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January 23, 2008 8:30 pm ET

Executives

Jamie Miller - Chief Accounting Officer and Investor Relations

Angela Braly - President and Chief Executive Officer

Wayne DeVeydt - Executive Vice President and Chief Financial Officer

Analysts

Matthew Borsch - Goldman Sachs

Bill Georges - JP Morgan

Josh Raskin - Lehman Brothers

John Rex - Bear Stearns

Christine Arnold - Morgan Stanley

Justin Lake - UBS

Tom Carroll - Stifel Nicolaus

Charles Boorady - Citi

Greg Nersessian - Credit Suisse

Scott Fidel - Deutsche Bank

Carl McDonald - Oppenheimer

Operator

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

Jamie Miller - Chief Accounting Officer and Investor Relations

Good morning and welcome to WellPoint's fourth quarter earnings conference call. I am Jamie Miller, Chief Accounting Officer and executive responsible for Investor Relations, and with me this morning are Angela Braly, our President and Chief Executive Officer; and Wayne DeVeydt our Executive Vice President and Chief Financial Officer.

Angela will begin this morning's call with an overview of our fourth quarter accomplishments, Wayne will then offer a detailed review of our fourth quarter financial performance and current guidance, which will be followed by a question-and-answer session.

We will be making some forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of WellPoint. These risks and uncertainties can cause actual results to differ materially from our current expectations, and we advise listeners to review the risk factors discussed in our press release this morning and other periodic filings we make with the SEC.

I will now turn the call over to Angela Braly.

Angela Braly - President and Chief Executive Officer

Good morning and thank you Jamie. We're very pleased to report another good year for WellPoint, with record membership levels, revenues and earnings. We achieved our earnings per share expectations during the fourth quarter and full year of 2007 and continued our strong organic membership growth by adding over 700,000 new members during 2007. This is an excellent indication that customers continue to find great value in the products and services that we are providing to the marketplace.

In the fourth quarter our reported GAAP net income of $1.51 per diluted share was 18% higher than $1.28 per diluted share in the fourth quarter of 2006. The fourth quarter of 2007 included less than $0.01 per share in net realized investment gains, while the fourth quarter of 2006 included $0.01 per share in net realized investment gains.

For the full year of 2007, GAAP net income of $5.56 per diluted share was 15.4% higher than 2006. Our 2007 earnings included $0.01 per share in net realized investment gains, while 2006 included tax benefit of $0.04 per share resulting from changes in state tax apportionment factors following the WellChoice acquisition.

Our medical enrollment totaled 34.8 million members at December 31, 2007, an increase of 708,000 members from 34.1 million members at December 31, 2006. The largest enrollment increase was in the National business, which grew by 537,000 members. Large, multi-state organizations continue to be attracted to WellPoint's compelling value proposition, which includes access to the broadest provider network in the industry, competitive pricing, leading wellness and care management programs, and innovative products and services.

Membership in State Sponsored business increased by 292,000 during 2007, as we entered new markets with our Medicaid managed care programs. We also expanded geographically in the Senior business, adding 57,000 members, and enrollment in the Federal Employee Program or FEP increased by 23,000. Membership declined by approximately 201,000 members in the Local Group and Individual businesses collectively, during 2007. Almost 90% of this decline occurred in our non-Blue branded service areas.

We are undertaking a number of strategic initiatives, such as the introduction of our Solaura consumer-directed plans to enhance the competitiveness of our non-Blue commercial product, which we expect to improve results in future years. We have seen significant growth in our consumer-directed health plans or CDHP product.

At December 31, 2007, we had 1,354,000 CDHP members and this business is grown by more than 500,000 members or 59% from December 31, 2006. While CDHP currently represents less than 4% of our business, we expect this membership will continue to grow.

During the fourth quarter of 2007, the state of Connecticut implemented changes to its Medicaid managed care programs, which resulted in approximately 144,000 members converting from fully insured to self-funded contractual arrangements. We are currently servicing these members under a self-funded arrangement that expires next month and we are in discussion with the state of Connecticut on extending this agreement.

Given this and other shift in business mix, our overall membership base was 51% self-funded and 49% fully insured at December 31, 2007, compared with 51% fully insured and 49% self-funded at December 31, 2006. For the full year 2007, operating revenues reached record $60.1 billion, an increase of $4 billion or 7.1% over 2006.

The revenue increases were driven by disciplined pricing in the Local Group business and growth in State Sponsored and Medicare Advantage membership. The benefit expense ratio was 82.4% for 2007, an increase of 120 basis points from 81.2% in 2006. This increase was due to higher than expected claims cost in the medical business of our Specialty, Senior, and State Sponsored Business segment or 4SB as well as business mix changes and less than favorable expected reserve development in 2007.

Wayne will discuss the benefit expense ratio in greater detail later in this call. I would like to take a few minutes to address recent developments in our State Sponsored Business. While 2007 was a very challenging year in our State Sponsored or Medicaid managed care operations, we remain committed to this business and we have taken strategic actions to improve performance in 2008.

These actions include our notice to terminate participation in the Ohio Covered Families and Children's or CFC Medicaid program at the end of the first quarter. Unfortunately, we were unable to reach an agreement with the state that would allow us to continue serving these 145,000 Medicaid recipients in a financially sound manner.

We haven't previously terminated such a relatively new Medicaid agreement; however, we incurred discipline financial results under this program in the latter half of 2007, as medical costs continue to increase. That coupled with the state proposed overall net rate reduction for the upcoming year, led us to provide a prompt notice to termination.

We will work with the state on the smooth transition of members and we will continue to provide service under the Age, Blind, and Disabled program in Ohio. In addition as we previously mentioned, we were unable to obtain adequate rates to continue to serve the state of Connecticut Medicaid members on a fully insured basis, but we worked with the state to convert our 144,000 members to a self-funded contractual arrangements. This contract currently expires on February 29, 2008 and we are continuing to work with the state to further extend this arrangement.

Finally, while we resolved our Medicaid rating issues in 10 of 11 counties in California, we still have one county left to resolve. In this county we operate as a subcontractor for the Medical Program, and we expect to finalize our negotiations with the primary contractor this quarter.

We believe that offering Medicaid managed care programs benefits the state to lower medical cost and the beneficiaries through better coordinated care. We continue to focus on initiatives that can optimize the cost and quality of care for these beneficiaries, but we must participate in these programs in an actuarially sound manner.

Although we only have three weeks in to the New Year, we continue to have good visibility in to our original guidance of a 1 million net new members. We are running slightly ahead of expectations in national accounts, and behind expectations in Medicare Advantage.

However, in light of our decision to terminate the Ohio CFC Medicaid program, we are lowering our full year membership growth guidance by 200,000 and now expect 800,000 net new members for 2008. The majority of this adjustment is in Ohio Medicaid. We had expected the Ohio Medicaid business to grow during 2008, to a 170,000 members.

