Ladies and gentlemen, thank you for standing by, and welcome to the Anthem second quarter Results Conference Call. At this time, all lines are in a listen-only mode. Later, there will be a question-and-answer session. Instructions will be given at that time. 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 Anthem's second quarter 2017 earnings call. This is Doug Simpson and with us this morning are Joe Swedish, Chairman, President and CEO; and John Gallina, our CFO. Joe will provide some high-level commentary on our second quarter financial results, discuss our business unit performance, and then provide some high-level commentary on our updated 2017 financial outlook. John will then discuss our key financial metric performance during the quarter and provide some additional details on our updated 2017 outlook. We will then be available for Q&A. 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 antheminc.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 Anthem. 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.

Thank you, Doug, and good morning. We're pleased to announce strong second quarter 2017 GAAP earnings per share of $3.16 and adjusted earnings per share of $3.37 with both membership and revenue tracking well. Our second quarter financial results show that we are continuing to carry forward the strong momentum we built coming into the year and during the first quarter. Our membership growth coupled with the strong quality of earnings so far in 2017 gives us confidence that the value proposition we bring to the marketplace is resonating well. Within membership, both fully insured and self-funded enrollment continue to track well versus our expectation, as we ended the quarter with nearly 40.4 million members. In the first six months of 2017, our membership has grown by 468,000 lives. We're particularly pleased with the membership trends in our commercial insured business, as both Large and Small Group membership came in ahead of expectations again during the quarter. Our membership results on a consolidated basis translated into second quarter operating revenues of $22.2 billion, an increase of $924 million or 4.3% versus the second quarter of 2016. During the quarter, our Individual enrollment declined by 107,000 lives which was expected. Our total Individual enrollment of approximately 1.8 million members consists of 1.5 million ACA-compliant members and 300,000 non-ACA-compliant members. Of the 1.5 million ACA-compliant members, approximately 1 million or less than 2.5% of our total enrollment were from the individual exchanges. Self-funded enrollment in Local Group and National Accounts were in line with expectations. Before I discuss the details of our business unit performance, I want to spend a few moments on the evolving policy landscape. As a company, we recognize that access to affordable and high quality healthcare is immensely important and intensely personal for all American. Anthem has always…

Thank you, Joe, and good morning. I'll begin by discussing the consolidated financial highlights during the second quarter. On a GAAP basis, we reported earnings per share of $3.16. These results included net negative items of $0.21 per share. Excluding these items, our adjusted earnings per share was $3.37 for the quarter. These results reflect our strong underlying financial performance. Operating revenues in the second quarter totaled $22.2 billion, an increase of $924 million or 4.3% versus the second quarter of 2016. The increase is primarily due to the premium rate increases across all lines of business to cover overall cost trends, as well as higher enrollment in our Medicaid, Large Group, and Medicare lines of businesses. These increases were partially offset by the impact of the one year waiver of the non-tax deductible health insurance fee in 2017, which allowed us to reduce premiums in 2017 to help improve affordability. Additionally, the increase was partially offset by less favorable adjustments to prior year risk-adjuster accruals compared to the second quarter of 2016. The benefit expense ratio of 86.1% in the second quarter of 2017, an increase of 190 basis points from the prior year quarter. This expected increase was largely driven by the impact of the one year waiver in the health insurance tax, partially offset by improved medical cost performance in the Local Group and Individual businesses. Our second quarter 2017 SG&A expense ratio of 13.8% came in higher than expected, but still declined by 20 basis points from the 14% in the second quarter of 2016. The decrease was primarily driven by the impact of the one year waiver of the health insurance tax and from lower administrative cost, which resulted from expense efficiency initiatives, coupled with fixed cost leverage on our strong membership growth. These decreases…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from the line of Ana Gupte from Leerink Partners. Please go ahead.

Yeah. Thanks. Good morning. On the guidance assumption of greater than $11.70, was looking for more color on what's being baked in on the exchange margins and the outlook that it will remain negative for the full year, is that conservative? Or is there something on the 2R true-up that has driven continued conservatism? And then, secondly, on the 2016 Iowa true-up, is that already in guidance for the Medicaid? And as far as the first half of 2017, have you included something where you haven't received the rate?

