Douglas R. Simpson - Vice President-Investor Relations Joseph R. Swedish - President, Chief Executive Officer & Director Wayne S. DeVeydt - Chief Financial Officer & Executive Vice President.

Kevin Mark Fischbeck - Bank of America Merrill Lynch Matthew Richard Borsch - Goldman Sachs & Co. Christine M. Arnold - Cowen & Co. LLC Tom A. Carroll - Stifel, Nicolaus & Co., Inc. Joshua R. Raskin - Barclays Capital, Inc. A.J. Rice - UBS Securities LLC David Anthony Styblo - Jefferies LLC Chris D.

Rigg - Susquehanna Financial Group LLLP Peter Heinz Costa - Wells Fargo Securities LLC Ana A. Gupte - Leerink Partners LLC Andrew Schenker - Morgan Stanley & Co. LLC Sarah James - Wedbush Securities, Inc. Brian Michael Wright - CRT Capital Group LLC.

Ladies and gentlemen, thank you for standing by and welcome to the Anthem conference call. At this time, all lines are in a listen-only mode. Later there will be a question-and-answer session. Instructions will be given at that time. As a reminder, this conference is being recorded.

I would now like to turn the conference over to the company's management..

Good morning and welcome to Anthem's Second Quarter 2015 Earnings Call. This is Doug Simpson, Vice President of Investor Relations. With us this morning are Joe Swedish, President and CEO; and Wayne DeVeydt, our CFO.

Joe will offer an overview of our second quarter 2015 financial results and Wayne will walk through the financial details and our updated 2015 outlook. Joe and Wayne are then both available for Q&A. During the call we will reference certain non-GAAP measures.

Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website at antheminc.com. We will also be making some forward-looking statements on this call.

Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Anthem. These risks and uncertainties can cause actual results to differ materially from our current expectations.

We advise listeners to review the risk factors discussed in today's press release and in our quarterly and annual filings with the SEC. I will now turn the call over to Joe..

Thank you, Doug, and good morning. As this marks our third conference call in roughly a month, we're going to keep it as succinct as possible and then move right into Q&A. We're pleased to announce strong second quarter 2015 adjusted earnings per share of $3.10 with solid membership and margin trends. On a GAAP basis earnings per share was $3.13.

Our adjusted earnings per share increased from the second quarter of 2014 driven by revenue growth and improved medical loss ratio and opportunistic capital deployment. We ended the second quarter of 2015 with over 38.5 million members, over 1 million members more than the 37.5 million members we reported at the end of 2014.

Our growth continues to be balanced so far in 2015 as we added 571,000 Medicaid members, 331,000 national members, 51,000 individual members and 16,000 local group members. As a reminder, we closed on the Simply Healthcare acquisition in February of this year, which contributed 209,000 members.

These results have been supported by strong operating cash flow of $2.8 billion year-to-date, which represents 1.6 times net income. I'd like to start by discussing our Commercial business. Commercial membership has increased by 398,000 since year-end 2014.

Revenues remain relatively flat in the second quarter, but have declined by roughly 6% since the prior-year quarter to $9.4 billion, primarily due to fully insured member declines, including the previously announced decision to discontinue our employer group Medicare offering in the state of Georgia account.

Self-funded membership trends have been encouraging, increasing by 710,000 versus year-end 2014. This was primarily driven by better than expected growth in our large group business. Large group and small group insured membership in the Commercial business remained relatively flat in the quarter as expected.

Small group ended the quarter with a total membership of 1.35 million. Individual membership declined by 51,000 during the quarter as we continue to see contraction in our legacy non-metal products and metal products off of the public exchanges.

Our exchange membership declined by 5,000 lives to 893,000 members, which was due to normal attrition outside of open enrollment and was slightly better than expectations.

We have a solid pipeline for national accounts and expect solid growth in this area in 2016, with several large new accounts already closed representing several hundred thousand lives. For the 3Rs we were able to incorporate the data received by CMS in late June in our second quarter financials.

All in, our current read is that the data received was relatively in line with our expectations. We did see some benefit from a higher than accrued reinsurance receivable, but that was offset by higher than expected risk adjuster payable. Risk corridor and MLR rebate estimates were then refined.

It is important to note that we may need to adjust our estimates for both the 2014 and 2015 benefit years as the data we have received is subject to appeal. So to summarize our current position, we've updated our reinsurance accrual as appropriate.