We also know that the State Sponsored business in South Carolina and the healthy Indiana individual program are coming on a little slower than expected. While 2008 membership guidance is lower, we are maintaining our $6.41 earnings per share guidance as the reduced membership in these areas had nominal contribution to EPS.

Our expected growth in 2008 and beyond results in part from a number of milestones we have accomplished during 2007. During the year, we expanded the services and value we offer to our members. We also improved our operational efficiency and reduced administrative costs as a percentage of revenue. We improved the selling general and administrative expense ratio by 120 basis points during 2007, when compared to 2006.

General and administrative expenses actually declined in 2007, while we served more than 700,000 new members. And we accomplished this while making strategic investments to grow our business in the future and provide superior service to our members. Some of the specific milestones we have achieved in 2007 include the following, completing several system migrations resulting in lower technology production costs and improved information management capabilities.

Rolling out industry-leading consumer driven health plans to all of our customer segments. Introducing an Action Plan for the Uninsured, a comprehensive plan to help reduce the growing ranks of the uninsured through a blend of public and private initiatives. We also sold new individual policy to 365,000 members, who are previously uninsured.

Launching the Member Health Index, a first of its kind initiative designed to measure the improvement in the health of the company's 34.8 million members and including this measure in our incentive compensation plan. Launching the State Health Index, the unique collaboration between WellPoint and local and state health officials that measures our progress and our commitment of improving the life of the people we serve and the health of our communities.

Expanding availability of new consumer transparency tools, including AnthemCare Comparison, 360 Degree Health, MyHealth Assessment and Medicare Part D decision tool. Introducing the Zagat Health Survey tool to support consumer's health care decision making, the new survey tool enables members to review and evaluate position based on set of distinct criteria creating a trusted resource to support informed member decision making.

While I am proud of these many accomplishments I have recognized that we still have much to do if want to truly transform health care.

To that end I am pleased to announce the completion of my executive leadership team following the announcement in October that Alice Rosenblatt and Joan Herman are retiring. Brian Sassi, who served as President at Blue Cross of California will succeed Joan Herman as President and CEO of the Consumer Business Unit. Brian has more than 25 years of successful industry experience including his leadership role over the California plan.

Cindy Miller was appointed to succeed Alice Rosenblatt as head of Actuary and Integration Management. Cindy has more than 20 years of experience in the industry and previously served as a Chief Actuary for Anthem. Both Brian and Cindy will report directly to me. We also recently announced the addition of two other key members of our senior team they will report to Ken Goulet.

Leslie Margolin has been appointed as the new President and General Manager for Blue Cross of California replacing Brian Sassi. Leslie has more than 20 years of health care experience including senior strategic and operational roles at CIGNA and Kaiser Permanente was recently served a Senior Vice President for health plan and hospital operations for Kaiser.

John Langenus has been appointed Senior Vice President and President and CEO of our National Accounts Division, replacing Ken Goulet, who had held that position.

John most recently served as president of group healthcare for Coventry Health Care and prior to that, he had leadership positions at Evolution Benefits and CIGNA Health Care, where he held increasingly responsible roles including Senior Vice President of the national market segment.

As a largest health plan in terms of medical membership in the country, our leadership positions are highly desirable and we are able to attract accomplished individuals. We've promoted some of our outstanding internal leaders and combined that with top external talents. In the coming year, our leadership team will continue to grow our business by focusing on the customer.

Comprehensive quality and cost initiatives will create value for our members, while we provide innovative and individualized products that meet each members needs throughout their life-time. We're committed to focusing on the needs of the uninsured and view this as a growth opportunity. We'll continue to be a leader in the health care reform debate working closely with our public and private partners to find solutions to the major issues facing our health care system.

Now, before I turn the call over to Wayne, I want to thank Alice Rosenblatt and Joan Herman for their many years of exemplary service to WellPoint. I feel fortunate to have worked with them for so many years, and wish them both well in their retirement.

I'll now turn the call over to Wayne DeVeydt, to discuss our fourth quarter financial statement, medical cost trend and update our guidance for 2008. Wayne?

Wayne DeVeydt - Executive Vice President and Chief Financial Officer

Thank you, Angela and good morning to all of those participating on this call. We are very pleased with our financial results this quarter to $1.51 in earnings per share, that include less than $0.01 per share in net realized investment gains. Premium revenue was a record $14.3 billion in the fourth quarter of '07, an increase of $972 million or 7.3% over 4Q of '06, due to disciplined pricing in our Local Group business and growth in State Sponsored and Medicare Advantage business.

Administrative fees were $914 million in the fourth quarter of '07, an increase of $9 million or 1% over Q4 of '06, due primarily to growth in our National Accounts business, including Blue Card and local group.

Self-funded membership increased by 992,000 members in 2007; during the year, 235,000 members switched from our fully insured plans to self-funded plans and this includes a 144,000 Connecticut Medicaid members.

The full year 2007 benefit expense ratio was 82.4%, an increase of 120 basis points from 81.2% in 2006. Approximately 80 basis points of the increase was driven by the medical business of our Specialty, Senior and State Sponsored Business reporting segment. The remaining increase includes our business mix shift to a larger proportion of higher loss ratio products and less favorably than anticipated reserve development from 2006 and 2007. The benefit expense ratio was 82.9% in the fourth quarter of 2007, an increase of 190 basis points from 81% in the prior year quarter. The higher than expected 4Q'07 benefit expense ratio results from items that generally should not impact 2008. What I'd like to do is take a few minutes to walk you through the specifics.

As we previously discussed, 2007 was unfavorably impacted by 2006 reserves that developed less favorably in 2007 than anticipated, this contributed 60 basis points of the difference between our 4Q'06 and 4Q'07 benefit expense ratios.

In addition, higher than anticipated medical claims in Ohio and Connecticut State Sponsored operations impacted the fourth quarter of 2007 benefit expense ratio by about 40 basis points. We incurred operating losses in both of these programs in 2007. We've taken fiscally responsible action in our problematic State Sponsored programs in Ohio and Connecticut.

As Angela noted, we are currently in the process of exiting the Ohio CFC Medicaid program, due to the inability to obtain fiscally sound rates. The Connecticut Medicaid contract converted to self-funded arrangements during the fourth quarter of 2007, and also in California, we resolved pricing in all, but one county and we expect resolution in that county this quarter. 40 basis points of the difference in benefit expense ratio include a mix shift with a larger proportion of our business being an higher loss ratio of products and other items.

And finally, we also experienced a relatively high level of intra-year reserve adjustments in the CCB segment during the fourth quarter of 2007. And this unfavorably impacted the comparison to the fourth quarter of 2006 by another 50 basis points. We're migrating to fewer claim systems and streamlining our operations and processes, as a result, we've seen a slowdown of certain claims processing and at September 30, 2007 reserves did not completely adjust for the slowdown.