Hi, Ana. This is John. Thank you for the question. Let me see if I can answer both of those. So, in terms of our raising guidance to greater than $11.70 per share, the exchange business, as you know, there's a lot of moving parts associated with that. We had some true-ups here associated with the 2016 business, based on getting the final CMS information at the end of June. Fortunately, the true-ups were relatively small. The reinsurance paid out slightly higher than we expected. But on the risk adjusters, we are quite pleased with the analytics that we had done prior and the fact that what we ended up in terms of our risk-adjuster receivers and the magnitude of the receivables that we are entitled to was virtually spot on what we had recorded, which really does show that we understand that line of business and then really do have very great data analytics associated with that. So, the true-up process itself really had minimal impact on our 2017 reported results. And in terms of the outlook for the rest of the year, in the first quarter, there had been a bit of commentary associated with the morbidity, it was a bit higher than we had planned for, due to a shrinking risk pool and various other issues. So, we've adjusted our thought process for 2017 risk adjusters, and we believe that they're all relatively, appropriately stated in terms of what's been recorded for the first six months and what's expected for the last six months. So, I would not say that there's a significant amount of conservatism associated with the guidance related to exchanges, as much as I would say is that our track record was doing a pretty darn good job of predicting it. That's pretty much where we stand on that. Related to Iowa, we've not finalized a rate increase for July 1. We did experience higher-than-expected claims during the second quarter of 2017. I'm not really going to go into much more detail than that. Yeah, we did, at the beginning of 2017, receive a partial payment associated with a portion of the 2016 losses into the 2017 period. And we continue to work with the state in Iowa in order to come up with actuarially justified rates for the future. So, we really haven't taken that into consideration yet. We're hopeful there's some conservatism in those numbers, but until we finalize the work with the state and get actuarially justified rates, that's still a bit of an open item. Thank you.

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

Hi, everybody. Thanks. Just – maybe I'll ask about the capital deployment. I know – if I look at what you did in the current quarter, that's consistent with your $1.5 billion to $2.5 billion you might even to – $1 billion in target for the year, you might even need to step up a little bit in the back half to get to where you're trying to be, but I also know that coming out of the Cigna transaction, I think Joe had mentioned in the spring at some events that there were some tuck-in MA-type of deals that you were looking at. Something – maybe things along the line of the Simply Healthcare deal you did a few years ago. Can you update us on your thinking about capital deployment there? And I know, Joe, you have a lot of interaction in Washington. Do you have – have you gotten any sense of the administration and their views on industry consolidation relative to what you may have faced in previous administrations?

Yeah. Hey, A.J. Thanks for the question. Let me briefly address the capital and then I'll turn it over to Joe to – and he wants to talk about the rest of your question. So, in terms of the capital, you're exactly right that we've begun our share buyback once the Cigna deal was terminated. And your thought process on we may need to do a little bit faster acceleration in the second half than we have so far, I would say, on a weekly basis, we are exactly on track to delivering that $1.5 billion to $2 billion, because we didn't start the share buyback until into the second quarter, because we didn't have the finalization of the Cigna thing until several weeks into the second quarter. So, when you look at our path that we have in terms of share buyback on a weekly basis, we feel very good about our ability to deliver back to the shareholders the $1.5 billion to $2 billion. So, anyway, Joe, I'll turn it over to you for the other part of A.J.'s question.

