Ladies and gentlemen, thank you for standing by and welcome to the WellPoint Conference Call. [Operator Instructions] I would now like to turn the conference over to the company's management.

Good morning, and welcome to WellPoint's Second Quarter Earnings Conference Call. I'm 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 second quarter results, actions and accomplishments. Wayne will then offer a detailed review of our second quarter financial performance 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 in our press release and 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 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're pleased to report a strong second quarter of 2010, with earnings per share of $1.71 including $0.04 per share of net investment gains. Earnings per share in the second quarter of 2009 totaled $1.43 and included $0.07 per share of net investment losses. Excluding the net investment gains and losses in each period, our adjusted EPS was $1.67 for the second quarter of 2010, which represents an increase of 11% over adjusted EPS of $1.50 in the same period of last year. Our quarterly results exceeded our expectations, primarily due to higher than anticipated favorable reserve development and continued strong performance in our capital management areas. We're also seeing positive results in our core operations from many of the strategic initiatives we put in place over the last two years. Based on our results through the first six months of the year, we've increased our full year 2010 EPS guidance to at least $6.30 per share, including $0.08 per share of net investment gain, partially offset by an impairment charge of $0.03 per share. Medical enrollment totaled 33.5 million members at June 30, 2010, a decline of 343,000 members or 1% from March 31, 2010, which is in line with our expectations. Enrollment in the non-Blue business decreased by 85,000 members reflecting our exit from certain markets in our UniCare business, while the remaining decline was driven by in-group attrition in the National and Local Group businesses and included a sequential reduction of 103,000 in our BlueCard enrollment. The unemployment rate in our Blue states is down slightly from the first quarter to 10%, but we expect that it will remain elevated through at least the end of 2010. We continue to generate solid sales, with group sales running 5% better than…

Thank you, Angela, and good morning. Premium income was $13.3 billion in the quarter, a decrease of $866 million or 6% from the second quarter of 2009. Approximately $550 million of this decline related to the conversion of the large municipal account to a self-funded arrangement effective April 1 of 2010. The remaining reduction was attributable to the transfer of UniCare business in Texas and Illinois, and lower fully insured membership resulting from continued high unemployment in overall economic conditions. Administrative fees were $949 million in the second quarter, down $28 million or 3% from the same period of last year due primarily to reduction in certain PBM related revenues earned in 2009 and lower revenue in the National Government Services business. These declines 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 drug by the NextRx PBM declined by $147 million from the second quarter of last year reflecting the sale of NextRx in December 2009. The benefit expense ratio for the second quarter of 2010 was 82.9%, a decline of 100 basis points from second quarter of 2009. The decline was driven by the Local Group business and over half the decline resulted from the large municipal account conversion. This account historically maintained a benefit expense ratio higher than our company average. The decline in the Local Group benefit expense ratio was partially offset by an increase in the Individual business due to the delay in implementing rate increases in California. In the second quarter of 2010, we recognize an estimated $100 million of higher than anticipated favorable prior year reserve development. This is equivalent to the estimated $100 million of higher than anticipated reserve development that was recognized in the second quarter…

Operator, please open the queue for questions.

[Operator Instructions] Your first question comes from the line of Justin Lake from UBS.

First question on the impact of reform cost. We've seen in the -- there's a number of benefits out there that are being mandated by the government through reform. I'm just curious as to your estimate of what you think the impact's going to be there in -- as you go into the fourth quarter specifically and then the 2011 from a cost trend and pricing standpoint.

Clearly, we are working on implementation of healthcare reform and are doing -- deep into the work around pricing for the new products and for 2011. In terms of being more specific though in terms of the range and the impact, we're hesitant to do that for obvious reasons, and we don't want to affect the marketplace in ways that are not going to benefit our members. So I'm not sure that we can give much more detail in terms of pricing trends right now.