In the fourth quarter, we dedicated resources to address this issue and improve the timeliness of effected claims processing. We have carefully evaluated our UN reserves; we've adjusted our completion factors to better take business process changes into consideration; and are confident that our reserving is consistent, conservative and appropriate maintaining our high single digit margin for adverse development.

So, our 2008 benefit expense ratio guidance remains at 81.6% for the year, given the strong full year 2007 operating results in our CCB segment, our continued outlook for stable medical cost trends in 2008 and the expected improvements in our State Sponsored operations. We continue to price our business, so that our expected premium yield exceeds total cost trend, where total cost trend includes medical costs in selling, general and administrative expenses.

As evidenced by an announce withdrawal from the Ohio CFC Medicaid program, we remained very disciplined in our underwriting approach, and do not pursue business that we believe is priced below our profitability targets.

Our 2007 medical cost trend was less than 8% and we continue to expect our 2008 medical cost trend to also be less than 8%. Inpatient hospital trend is in the mid single-digit range and is related to unit cost increases as utilization has been flat. Due to our recontracting efforts, unit cost trend is slightly lower than it was earlier in the year.

Outpatient services trend is in the upper single-digit range and is all unit-cost driven. Emergency room costs, surgery and radiology continue to be the main drivers of outpatient cost trend. Physician trend is in the mid single-digit range and is about 65% cost-driven and about 35% utilization. Pharmacy trend is in the upper single-digit range and is 60% unit-cost related and 40% utilization driven.

Moving to the SG&A expense ratio, it was 13.8% in the fourth quarter of 2007, a decrease of a 190 basis points from 15.7% in the fourth quarter of 2006. In absolute dollars, G&A spending in the fourth quarter of '07 was lower in the fourth quarter of '06, even though we've added more than 700,000 new medical members in 2007.

The 190 basis point improvement is divided among the following categories: First, lower administrative expense, predominantly lower salary, fringe, and related expenses contributed 80 basis points. As noted earlier, we are standardizing our processes, migrating to fewer claim systems and streamlining our operations to become more efficient.

Second, spreading administrative expenses across a growing revenue base contributed 70 basis points. And finally, lower incentive plan expense contributed 40 basis points.

Moving now to interest expense. It was a $125 million in the fourth quarter of 2007 and increased $25 million or 25.3% from 4Q'06 due to our higher debt balances, as we increased our debt-to-cap ratio. Our effective tax rate was 35.1% in the fourth quarter of 2007, 250 basis points lower than the 37.6% in the fourth quarter of '06 and a 160 basis points lower sequentially.

As we continue to execute on our tax planning strategies, we reached agreements to close certain open tax years. Our tax planning strategy that reduced our effective tax rate by approximately 90 basis points over the past year, this is part of our ongoing business activity and we continue to expect our full year 2008 effective tax rate to be 36.7%.

Turning to our reportable segments, CCB is our largest segment and continues to have strong financial results. Operating revenue in 4Q'07 was $10.6 billion, an increase of $305 million, or 3% from 4Q'06 led by disciplined pricing.

Operating gain for the CCB segment was $872 million in the fourth quarter of 2007, an increase of 2% compared with $854.7 million in the fourth quarter of 2006. The year-over-year growth in operating gain was driven by revenue growth and lower SG&A expense partially offset by higher benefit expense.

The full year 2007, operating gain was $4 billion, an increase of 8.7% over 2006. The increase is an operating gain was driven by premium rate increases across all lines of business and lower general and administrative expenses, partially offset by an increase in the segment's benefit expense ratio.

Premium yield exceeded total cost trends in 2007 and operating margin in the CCB segment expanded by 40 basis points confirming the company's disciplined commercial pricing.

In our Specialty, Senior and State Sponsored Business or 4SB operating revenue in our fourth quarter was $3.6 billion, an increase of $586 million or 19.4% from 4Q'06, primarily due to growth in State Sponsored and Medicare Advantage business.

Operating gain for the 4SB segment totaled $392.3 million in the fourth quarter of 2007, an increase of 3.3% compared with $379.7 million in the fourth quarter of 2006. The increase in operating gain was driven by lower performance-based incentive comp in 2007 and improved results in our Pharmacy Benefit Management mail-order business, partially offset by lower Medicare Supp and State Sponsored Business profitability.

Operating gain totaled $972.3 million for the full year of 2007, a decrease of 13% from $1.1 billion in 2006. Lower financial performance in State Sponsored operations and lower Medicare Supplement profitability was partially offset by growth in the PBM business.

Other segment operating revenue in 4Q'07 was $1.1 billion, an increase of $82 million or 8.2% from 4Q'06, primarily due to additional FEP revenue, partially offset by higher inner-segment elimination, reflecting additional PBM to our CCB segment.

Operating gain for the other segment totaled $15 million in the fourth quarter of 2007, which compares to an operating loss of $12.7 million in the fourth quarter of 2006. For full year 2007, operating gain was $12.2 million, compared with an operating loss of $59.6 million in 2006. Results in this segment improved year-over-year, due to the non-recurrence or merger-related retention bonuses and growth in the FEP.

Now moving to the balance sheet. Current assets were $13 billion at December 31, 2007, an increase of $1.4 billion from year-end 2006, due to increased cash and investments. I know many of you had questions concerning our investment portfolio in light of the broader market issues. Our investment portfolio continues to perform extremely well, despite the turmoil in the financial markets.

There have been no downgrades of any of our mortgage-backed securities, we had no CDOs. We did have $271 million of subprime related securities at December 31, 2007, which is down from $288 million at September 30th due to the normal pay down associated with these mortgages. Nearly 99% of our subprime bonds are AAA with remainder either AA or A. We are in higher quality tranches and again not one of the securities has been downgraded by any of the rating agencies.

Total assets were $52.1 billion at 12/31/2007, up $485 million from the year end 2006. Medical claims payable were $5.8 billion at the end of the fourth quarter and increase of $498 million or 9.4% from the year end 2006.

Days in claims payable as of December 31, 2007, was 45 days, a decrease of 1.8 days from 46.8 days as of December 31, 2007 primarily due to the following. We had a 1.1 day decrease due to the timing of our medical claim payments. We had a 0.8 day decrease due to reduction in claim cycle time, which is really the length of time between the date of service and claims payment and 0.1 day decrease due to the timing of PBM claim payment. This was partially offset by a variety of other small items that netted to a 0.2 day increase.

We have included in our press release a reconciliation of roll forward of our medical claims payable reserves. This disclosure is comparable to the reconciliation provided in our third quarter 2007 press release.

We report prior-year redundancies in order to demonstrate the adequacy and consistency of prior-year reserves. For the year ended December 31, 2007, we had significant positive prior-year reserve development of $333 million. We continue to establish reserves in a consistent and conservative manner.