Right. Good morning, A.J. Thanks for the question. Very quickly, maybe chop your question up into a couple parts. First of all, regarding some prior comments regarding M&A around MA, we still are very focused on examining markets, market by market looking at opportunities. Yes, we're still mindful of the opportunities for tuck-ins. We think that there certainly are opportunities that we should focus on very carefully and so we're going to continue that pursuit. As you know, we've got a MA platform that is now restructured and completely ready for expansion, both organically as well as by way of M&A. So, we're going to keep our options open. We're going to continue to look at the right fit for us in the markets that we believe where we can perform at a very, very high level. And so, we do have teams that are very actively engaged and focused on the best proposition possible. M&A, broadly speaking, is still a very significant long-term strategy for us given that – kind of an overarching theme is that it's still all about access, affordability and quality of services, both with respect to service as well as safety. We're very mindful of that fact that scale does matter in this pursuit, and we will continue to very carefully examine the marketplace to assess our optionality, our targets and hopefully create fits that are really synergistic with respect to how we're going to best serve the marketplace. Great example of – you may recall, a few years ago, the acquisition of Simply Healthcare probably stands out as the kind of transaction that I think and will be incredibly beneficial for the company, not just serving the marketplace, but also from a financial perspective being a great fit with respect to the synergies that…

Your next question comes from the line of Chris Rigg from Deutsche Bank. Please go ahead.

Hi. Good morning. Just wanted to ask a couple of questions on the Individual business. First, in the three states where you're downsizing next year, do they contribute a disproportionate amount of the losses this year? I know it's a small percentage of your membership, but would love to get a sense for how profitable those states are. And then, Joe, you commented that you might have to revisit your rates for 2018 if the level of uncertainty changes. Is that primarily CSRs? Or are there other reasons that you might have to come back and look at the rates? Thanks.

Yeah, hey, Chris, thanks for the question. I'll address the first half and that's about the three states. As you indicated, it is a very small component of our membership associated with individual exchanges. In terms of profitability, it really is not significant, one way or another, in terms of the overall profile for the Individual book of business. So, it in and of itself is not a significant driver in terms of 2017 expectations.

Okay. Yeah. John, thank you very much for that comment. With respect to rates, you asked a question about what other characteristics of the market might influence our decisions around rate adjustment. Clearly, CSR is a standout. We've repeatedly said that that aspect of pricing and the subsidies that support membership in our markets can translate to as much as a – maybe 18% to 20% uptick in premium, if subsidies aren't granted. It remains to be seen whether that will ultimately be allowed, but if not, then obviously we're going to have to revisit our pricing market by market in order to judge whether or not pricing adjustment is necessary or even if re-entry on any measure of scale is appropriate. As I said earlier, so much is dependent on stability of each of those markets of which you may know. We have 139 rating regions and so those rating regions are going to be carefully analyzed, sliced and diced and then determined if quite frankly a rating – or excuse me, a premium increase is tolerable beyond a certain point, and if in fact we will be able to remain as an active participant in those rating regions. Right now, as you know, our extraction represents about 10% of membership and our hope that between now and, let's say, through September a lot of decisions will be made, but I can't underscore that time is of the essence, and some of our critical decisions may have to occur in a relatively short period of time. So, I would tell you, the decision making is going to be, as they say, fast and furious and time is of the essence for us to make the right decisions for the benefit of the markets we serve, the membership we serve, as well as for the company overall. John?

Thank you, Joe. And, Chris, I was just going to maybe expand on your question about, is CSRs the only issue. Maybe a sort of think through what that means when we talk about CSRs. CSR – without CSR funding, as Joe said, we're talking about incremental 20-plus-percent rate increases. Well, we have 20-plus-percent rate increases with CNRs (38:40), so those are additive to each other. And in order to come up with a target margin with that level of rate increase is really a very difficult thing to do. And you look at – gee, if CSRs are not there, then what does that do to the number of people who are actually going to participate in the exchanges? And so then if that changes, how does that impact the risk profile or the risk pool associated with it? How will that then impact our ability to collect risk adjusters and the price for that and the various other aspects? So, there really is – this one item impacts multiple things downstream in terms of how we look and assess at these things. So, I just wanted to make sure it wasn't just the CSR, it was all the ramifications and there are many associated with that.

Yeah. And John's absolutely right, there's a cascading effect. One other key ingredient, which is material, is the tax. And the tax, if it were to have the moratorium lifted, it's probably something on the order of 4% to 5% premium increase, so you can see the compounding effect of all of these issues that don't map to stabilization that then creates this cascading effect that John mentioned earlier. So, again, that's all included in our analytics specific to 139 rating regions that we are looking at very carefully to judge the in and out decisions that we have to make.