A couple of things though to give you at least some -- maybe some direction, I think as Angela said, until we get final clarity on some of the rules and regulations, this will be more directional than anything. But I think it's important to recognize that when we look at the commercial book and we consider the age in the 26 lifetime limits going away and preventive care so when you look at those components, we think that will have a low single-digit impact on pricing for next year. When you look at it relative to the fourth quarter, it's lower than that, primarily because of how the rules are actually implemented, meaning that while they go effect in the fourth quarter, many of those do not become effective until the re-enrollment periods. So if you think about the age in the 26 unless you were to turn within that age group in the fourth quarter, you won't be able to enroll for it until the next open enrollment period. The other thing to recognize is that with our commercial book, we generally have a more robust product design. So we generally offer preventive care in a lot of our product designs and so to the extent that we offer that already, we will have less of an impact versus say other competitors that may have had a more skinny-down version of a product that did not have preventive care. So from our perspective, we do not see as much of an impact in the fourth quarter as we do for next year but we think in pricing you're probably looking at low single-digit impact on pricing for next year.

And we have to keep in mind to, Justin, that every customer is coming from a different place and their benefits are different. So when you give these kind of norms, it all depends on where their benefits are and if they hit aging increments and other things.

And then just in terms of the guidance change, it appears the $0.30 increase there it appears that was basically a function of the investment gains plus a lower share count and the reserve releases. I'm just curious as you think of the fundamentals, as you -- going into the back half of the year, can you give us an idea of how you see that playing out as far as the continued potential for the declines in cost trends and the jumping off point for 2011, how we should think of that?

Justin, I would say that when you look at the change in guidance, it is due to those components that they were reserve development and better performance below the line. I would say the core operations look very solid at this point, which is one of the reasons we raised our cash flow guidance for the year. We are taking a cautious and conservative view for the second half of the year as we wait to see some of the impacts of health reform. We believe we could probably bake that into our guidance. But right now, I would say underlying trends look good. And as it relates to next year, that's really going to vary based on how the final MLR rules are defined at this point. I think in some states we may do a little better. Some a little bit worse. So it's really hard to say at this point until we get more clarity on the rules. But overall trends really have stabilized and in many areas have come down.

And Justin, you were talking about the last six months of this year, we don't put into the guidance prospectively reserve releases and we never have. And also as we look at trends, as we said we are experiencing towards the lower end of the range that we've provided around overall trend. And as you'll remember, the last quarter in particular, by the last six months of the year, more and more each year now reflect more seasonality reflecting kind of the nature of our product designs and as the deductibles wear off, we see kind of more seasonality in the third and fourth quarter. But all of that is planned for in our guidance.

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

Angela, you mentioned you would need to make changes to your individual product and the business model there. I'm assuming that includes distribution cost. Could you talk a little bit about what you meant when you said fundamental changes to that business model?

Yes, I will, Josh. Brian's here though and he could probably speak in more detail about that. Brian?

What Angela was referring to is we're taking a look at basically all aspects including, distributions costs, G&A expenses, obviously, we're working on our product changes to be compliant post 9/23. Not in a position to kind of get ahead of our announcements but one of the components is distribution costs. And so we're looking at that across the board, and we'll be announcing potential changes in some markets later this year to take effect next year. It's not as simple as announcing one thing across the board, because we pay both our internal distribution and external distribution differently in each of our states. And so, we're looking to primarily get alignments, but again, we've been talking with our distribution channel across the country, getting their input. But not in a position to kind of release the details, particularly since a lot of the regulations surrounding MLR are still outstanding.

Logistically, Brian, when would you need to make announcements to your distribution partners in order to have something set up for January 1?

Typically, all of our contracts have a minimum of 30 day. We would at least provide that to our distribution partners. Again, a lot of this is predicated on when we're going to get the MLR final regs.

Just a quick follow up on the drug trends with Express Scripts. I think, Wayne, you had given Rx coming in at high single digits. Could you maybe give us a sense on the procurement side the cost of buying drugs with Express? What sort of savings do you think you are seeing relative to where WellPoint PBM went?

Yes, Josh. This probably won't answer your question clearly. It's a little more complicated than just a percentage decrease. But what I can tell you is that on every product line that we had, whether we were looking at generic drug distribution, specialty drug distribution, retail distribution, mail-order versus non-mail there was a discount that could range from a few percentage points to say mid-single digits across the board. Some cases, it was even higher, but those were on less frequently used drugs. What's interesting though is because overall utilization is down, so we are seeing the savings we expected by drug, but the volume isn't there because of overall utilization being down. So when we're looking at it on a percentage basis though, I don't think it's unreasonable to assume that you're saving mid-single digit range in general relative to previous contracted in terms.