Long-term debt was $9 billion at December 31, 2007, a $2 billion increase from year end 2006. Our debt-to-cap ratio at December 31, 2007 was 28.2%, up from 22.2% at year-end 2006 and closer to our targeted range of 30%. During the fourth quarter, Standard & Poor's upgraded WellPoint senior debt rating to A minus from BBB plus, based upon their confidence in our capabilities and strong operating cash flow.

For the year ended December 31, 2007, operating cash flow was better than expected, and totaled $4.3 billion or 1.3 times net income. Operating cash flow in the fourth quarter was $1.1 billion or 1.3 times net income and included approximately $100 million in tax refunds related to settlements of prior years', a majority of which was acquisition related and was applied to goodwill.

As of December 31, 2007, we had $2.2 billion of cash and investments at the parent holding company. In 2007, we received $4.4 billion in dividends from subsidiaries and expect at least $3.3 billion in dividends during 2008. During the fourth quarter of 2007, we repurchased 22.5 million shares of common stock for $1.8 billion, bringing our year-to-date total to 76.9 million shares for $6.2 billion. Our remaining Board approved share repurchase authorization was $4.3 billion at 12/31/2007 and we expect to utilize this in 2008 subject to market conditions.

Turning to our 2008 guidance, we continue to expect net income of $6.41 per share representing growth of 15.3% over 2007. Year end medical enrollment is now expected to approximate 35.6 million members, with fully insured membership now expected to be 17.1 million and self-funded membership expected to be 18.5 million, due primarily to the change in Ohio and Connecticut State Sponsored business.

Operating revenue is now expected to total approximately $62.6 billion. As I noted earlier, we now expect to benefit expense ratio to be approximately 81.6 and our SG&A expense ratio is now expected to be approximately 14.4. We expect full year 2008 operating cash flow of $4.4 billion or 1.2 times net income. Weighed average shares outstanding are expected to be 552 million for the full year 2008 down 50 million shares from 2007 due to share repurchases. We expect net income of $1.44 per share in the first quarter of 2008.

I will now turn the call over to Angela to lead a question-and-answer session.

Angela Braly - President and Chief Executive Officer

Thank you, Wayne. Operator, please open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question and comes from the line today have Matthew Borsch with Goldman Sachs. Go ahead.

Matthew Borsch

Yes, Hi good morning. Maybe I could just dig a little bit deeper on the fourth quarter MCR in particular just understanding the change in your view on reserving from last quarter. Can you give us some idea of, where are you saw the impact in terms of -- if it doesn’t change your view on components of medical trend maybe where are the bulk of the claims volume was and was there a regional area, where the expenses came in higher than expected and I guess last sort of related point here is the extent which you are comfortable that you have this cleaned up now and ensure conservative position going into 2008.

Angela Braly

Let me kind of address that on a high level Mathew, we do feel very solid about 2008 and where we are. As saw this experience in the slowdown that Wayne referred to, it was on a single system and we did have some migration into that system. We are very focused on excellent service and we saw the results of that in the fourth quarter as our claims processing timeliness increased and we got better transparency into the reserve bank. So, I will let Wayne speak to a little bit more, but we are feeling really good about '08.

Wayne DeVeydt

Yes, Hi Matt. In terms of the question the slowdown we had contemplated, it is very common when you are doing a migration that you get a slowdown in some of your claims processing. Part of our focus was to account for that, which we thought we had done as of the third quarter, as part of our desire to continue to provide customer service and improve our customer service rankings, which did improve in the fourth quarter. We really accelerated paying some of that backlog down. In doing that, we got a little more transparency around some of the actual development.

So from our perspective, I'd say I feel very confident that we've got our reserves with that high single-digit level they have been at historically and then we are going to start the New Year off very strong, but these type of items are do occur. A couple of things we did at year end though as we did slow the completion factors down a bit, and we also increased our incurred PMPM on the reserves and that combination of those two items, I think really gives us much more comfort that we think we got it right and they will be starting off the new year strong.

Matthew Borsch

And if I just we can, one more quick one which is just on the, pricing conditions you are seeing in your markets since you entered the new year, if you can compare that to last year?

Angela Braly

We still think the market is very rational. We certainly are seeing competition, but we are seeing very disciplined and we think the market continues to stay disciplined. In terms of year-over-year, we thought the market was rational in 2007 although quite competitive.

Matthew Borsch

Alright, thank you.

Operator

Thanks. And our next question comes from the line of Bill Georges with JP Morgan. Please go ahead.

Bill Georges

Thanks. Good morning. Just another follow-up question on the MLR, I guess, during the Investor Day, you provided a walkthrough taking us from, in '07 MLR of 82.0 to your forecast for '08 of 81.6. Could you update us on that starting with the higher base, now that's '07 books are closed?

Jamie Miller

Wayne, you want to respond to that?

Wayne DeVeydt

Yeah. Hi, Bill. I would say that again, while the pieces may change slightly as we roll that forward. I don't expect our original guidance to change from what we provided at our IR day. One of the things to keep in mind is that, some of these programs, specifically Ohio and Connecticut, I think it's very fair to say that we have learned our lessons a year ago in light of what happened in California. And we are going to get big rate increases into the next year without knowing we had those locked and loaded.

So from an earnings per share perspective, these become very neutral, in fact, our assumption was that we wanted to be conservative to the extent that if had to exit these programs, we will be able to cover our exit cost.

So in terms of exiting Ohio, it's neutral. In terms of Connecticut the state has put forward an extension. We have not agreed to that extension and we are still working through the details, but from an overall earnings per share perspective remains neutral. From a NOR perspective, well that inherently would drive a lower NOR in moving those programs.

As we talked about, we little behind in some of other areas, and as we finished up our fourth quarter some of our individual was slightly lower than we had expected. And those, are actually contribute a little bit favorably to the EMR, so when you cut a net amount, we still think our original guidance is right on at this point in time and we are very confident with it.

Bill Georges

Okay. And then just as a follow-up question. I guess, Medicaid membership growth was a meaningful part of the story in '07. Do some of the problems that you've seen in your Medicaid book, does that change you philosophy towards the business, and if so, how?

Angela Braly

Let me speak to that a little bit. We, I think, believe that the Medicaid managed care business is an important one. It's a reflection of our value. We have the opportunity to really drive more value for the state and drive better outcomes for the beneficiaries. But what 2007 has meant to us is that we do have some process improvement around the way that we enter into market and the way that we contract with the states. We're very conscious of what the termination provisions are. We're looking at cost and quality initiative around the cost of care, so we really can optimize that.

And so, we're going to stay incredibly disciplined, I think, as a result of some of the process improvements we have from 2007. But we are committed to that market segment. We drive value there. And so, you will see a stay in that market, but we're going to be very disciplined in how we contract with the states.