Your next question comes from the line of Christine Arnold from Cowen. Please go ahead. Christine Arnold - Cowen & Co. LLC: Hi there. A couple of things. Thanks for the question. One, with respect to Iowa, what are your options? What if you don't get what you view as actuarially sound rate, can you exit? I'm not sure what the contract gives you in terms of latitude. And then in D.C., I understand the whole issue with CSRs. How much can the administration do? Like if the Trump administration stops saying, we're not going to fund this, we're going to let it implode, is that enough or do you need legislation and where do you think the administration can do something and is willing to versus where you need to see legislation? Thanks.

Two parts, one, Iowa; one CSR in terms of further exploring that issue. Regarding Iowa, we got a great state partner and, obviously, we've been engaged in dialogue with them now for a quite lengthy period of time and we're very hopeful that, as John pointed out in his remarks, the actuarial soundness that we're pursuing, I think, will be made clear and the right decisions will be able to occur. And again, it's a work in process and I think going beyond, any kind of conversation at that level, I think, is not appropriate given the intricacy of the dialogue that we're having with our state partners. And with respect to contract terms, obviously, probably, in fact, cannot go into those terms at this time, but in the main we do believe that over time we'll be able to have the right kind of facts laid out that demonstrates the degree of adjustments that are necessary to create the actuarial soundness that we need to continue to serve the membership in Iowa. So, we're optimistic, but it is truly a work in process. With respect to CSR, there are a variety of paths and, obviously, the first path focuses specifically on action taken by Congress and if CSRs will be embedded in some type of legislative model and that's going to have to kind of play out based on the votes that occur in Congress. Absent that, and again I don't want to predict where all of that might go with respect to yet again another path, but obviously, there may be other choices that may occur related to funding by other means. Funding specific to an action taken by the administration, but I think put it altogether, I believe that the leadership that we deal with in Washington are very mindful and fully aware of how CSR really maps to stabilization and, in particular, the effect on premium increases for the people that we serve across the country. So, I think it's – that too is a work in process, but it's yet – remains to be seen exactly how that funding will flow to us to support our marketplace. We just don't know yet.

Your next question comes from the line of Matthew Borsch from BMO. Please go ahead.

Hi. Thank you. Good morning. Question, if you could just – you had mentioned higher-than-expected enrollment losses or maybe it wasn't losses, maybe it was slower growth in the BlueCard product. Can you just talk about that and talk about your outlook for your own large employer, ASO National Account enrollment going into next year and how good a vehicle you think BlueCard is going to continue to be for you?

Yeah. Sure, thanks, Matt. So, in terms of the BlueCard, as I had – in the prepared comments had talked about that that was an offset to some of our other gains in terms of our overall membership outlook. And just to remind everyone, BlueCard is where it's another Blue Cross and Blue Shield carrier and owns the account and has sold the account and their member as a resident in our state is a typical methodology of how we obtain BlueCard membership, and that was a bit lower. However, as we look at the national account selling season, we really are pleased with the expected growth in membership for 2018. It's been a bit quiet for large jumbo national accounts, but we're a very strong player in the market and we expect to at least hold, if not, increase our market share in the national account space. We've had some great success with zero trend guarantees related to first-year customers. We have consistently delivered on that guarantee, providing value, saving customers medical cost. And we already have received a few RFPs for 2019, so we feel pretty good about our positioning, and quite honestly we're not all that worried about the small drop in BlueCard membership year-over-year, because we think that national accounts is – that the sales cycle is going to work its way out and that we're going to do just fine.

Your next question comes from the line of Lance Wilkes from Bernstein. Please go ahead. Lance Arthur Wilkes - Sanford C. Bernstein & Co. LLC: Morning. I wanted to ask a little bit about the PBM or RFP process, and understand you can't go into the specifics on who is bidding what right now. But if you could talk a little bit about what you've learned going through the process, in particular, your views on hybrid versus outsourcing, your views on which functions perhaps are best housed within your company. And also what segments on the insurance side do you think would benefit the most from a growth perspective from the improved pharmacy rates?

