5 14 2009 (Deutsche B) Well Point- Highlights Fro_abx01099

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North America United States Health Care Managed Care

13 May 2009

WellPointReuters: WLP.N Bloomberg: WLP UN Exchange: NYS Ticker: WLP

Highlights from Meetings withCFOScott FidelResearch Analyst(+212) 250 [email protected]

Gregg GenovaAssociate Analyst(+1) 212 [email protected]

Justin BowersResearch Associate(+1) 212 [email protected]

We recently hosted meetings with WellPoint's CFO on the West CoastThe underwriting fundamentals continue to stabilize for WLP; we expect positiveMLR results could show through again in 2Q09. WLP's war chest for sharebuybacks and M&A could reach nearly $10 billion in 2009-2010 (equating to 43%of current market cap), while at the same time reducing overall debt. WLP alsosees positive signs emerging for the 2010 national accounts selling season,lodging its first big win with the addition of the Wells Fargo account. Reaffirm Buy

rating since WLP remains one of our top two picks in managed care.

Forecasts and ratios Year End Dec 31 2008A 2009E 2010E

1Q EPS 1 1.13 1.62A 1.73

2Q EPS 1.47 1.45 1.62

3Q EPS 1.58 1.40 1.68

4Q EPS 1.39 1.23 1.58

FY EPS (USD) 5.56 5.70 6.60

P/E (x) 9.4 8.2 7.0

Revenue (USDm) 62,430.3 61,848.6 62,553.3Source: Deutsche Bank estimates, company data

1 Includes the impact of FAS123R requiring the expensing of stock options.

Deutsche Bank Securities Inc.All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from localexchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. DeutscheBank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firmmay have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single

factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's researchis available to customers of DBSI in the United States at no cost. Customers can access IR athttp://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARELOCATED IN APPENDIX 1.

Company Update

BuyPrice at 12 May 2009 (USD) 46.48Price Target 60.0052-week range 57.57 - 29.44

Key changes

EPS (USD) 5.70 to 5.70 -0.0%

Price/price relative

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WellPoint

S&P 500 INDEX (Rebased)

Performance (%) 1m 3m 12mAbsolute 15.2 6.6 -11.5 S&P 500 INDEX 6.0 8.8 -35.3

Stock & option liquidity data

Market cap (USD) 22,598.6Shares outstanding (m) 486.2Free float (%) 100

Volume (12 May 2009) 4,677,700Op tion volume (und. shrs., 1M avg .) 34 8,425

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While valuation suppressed by reform risks, fundamentals are improvingThe story around the MLR for WLP has improved dramatically over the past year.At this point last year, WLP had just reported a huge underwriting miss that sentshockwaves throughout managed care. Fast forward a year later and MLRs justimproved in 1Q09 in the Commercial, Medicare, and Medicaid segments. WLP’sclaims inventories declined by a further 10% again in April, instilling near-termconfidence in the MLR. However, WLP is seeing evidence of providers upcodingin certain markets. WLP is also optimistic it will take share in National Accounts in2010, having just locked in its first big account win with the addition of WellsFargo. WLP could also be positioned to repurchase 20% of its shares by end of2010 and still have ample excess capital for M&A, once better clarity on reformemerges. WLP remains one of our top two picks in managed care along with AET.

Noisy NT headlines on reform expected; WLP’s CFO skeptical on public planWLP’s CFO expects the initial House and Senate bills will look a lot scarier for theindustry than the final product. The House’s initial bill will likely look particularlyextreme to investors. WLP’s CFO is skeptical though that the public plan will makeit into a final compromise package. Our view here is that it’s still too early to call.

Maintain $60 price target based on 9x our 2010E EPS; risksWe note that our target multiple assumes the shares trade at a 15% premium toour target multiple for the MCOs of 8x to reflect improving EPS prospects and lowMA exposure, partially offset by recent execution challenges and systems issues.Risks: inability to reprice commercial book, further investment portfolioimpairments (see p. 8).



