Ladies and gentlemen, thank you for standing by and welcome to the Anthem Third Quarter Results Conference Call. At this time all lines are in listen-only mode. Later there will be a question-and-answer session, and instructions will be given at that time. As a reminder, this conference is being recorded. And I would now like to turn the conference over to the company's management.

Good morning and welcome to Anthem's third 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 begin the call by giving an overview of our third quarter financial results, discussing our business unit performance, and providing some qualitative remarks around our strategic positioning and high-level headwinds and tailwinds going into 2018. John will then discuss in more detail our key financial metrics, performance during the quarter, and provide some 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 expectation. We advice 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. Before we discuss our third quarter financials, I wanted to take a moment to highlight the acquisition of America's 1st Choice that was announced last night. America's 1st Choice is a Medicare Advantage company that offers HMO products, including Chronic Special Needs Plans and Dual-eligible Special Needs Plans. America's 1st Choice currently serves approximately 130,000 members through its proprietary technology tools, managerial processes, and member engagement programs that helps the company deliver efficient, cost-effective healthcare services to its members. Its two health plans in Florida receive a 5.0 and 4.0 Star Rating for 2018. The acquisition is expected to close in the first quarter of 2018 and be slightly accretive to earnings in year one. Turning to discuss our third quarter financials, we announced GAAP earnings per share of $2.80 and adjusted earnings per share of $2.65, reflecting continued strong execution across our businesses. We ended the third quarter with 40.3 million members, translating to a growth of 338,000 lives since the end of 2016. We continue to be pleased with the enrollment trends in our Commercial group insured business, which grew again during the quarter. Our Individual enrollment declined by 83,000 lives in the quarter, as expected. As of September 30, 2017, our total Individual enrollment was approximately 1.7 million members, consisting of 1.4 million ACA compliant members and approximately 300,000 non-ACA compliant members. Of the 1.4 million ACA-compliant members, a little more than 900,000 were from the Individual exchanges. Finally, our employer self-funded business grew by a little more than 100,000 members during the quarter, as we continued to win new sales and benefit from an improving labor market. Our membership results translated into top line growth that continues to be solid, with consolidated third quarter operating revenues of $22.1 billion, an…

Thank you, Joe, and good morning. I'll begin by discussing the consolidated financial highlights during the third quarter. On a GAAP basis, we reported earnings per share of $2.80. These results included net positive adjustment items of $0.15 per share. Excluding these items, our adjusted earnings per share was $2.65 for the quarter. These results reflect our continued strong underlying financial performance. Operating revenues in the third quarter totaled $22.1 billion, an increase of $972 million, or 4.6%, versus the third quarter of 2016. The growth was primarily driven by premium rate increases across all lines of business to cover overall cost trends, as well as enrollment growth in our Large Group, Medicare Advantage, and Medicaid businesses. These increases were partially offset by the impact of the one-year waiver of the non-tax deductible health insurance tax in 2017, as well as lower current year risk adjustment accruals compared to the prior-year quarter. Our benefit expense ratio of 87% in the third quarter increased by 150 basis points from the prior-year quarter. This increase, which was slightly better than expectations, was largely driven by the impact of the one-year waiver of the health insurance tax, partially offset by improved medical cost performance in the Individual business. Additionally, we benefited from a retroactive revenue adjustment in the Medicaid business, which was expected to be received in the fourth quarter. Our third quarter 2017 SG&A expense ratio of 13.6% declined by 120 basis points from the 14.8% in the third quarter of 2016. The decrease, as expected, was primarily driven by the impact of the one-year waiver of the health insurance tax in 2017 and the impact of fixed cost leverage on operating revenue growth. These items were partially offset by the impact of the increased spend to support growth initiatives during the…

And, ladies and gentlemen, we will now begin the question-and-answer session. Our first question comes from the line of Ana Gupte with Leerink Partners. Please go ahead.

Yeah. Thanks. Good morning. We appreciate the commentary directionally on 2018. Now I had a couple of follow-ups. The first one is on the HIP headwinds, $0.20 each, I think, roughly on Commercial and Medicare. Do you see any offsets from utilization into 2018? You have a very good loss ratio in the third quarter, possibly even ex-hurricane it looks really good, given your presence in Texas and Florida. So how should we think about that for 2018?

Hey, Ana. This is John. Thank you for your question. Yeah, the HIP headwind – make sure I've got your question correct. Yeah, we've actually got a tailwind here in 2017 associated with HIP of about $0.20. That then turns into a little bit more than a $0.40 headwind in 2018. But specifically related to the hurricane, it really didn't impact us that much. We do not have the Blue properties in either Florida or Texas. And the Medicaid business that we had was fairly well-controlled. So the hurricane – neither of the hurricanes really had a significant financial impact to our results or our outlook.