Let me also add to that. There was a strategic value -- many strategic elements of that transaction but as we are migrating this membership on to the Express Scripts' system, part of the value we get is that they have some capabilities that deal with mail-order, getting the member to lower-cost drugs, working with the member on compliance in terms of their medication regimen. So we're beginning to see the benefits of that as well, and will so even more as the rest of that membership is migrated over to their platform.

Your next question comes from the line of John Rex from JP Morgan. John Rex - JP Morgan Chase & Co: Just a follow on to your commentary on reform, impact reform provisions, that go alive into this year and impacts, you've grouped up kind of three of the important ones and the other one I was curious about your view on was the impact of pre-existing condition clause for children and how you size that. Were you including that in your commentary of kind of the young adults lifetime limits and preventative care or was that separate?

John, I think we need to start thinking about as we get into the reform discussion a couple of things. One, we're going to have this body of membership which is grandfathered. And for the grandfathered membership there are certain changes that went into effect, for healthcare reform will go into effect this fall, on the grandfathered books, but those were fairly minimal. So they're going to be kind of one body of membership. Then we have new products that are being -- will be filed and issued going forward that would be kind of the non-grandfathered healthcare reform provision. And those, obviously, you'll have a different experience and a different pricing base and as we look at increases over time, those will reflect the nature of the benefit. In terms of some of the more explicit provisions around healthcare reform that are coming forward, including additional regulation that are coming forward, we didn't really speak to that specifically. A lot of it still has to be defined and there still is even some more moving parts around the child's only policy or the pre-ex for kids. There's some discussion about additional regulation around that, and so we're still evaluating that guidance. It's difficult for us to speculate on what that means in terms of the impact overall, and we've got to asses what our options are around that business as well.

And John, for those reasons, the numbers I spoke about previously were only the Local Group business. So until we get more clarity on that and what profit designs we have and how we may change those and some more clarity, we are not including anything for the guarantee that she did. John Rex - JP Morgan Chase & Co: A number of plans have spoken to this, the pre-existing clause, potentially in an individual book being worth a few hundred basis points of cost pressure on the adverse selection risk. Would you agree with that directionally?

I think, directionally, yes. Yes, it's going to have an impact. But again we really want to get a little more feedback on the regulations and whether or not -- late last night the provision was added that there may be an open enrollment period. And so we really want to get more clarity around that and what that would impact. But yes, John, I'd say directionally, that's reasonable. John Rex - JP Morgan Chase & Co: I'm glad you brought that up because I'm referring specifically to that, so that reg that came up on the HHS site late last night where now there'll be open enrollment period. How important is that in terms of mitigating what could have been quite a bit of pressure there?

I think that is important. I think there's a lot of good work being done right now in evaluating what the consequences of some of these provisions are and really understanding what it means in terms of the sustainability of these products in these markets over time. So we appreciate the guidance there and we need to study it a little bit and study what our options are relative to that. John Rex - JP Morgan Chase & Co: With that, I guess with an open enrollment period though, would that essentially mostly mitigate what could have been a few hundred basis points of pressure in your view when you kind of think about how that impacts the book?

Not necessarily, John. So we're going to evaluate that carefully and think about what actions we need to take with respect to that. John Rex - JP Morgan Chase & Co: Just your view on cost in general. There's a lot of commentary kind of utilization being slack in the cube. Could you just comment here as you think about your books of business, commercial and the government books, are you seeing different trends in the utilization there or are seeing kind of weaker utilization trends across all books regardless of the class?

Let me say this because I want to clarify when I was -- it was responding I think to Justin's comment earlier. We're looking at overall trend and we were at eight, plus or minus 50. We are trending in the lower end of that range. But let me turn it over to Ken, since he can speak to some of the commercial experience that we're having and he and Wayne might comment more.

John, this is Ken. We have seen favorable trends as we indicated and for a variety of different reasons but the trends Brian and I both have seen lower trends in general. There may be spiked out in different areas of the business slightly but in general, there is a lower utilization on both books.

And John, the one thing I would add is that beyond just the state-sponsored, that Brian is seeing positive in as well, when we look at our FEP business one of the reasons for the change in our revenue guidance as you know is FEP is essentially a cost-plus program and about 40% of that change in the guidance is due to us having overall lower claims experience on FEP which, of course, translates in lower revenue as well.

And this is Brian. I agree with what Ken said across most of our business. We are seeing in some of our regions an uptick in individual utilization and trends.