We increased the net payable position for risk adjusters for both the 2014 and 2015 benefit years during the quarter. As a result of the increase, we reduced our risk quarter expectation from 2014 and are now in a net neutral position for the 2014 and 2015 benefit years.

We believe our estimates are prudent given the dynamic nature of available information. I'd like to now turn to the Government segment and speak to the solid second quarter results. Our Government business segment had another strong quarter, adding 147,000 members driven by strong organic growth in Medicaid.

Revenues in the quarter were $10.4 billion, up approximately 25.7% versus the prior-year quarter. Government business year-to-date membership growth has exceeded our expectation. We've grown by approximately 630,000 members, including 571,000 in Medicaid, 31,000 in our federal employee program, and 28,000 in Medicare.

Please note that these results include membership associated with Simply Healthcare. The pipeline of opportunity for our Government business remains substantial. We continue to expect $65 billion of new business to be awarded by the end of 2018, split about evenly between traditional Medicaid and new populations in specialized services.

We believe our experience and footprint positions us very well to continue our growth as we help states address the challenges of rising healthcare costs and improving quality for their residents.

We are pleased to have announced during the quarter that we were awarded the opportunity to geographically expand our offering of Medicaid services for the state of Kentucky. Government operating margins improved 210 basis points quarter-over-quarter to 5.9%.

This primarily reflected improved medical cost performance in certain markets in the Medicaid and Medicare business and expected retro rate adjustments recorded during the quarter for certain Medicaid contracts. I now want to turn the call over to Wayne to discuss the key consolidated financial highlights for the second quarter of 2015.

He will also provide updated commentary on our 2015 outlook..

Thanks, Joe, and good morning. As Joe stated, in the second quarter we reported earnings per share of $3.13 on a GAAP basis and $3.10 per share on an adjusted basis. Medical enrollment has increased by over one million members or 2.7% during the year to approximately 38.5 million medical members as of June 30.

This reflected membership increases in virtually all lines of business.

Operating revenue was nearly $19.8 billion in the quarter, an increase of approximately $1.5 billion or 8.4% versus the second quarter of 2014, reflecting robust enrollment in the Government business, additional premium revenue to cover overall cost trends, and new fees associated with healthcare reform as well as growth in administrative fees as a result of our strong self-funded membership trends.

This was partially offset by fully insured membership losses, including the previously announced decision to discontinue our employer group Medicare offering in the state of Georgia account.

The growing diversity of our business aligns with our long-term strategy, as we believe we are well positioned to continue capitalizing on future growth opportunities. The benefit expense ratio was 82.1% in the second quarter of 2015, a decrease of 60 basis points from the prior-year quarter.

The decline reflected a lower medical cost ratio in the Local Group business due to the timing of medical costs experience, improved medical cost performance in the Medicaid and Medicare businesses, and the impact of retro rate adjustments reported during the quarter in the Medicaid business.

Our MLRs improved by 150 basis points year-to-date in 2015 versus year-to-date 2014 on a consolidated basis to 81.2%, with improvements in both business segments contributing to the change. For the full year 2015, we continue to expect underlying local group medical cost trends to be in the range of 7% plus or minus 50 basis points.

Our SG&A expense ratio decreased by 40 basis points from the second quarter of 2014 to 15.4% in the second quarter of 2015. The improvement largely reflected our ongoing cost improvement initiatives, the changing mix of our membership toward government business, and lower spending related to the public exchange's open enrollment season.

Partially offsetting the decline was higher administrative costs as a result of the strong membership growth in the first six months of 2015. Our Specialty business has shown strong growth this year as we've added 542,000 total dental members and 398,000 vision members.

We are pleased with the improvement in Specialty's performance, which shows that our recent efforts toward driving an increased penetration in our medical book are bearing fruit. Moving to the balance sheet, days in claims payable was 43 days as of June 30, down 2.7 days from 45.7 days as of March 31, 2015.

The expected decrease was primarily due to an acceleration of payments fee during the quarter as the company worked through the normal first quarter peak season of new and renewal memberships. As previously discussed, we expect days in claims payable to come back down closer to 40 over time.

Our debt-to-capital ratio was 41.9% at June 30, 2015, up 260 basis points from 39.3% as to March 31, which includes the impact of our recent equity issue offering and partial 2.75% convertible security repayment in early May. We ended the second quarter with approximately $2.2 billion of cash and investments at the parent company.