13 May 2009 Managed Care WellPoint

Deutsche Bank Securities Inc.

Fiscal year end 31-Dec 2006 2007 2008 2009E 2010E 2011E

Financial SummaryDB EPS (USD) 4.80 5.55 5.56 5.70 6.60 7.35Reported EPS (USD) 4.82 5.56 4.76 10.03 6.61 7.35DPS (USD) 0.00 0.00 0.00 0.00 0.00 0.00BVPS (USD) 38.27 38.18 40.97 50.80 56.76 66.16

Valuation MetricsPrice/Sales (x) 0.8 0.8 0.4 0.4 0.3 0.3

P/E (DB) (x) 15.7 14.5 9.4 8.2 7.0 6.3P/E (Reported) (x) 15.6 14.5 11.0 4.6 7.0 6.3P/BV (x) 2.1 2.3 1.0 0.9 0.8 0.7

FCF yield (%) 7.8 8.4 8.1 12.4 14.5 17.3Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0

EV/Sales 0.6 0.6 0.3 0.2 0.1 0.1EV/EBITDA 5.4 5.5 3.1 1.7 1.2 0.6EV/EBIT 6.4 6.4 3.6 2.0 1.5 0.7

Income Statement (USDm)Sales 56,953 61,123 62,430 61,849 62,553 63,936EBITDA 6,221 6,572 5,808 5,634 5,790 5,868EBIT 5,318 5,695 4,951 4,818 4,954 5,001Pre-tax profit 5,793 6,248 5,332 5,110 5,267 5,335Net income 3,095 3,345 2,491 4,877 2,847 2,867

Cash Flow (USDm)Cash flow from operations 3,970 4,345 2,535 3,078 3,201 3,436Net Capex -188 -265 -333 -285 -292 -300Free cash flow 3,783 4,080 2,203 2,794 2,909 3,136Equity raised/(bought back) -3,854 -5,214 -3,139 -1,938 -3,100 -1,500Dividends paid 0 0 0 0 0 0Net inc/(dec) in borrowings 129 1,804 -597 156 -600 -400Other investing/financing cash flows -270 373 949 2,451 -444 -425Net cash flow -212 1,043 -584 3,463 -1,235 812Change in working capital -339 204 -1,800 -651 -482 -297

Balance Sheet (USDm)Cash and cash equivalents 2,602 2,768 2,184 5,646 4,411 5,223Property, plant & equipment 989 996 1,055 790 942 1,096Goodwill 0 0 0 0 0 0Other assets 48,169 48,296 45,165 45,228 45,270 45,629Total assets 51,760 52,060 48,403 51,665 50,623 51,948Debt 6,493 9,024 7,834 8,227 7,627 7,227

Other liabilities 20,691 20,046 19,138 18,738 18,549 18,907Total liabilities 27,184 29,070 26,972 26,965 26,176 26,134Total shareholders' equity 24,576 22,990 21,432 24,700 24,447 25,814Net debt 3,891 6,256 5,650 2,581 3,216 2,004

Key Company MetricsSales growth (%) nm 7.3 2.1 -0.9 1.1 2.2DB EPS growth (%) na 15.7 0.2 2.4 15.9 11.3

Payout ratio (%) 0.0 0.0 0.0 0.0 0.0 0.0

EBITDA Margin (%) 10.9 10.8 9.3 9.1 9.3 9.2EBIT Margin (%) 9.3 9.3 7.9 7.8 7.9 7.8

ROE (%) 12.6 14.1 11.2 21.1 11.6 11.4

Net debt/equity (%) 15.8 27.2 26.4 10.4 13.2 7.8Net interest cover (x) 13.2 12.7 10.5 9.4 9.2 9.0