Your next question comes from the line of Doug Simpson from Morgan Stanley.

Wayne, could just talk to the $2.8 billion I think was the number you threw out for cash at year end, is that the sort of working capital you plan to hold for some period or is that just sort of where you see yourself winding up? If you could also connect the dots to the debt to total cap down at 26%, how much dry powder do you need to keep around and just maybe give us a sense for how that may play out?

Yes, Doug, just want to remind all those on the call that we have approximately $1 billion of debt coming due in January of 2011. So when we look at our working capital, short of us refinancing, and I would fully anticipate that we would be able to refinance the debt. The markets are favorable at this point. But subject to that ability, no, we would not need to maintain $2.8 billion for working capital purposes. We do want to have an opportunity though first to refinance that debt though before we would discuss with our board opportunities on how to deploy that additional excess capital at this point. But ultimately, we like to keep enough cash on hand to cover at least 12 months of interest and principal payment. And outside of that, we have very few requirements at all at the parent level. So we would anticipate meeting with our board later this year to discuss those capital levels.

And then maybe if you could just talk to the end group attrition. Is there any data you can help us with on the characteristics of the lives you're losing as a result of that? Just thinking about the incremental margin and the negative leverage carry from that. If we got 100 basis point lift in employment, how would that impact the business and the risk pool overall?

We've experienced attrition since the recession began on both our -- on really all of our books of business but it's been predominantly in the small micro group market. Almost a third of the business that we lose is not going to a competitor, but is going through attrition of dropping coverages or transitioning to individual coverages. And the larger group business or multistate national account, it is attributed to layoffs, as well as to off-sourcing. What we saw this month in Small Group was we did have growth for the month overall in membership, and that was because attrition was down. We have been seeing it go down in each of our books of business, but it is still a fairly large negative, whereas 18 months ago, it was a positive month-over-month. So we anticipate as the business turns, we'll see both Small Group and National with increases and it's the Small Group that'll impact our margin.

In terms of experience too, I think you have to keep in mind, we've had higher than kind of a normal run rate at COBRA as a result of unemployment and some of that is beginning to essentially age off because it was subsidized for a period of time. So we're getting to the point where we're seeing that experience from the COBRA membership, and as we go through the rest of the year, some of that we anticipate will be dropping off.

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

Did you indicate directionally whether you think operating earnings will be up or not in 2011 or is it too early at this point?

Too early at this point to really comment on 2011, Matt. So you didn't miss it.

As you look at the grandfathering by your employer groups. Do you have any sense for how broadly employers are going to try to hold onto grandfathered status and where that might make it difficult for them to make the necessary benefit design changes to offset cost trend pressure? Are you starting to have some fix on that at least for 2011?

Yes, Matt, I'm going to let Ken answer that. I have to tell you from an operational point of view and implementation point of view, we are assisting our groups to either maintain their grandfathering or move forward to change their benefits as they might desire knowingly so that they know whether or not they're going to impact the grandfathering. So Ken, you want to talk about how that's being received?

We've been working hard. We made the decision. Of course, we could have saved operational dollars by not allowing grandfathering across-the-board. We want to leave that options open for our employer groups and we've been working with them and educating our brokers and groups in doing that. We've done a lot of primary market research. There's still some confusion about the bill and how it will impact but we have seen a lot of questions and individual companies making choices about the benefits they have. Of course, we have some flexibility on the buy down benefits and self-stayed grandfather. That was important in the provisions that were being offered. I can't give a percentage yet, but we felt it was extremely important to keep the books open for two reasons. One, to give the flexibility to the groups. And secondly, for the groups that are deciding to remain under grandfathered programs to be -- are better risk groups. It'll preserve the better risk pools for those individuals and let them keep their rates and benefits at the levels they're more accustomed to.

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

We've seen some reports recently of some of your peers talking about considering expanding or diversifying their intermarkets outside of health benefits just given some of the expectations for reform pressure and just interested in your thoughts around that in terms of the product and market mix and whether you would consider expanding into certain markets outside of sort of the core health benefits markets.

We do have an important element of what we call our specialty business. So our dental business is growing rapidly, vision, life disability, other kind of ancillary product offerings. We are evaluating all the strategic options as well as geography. We have operations and some other opportunities to expand more globally. So we are considering those issues. We, first and foremost, though, are very focused on serving and satisfying our members and taking care of them and there's a lot of additional value that they could receive from us through expanding the portfolio of offerings that we have available for them.