And we do have a question from the line of Ralph Giacobbe with Citigroup. Please go ahead.

Thanks. Good morning. Just want to go to exchanges and your exchange expectations into next year. I guess, how do you approach it in terms of just an overall enrollment? I mean, is it just expectation that things are stable? Do you expect there to be a lot of churn? How committed are you, I guess, to the marketplace in general? I mean, if you expect membership to be down 70%, kind of what's the benefit of sticking it out? And then just a follow-up around that was just, the executive order, how you see that potentially impacting you? Any thoughts on how the short-term plans – or how you think association health plans will sort of impact the small group for you? Just trying to get a sense of your position and how disruptive that may or may not be. Thank you.

Ralph, this is John. Why don't I start out by addressing a couple of your financial questions, and then I think Joe will weigh in on some of the strategic elements to your questions. In terms of the enrollment, as Joe stated, we're expecting our footprint to decrease by about 70% in 2018 from our current 2017 perspective. That's about half of the rating regions that we're currently in, we're getting out of, maybe a little bit more than that. And then for the rating regions that we're staying in, really refining our product designs and our offering in the various meta levels, and that all relates to about a 70% decrease in footprint. In terms of being committed, it's really related to providing optionality associated with 2019 and where do we want to head in 2019 based on what happens in 2018. It's really premature for us to make a decision on 2019 today. So with that – well, obviously, we do have the CSR funding issues need to be resolved as well, and that's part of why we're actually pretty comfortable with the significant drop in membership that we have in 2018, given the uncertainty of that area. So a lot needs to be resolved in the next 12 months before there's a final declaration. But we've been in this business since day one, and we think it can be a viable business, assuming that the appropriate legislative and regulatory fixes are in place.

Yeah. Ralph, good morning. Let me weigh in based on that background. I think that – well, let me key in on one phrase you used, which is sticking it out. I think, surgically speaking, I've used that term quite often in the last year. I think we've successfully repositioned ourselves in a way that allows us to participate in a more stable environment with respect to the rating regions that we have remained in. Specifically, we will continue to participate in 56 of the 143 rating regions, which, comparatively speaking, we were in virtually all of the rating regions previously. My sense is that where we are sticking it out, we've got, I think, a reasonably good line of sight to the year. And our expectation is that by the end of 2018, we'll be making the choices that are necessary, considering the advancement of stability, which still there's tremendous amount of lack of clarity in terms of what the future state might look like until further legislation occurs or specificity around certain policy announcements bring clarity. So long story short, I think, again, surgically we're very well-positioned. I think our pricing is appropriate relative to the hand that's been dealt us. And so, again, I think we have said that we're targeting a low single-digit margin, albeit certainly not at the 3% to 5% target that we continually hope to achieve. We're not there yet. But as John just pointed out, I think we've got the technical and kind of the strategic insights necessary to effectively perform that then we are well-positioned to make the right choices by the end of 2018. So, hopefully, that gives you some line of sight with respect to the ask about our ability to stick it out.

And we do have a question from the line of Kevin Fischbeck with Bank of America Merrill Lynch. Please go ahead.

Great. Thanks. Can you just quantify how much the Medicaid retroactive payment was in the quarter? And, I guess, just clarify, it sounds like you're saying it was in your guidance. This is just the timing of it that was the issue, as far as the guidance goes, that did not contribute to your guidance raise. Is that correct?

Yeah. You're correct with your assessment there at the end of your question. We really don't go into exactly how much a retroactive adjustment is. There are retroactive adjustments in the Medicaid arena on really a regular basis. We only spike it out when it's material enough to move the needle. But we have retroactive adjustments every quarter within that – our block of business, and we have been expecting it all along and we expected it to occur in the fourth quarter. So we actually got it early, which is good news. But it did not change our annual guidance at all.

And we do have a question from the line of Christine Arnold with Cowen. Please go ahead.

Hi. Two questions. One, prior period development looked pretty significant. Was it heavily weighted towards Government or Commercial? And looking at Commercial earnings, they were down about 15% year-over-year this quarter versus about 10% in the prior quarter. And I think the prior quarter also had some cyber security drain. Is there a comp issue we should be thinking about when looking at this quarter year-over-year on the Commercial operating earnings that I'm maybe forgetting about? Thanks.