Great. Lance, thanks for the question regarding PBM. Questions really come at us repeatedly on this point and obviously, it's evolutionary from the very beginning back in January of 2016. And go back in time, we've always stated that we would make it very clear, quite frankly make a clear statement of the choice we've made in terms of contracting by the end of the fourth quarter and we still are committed to that. With respect to that, we've been engaged in a very analytical process. You all well know that RFPs went to the market and we now have received those RFPs and are in an analytical mode that's very thoughtful, very thorough. And as we've repeatedly said, we think our pursuit has always been about optionality and kind of constructing a hybrid model has been one of those options that we've carefully evaluated, meaning that we have probably multiple paths that can best serve our customers, our members, whether it's a mail order proposition that is sent out to someone to administer by way of maybe private labeling it, the fact that we will always retain control of our formulary, and then other characteristics of a hybrid model, which represents various constructs within a model that equates to great value for our membership. Of course, the other extreme would be to send it all out to another vendor and so we've always been mindful of the many choices we have, which I think speaks to the power, the significance of optionality being very much in our favor. We've stood by, as you well know, our expectation in terms of $3 billion per year in terms of savings, go forward at 01/01/2020 and beyond and nothing that has occurred thus far has moved us off of that expectation. And so again, we're working very carefully with respect to the analytics around an RFP. I do want to underscore that it's not just about the money. It has a lot to do with customer service, our commitment to a transition that is virtually seamless. Given the complexities, we well recognize that and so whichever direction we go in, we will be very careful in our choices regarding best serving our customers with a seamless transition. So, it's obviously a complicated formula for success, but it's literally – it's all hands on deck to get us from today to 01/01/2020 and I feel really good about the path we're on and I don't think there are any complexities that we aren't aware of and working on. And I think we again feel very, very good about the process and what potential will come our way in terms of very positive characteristics beginning 01/01/2020. John?

Thank you, Joe. And, Lance, in terms of the second part of your question of growth areas, I'm not understating this when I say that it will impact and help every line of business we have. And in terms of existing business, it will be very significant for new business and maybe specifically the question you're looking for is that we believe it will make our Medicare business that much more competitive, our Medicare Part D that much more competitive. We are growing that because of all the other benefits and things that we offer to the marketplace, we think it'll really help accelerate the growth in that area. And then in the Large Group ASO, it's not uncommon to have a PBM carve-out as part of the National Accounts or the Large Group ASO, and we believe that we can minimize the PBM carve-outs on that in the future, that's just two examples, but when I say it will help every line of business, we believe it will help every line of business. Thank you.

Your next question comes from the line of Justin Lake from Wolfe Research. Please go ahead.

Thanks. Good morning. Just got a quick question on Individual and then a follow-up on Medicaid. So, Joe, on the Individual ACA-compliant business, you've previously indicated a focus on getting to profitability here in 2018, or exiting where you needed to. Understanding that there're still unknowns, should that still be our expectation next year in terms of how you're making decisions in this business?

Justin, thanks for the question specific to this continued formation of the ACA marketplace. We've always said that our target is 3% to 5% margin. We certainly haven't backed off of that. As you can imagine, toward the day-to-day grind of best managing that portfolio is governed in large measure by rules of engagement and the stabilization necessities that I talked about earlier coming to reality. Our sense is that stabilization is a distinct possibility. We are still committed to the 3% to 5% margin performance and we're also committed, as I've said repeatedly over nearly a year now and going back to last summer, kind of worked off the characterization of surgical extraction, we still are very focused on that as well. And I think, Justin, that we will make the right decisions with respect to engagement in the market, detachment from a market. Our hope is that we will be able to continue to perform in a very robust and meaningful manner in all 139 rating regions, but so much depends on how legislative process plays out and what stabilization rules are put into place, but again I'll reiterate, we're still hopeful that a 3% to 5% margin is achievable. And so, John, I don't know if you want to add to kind of the outlook and how engaged we are in making that a reality.