And Angela, would that include looking at expanding into new products and markets or really just expanding some of the specialty and other offerings that you already currently offer?

I'd say, we talk about the core business as saying the medical insurance business and the non-core business being specialty and other opportunities. So we're expanding our view of non-core growth opportunities as well, and there are many ways in which, synergistic ways, in which our customers would benefit by that expanded relationship.

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

You've had more direct experience with the difficulty raising rates than probably anybody and it certainly makes sense that you ultimately get a rate increase in places like California and Maine where you're not making money right now. But you also have a lot of individual and small-group markets where you do very well now. So why shouldn't we be worried about pricing pressure in those markets next year?

I'll let Brian talk a little bit to the experience that we're having across the states. As we commented earlier in the remarks, it's really important to think about this from a long-term perspective and we need a sustainable marketplace. And so I think as these issues continue to be evaluated, people understand the actuarial principles, the dynamics of what the rate need to reflect and I think that's going to find an equilibrium over time.

Carl, I'm sure you're well aware, reg-review process has been in place in most of our geographies. So this is kind of a normal course of doing business. I think one of the things that we've learned is that becoming as transparent as possible with the regulators in terms of our rates, what's needed with our rates, following the additional scrutiny in California, we've had a number of inquires across our states, a number have reaffirmed our rates. Others have posted additional questions and we continue to work with the regulators. We anticipate that into 2011, some states are going to look closer, and I think other states have been pleased with our level of rate development and the levels of transparency which we only expect to continue and to get better.

Operator, I think we have time for one more call. Final question.

Your final question comes from the line of Tom Carroll from Stifel Nicolaus. Thomas Carroll - Stifel, Nicolaus & Co., Inc.: Angela, you indicated that less than 5% of your operating gain comes from your individual book. What is the corresponding number for Small Group?

Wayne, you want to speak to that? We don't typically...

Yes, we don't typically break out by segment. The one thing I would say, Tom, is obviously, it's more than what our Individual is. I would highlight though that on the Small Group business, the exposure from the MLR is not as significant at all compared to the Individual. Most of our Small Group already runs a higher MLR. And so I think the bigger issue we wanted to highlight for shareholders is where the concerns might be around Individual but the exposure isn't what many believe it is and we believe we'll be able to manage it. Thomas Carroll - Stifel, Nicolaus & Co., Inc.: So as a follow-up on the Small Group, would you suggest that a quarter of your Small Group business perhaps is going to feel some pressure or is it more like a half and some magnitude of the actual size of the Small Group book that perhaps is going to get pressured?

It's difficult to answer until we get the final rules around the MLR. I would love to give you more clarity but until we can get further clarity on it, is really a difficult question be able to answer.

And let me just say the small group market is one where we have lots of expertise and in this economy and with the challenges that small groups have, they're really looking carefully at their benefits and we're working with them on whether they should be grandfathered or have other benefit designs. So we're really partnering with them and working together to make sure that they can have benefits that are affordable. I'm going to have to apologize for others who were in the queue and didn't get to ask their questions. We're going to be respectful of the fact that many of you guys might have to get off pretty quickly and I want to thank you all for the questions that you have provided us. In closing, I want to reiterate that we are performing well in 2010, and we do remain confident in the future. Our underlying business is doing well, and we benefited in the quarter from certain non-run rate items that have had a favorable impact on our quarterly results. We are taking a leadership role in our industry and making changes to our business model to enhance the quality of care, while holding down increases in future medical costs and operating expenses in order to further enhance our strong value proposition. We believe we're well-positioned to drive increased value for our current and our future customers and our shareholders. I want to thank everybody for participating on our call this morning, and we're looking forward to speaking with you on our third quarter earnings call that we've currently scheduled for November 3, 2010. Operator, please provide the call replay instructions.

Thank you. Ladies and gentlemen, this conference will be available for replay after 10:00 a.m. Eastern time today through August 11. You may access the AT&T Teleconference Replay system at anytime by dialing 1-800-475-6701, and entering the access code 123546. International participants dial (320)365-3844. That does conclude your conference for today. Thank you for your participation, and for using AT&T Executive Teleconference. You may now disconnect.