And our investment portfolio was in an unrealized gain position of approximately $688 million as of June 30. Moving to cash flow, we generated strong operating cash flow of more than $2.8 billion during the first six months of 2015 or 1.6 times net income. During the quarter, operating cash flow was $1.2 billion or 1.4 times net income.

Cash flow trends thus far in 2015 have been encouraging and we remain comfortable in our outlook of greater than $3.5 billion for the full year. As a reminder, cash flow in the third quarter is impacted by the payment of the 2015 health and surety and the receipt of the 2014 reinsurance reimbursement from the federal government.

We repurchased 4 million shares during the quarter for approximately $637 million, representing a weighted average price of $157.89. As of June 30, we had approximately 4.3 billion of share repurchase authorization remaining, which is intended to be utilized over a multiyear period subject to market conditions.

As a result of the recent agreement to acquire Cigna, we have halted share buybacks for the remainder of 2015. We used $164 million during the quarter for our cash dividend. And yesterday, the audit committee declared our third quarter 2015 dividend of $0.625 per share to shareholders.

Turning to our full year 2015 outlook, we continue to see 2015 as the year of continued growth across our business. We are updating our full year 2015 adjusted earnings per share outlook from greater than $9.90 to greater than $10. Our revised outlook is consistent with current analysts' estimates and reflects the strong first half trends.

Our outlook includes the impact of halting our share buyback program for the remainder of 2015. Additionally, our updated revenue outlook now includes the impact of slower than expected growth in the Dual Eligible program. We are pleased with overall results in the first half, which bodes well for the full year 2015.

While we do not offer quarterly EPS guidance, as we said last quarter, we expect the fourth quarter to be the lowest quarterly EPS figure for the year as a result of the diminishing impacts of the 3Rs, time to get medical cost experience for our members and changes to our overall business mix.

While we are encouraged by the underlying trends in the first half of 2015, our outlook continues to expect commercial business margin to be lower in the second half of the year versus the 11.6% reported year-to-date which is reflected in our outlook. We continue to expect operating cash flow in 2015 to be greater than $3.5 billion.

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

And our first question is from Kevin Fischbeck from Bank of America. Please go ahead..

Great, thanks. I just wanted to go into the items that you had spiked out as helping the MLR in the quarter. I was wondering if you could try and quantify a little bit more exactly how much of the benefit was from the expense timing, how much of the benefit was from the retro Medicaid, and some of the things that you highlighted..

Hi, Kevin, good morning. First, let me start with a number of the items that actually occurred including the retro were anticipated in the second quarter, so while we did benefit from it in and of itself, it was not necessarily something that was not expected.

And probably more importantly, I would say the MLR in total still came in better than our expectations. So first of all, underlying run rate appears to be strong across the businesses and we continue to be encouraged by it..

Okay, well, you're not prepared to break out just how much they were in the quarter?.

No, no. These are – again, I view these as normal run rate expectations with puts and takes that occur every quarter. So no, we wouldn't break those out separately..

Okay, then you mentioned the trend is – underlying trend is solid.

Any additional color you can give there about components of trend or is it the midpoint of the range that you guys are reaffirming or does it only count for the one and/or the other?.

Yeah, we continue to reaffirm our trend guidance at 7% plus or minus 50 basis points but I would say at this point, Kevin, if the first half were to continue through the second half of the year, we would be in the lower half of that range, this 6.5% to 7% range..

Thank you. Our next question is from the line of Matthew Borsch with Goldman Sachs. Please go ahead..

Ah, yes. Good morning. Thank you. If maybe I could ask about the reserve development in the quarter. So the days claims payable came down just shy of three days. And looks like the reserve development for the first half was considerably larger than the rate of reserve to development in the last year.

I guess the question here is, it clearly shows conservative reserving and strength in 2014, but at first glance, that looks like your reserve reduction to medical claims liability benefited your earnings in the first half, maybe by significant magnitude.

Can you talk to that?.

Yeah, Matt. Thank you so much for the question as well. Let me first state that we do not believe our first half benefited from the additional reserves that came through in the reserve roll-forwards.

Specifically as those reserves related to the prior year, the majority of that release actually ended up being re-established as additional liabilities for the risk collars we had in Medicaid, for the MLR rebates in our individual business, and for risk adjusters on our individual business.