DuPont AnalysisEBIT margin (%) 9.3 9.3 7.9 7.8 7.9 7.8x Asset turnover (x) 1.1 1.2 1.2 1.2 1.2 1.2x Financial cost ratio (x) 0.9 0.9 0.9 0.9 0.9 0.9x Tax and other effects (x) 0.6 0.6 0.6 1.1 0.6 0.6= ROA (post tax) (%) 6.0 6.4 5.0 9.7 5.6 5.6x Financial leverage (x) 2.1 2.2 2.3 2.2 2.1 2.0= ROE (%) 12.6 14.1 11.2 21.1 11.6 11.4annual growth (%) na 11.7 -20.3 88.6 -45.2 -1.5 x NTA/share (avg) (x) 38.3 39.5 42.5 47.4 57.1 64.4

= Reported EPS 4.82 5.56 4.76 10.03 6.61 7.35annual growth (%) na 15.3 -14.3 110.7 -34.1 11.2

Source: Company data, Deutsche Bank estimates

Model updated:14 May 2009

Running the numbersNorth AmericaUnited StatesManaged Care

WellPointReuters: WLP.N Bloomberg: WLP US

BuyPrice (12 May 09) USD 46.48

Target price USD 60.00

52-week Range USD 29.44 - 57.57Market Cap (m) USDm 22,599

EURm 16,613

Company ProfileWellPoint Inc. is a managed care company that servesmembers as the Blue Cross licensee for California and as theBlue Cross and Blue Shield, or BCBS, licensee for Colorado,Connecticut, Georgia, Indiana, Kentucky, Maine, Missouri(excluding 30 counties in the Kansas City area), Nevada,New Hampshire, New York (as BCBS in 10 New York citymetropolitan counties, and as Blue Cross or BCBS inselected upstate counties only), Ohio, Virginia (excluding theNorthern Virginia suburbs of Washington, D.C.), andWisconsin.

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Scott Fidel+212 250 3716 [email protected]





DiscussionInvestment Thesis

We hosted investor meetings in California this week with WellPoint’s Chief Financial OfficerWayne DeVeydt and Director of Investor Relations Michael Kleinman. Despite the elevateduncertainty hanging over the industry right now relating to health reform, the tone of themeetings from a fundamental perspective reflected a dramatic improvement from the samepoint last year, when the historically rock-steady WLP had just shocked the market with amajor MLR and EPS miss. Fast forward one year, and WLP just exceeded Street EPSexpectations by 30% in 1Q09, driven by a better MLR. WLP also just announced a highlyaccretive sale of its PBM that will provide substantial new capital, shoring up both WLP’s2010 EPS prospects and the balance sheet. While overall we remain Neutral on the managedcare sector due to elevated Washington risks and continued challenges relating to theeconomy, WLP remains one of our top two picks in managed care along with AET. Wereaffirm our Buy rating since our price target of $60 suggests nearly 30% upside from current

levels. We discuss in further detail the key themes coming out of our meetings withWellPoint’s management in this report.

Health Reform: CFO Skeptical Public Plan will be ApprovedWLP’s CFO expects that managed care stocks will remain volatile in the near-term as theproposals develop out of Washington around health reform. He expects the initial legislationcoming out of the House will likely be particularly frightening for investors, while the Senatebill will also include some discomforting content. However, while it is still early in theprocess, WLP’s CFO said that he is “cautiously optimistic” that a Public Plan option won’tmake it into the final compromise legislation. However, he sees much higher odds that therewill be some form of health reform approved during 2009 that will include significant new

regulations for the industry, including around the Individual market where WLP is the numberone player. Notably, WLP’s CFO said that he will be looking to take advantage of any volatilityin his stock to leverage his share buyback program. He said the company was particularlyaggressive around repurchasing shares when the stock dipped into the $30’s earlier this year.These buybacks appear right now to have been nicely timed with the stock now trading atover $46. We note that our own view on health reform is that we think it is still too early tocall whether there will be a public plan or not. While we believe the managed care stocks atthe current valuations have already priced in significant risks relating to health reform, we alsobelieve that the overall political environment in Washington has lurched dramatically to theleft this year and that the overall tenure of the Obama Administration will be a very difficultperiod politically for the managed care industry. Notably, WLP’s CFO said the managementteam would like to have a better sense of where health reform will develop to before gettingmore aggressive around M&A. Indeed, he said that while he would “love to do” a meaningfultransaction here given that he views that managed care sector (and WLP) as “woefullyundervalued”, he also feels that the company has a responsibility to shareholders to first seehow health reform will play out before getting more aggressive on M&A.