Yeah. So, no, Justin, as Joe said, we're committed to that. I just maybe wanted to reframe the 2018 commentary you said. Back in 2014, we did extremely well in exchanges. And then, 2015, we ended up being closer to breakeven, and that's when we really saw how the co-ops were pricing on an irrational basis, some of the other issues were going on in terms of the stability of the marketplace. And we've looked at it and thought it would take a few years for all that to work its way through, again, for some of the co-ops to continue to exit and we predicted that it wouldn't be until 2018 until the marketplace obtains stability. So, we still, as Joe said, believe that that's possible with the appropriate regulatory and legislative changes. But as you've phrased your question, I would say, the short answer is yes. We want to ensure that there is a path to target margins in a sustainable marketplace. Did you have a follow-up on Medicaid?

Just to repeat, Medicaid rates for 2018, anything you could tell us there, and specifically the governor's budget indicated in California that 2018 Medicaid expansion rates might be cut high single digits. Just want to hear what you guys saw there in California Medicaid expansion, particularly. Thanks.

Yeah, thanks, Justin. So, in terms of 2018, the Medicaid, it's a little premature to talk about the specificity and we really would prefer not to talk about any one state. We're closing in on being in 50% of the states of America in terms of providing Medicaid services. And as you can imagine, within all those states, some do a little bit better and some don't do as well as we would have liked, and it's really a portfolio type approach. And it's really, I think, premature to discuss any one particular state, especially for 2018, other than to say that we are extremely high on the pipeline associated with future Medicaid opportunities and continue to capitalize on that. And we do see it as a growth area for the company, even without Medicaid expansion in the future with all the other various long-term support services; aged, blind and disabled; and various other things that are all part of the future pipeline. So, Medicaid clearly is continuing to be a growth area for us in the future. Thank you.

Your next question comes from the line of Sarah James from Piper Jaffray. Please go ahead. Sarah E. James - Piper Jaffray & Co.: Thank you. We're seeing an investment cycle pickup at your peers in adding to IT and analytic assets, especially in the artificial intelligence area which feeds into strategy decisions around benefit design and underwriting. So, can you speak to where Anthem is in the investment cycle on IT? And what Anthem is doing specifically on the AI front?

Sarah, that's kind of the question that is very powerful perspective on the future of our industry. I've been a great believer that so-called secret sauce for our performance in the marketplace moving into the future is all about translating data to information, meaningful information that supports our provider community, especially in terms of better choices that they can make in and around evidence-based practice. Information that supports the needs of our consumers given the significant risk position that they're now being subjected to in terms of higher deductibles, etcetera. They need to make very well-informed decisions in terms of accessing healthcare and remaining healthy. Therefore, we are very committed to the wellbeing of all of our members. In that regard to your point about artificial intelligence and the foundational aspect of how you support the development of useful information, we're investing quite heavily with respect to data infrastructure, foundational buildout with respect to our IT systems. We are definitely using artificial intelligence today and optimizing our ACA benefits across 139 rating regions and actually, this has been a three-year journey for us in the AI space specific to that process. Again, I do want to underscore we will recognize that this is the future of a very successful health benefit manager and in that regard, the appropriative amount of funding is being distributed, allocated to our technologies that will advance artificial intelligence that can best support the needs of all the interests that we engage with, whether it's a provider or a consumer, government, what have you, we are intimately involved in building out that kind of capability today. Hopefully in the near future, we'll be able to talk more about that. So, thanks for questions. Very appropriate and very significant.

Thank you. I'd now like to turn the conference back to the company's management with the closing comments.

Great. Thank you, operator. And thank you all for your questions. They were great questions today. And I just want to underscore that as a company we remain committed to confronting some really tough questions and challenges in and around the healthcare delivery system, as we are focused on expanding access to high-quality affordable healthcare to our customers. And I think that it's really critical for me to underscore the key contributors to that success being our associates who've given continued support to the company and to our customers, which total 40.4 million members. And our associates do that every day with incredible commitment. Thank you all for your interest in Anthem, and we look forward to speaking with you soon at upcoming conferences. Thank you very much for the time.

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