So it simply shifted from one bucket of the reserve balance sheet to another bucket of the reserve balance sheet. As those got released there, additional reserves were then established.

That was part of our conservative posturing we tried to take at year-end so that as things would develop, we knew there wouldn't be much upside, but we also knew we were protected against the downside.

Probably the best quality metric I can point you to, Matt, to then validate that we did not benefit in the quarter is the cash flow to net income, which will show how strong cash flow is relative to our net income earnings.

But we did not benefit in the quarter, and believe we continue to have high-single digit margin for adverse deviation in our reserves..

Okay. Thank you for addressing that..

Thank you. Our next question will come from the line of Christine Arnold from Cowen. Please go ahead..

Hey there. I'm getting a huge increase in the government premiums.

Is that exclusively the Medicaid true-up or were there any outside or out-of-period revenue adjustments we should think about within Medicare Advantage?.

Hi, Christine. A little bit was the true-up, but the true-up in and of itself was not that meaningful and so it wasn't the largest driver.

I will tell you that our Medicare is performing quite well, and a number of the items that we were fixing in previous years including risk adjusters and other items are no longer impacting our Medicare book of business.

So as we said as part of our turnaround strategy that this should be the first year that we thought investors would begin to see stability, in fact increases in its earnings. And we think that run rate will continue. But I will tell you Medicare was as much a contributor as Medicaid was within the quarter..

So last year, you had prior-period negative adjustment to the risk adjuster. Can I assume that this quarter there might have been some positive true-ups to risk adjuster past accruals because you had increased your conservatism or how do I think about that? Because that Medicare PMPM has got to be up pretty big too..

Yeah, actually, we did not – I would say we have a conservative balance sheet though regarding the risk adjusters at this point. But I would say that we did get our recent mid-year statement on Medicare Advantage and it's in line with our expectations.

I would say relative to risk adjusters for the broader exchange book, we actually had a true-up for the prior year which again, was offset by the excess conservatism on the balance sheet because that's why we had it established. And then we applied a run rate factor for the first half of the year to that as well.

So again, we believe our balance sheet continues to maintain a decent amount of conservatism for the unknown..

I'm sorry. I just need a – I'm not clear. Was there a positive true-up to the risk adjuster for Medicare Advantage in the quarter? Because then MA, Medicare Advantage premium yield looked like it was up pretty significantly..

No, not a meaningful adjustment versus our expectations, I should say, Christine. But clearly we were expecting a much better and positive return from our investments we made in the previous years..

Thank you. Our next question is from the line of Tom Carroll from Stifel. Please go ahead..

Hey, guys. Good morning. Maybe you could spike out for us a bit more or give some more clarity on the increase in the operating gains seen in the Government business. I mean you're going from $313 million to almost $610 million.

How much of that was improved operations, Wayne, as you mentioned versus perhaps retro adjustments in the businesses?.

Hi, Tom. Good morning. The vast majority of it is improved operations in the Medicare book plus you're getting full run rate benefits from the Medicaid expansion that occurred last year plus our new wins. Remember, a lot of the Medicaid expansion in and of itself did not really get on the books until around June of last year.

And so last year's 2Q is really not reflective of not only the full quarter growth but, as you know, that ramped up then through the end of last year plus new wins we had into this year. So what you really are seeing there is core organic growth in our Medicaid book as well as unique improvement in our Medicare book.

And I do want to reiterate the retro adjustment is quite de minimis relative to the quarter but just one of many things that we have happening every quarter..

Great. Thanks, Wayne..

Our next question is from the line of Josh Raskin with Barclays. Please go ahead..

Hi. Thanks. Just a quick clarification on the guidance.

Stopping the buybacks, Wayne, what was the impact on adjusted EPS in terms of the guidance?.

Hey, Matt. It was not overly significant. You're looking at around $0.04 to $0.05 total is what the impact is based on the timing that we had assumed we would have..

Okay. And then next question just sticking with that Government segment margin, you guys put up a 5.9% margin this quarter. I know it's just under 5% for the full year, or year-to-date I should say. So what's running – I mean I just, I think about the Medicaid businesses on a pre-tax basis and none of the competitors are anywhere close to that 6%.

Medicare historically, at least Medicare Advantage has not been that high and I know your business has not performed to that level in the past.

So what's causing that margin, that sort of 6%? And how do we think about, you've talked about this turnaround from 2014, are we fully there or is there actually an opportunity for even higher margin?.