Pricing: Improved Competitive Environment in 2009WLP’s CFO views the pricing environment in the fully-insured Commercial market as“dramatically better” in 2009 relative to 2008. Indeed, WLP sees all of its major competitorsas pricing rationally with the notable exception of Blue Shield of California, which WLPbelieves has been pricing aggressively in the California market over the past year. On thepositive side, WLP noted that the most recent pricing data shows Blue Shield raising rates on





recent renewals by up to 30%, indicating that the aggressive pricing actions may now becatching up to the company. However, even with these recent rate actions, WLP’s CFObelieves that Blue Shield’s products are still under priced by around 15% relative tocomparable products in the marketplace. Regardless, with Blue Shield now showing signs ofstarting to lift pricing, WLP will likely see a reduced threat of losing market share relative towhen Blue Shield was more aggressively pricing its products during 2008.

WLP also sees Kaiser pricing rationally in the market, likely as the company keeps an eye onpotential balance sheet pressures relating to the downdraft in the equity and credit markets.Switching to the East Coast, while Horizon BCBS had previously been aggressively pricing inNew Jersey, WLP believes their pricing posture has improved in 2009. WLP sees its publiccompetitors as largely pricing rationally in the market. However, pricing in the fee-basedproducts remains competitive.

WLP also believes it has now fixed the pricing problems it experienced in its Lumenosconsumer-driven health plans (CDHPs) during 2008. The mispricing of the risk-based CDHPproducts in 2008 was one of the contributing factors to the underwriting miss during 2008.Indeed, WLP’s CFO believes the company missed its pricing in these products by 30% last

year. After identifying the problem, WLP has since responded with major price increases inthese products, so that the CFO is now much more comfortable with the underwriting profilefor these products.

On another positive note, WLP is seeing improved margins in its non Blue-branded Unicarebusiness in 2009. Unicare has long been one of the Achilles heels’ in WLP’s portfolio, asgrowth, margins and returns in this business have lagged the Blue-branded businesses dueto weaker market share positions and less brand recognition. However, the business appearsto be showing signs of a turnaround with margins improving in 1Q09, which WLP’s CFOcredited to Dennis Casey, who was promoted to run Unicare in 2007. Unicare currently hasaround 1.2 million Commercial members, down around 100,000 members sequentially. Wealso find it interesting that Unicare’s results have started to improve in 1Q09, at the sametime that many of the non-profit Blues have been raising premiums in response to increasedpressures on their investment portfolios. We believe the timing of the Unicare marginimprovement indicates that this business is indeed highly leveraged to the pricing behavior ofthe non-profit Blues, which has become more conservative during 2009, likely providing abackdrop for improved margins this year. However, while the margin opportunity appearsbrighter for Unicare in 2009, we continue to have concerns around the long-term prospectsfor this business. We expect Unicare’s disadvantaged scale position will likely continue todrive volatile results in the future, suggesting that this is still one of the assets that may makesense for WLP to divest over time, thus freeing up capital for management to reinvest intobusinesses where WLP enjoys stronger competitive advantages.

Medical Costs: In Line with Expectations So Far in 2009Medical costs have so far in 2009 developed right in line with management’s expectations of7.5-8.5%. Indeed, WLP’s CFO noted that med cost trend in 1Q09 was within 10 basis pointsof the company’s internal target. WLP noted that it is currently seeing benefit buydownsrunning in the 150-200 basis points range.