Bill Georges

Okay. Thanks very much.

Operator

Thank you. And we have a question now from the line of Josh Raskin with Lehman Brothers. Please go ahead.

Josh Raskin

Thanks. Good morning. I guess I'll ask one more question on the MLR. Wayne, I think you said that the fourth quarter items, none of them were going to impact 2008. I certainly understand the '06 reserve, now assuming if reserves were adequate that would not occur, Ohio and Connecticut, 40 bps, I understand that. But the mix shift of 40 basis points, I am just curious why would that not continue into 2008? Do you expect a shift back to a different mix of business?

Wayne DeVeydt

Josh, that's a very good question. Part of it is there will be some inter-quarter potentially shifting occurrence. So, for example, let's take Ohio. In Ohio, we had assumed that we would not get a level of rate increases in the plan. We wanted to be conservative with that. At the same time, what was disappointing for us was that in the fourth quarter Ohio deteriorated significantly. And that, coupled with the rate decrease, really required us to terminate that contract effective in the first week of January, which we did.

That inherently will cause a higher MLR in the quarter. The flipside is we have some other areas where we are doing better than expected that we think will drive the MLR down. We continue to see some good growth within our group business, both small and local. Our national accounts are doing better, including adding over 5,000 full insured lives that we had not expected.

So, we have a number of really moving parts here. And again, we're three weeks into the year at this point. So it's hard to have a 100% visibility. But what I would tell you is we've got some good things happening out there and we're seeing some positive development in other areas. And we think, when you net them all out, we're still going to be dead-on with our original guidance.

Josh Raskin

Okay. So, it sounds like, obviously, the mix shift occurred, but there are some of the offsetting factors.

Wayne DeVeydt

Yeah

Josh Raskin

A quick follow-up. Could you just walk us through your expectations in terms of investment portfolio returns, your investment income expectations and what sort of yield assumptions you are using?

Wayne DeVeydt

Michael, do you have a yield assumption? I don't have it. It's off of the top of my head, Josh. I can get back to you on that. I would tell you that we were conservative in our estimation because we did expect that there may be some levels of decline in rates. I would say that the level of declines, I think, we would all agree have been somewhat unprecedented in the recent term. But I still feel confident in our original guidance there. But I'll get you specifics on that later after the call.

Josh Raskin

Perfect. Thanks.

Wayne DeVeydt

Thanks.

Operator

Thank you. And our next question then comes from the line of John Rex with Bear Stearns. Please go ahead.

John Rex

Yeah. I was wondering if you just could compare for us. I mean you mentioned about using slower completion factors in your 4Q accruals, also increasing the PMPM reserves. How does that compare to the factor that we are using in the 4Q '06 on both those elements? I know this is difficult to quantify, but a way you can kind of show us how that's changed.

Wayne DeVeydt

John, I have to get back to you with the specifics on it. What I will tell you is that we did a number of analyses, both from an actuarial perspective, but I would tell you I also did in on a cash basis, because, as you know, sometimes the numbers can be a little misleading if you don't look at it on a cash basis.

What I would tell you is that they are higher, but they are higher to reflect the combination of cost of care trends coupled with the fact that we do know last year in 4Q of '06 that we were artificially too low, and we know that, and we know that having the benefit of hindsight.

So, one of the things we did is, is not only looked at it from an actuarial perspective, but we did somewhere announce from a cash perspective. And I would say that they are up over the last year, they are up quite a bit. And I think it gives us some comfort that we're going into '08 adequately reserved.

John Rex

And are the completion factors that you are using for 4Q '07 are they slower than you were using for 4Q '06?

Wayne DeVeydt

Yes.

John Rex

Okay. And then, just on your G&A spend, I mean usually in a 4Q because of open enrollment you will bear a lot of cost. So it's a little unusual to be down sequentially in a quarter like that. Is there an element here that we should consider deferred spend in the G&A line in 4Q '07?

Wayne DeVeydt

No, John. There were no investments in advertising. Any of our decisions that we said we are going to invest in '08 at all that were deferred. What is fair to look at is that we are a performance-based company. And while we exceeded a number of our metrics this year and actually added over 700,000 new lives, more than any other competitor did, it fell short of our goals. And a big adjustment in the quarter was related to performance-based compensation.

John Rex

But aside from that portion, and then this isn't a bad run rate to think about for the 1Q, and then we'd also want to be backing off the normal $70 million to $80 million in additional spend you get for an open enrollment in 4Q. Is that the way to think about the setup going into the next quarter?

Wayne DeVeydt

Yeah.

John Rex

Okay, great. And maybe just one last thing just back on Ohio and Connecticut, I want to make sure I understand if something changed from what you're seeing, is it a right call like nine months to-date in '07, both plans are running kind of in a mid 90s in terms of MCR. Did they get meaningfully worse in the 4Q or kind of just persisted the levels you think throughout the year?

Wayne DeVeydt

No. They got meaningfully worse in 4Q, John. What's interesting is, take Ohio as an example, being such a new program you really don't have lot of visibility until you get further in the year when you get enough data points. We saw slight deterioration in the third quarter, but not enough to really concern us or worry us. It's still a new program. We are working with the state on contract negotiations.

What we saw was pretty significant deterioration in the fourth quarter, much more than we had expected. And couple that with late in the year, and I'm talking about literally right before the holidays, as they're coming forward, the net rate reduction really led to our action that we took in January. So, it was really unexpected.

John Rex

Okay, great. Thank you.

Operator

Thanks. And our next question then comes from the line of Christine Arnold with Morgan Stanley. Please go ahead.

Christine Arnold

Hi. I'm going to come at this head-on. So I apologize if it comes across in a tough way. But it seems to me that your medical trends came in higher than expected if you needed to increase your reserves related to '07. So baseline medical trend looks like it was higher than you thought. And yet, we're hearing from the marketplace that you elapsed pricing entering 2008. Could you help us understand whether you are going to reprice later in the year on commercial or what your plans are?

Wayne DeVeydt

Christine, that's why I always appreciate and love about you, is you don't pull any punches and you hit its head on with it. No, I am very confident in our pricing right now, I really am. Keep in mind, and I think your comments are dead-on. I mean what it really says is that our high single-digit margin for adverse development within '07 was not we thought it was within some of the quarters and so when you just quote you get it back toward needs to be.

Christine Arnold

Is that means medical trend had do have been higher than you expected when your reserves to your baseline trend is higher, true or false?

Wayne DeVeydt

No, I think it's true to say that medical trend was slightly higher than we had expected. I would also say that relative to our pricing that we had assumed next year meaning '08, we had contemplated some of that higher trend. When we saw October which again, October was more than normally wasn't really run rate, but we looked at that and we said, look we got to think about some of that some of our pricing that we had been filing at the time and that's what we did. So, I'm not worried about '08, but your point is that on for '07.