Hi, Josh. Good question. So a couple of things to keep in mind regarding how the margins look in the quarter and then where we think they'll pan out.

And I think it's fair to say that on the Medicaid front, the margins are quite strong in the quarter, but when you're comparing it to the previous-year quarter but recognize again, with the ramp up that occurred last year there was heavy G&A for that initial ramp up, so as we're staffing and resourcing in the quarter a year-ago for all that ramp up coming in, you're getting a fairly sizable G&A hit to the margins but you're not necessarily getting the revenue bump that comes with it or the earnings that are associated with it.

So as you compare to this year you're getting what I'll call much more normalized view of what margins could look like. The second thing I would highlight is our Medicare book has improved meaningfully. This was one of our strategies.

We've done the things we've wanted to do around pairing the business back, refocusing on HMO products and slowly starting to improve our risk adjusters, and so I would tell you on a year-over-year basis the margins in Medicare specifically are quite strong.

And then finally I would say that we had assumed some duals though still to continue to grow through the back half of the year, and as you know the duals will have a very muted effect, somewhat a negative margin in the early rollout.

So that's another reason why I think you'll see the margin start to come down through the back half of the year but in general, Matt, we're very encouraged by how the whole book is running.

I would also highlight that we still see margin opportunity for improvements, Josh, in a number of our areas that we have right now around certain states including Florida, Kansas and others where we continue to believe that they're large states that have upside still..

I guess, Wayne, my question was more around that 6% margin or even 5% on a year-to-date basis, just kind of absolute, not – forget about relative to where you've been but just on an absolute level do you think 5% margins in your Government segment can get better, right? And so is Medicaid actually running at 5% pre-tax margins?.

I think that is probably more the high end of the range of where we're going to be on a sustainable basis. I wouldn't necessarily look at that to be higher than that level..

Thank you. Our next question is from A.J. Rice from UBS. Please go ahead..

A.J., are you there?.

Yeah. Hello, everybody. Sorry about that.

Can you hear me?.

Yes, A.J..

First off, on the medical loss ratio, if I look at where you're at year-to-date across the board and then look at where you've maintained guidance so what that would imply about the back half of the year, a significant step up overall.

Can you just give us a little flavor on what some of the drivers of that would be? Obviously seasonality to some degree, maybe mix shift back half versus first half, just general conservatism as you look in the back half of the year, maybe some color on that..

Thanks, A.J. Good morning. Let me start with one of the things that I would point each of you too is to actually look at the margin that the Commercial segment has reported through the first half of this year being around 11.6%.

We believe that the seasonality patterns are very different that what we've seen historically and part of this is due to the ACA and how it's rolling out.

We believe we'll get to what I'll call our typical sustainable high single digit margin, but if you take that 11.6% for the first half and then consider what it would take to bring that down the high single digit margin, to give you a little bit of a flavor in the Commercial book of the seasonality that we believe we're seeing along with the mix.

I would also highlight that you start getting diminishing returns on margins in the back half of the year now because of the way the 3Rs have been established and the way the MLR rebates work.

So as you have outperformance profitability early on, as that continues, you end up essentially recording collars under the Medicaid and then, of course, MLR rebates and risk adjusters and corridors under the exchange-related business. So it's not that the business will be performing worse in the second half.

We actually think the business is doing quite well, but we think the seasonality and mix patterns have changed meaningfully from what we've seen historically..

Okay, that's helpful. And then just as my follow-up, I was going to ask about your updated thoughts on the 3Rs. Obviously, we've gotten two of the 3Rs data actually in hand on that.

Can you comment on whether you learned anything from that that's impacting the way you're thinking about them for this year, and then second, have you got any early information on the risk corridors and where they're coming out or any thoughts on that?.

Yeah. So let me start, A.J., on the reinsurance corridor. No big surprises there from our perspective. A little bit of upside to it because we had put some reserves up against some of that, but nothing of what I'll call a meaningful nature and not much of a run rate impact for the current year.

On the risk adjusters, though, we did have a net payable true-up, as high a reserve as we had booked on the risk adjusters. But it's part of the reason we maintain the excess reserves within our roll forward and our balance sheet, because we knew there could be some unknowns and that was some of the protection that we were trying to build against.