However, WLP still sees pressures in the market on medical costs coming from several areasin 2009. First, similar to Aetna’s report in the first quarter, WLP continues to see pressures inthe facility setting relating to higher acuity (intensity) of claims. Indeed, Inpatient medicalcosts overall are still running at an elevated level in the low double-digit range, almost entirelyrelated to increases in cost per admission. Meanwhile, outpatient costs are also trending inthe low double-digit range and are about 75% unit-cost driven. WLP’s CFO noted thatadmissions in 1Q09 were in line with expectations and were flattish overall. Notably, WLP





has been investigating the claims intensity pressures and the company believes it is seeingpatterns of upcoding by providers, particularly in certain geographies. WLP mentioned that ithas identified four states in particular where it has determined that providers are likelyupcoding to boost revenues, likely in response to volume pressures relating to the economy.WLP provided one example where they discovered a provider billing them for outpatientservices at inpatient rates. WLP also has compiled evidence of providers potentially abusing

coding of ER services, which are often paid at higher reimbursement rates. Given widespreadcomments from a number of major MCOs of seeing pressure on the intensity of claims in thefacility settings across the U.S., this appears to be a real economic-related problem for theindustry. Given that media coverage almost always favors health care providers over healthinsurance companies, this issue has so far generated extremely limited coverage in thepress. However, we expect the focus on the issue of provider upcoding could come more tothe forefront in the broader media over the coming months, given that if this is reallyoccurring, it is the consumer and employers that at the end of the day are footing the bills forthese provider behaviors.

WLP’s CFO also noted that they have observed a modest uptick in medical costs relating tothe Swine Flu scare, although this is expected to be transitory in nature. The pressure has

largely centered on a pick-up in prescriptions for Tamiflu while the company has alsoobserved an increase in visits to the ER from some members that are panicking that theymay have come down with the illness. WLP did not quantify the extent of the medical costuptick relating to the Swine Flu although management did not appear alarmed that the overallcost exposure will be material.

Relative to COBRA, WLP has not yet seen any evidence of an uptick in cost pressuresrelating to increased adoption of COBRA. WLP noted that the forms relating to notifyingindividuals of the new COBRA subsidy from the federal government were not sent out untilApril, while the company believes that employers are still struggling with how to approachadministering the new subsidy benefit. Given that COBRA products are one of the absoluteworst for the industry from an MLR perspective (typically generating MLRs in the 150-200%range), WLP is trying to be proactive in identifying people who are enrolling in COBRA to tryto sell them lower cost (and much higher margin) individual plans. While WLP doesn’t haveany specific numbers yet on how many COBRA members it has converted to its Individualplans, WLP said it will look into compiling this data and provide it to the market at some pointin the near future.

Seasonality: Deductibles Driving Change in Annual MLR PatternOne areas of focus on the 1Q09 conference call related to WLP’s commentary that anongoing increase in the value of member deductibles is driving a change in the seasonality ofthe business from an underwriting perspective. WLP believes that this phenomenon alreadywas in place during 2008 although it was masked by the numerous MLR blow-ups in theindustry, which added noise to this underlying secular trend. WLP noted that the averagedeductible for its fully-insured small group members now exceeds $1,000. Indeed, WLPestimates that the average deductible has increased by almost 20% from January 2008 toJanuary 2009. Seasonality is also being influenced by the ongoing increase in the company’smix of CDHP members. Specifically, the company’s total CDHP membership increased by242,000 lives, or 14%, during 1Q09. CDHP membership now stands at around 2 million, with56% of the CDHP members enrolled in fully-insured plans and 44% in ASO products.Meanwhile, WLP’s overall fully-insured membership has declined by over 1.1 millionmembers, or 6.5%, from 1Q08 to 1Q09. This shows that the CDHP membership is clearlygrowing as a percentage of the total Commercial fully-insured membership block.