Hey, Christine. On the PPIA, I'll say that our reserves have been calculated consistently conservative across all lines of business. And some of the favorable results, I think, reflect the fact that we do have consistently conservative methodologies associated with our reserving patterns. So I really can't say more about a specific line of business after that, but we continue to target a high single-digit margin for adverse deviation. And again, we believe our reserves continue to be consistent and conservative. In terms of the other questions of year-over-year or quarter-over-quarter, there are several things that are going on. Obviously, the HIP Fee always impacts every analysis, and the fact that we had HIP Fee in 2016, and then not in 2017, and then presumably we'll have it again in 2018, profitability by line of business, all the ratios, all the metrics, are all really non-comparable. You're correct in terms of compensation expense, and basically our bonus program had issues in 2016, if you recall. We reduced our compensation in 2016 and we have been fortunate enough that we have not had to do that yet in 2017. Hopefully that helps answer your questions.

And we do have a question from the line of Justin Lake with Wolfe Research. Please go ahead.

Thanks. Good morning. Can you talk about what you are assuming now in updated 2017 guidance for Iowa performance relative to what I think was breakeven expectation in the second half of this year on actuarially sound rates? And then can you tell us why admin fees were down nearly $100 million sequentially in the third quarter? Thanks.

Justin, good morning. This is Joe again. With respect to Iowa, we're continuing negotiations with the state, and there are adjustments that have occurred from time to time and we're in the middle of negotiations as we speak. And there have been some recommendations with respect to those rate adjustments, which we've now – those adjustments have been put forward to CMS for review and, hopefully, approval. We've not heard back from CMS as yet and expect at least, hopefully, we'll get something by the end of 2017. But in any event, Iowa is still a work in process, and obviously we're always optimistic that we'll finally be able to work out the situation there. And so, I guess, we'll just have to ask you to kind of stay tuned with respect to the final solution that will be given to us by CMS. John, do you want to speak to the other matter?

Yeah. On the admin fees, there's really nothing within that line item that's problematic or an issue, Justin. It's a good question. The revenues are very much in line with expectations. Our membership is very strong. We did exit the Massachusetts Medicaid ASO arrangement that caused that to drop out and just some other true-ups, but nothing that's really overwhelming associated with that line item.

And we do have a question from the line of Dave Windley with Jefferies. Please go ahead.

Hi. Good morning. Thanks for taking my question. Management embarked on some fairly significant SG&A streamlining efficiency initiatives going back, I think, as early as maybe 2015. Some of that SG&A savings continued in 2016, obviously, over and above the comp issues that you've already discussed. And then in the press release today you talk about some investments in growth initiatives. I wondered if you could describe where you've been able to take costs out, and then where you are now putting costs into the business, and kind of clarify that those are distinctly different buckets.

Yeah, Dave, great question. This is John. So, happy to respond to that. In terms of where we're taking costs out, we continue to focus on non-value-added services, things that really don't provide a lot of impact to the members and eliminating any duplication of processes and things like that, and just being wise stewards of shareholder dollars and member premiums. In terms of some growth initiatives, I'll just give you a few examples just to get you comfortable on that, like, for instance, we're really building out our capabilities to enhance our position with the employer group retiree business for Medicare offerings is an example that we see some significant long-term potential, and we really need to enhance our capabilities. We're focusing on the aging population, and what we mean by that is, let's take a look at the 63 and 64-year-olds, who actually buy insurance through Anthem's Commercial marketplace and get them signed up for a Medicare offering when they age into Medicare. Addition, building out offerings for Specialty, stop loss, integrated healthcare management for ASO customers. All very specific items associated with our growth imperatives and our growth strategies that are clearly different than systems consolidation and elimination of duplicate processes.

Yeah, let me jump in here. Thanks, John, and maybe I can step up a little bit higher just to let you know, just by reminder, back in first quarter communicated to you that we've embarked upon some really detailed review of our SG&A specific to capturing more efficiencies as we service our customers. I challenged our senior leadership at that time to take a really hard look at our relative performance, as well as our cultural characteristics, and we compared ourselves against our competitors and performance variations across our business environment. We are taking those insights and really translating it to strengthening the assets that we do have, and by way of some specific examples, for instance, our service operation center is really getting streamlined tightly now with respect to how well we service each one of our members with respect to their necessity to have a very efficient and effective engagement with us. So we're taking out costs, but translating that level of performance in a way that leverages, for instance, digitization by way of mobile technologies, by way of other assets that makes it a lot easier for our customers to use our business model. And so, I guess, that's just one small example, but we've got a really significant commitment now to digitization that gives the kind of leverage we think is necessary to optimize the spend that we've historically placed with respect to eliminating customer abrasion. Again, one small example is producing very meaningful large results for us, in addition to what John said with respect to capital deployment that really is supporting our growth imperatives, which we've mentioned to you. I think there's seven key areas I won't get back into, because we've made that clear to you with respect to where we're putting our commitment going forward with respect to growth. But it's literally just reallocating our cost structure in a way that optimizes our commitment to our customers, as well as our growth imperatives.