So the good news is that we reserved in total for it so it didn't have a net negative impact to our bottom line. And then we took that updated adjuster view and then ran rate that for the full year and then booked six-twelfths of that as of June 30.

So that is reflected in our outlook as well, what I would call the most current view, as conservative as we can be on it. So we do have that reflected. And then relative to risk corridors, we're pretty much in a net neutral position, not much of a receivable, not much of a payable.

It's more of a mathematical calculation and so we're not really expecting any surprises on the last R from our perspective..

Thank you. Our next question is from the line of Dave Windley from Jefferies. Please go ahead..

Sure. Good morning. It's Dave Styblo in for Windley. Some of question's to A.J.'s except on the SG&A and talking about the seasonality and ramp, and I guess as you're thinking about duals coming on, I guess I would have thought that might have created a little bit more leverage than in prior years.

So, again, it seems like the guidance there might be biased, having some conservatism.

Can you walk us through sort of the bridge from the first half to second half and why maybe SG&A shouldn't lay at the lower end of the range?.

One thing to keep in mind on the duals is that they're actually very heavy on the SG&A during the initial rollout phase, and that the leverage actually comes in more in years two and three than it does in year one.

So I think one thing to keep in mind is in the programs that are starting to expand in the second half, when you look at Texas and some of the other pilot programs still ramping up in California. So it actually has the opposite dynamic of what you're describing in the first year of rollout.

And then you start to get your leverage more effectively in the later periods of time, and primarily because you continue to ramp up and provide a lot more medical care as you're trying to get these people involved in what I'll call your sustainable programs around medical cost management..

Okay. Got it. I thought there was just a load ahead of that until the revenue started. But I understand what you're saying. And then two quick housekeeping items.

On the Florida Medicaid rates, what are you guys expecting on the booking guidance there? And what are your thoughts sort of on how the state's shaking out? And then on taxes, you guys are running about 150 to 200 basis points below your original guidance.

Have you done something there to improve the tax profile or is there just some unusual items that are going to shake out where taxes ramp back up in the latter half of the year?.

Yeah. So let me start with the Florida rates. Our guidance reflects what we know the rates are as they're currently being put forward. With that said though, I would indicate that we still believe the rate environment is somewhat challenging in Florida. We would like to see the rate continue to be improved.

And we continue to work with our partners in the state around the product designs we have and the geographies. And that's why I indicated we believe we have opportunity for margin improvement in the state still.

But again, the initial rates that were put forward were slightly behind what we thought were the rates that were needed, but not meaningfully, which is encouraging. And then I would say that our outlook reflects those rates, at least as they've been put forward at this point in time.

Regarding taxes, it's important just to remember that the health insurer fee is a fixed fee. And so it doesn't ebb and flow based on your current year revenues or membership.

And so as we have better income performance, and in this case where we are having strong operating gain performance and strong net income performance, it actually creates a leverage on your tax rate. And so in essence, what you're seeing in the lower rate is really a function of better operating earnings..

Thank you. Our next question is from Chris Rigg from Susquehanna Financial Group. Please go ahead..

Good morning. I just wanted to get some more color as to what you guys are seeing with regard to the duals. And I'm not sure I knew where you started the year in terms of projections enrollment for that group of people in revenue and things. Just trying to figure out how that impacted the $500 million reduction. Thanks..

Chris, good morning. The majority of the reduction is related to the dual space and then specifically in Texas as we looked at the outlook. A couple just reminders, we had three counties in California, Santa Clara, Alameda and L.A. that we were selected in to be part of the demo pilot.

Relative to that, Alameda actually ended up withdrawing the pilot so that did impact I would say our full-year outlook from a revenue perspective as we had fully anticipated that pilot would continue. L.A. County went live last year but the membership continues to be a slow uptake at this point.

And I would say that phenomenon we saw in California which started last year is really continuing as we get into this year. We're seeing in Virginia the enrollment is slower as well as New York. I do want to remind you that we had a fairly, I thought, conservative outlook for duals revenue over our five-year outlook period.

So we had anticipated really only around $2.5 billion of duals revenue by 2018. And based on the current ramp up and the pace that it's going on the pilot programs, we're running closer to about $1.4 billion at this point in time.

So we still have a number of years to close that gap, but I would say in general the duals continue to come on much slower than we even we had modeled at this point in time. But the majority of the revenue decline is solely related to the duals uptake being slower than we anticipated..