Christine Arnold

But your last pricing in individual and small group entering '08 in California, which is like 2 million members, are you saying that's not representative of your pricing across your book or you saying California is better than the last year book?

Wayne DeVeydt

California was a very good year. We did very well in California in '07.

Christine Arnold

So, where were the costs higher than expected in '07 regionally?

Wayne DeVeydt

The more across the board and again this is about high single-digit margin that we are talking about the delta. We are not talking about changing underlying pricing. So, I want to make sure that I'm adequately addressing your question, but we carry more margin on our books than anybody does in the industry, anybody and we stood very significant margin development. So we are talking about the delta between a mid to upper single-digit versus high single-digit that we're strengthening for. So, I still feel very confident in our pricing in our renewals, if we had a situation, which I don't believe we have today, where we thought the pricing wasn't adequate and we sell the one-third of our book that comprise with 30 to 60 days notice, but at this point Christine I feel very confident of that.

Christine Arnold

Okay. Thanks.

Operator

Thank you. And our next question and then comes from the line of Justin Lake with UBS. Please go ahead.

Justin Lake

Thanks, good morning. Just getting back to the commentary around based claims payable, Wayne I think you described pretty adequately what the issues were that kind of drove that lower sequentially, but when you talk about those higher completion factors and the higher reserve levels on a PMPM basis, when I look back to the fourth quarter of last year days claims payable are basically flat year-over-year. So, can you kind of give us an idea what leaves you confident that -- which will leave us confident that those reserve levels are higher and maybe give us an order of magnitude given that the days claims payable really the only number that we have to look at is telling us that the reserves are fairly comparable especially given that, they were problematic last year.

Wayne DeVeydt

Yeah, I think a couple things, one is Justin unlike last year we had a significant drive in the fourth quarter of this year to drive our outstanding backlogs down significantly. So, one is despite having significant paid activity in the quarter as compared to 4Q of last year we still increased our incurred PMPMs and slowdown our completion factor. So, one thing I think to recognize is that unlike last year, while we may look at some of DCP standpoint is apples-to-apples they really not.

The second thing, I would tell you is that having the benefit of what happened throughout this past year and how reserves developed, while we migrated, one of the things that we met with the actuaries on and talked about is the fact we want to ensure that we go in to '08, there we're going with great confidence, we're not going to fall short. It's still an estimate. I can't tell you that, it's going to be exactly 100% right. It could be little over, could be a little under, but at this point in time we are still looking at.

The other thing is our cycle time has really shrunk between when we receiving a claim we will be paying and that’s part of our initiative to drive better customer service. So, I think those are really the two factors that are different from a year ago and when you consider these factors those would generally say you should accelerate your completion factors and we didn’t do that we actually slowed them down.

Angela Braly

Well, also we do have fewer claims processing systems now than we had at the end of '06 and we are seeing the benefit of that in number of ways. We can get our arms around the inventory, the claims processing metrics. We get better visibility as we get more efficient and have fewer systems.

Justin Lake

Wayne, I guess I looked at your -- you provided a lot of disclosure on the roll forward I don’t mean to get through details here, but I did look at the roll forward you gave us the incurred claims and you gave us the paid claims. When I looked at that '07 versus '06 and its running exactly on top of each other at 88% and I even look at the third quarter versus the fourth quarter and how it trended, the numbers aren’t staying that you paid a lot more claims as a percentage of incurred in the fourth quarter, is there something else I can look at or is there -- is that not representative of what actually happened, am I looking at the wrong number.

Wayne DeVeydt

Yeah. I think Justin -- I think after the call we will take it offline, but I don’t think they are representative. I think also things keep in mind these are full year numbers, so again we talked about some of that trip we did in this quarter related to what should probably happened in earlier quarters, but our pays were down significantly in the fourth quarter, and again that's a point in time roll forward. So, we will address this one offline with you, but I'm very confident.

Justin Lake

Okay. And then maybe just to follow-up on the revenue guidance, you took down the top line by 1.3 billion, obviously the Ohio Medicaid hasn’t impacted -- maybe you can just spike out Ohio Medicaid, you mentioned Medicare Advantage is running a little bit below your expectations. Can you give us kind of components of where that revenue guidance decline comes from?

Wayne DeVeydt

Its about a third of it relates to the Ohio Medicaid at this point in time. We have about a third just it relate to Connecticut. While we had literally right before IR they gotten a verbal agreement on a ASO contract, we are adjusting for that, are fully insured basis, because they were still talking to us about doing fully insured. They are still meeting with us and offered a new contract expansion, but again we are not talking about that publicly at this point rather than to say that, we are not going to bake in any of that into our revenue guidance for next year. So, we are mending for that. And then about a third of that really relates to our fourth quarter shortfall and some of our individual and some of our MA shortfall we're seeing right now.

Justin Lake

Right, what is the MA number now for this year, I think you said 150 before?

Wayne DeVeydt

It's only slightly below that and Justin I'm hesitant to amend it much at this point even quite a number, because while our ops are slightly down, we think our terms were little bit conservative than our estimation. And we do have some action plans throughout the year. So, I'm not prepared yet to lower the number with a specific yet, since only three weeks into the New Year. But the big thing is right now it's clear to say that ops are down, where thought they be at and so we are starting up the year a little bit in the hone of revenue side.

Justin Lake

Thanks a lot.

Operator

Thank you. And we have a question now from the line of Tom Carroll with Stifel Nicolaus. Please go ahead.

Tom Carroll

Hey, good morning. Quick follow-up on Ohio market, could you talk more about what drove the unfavorable medical experience there? And then secondly, was there anything in your contract that precluded you from selling that business to one of the other managed care companies?

Wayne DeVeydt

Tom, well, first of all, I would say is very much utilization driven in the program. And we saw utilization really spike there, because other lines of business and books in Ohio doing quite well. One of things that concerned is still, was that again with the new program, you get better data as the year goes on, but really saw a pretty significant spike in the fourth quarter.

And I don't think, I mean I’ll be surprised if any of our competitors aren’t seeing the same thing, because if you look at public filings at 930, almost all of them were starting to see some early signs of some negative development. So, when you couple that with a net rate reduction that made that decision quite easy to exit. The issue is with the state is that, we had to give appropriate notice and timely notice to them.

So they can provide appropriate notices to other players and vendors. When you consider the fact that it was running at a loss, when you consider the fact that the state was not willing to give any rate increase, in fact, one of rate reduction, there wasn't much of the sale that could be made of the book.

Angela Braly

Tom, we have really focused on our contracting in the Medicaid managed care contract, to make sure we have appropriate termination provision, in terms of whether you can transfer the contract. In some cases, we can and look at that as an option, here they were offering a rate decrease probably for the universally.

Tom Carroll

So utilization driven, again, is it coming from any one particular specialty or service, I mean is it OB related, that's kind of think I was looking for in terms of an answer.