The result of the increase in HDHP and CDHP membership is that the company expects tosee a more significant ramp up in seasonal costs throughout the year. Indeed, while the





1Q09 EPS results did exceed WLP’s internal plan by around $0.09 per share, EPS exceededthe Street by a much more substantial amount due to this emerging change in the seasonalMLR pattern. While WLP does not provide quarterly guidance anymore, the CFO noted thatthe Street estimates for the first and fourth quarters are most pronounced in not reflectingthis trend. Our interpretation of this is that while the Street’s estimates for the second andthird quarters may be too low, the Street is likely too high in its EPS projection for the fourth

quarter. To better reflect this likely changing seasonal pattern, we are increasing our 2Q09EPS estimate to $1.45 from $1.41, while we are reducing our 4Q09 EPS estimate to $1.23from $1.26.

Reserves: Continuing to Develop at Favorable LevelsOne key area of the story that has improved dramatically is around WLP’s claims reserveadequacy. WLP strengthened reserves significantly in 2008, which was one of the primaryfactors driving the 120 basis point increase in the consolidated MLR to 83.6%. WLP hasbeen focusing on reducing its outstanding claims inventories which has continued into April.Specifically, after reducing claims inventories by 43% in 2008, WLP reduced them by afurther 16% in 1Q09 and another 10% in April. This means that WLP likely has much bettervisibility at this point into its underlying medical cost trends. WLP’s CFO noted that thecompany continues to target managing its reserves to a high single digit margin for adversedevelopment and that he is comfortable that the claims reserves are now comfortablytracking at that level. Indeed, it appears that the reserves are now tracking at enough of aconservative level that the auditors may require WLP to release some excess reserves in2Q09, which would have positive implications for the MLR. WLP noted that if it does releaseexcess reserves in 2Q09, the company will spike out the exact amount when it reportsearnings. Moreover, WLP’s CFO expects that its 2Q09 medical claims rollforward will likelyshow a material increase in the level of favorable reserve development over the past sixmonths, possibly exceeding $400 million, which would reflect a substantial improvementfrom the $270 million reported in 1H08, and even an increase from the $356 million levelreported in 1H07.

Enrollment: National Accounts Prospects Solid for 2010WLP has been consistently taking market share in the national accounts arena and thecompany believes it can continue this trend in 2010. WLP has added 1.5 million members inits national accounts segment since the end of 2006, with total segment enrollmentincreasing by over 14% during this timeframe to 11.9 million members. During this sametime period, we estimate the overall national accounts market has probably contracted in thelow to mid single digits. WLP expects 2010 will be an active selling season in the nationalaccounts market with the company seeing more accounts out to bid with larger overallaverage case sizes. One change though WLP has observed for 2010 is that while in the pastseveral years an above-average number of employers going out to bid were using

UnitedHealth, for 2010 the cases going out to be bid appear to be more evenly distributedacross United, Aetna, and Cigna. Indeed, WLP’s CFO believes that United’s competitiveposition appears to be stabilizing in the marketplace, after a couple of really tough years froma service perspective. However, WLP’s CFO also mentioned that the company landed its firstbig account win with the signing of Wells Fargo, which we think was previously using Unitedas their carrier. WLP expects this account win could add around 35,000 lives in 2010.

However, we expect the company’s fully-insured enrollment will likely remain pressured byrising unemployment and the multi-year trend of employers shifting to self-funded statusfrom fully-insured. When we asked WLP’s CFO whether he thinks the industry will ever beable to grow Commercial fully-insured enrollment again, he acknowledged that it will likely bedifficult without some form of health reform that includes coverage expansions for the





uninsured, although likely with the trade-off of taking lower margins. WLP’s membershipguidance for 2009 currently assumes weighted average unemployment levels in the double-digits, meaning that the company has already built in reasonable conservatism. However,WLP’s CFO mentioned that the uptick in unemployment has been somewhat faster thanexpected, which could pressure the overall member months in 2009 relative to thecompany’s initial forecast. We expect this is probably one of the reasons WLP did not raise

the high end of its guidance despite exceeding its internal plan for EPS by nearly a dime inthe first quarter. On the positive side, WLP believes that the increase in unemployment hasbeen evenly distributed across age cohorts and health status, meaning that the company isnot observing deterioration in the overall risk pool or seeing increased adverse selection inthe market due to rising unemployment.