And we do have a question from the line of Chris Rigg with Deutsche Bank. Please go ahead.

Good morning. Just one quick clarifying, could you remind us of the 1.7 million Individual, how many are ACA-compliant? And then my real question relates to Medicare Advantage. How do you guys think you'll grow organically next year when you think about how your plans stack up against the competition? Do you think you're positioned to take market share or grow more in line with the market? Just wondering how you're thinking about that. Thanks.

Yeah. So, Chris, this is John. In terms of the Individual membership, we have about 1.4 million ACA-compliant, and of that 1.4 million ACA-compliant a little less than 1 million of it, maybe a little bit more than 900,000 actually purchased via the exchanges. So that, hopefully, will help you reconcile that. In terms of where we are in the marketplace we feel very comfortable with our ability to grow. We're going to grow our self-funded membership, we're going to grow our Medicare membership above and beyond the M&A issues that we have in terms of nice Medicare growth associated with the two acquisitions that we've announced here in the last several weeks, continue to grow that. Local Group, we expect the enrollment to be stable in a slightly shrinking marketplace, in terms of the overall market share we expect our market share to increase, so our enrollment will stay stable in that. So we feel pretty good about where we're positioned and, of course, the Medicaid pipeline continues to be extremely strong in terms of some of the specialized services, whether it's LTSS populations, aged, blind and disabled, various other areas within Medicaid that have not historically been in a Medicaid managed care arrangement that we can provide a lot of savings to the states by providing our support there.

And we do have a question from the line of Gary Taylor with JPMorgan. Please go ahead.

Hi. Good morning. Two-part question. One, I just wanted to make sure I'm following what you had laid out for 2018 correctly. So, midpoint of this year would be $11.95. Midpoint of your long-term guidance 10% growth takes you to $13.15. Back off $0.40 of HIP would be about $12.75 for 2018. So is that – is there anything wrong with that math?

Gary, your math is very credible and reasonable without – saying that we, obviously, can't comment on specific point estimates, and I really don't want to go into providing guidance on 2018 yet, since our planning process is not yet complete. But your math is credible.

And we do have a question from the line of Sarah James with Piper Jaffray. Please go ahead. Sarah E. James - Piper Jaffray & Co.: Thank you. I appreciate the comments around the exit in specific exchange counties with lack of clarity, but I wanted to get a little bit more context around the evaluation process and what you perceived as the biggest risk or swing factor. So some of the common characteristics in markets where you decided to stay versus commonalities you saw in markets where you decided to leave. Thank you.

Yeah, thanks. Regarding levels of specificity, obviously, it varied by state, as you would expect. And it's obvious there were multiple factors that we considered when we examined the rating regions. In the main, the instability was a big driver for us, and we tried to map the instability that we could observe and determine how then it would be applied to each one of those rating regions. In some cases, we did feel that exiting was appropriate. Then we began working very carefully with state government to get a better line of sight as to what could occur, and then what adjustments would be necessary to create stability that we needed to stay in the marketplace. So we did look at trend expectations and we examined various risk profiles that then gave us some line of sight regarding what our position needed to be. We looked at our competitive factors with respect to how they were performing in the markets. And I think in the main, we were able to target some long-term margin expectations based on how we could price, and then what we would sell. And, quite frankly, at the end of the analytics, we then made decisions to stay in certain rating regions and exit others. So I think that that probably pretty much sums up kind of our outlook going rating region by rating region. CSR subsidy certainly was a very serious consideration. And the fact that we priced accordingly, recognizing that that probably would not – well, we assumed it would not be in place and that gave us, quite frankly, a line of sight or a commitment to pricing that we felt put us in a good standing with respect to at least being able to price effectively and position ourselves well in the rating regions that we did decide to stay in.

And our last question this morning comes from the line of Josh Raskin with Nephron. Please go ahead.