Wayne DeVeydt

No. No, I mean it's more broad across the board. But Tom, we'll get back to you if there is any one area that's specifically driven, but it was pretty across the board.

Tom Carroll

Okay. Thanks

Operator

Thank you. And our next question comes from the line of Charles Boorady with Citi. Please go ahead.

Charles Boorady

Hi, thanks. Good morning. First, I'm wondering when in '07 did you identify that the fourth quarter '06 medical claims liabilities were developing less favorably than your previous expecting?

Wayne DeVeydt

Thanks. Good question. Good morning, Charles. You want to know when in '07, we identified that '06 was developing less favorably?

Charles Boorady

Yeah.

Wayne DeVeydt

That was in Q1. I would say by basically mid February, we had pretty good visibility that we were starting to develop negatively.

Charles Boorady

Okay. So the comment that you put in your press release about it was really more explaining, why '06 was reported so low and…

Wayne DeVeydt

Yes. That's correct.

Charles Boorady

Okay.

Wayne DeVeydt

That's correct, Charles.

Charles Boorady

So, this was related to the lag. There was a lag and you're identifying this related to the systems conversions that you described in other words?

Wayne DeVeydt

No. No.

Charles Boorady

And in terms of the systems migrations, in light of what happened in '07, the case there had been a change in your plans for continued migrations in '08. Are you slowing them down and how many platforms where you are now and what do you expect to be at the end of the year?

Angela Braly

We are dealing around our migrations, and we saw real process improvement over the year. We migrated over the last really year and a half four states off of their legacy systems onto our preferred systems. And so, there was quite a bit of migration movement over '06 and '07.

But towards the end of '07, we had pretty significant migration activity in our national accounts, host business that went very well. We executed really well on that migration as well as into PBM. We had some flawless execution around those migrations. So, our plan is to continue to migrate in the way that we have with the process improvement, so that we are doing so slowly and cautiously and making good decisions around each element of the process and a really integrated business plan with operations and claims and IT. So, we feel really good about that.

In terms of ultimately, our destination systems, we have hope to be down to three systems in 2010, three core claims processing system, and in 2011 and beyond even reducing that further. So, we have not changed our overall strategy. We are going to continue to do that, because it does drive the right results and then we can make investments, with lights on retiring systems into innovation and consumer directed capabilities.

Wayne DeVeydt

In 2008 though, it is one system that we would expect to retire represents about 7.7 million members. But 3.1 is Medical and about 4.6 is specialty members. But I think as Angela said, we are driving the efficiencies from a G&A perspective that we fully expected to get with these and that's going well, we have managed these well, our customer service scores are actually improving and they have been good, but they are actually getting better. But the flip side is; I think we took in to account some of the payment activity and shortened our completion factors. And so the real change is, we are not going to do that in the future. We're going to remain ultra conservative on the reserve side. And we can change our process.

Charles Boorady

You mentioned the Medicaid, it seems like there was a pattern when you look at California, Ohio, Connecticut. And states budgets are going to get even tighter in '08 especially California's. So I am just wondering if you think it's prudent to revise enrollment expectations for Medicaid. Could there be other surprises in '08?

Angela Braly

Yeah I think we are trying to be really clear. Connecticut doesn’t extend on an ASO basis. We'll keep describing that. We feel comfortable with where we have come with the 10 of the 11 contracts in California. Obviously, we have this one contract that were a subcontractor that remained. But essentially, as the states are looking at their budgets, we have good data that shows that managed care and Medicaid really produces a better outcome for the state in terms of overall cost, than a pure fee for service environment.

So, we really believe that they are going to look for that solution. We are going to be very disciplined in how we do that, but we'll stay very focused on executing well in the Medicaid segment.

Charles Boorady

When you bought $77 million shares back in the last year, the share count went down about $56 million, generally where did the other $20 million shares go? How much was for comp versus for acquisitions or other things?

Wayne DeVeydt

Sorry Charles. Could you repeat that, I want to make sure I understand the question.

Charles Boorady

Yeah, you bought back 77 million shares in the last year.

Wayne DeVeydt

Yeah.

Charles Boorady

Your share account is down by $56 million. So there's about a $21 million share difference.

Wayne DeVeydt

Yeah the weighted average account is down by that amount. So, again the number of the shares we buy late in the year, we are not getting the full credit for, but we get the full credit in '08.

Charles Boorady

And mostly adjusting for that but was there an issuance of shares for an acquisitions or?

Wayne DeVeydt

No. The acquisitions we did this past year such as AIM, we used our -- we used cash.

Charles Boorady

Got it. Okay. Thanks.

Operator

Thank you. We have a question then from the line of Greg Nersessian with Credit Suisse. Please go ahead.

Greg Nersessian

Hi, thank you. Good morning. Wayne a question about the 1Q '08 guidance just in terms of the medical loss ratio, it sounds like you are getting rate cut in Ohio and that business doesn’t terminated until the end of the quarter. And then you are also getting more heavily into Part D with lower risk quarters. So wondering that directionally the 1Q, '08 MLR versus 83.1% you reported 1Q '07 how should we think about that? Should it be higher 1Q, '08 year-over-year?

Wayne DeVeydt

It's a good question. If everything was equal, than I would say yes. The flip side though is, we expect to see some improvement in our California state sponsored operations relative to 1Q of last year as well. So, we need to see how more the quarter pans out right now. While we don't provide the quarterly guidance, I would say that, again if everything was equal and perfect, that you would expect within the quarter slightly higher MLR.

Greg Nersessian

Okay. And then just a follow-up on Charles' questions about the other states. You entered Indian, Kansas, Texas, and Nevada within the last couple of years also, can you allude it to me are there any issues in Indiana those states you are working with the states on or where those tracking inline with your expectations?

Wayne DeVeydt

I would say most of our states attracting very much inline with our expectations, and I am pleased with our contract negotiations we did in California, because we are returning to a levels in those counties where we want to be. The flip side though is that, with all these programs many of these are annual programs and so you have to negotiate in every day.

And I don't think there is any secret that more and more states are struggling with balancing their budgets, and so with that it makes our negotiations harder. So it's one though that, we want a partner with the state, we value the relationships with the state, but we can't be funding the states budgets and that what's been happening in the last year or so and that's why we took the swift action, we took in Ohio.

Greg Nersessian

Okay. And then just last quick question on Connecticut. Is this freedom of information, situation, a deal breaker for you in that state, and I guess what would it take for you to stay or to leave and then just also the enrollment guidance for '08 that is not assuming you leave Connecticut, right that's assuming is stay either self-funded or fully insured?

Angela Braly

Yes. The guidance it seems we are still in Connecticut on an ASO basis, and the four year issuing Connecticut has been a very significant issue for us and it's one that we've been very clear with the state on. It's important to us and it's different for us than potentially other contractors, because we are happy to have complete transparency around the Medicaid contract and the Medicaid piece schedules themselves.