Great. I'll leave it there. Thank you..

Thanks, Chris..

Our next question is from the line of Peter Costa from Wells Fargo Securities. Please go ahead..

Getting back to the risk adjusters and changes you made relative to the government data that came out, can you quantify the impact of that charge that you took to earnings this year for 2014 for the risk adjustment changes, as well as quantify the amount that you changed your 2015 guidance for? Because you said you had updated that.

Can you gauge what the impact was in the quarter of just the risk adjusters? And I understand from what you're saying that you sort of offset that with the reserve drawdowns.

Is that the way to think about the reserve drawdowns as well?.

Yeah. First of all, let me start by saying that what we used in establishing risk adjusters was the Wakely data. It was the best information we had and we continue to use that data. We had concerns though, regarding the Wakely data because we knew a number of competitors had not reported their data.

And so we booked our risk adjusters at 12/13/2014 relative to Wakely and then we established additional reserves on our balance sheet for what we thought a range of outcomes could be, and tried to maintain a conservative range for that. And that's what you see running through the reserve roll-forward under DCP.

So as we got to this year, and you can look at the public data that was available, but the number was north of $50 million that we were short on the risk adjuster.

But at the same time, the number that we have within our balance sheet was more than adequate to cover that because we had assumed that it would be potentially short from what Wakely had posted. So ultimately, our current year earnings to date did not have a detriment to them because of risk adjusters, nor did they have a benefit.

And of course, at that point then we could release any additional reserves that we thought we needed related to prior year, which we did. However, those reserves then resulted in collars for Medicaid being paid back to the states as well as risk corridor payables that would be adjusted from there as well as MLR rebate payables.

So you have to almost look at the math in a chronological order. So, ultimately, no real benefit to the year, no real detriment to the prior year because we were obviously fully reserved it. And from a run rate perspective, we trued up for that delta.

And so you can kind of use that as a gauge of that shortcoming of what we thought it would impact the current year..

So is $50 million the number that I should use to be thinking about moving from the reserves in one area to the reserves for the other areas, or....

Yeah, it's a reasonable proxy. I mean, it's less than $100 million, more than $50 million is what I would say at this point.

But, again, I think to try to pinpoint one number down is really not the way I would recommend looking at it because you have to consider that our reserving was done with a lot of unknowns, and you have to evaluate kind of all reserves we had on the balance sheet..

Sure. I appreciate that. Thank you..

Thanks, Pete..

And our next question is from the line of Ana Gupte from Leerink Partners. Please go ahead..

Yeah, thanks. Good morning. So the first question is I just wanted to understand better when you look at the mix shifts between your fully-insured, individual and self-insured groups, you're obviously growing in self-insured, losing membership in fully-insured, haven't been doing as well on the individual market.

Are you retaining all that within your own book? Are you losing it to players like Cigna or even Anthem – I'm sorry, Aetna or United..

I would say the vast majority of what we're retaining within our own book, it's back to our long-term strategy that we built which was to have the biggest catcher's mitt so that we were indifferent to where the customer wanted to play but rather be in a situation we could have a product offering to them.

And I think that's reflected obviously in our overall growth in the first six months of 1 million new customers. So you think about it, we're clearly retaining the vast majority of that between our business lines and then adding to that as well. I would add the national account selling season is starting to draw to a close.

We have a small handful of accounts that we're still waiting to hear from that we're optimistic about but we continue to believe we'll be a net grower next year in the several hundreds of thousands range..

That's helpful, Wayne, thanks.

On the $800 million to $400 million, then, this to your point around, where are you in that trajectory? And as you're looking into 2016 with the extension of small group to 100 and potential mix shift to self-insured and individual, how are you pricing for your other exchange book and across the board? And is that likely to go down in a – is that even bigger headwind in 2016?.

The headwind continues to occur in this year at a meaningful clip. What I would tell you, though, is similar to this catcher's mitt scenario we keep describing, we did not see as much small group attrit this year into the public exchange as we thought.

So small group is still down year-over-year on operating earnings as we had expected, but not down as much as we had expected so some of the underperformance on the membership and individual is being offset by over-performance on the membership in small group while the EBITDA in small group.

So it will continue to add to the headwind for next year, but I would remind you that the headwind next year becomes the lowest headwind of our three-year period and really starts to become very, very manageable beginning in 2016 and beyond..

Very helpful. Thanks, Wayne..