Hi. Thanks. Good morning. Wanted to sort of maybe take a step back just from an overall strategy perspective and get your views, Joe, in terms of what's the plan for Anthem's growth, right, as you think about sort of expanding markets. And I guess I'm curious on a couple of fronts. The understanding there's timing issues. The cash flow's been really strong, and I think what we're seeing in the last quarter was really a big acceleration in buybacks, largest we've seen probably in three years, three years plus. And then a couple of Florida Medicare Advantage deals. And so I'm just curious, is the strategy here to buy back stock, but look for selective opportunities to expand beyond the 14 markets or do think more of the growth is going to come from your 14 markets? And maybe within that, how do you play with the other Blue's Plans?

Well, covered a lot of territory there. And I think it's obvious, share buyback is always an element of our capital deployment strategy and we have targets. We've made it very clear what that is year-over-year, and so I think in that regard we're very prudent with respect to how we deploy capital in that regard. With respect to growth overall, we have made it clear that we do have numerous strategic growth imperatives that actually are playing out quite nicely. As an example, M&A in the Medicare Advantage space, which obviously we were just able to make two very significant announcements in short order in the last few weeks in the Florida marketplace. I think that is going to be a contributor with respect to M&A opportunities. And, obviously, we are targeting organic growth in the Medicare space. I think looking more long view, as an example in the Medicare space, our PBM opportunity going forward will give us – albeit it's still a couple years off in terms of 01/01/2020, but I think we will be incredibly competitive in the Part D space that we cannot take advantage of today as effectively as we envision after 01/01/2020. I think that the big unknown – I've already mentioned it – is the hopeful stability in the Individual marketplace, and that's a story that probably is going to unfold in the coming 12 to 18 months. There are a variety of other opportunities. John already mentioned a few, such as our very heavy focus on Specialty cross-selling to our medical membership, and overall our PBM outlook is very strong, not just Part D, but broadly speaking, it's going to give us a lot of opportunity going forward in terms of capturing share. John, am I missing anything that maybe...

No. Thank you, Joe. I really think there's no way we can oversell the ability for our new PBM contract to really accelerate growth in 2020 and beyond. Every line of business is going to benefit from it significantly. Certainly, in the Part D in the Medicare space, where drug spend is a higher percent of total, it benefits even more, but the large National Accounts, not having carve outs on ASO, really positioning ourselves better for Local Group fully-insured, every line of business benefits from that in 2020 and beyond.

Yeah. Probably I'm remiss not mentioning other strategic imperatives that we've talked about for growth, like solidifying our Commercial portfolio so that we stem the historic tide with respect to out-migration of certain parts of the business, and we're hopeful to really make that a very strong part of our portfolio going forward. And...

And, Joe, maybe...

And Medicaid, obviously, is another great example. We keep talking about that pipeline. So, John?

I would say just to finalize one of Josh's other comments on capital deployment, our share buyback sits consistent with our expectations. We had not done any share buyback for a couple of years while we were going through a large M&A deal that ended up falling through, and so the fact we just came back to a more normalized level of M&A, but really the capital deployment thought process is that we want to be very opportunistic. We want to be diligent in the effective use of capital. To the extent that there's additional merger and acquisition opportunities, we'll focus the capital on that. To the extent that we think it's a better return of capital to shareholders to do share buyback, we'll do that, and we'll always pay one of the market-leading dividends as well. So there's a lot of different places to go with capital deployment, and any one year is literally just any one year. And we'll make the decisions as the market allows us to.

Yeah. I guess, in summary, it's an overarching question. I think it's on everybody's mind, but I can assure you that the team here has well thought out our outlook for next year, and then beyond. That's why we can say that our earnings growth rates, certainly we can hold firm with respect to upper single-digit and low-double digit outlook. And just in summary, I can tell you our Government business is strong. Our Commercial business is continually repositioning and strengthening in many, many ways. And then the core element of performance of the company around SG&A controls, our capital deployment strategies, as John just pointed out, and another sort of driver is our PBM outlook in terms of repricing opportunities. So I think your question really allowed us to give you kind of a summary statement about the entirety of our performance outlook and the commitment that management has made to the growth agenda for this company. I think the proof points are there and we're very excited about the potential for the company going forward.

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

Great. Thank you for all your questions. As always, they are very insightful and very probing, and I'm glad we're able to give you line of sight to our directions going forward. As you know, as a company, we are committed to confronting our healthcare system's challenges and we're focused on expanding access to high-quality, affordable healthcare for our customers. I have to again underscore, thanks to all of our associates for their continued commitment to serving over 40 million members every day. Thank you for your interest in Anthem and we look forward to speaking with you soon at upcoming conferences. Have a great day. Thank you.

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