The language that's been proposed in the past has gone beyond that, and we go to our commercial business which we can't do. So that's what's been important to us in terms of that contract.

Wayne DeVeydt

Greg, we are working on, we are working with the state though on alternatives. We provided a lot of alternatives; in fact, we very much support the state having all rights and access to all the data as it relates to their program. We've never had an issue with that and we continued to provide them language and supports in that manner and we are working a number of strategies. And I think the state values that and sees that, and that's why they've put forward a contract extension in front of us.

Again we haven't signed it yet, because we are still wanted to make sure that we are all meeting the mutual needs of all parties. But that's why we are also so far leaving the membership in our guidance as well, because we do have contract extensions in front of us.

Greg Nersessian

Okay. That's helpful. Thank you.

Operator

Thank you. And our next question and it comes from the line of Scott Fidel with Deutsche Bank. Please go ahead.

Scott Fidel

Thanks. Question just relates to individual '08, and you did mention there was a bit of a shortfall in the fourth quarter. Maybe if you can tell us what sequentially your individual enrollment did in the fourth quarter, and then what expectations you've built into individual for your guidance for 2008, and maybe just some in the markets where you might have seen the pressure around the individual enrollment?

Wayne DeVeydt

Well, to tell you, a lot of the pressure we are seeing on the individual side is in our "non-Blue" states. We are seeing a fair amount of pressure there. In a few of our Blue states, we have seen some pressure, mostly in large metropolitan areas. And we have at least one competitor who is doing very rational pricing, the pricings very rational. But as you know with individual business, you are generally writing somebody at the healthier stage in your life, and so these individuals are applying a very appropriate strategy. They are coming in the markets, they are pricing appropriately, but they are offering higher commission, and so we’ve seen some slight deterioration and some of our Blue metropolitan areas, specifically in Georgia and California would be the two Blue states where we’ve seen some declines. But a significant portion of that decline is actually occurring in our non-Blue states.

Scott Fidel

Okay. And then Wayne just interested in sort of how you are approaching assumptions around the slowing economy, and I know you've talked a previously that build in some expectations for higher attrition and maybe just if you could update us on sort of how you are approaching expectation for attrition and then also how you think about medical cost trends as the economy slows in terms of, is it offset to slowing enrollment or do you think about medical cost transaction accelerating as the economy slows.

Wayne DeVeydt

It's interesting. We have taken our guidance assuming a slowdown and specifically we were very specific about relative to the national account business that we had expected. Now the good news is, think our assumptions were conservative and we are actually seeing slightly better than expected result there, which is good.

But I think we are far from having this economy downturn from being final, and so we are not ready to declare victory there that we’ve got it a 100% right, but right now I would say some of our assumptions appear to be conservative at this point.

Flipside is we all know that when we start to see reductions in jobs that you actually end up having not detecting utilization initially, because you have individuals who are taking advantage of those elective services that they didn't have done before. When they know they are losing their job, they try to take advantage of that. So, that is something we all have to keep an eye on for the next year relative to that. But we did bake in some of that into our original guidance and, right now, we appear to be okay on that.

Scott Fidel

And if I could just ask one last quick one. Just relative to the Medicaid MLR again, and maybe, can you tell us how much improvement in the Medicaid MLR overall you are anticipating in the 2008 guidance relative to 2007? And maybe just give us sort of a base line of where the aggregate Medicaid MLR is sort of exceeding 2007 out?

Wayne DeVeydt

Scott, let me get back to you on that one. I want to make sure I'm adequately addressing your question. But one of the things we really need to do is pull together more of an apples-to-apples comparison to on what we are exceeding. Well, we are not exceeding but rate increases have helped us after negotiations.

So, we don't usually provide this information by line of business. But let me respond to you offline on that to make sure I get your question and answer that adequately.

Scott Fidel

Okay. Thank you.

Operator

Thanks. And our last question this morning comes from the line of Carl McDonald with Oppenheimer. Please go ahead.

Carl McDonald

Thanks. Just had a quick balance sheet follow-up, which was end of '06, you had about $5.5 billion of mortgage securities on the balance sheet. Can you give us a sense of how that broke down between various categories?

Wayne DeVeydt

The mortgage security?

Carl McDonald

Exactly.

Wayne DeVeydt

Most of them were in high quality government-backed securities. So I mean we have very little in what I would call alternatives. In fact, our entire alternative portfolio, even when you include REITs, LLCs, everything out there is less than 2.5%.

Carl McDonald

Okay.

Wayne DeVeydt

These are very high quality government-backed, Fannie Mae, Ginnie Mae. I mean these are really high quality, Carl.

Carl McDonald

Got you. All right. And then anything that you are anticipating in terms of shipping that portfolio around in 2008, any impact on the yield there?

Wayne DeVeydt

Well, I think we're going to have to, obviously, keep an eye on where yields are at. The spreads right now are obviously pretty dramatic. And we're going to continue to manage our portfolio to maximize our total return.

So, at this point, I think our strategy going in the year was we assumed a lower yield curve. But right now, I would say, rates are probably slightly lower than what we would expected. And at the same time, we manage our portfolio on a regular basis, on a daily basis.

So, it's hard for me to give you a specific strategy point. I think when you look at '07 we would all agree who would have thought rates would have went up as fast as they went, who would thought they would have went down as fast as they did, but they didn't, both extremes in the same year. So, we're obviously not going to bet they're going up on some of the things we're seeing right now. And so, we're taking appropriate actions in the portfolio.

Carl McDonald

Great. Thank you

Operator

Thank you. And I'd now like to turn the conference back to Angela Braly for the company's closing comments.

Angela Braly

Thank you all for your questions. In closing, we had a productive year in 2007 and we're off to a good start for 2008. I am very proud of our 41,000 associates for their efforts, accomplishments and dedication. As 2008 began, the new executive leadership team and I energetically look forward to leading WellPoint forward with confidence about our ability to truly make a difference in healthcare and provide more value to our customers and our shareholders.

I want to thank you for your interest this morning, and have a great day.

Operator

Thank you. And ladies and gentlemen, this conference will be available for replay starting today Wednesday, January 23 at 1:45 PM Eastern Time, and it will be available through Tuesday, February 5 at Midnight Eastern Time. And you may access the AT&T executive replay service by dialing 1-800-475-6701 for within the United States or Canada, or from outside the United States or Canada please dial 320-365-3814, and then enter the access code of 857272. Those numbers once again are 1-800-475-6701 for within the US or Canada or 320-365-3844 for outside the US or Canada, and again enter the access code of 857272.

And that does conclude our conference for today. Thanks for your participation and for using AT&T's executive teleconference. You may now disconnect.

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Source: WellPoint Inc. Q4 2007 Earnings Call Transcript

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