Thanks you, and our next question is from Andy Singer from Morgan Stanley. Please, go ahead..

Thanks. Good morning. So just following up on those comments you made on the wins in the national account selling season.

Any additional color maybe you could talk about and what's driving that success in this self-insured market? Are the wins you're really benefiting from reliance on the Blue Card, or are these primarily wins within your Blue States? Any color there would be appreciated. Thanks..

Yeah. So the vast majority of the wins are directly associated with our direct bidding in our states and the value benefit that our national accounts continue to bring. Now obviously, the Blue Card is an instrumental part of that value proposition because we can offer a significant discount to those ASO members.

As you know, large national accounts are very sophisticated buyers. It's a highly competitive market within the ASO segment, and we're able to show not only the benefits of the discounts, but those benefits pass on 100% to the ASO customers. So our value prop is simple, and it's resonating..

Okay, thanks. Maybe just following up on some of your comments earlier on the better performance Medicare.

I know you touched on some of the drivers there, but can you really just discuss a little bit more detail the changes you guys have made to the Medicare offering that's really driving that performance and any updates related to your bidding strategy for 2016 that you think will continue that trend? Thanks..

So let me start with some of the things that we did. One was, we clearly spent more time and energy ensuring that we got from a best-in-class from a risk-coding perspective.

I would call those soups and nuts, nothing crazy, just coding better and really bringing a medical management team in that really understood what to do around coding and making sure that we were looking at the charts.

The second thing that we did that's helping us is that we really are medically managing this book of business much better than we believe we have in the past. I think a combination of our historical medical management processes but combining our Medicaid book with our Medicare book and the overall leadership and management has helped meaningfully.

And the last thing I want to highlight is one of the things Joe did when he came here was said, it's hard to manage your business when you're on multiple Medicare platforms. And so last year was the last year of consolidating our Medicare platforms onto a single platforming system. That's done a couple of things.

One, it's given us platform expansion because the G&A costs associated with that now are behind us. And two is it's giving us better data analytics and more real-time data to respond than we've had historically. And I would say none of those are sexy or unique, kind of nuts and bolts of running a business..

Thanks..

Thank you. And our next question is from the line of Sarah James from Wedbush Securities. Please go ahead..

Thank you. Your $65 billion estimate for the Medicaid opportunity through 2018 is at the high end of what peers have been discussing, and I was hoping that you could give us a little bit more clarity on whether or not that includes incremental duals contracts within that 2018 timeframe..

So Sarah, to give you some flavor for it and I can't really speak to our competitors but I can speak to how we plan to participate because we actually participate in a number of markets but if you look at the RFP pipeline that's out there, you've got about $33 billion of what I'll call core Medicaid either re-procurements or new expansion programs, obviously like you've seen in Iowa, et cetera.

When you look at long-term services care and ABD, you've got about $13 billion that's out there. And we've got to look at states like Georgia and Louisiana and North Carolina, et cetera. There is a duals demo opportunity out there and that number's closer to about $7 billion. Now, whether or not that occurs based on the slow pace, we'll see.

But there's a lot of other areas, and I don't want to touch on them all, but intellectual and development disability, complex children in foster care, behavioral health integration, et cetera. So we've got line of sight I would say on each one of these by market, and feel very confident in our $65 billion pipeline number..

And that $7 billion of duals opportunity, what state would that be in?.

You're looking more to Ohio and Oklahoma as opportunities there..

Got it. Thank you..

Thank you. And we'll move to the line of Brian Wright from Sterne, Agee. Please go ahead..

Good morning. Sorry about that. My questions have been answered..

Thanks, Brian..

Thank you. And I'd now like to turn it back over to the company's management for any closing remarks..

Great. Thank you very much, operator. This is Joe again. Wayne did a great job. Thank you, Wayne, for that update for everyone. I'd like to thank all of you for your questions. We're pleased with our performance of the company in the second quarter as you can tell, and for the entire first half of 2015.

It's reflected in our adjusted earnings per share outlook for 2015 of greater than $10. We remain optimistic about the growth opportunities that we believe lay ahead and I remain confident in our ability to execute against them.

I also want to thank our associates for their efforts, which are critical to help drive greater affordability and access to quality healthcare for our 38.5 million members. Thank you for your interest in Anthem, and we do look forward to speaking with you at upcoming conferences and events. Again, thank you very much..

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