that for a variety of reasons. And I think our sense is that because the timing of this remains so uncertain, we're kind of like letting some period of time evolve this year to better understand the play in the small group space. And even so, with some of the delays that have been announced, I think we'll have the ability to get clear and crisper insight in the small group migration as the year progress. I think the issues of cost and affordability is key regardless of the pace. So there are a lot of moving parts here. And so we're going into this eyes wide open regarding the small group space.

Okay. And then just a follow-up in the Medicaid business as it relates to the industry tax. Can you give us your latest thinking as to how much margin pressure, if any, you're currently expecting? And I think when Amerigroup was initially announced, there was an assumption -- there is an assumption in the accretion for some margin headwind. Just any update as to how you're thinking about the tax with regard to Medicaid would be helpful.

Yes, Chris. Just a couple of comments I'll raise at this point. We're obviously still in the process of continuing to work with our states. The big renewal period for some of our states comes up in October. So far, I would say our states are understanding. They get it. They recognize this is a new cost that the country bears, and that the country bears it with the goal of providing coverage for more individuals broadly. And so, so far, we're cautious but optimistic in our ability to have the fee reimbursed as part of our broader funding. I think the one thing I would continue to highlight though is that the lack of deductibility of the fee is what I think investors need to focus on because I think that's a hard cost for anybody to bear without being more efficient in your G&A. And I think this is where we think as a company, we think we can be successful in passing on the tax, but we think it'll be challenging to completely offset deductibility or lack thereof of that tax without being more efficient in G&A.

And I'd now like to turn the conference back to the company's management for closing remarks.

Well, thank you for your questions and participating on the call today. In closing, we're pleased with our first quarter results. I'm impressed by the way in which our associates have delivered in a challenging environment during a period of some uncertainty. As I look ahead to the coming changes, there will be challenges and opportunities that I believe we are well positioned that will help drive access and affordability and expand our role as a trusted partner advancing solutions to this country's health care challenges. I want to thank everybody for participating on our call this morning, and I'm looking forward to meeting many of you in person in the very near future. Operator, please provide the call replay instructions.