On the new product front, WLP noted that the Blues plans are now more closely workingtogether to better leverage their respective HMO networks, whereas most of the previouspartnership efforts have been around the broader PPO networks. This could help the Bluesbetter leverage their relative network discount advantages in their HMO networks. WLP isalso excited about a new POS product it is rolling out in the Georgia market, whichmanagement estimates has a 15% cost advantage over similar competitor offerings.

Balance Sheet: Cash Position Expected to Grow SubstantiallyOne of the most appealing aspects of the WLP investment story is that we expect thecompany will have substantial capital available for share buybacks and M&A over the nexttwo years. When first looking at 2009, WLP currently has $1.1 billion of deployable capital atthe parent company. The company expects to receive an additional $2.4 billion in subsidiarydividends throughout the remainder of 2009 while it should generate another $3.3 billion orso in cash when it closes the sale of the PBM to Express Scripts later this year. This suggeststhat WLP should have access at the parent company to around $6.8 billion in capital in 2009.The company will have around $700 million in debt maturing this year, meaning that the nettotal after addressing its maturing debt will still be over $6 billion, relative to a market cap at

around $22.5 billion. When looking out to 2010, the company will likely generate another $3billion or so of free cash at the parent, while only $50 million of debt matures next year. Thismeans that WLP should have access to nearly $10 billion of capital for share buybacks orM&A during 2009-2010, equating to over 40% of the current market cap. WLP’s CFO thusexpects the company can likely reduce its overall outstanding share count by around 20% bythe end of 2010 and still have significant excess capital available for M&A, while alsoaddressing all of the $750 million of debt that comes due during 2009-2010. Moreover, WLPwill continue to maintain capital at the subsidiaries that will exceed both the minimumregulatory and BCBSA requirements. We note that in our model we currently assume WLP’sdiluted average share count will decline by 18% during 2009-2010. We expect that the higherlevel of assumed share repurchases in our model is one of the primary reasons that our 2010EPS estimate of $6.60 is well above the current Street consensus of $6.21. At the simplestlevel, we believe the Street consensus is not yet nearly factoring in all WLP’s deployablecapital into its 2010 EPS estimate.

Investment Portfolio: Unrealized Loss Position Improves in 2Q09WLP has been one of the most conservative MCOs around taking unrealized losses on itsinvestment portfolio into its GAAP earnings. On a positive note, given that rebound in theequity and credit markets so far during 2Q09, WLP estimates that its gross unrealized lossposition has shrank by nearly $500 million from the 1Q09 report, particularly due toimprovements in the value of the equities portfolio. In a nutshell, we are extremelycomfortable with WLP’s overall capital position and the position of its balance sheet.





Medicare and Medicaid: Closely Managing ExposureWellPoint took some serious lumps in both its Medicare and Medicaid businesses in 2008.As a result, the company took a step back around its overall exposure, exiting the Ohio,Connecticut, and Nevada markets in Medicaid, and eliminating its deeply flawed EnhancedPFFS product in Medicare Advantage. The result of these market exits is that MLRs improvedsubstantially in both segments in 1Q09 and the company is once again making money inthese products. WLP also appears to be particularly well positioned for the pending MA cutsin 2010 given that the company earns most of its money in the Senior market in the MedicareSupplement business. Specifically, the company’s Med Supp business has total enrollmentof 813,000 lives, compared to 270,000 in MA network-based products and 173,000 in MAPFFS products. This means that if we see a movement back to traditional Medicare in themarket as MA plans raise price and reduce benefits in 2010 to offset the rate cuts from CMS,WLP’s Med Supp business should be well positioned to grab a larger share of the availablewallet in Senior. Relative to MA PFFS, given that the company is now making money in theproduct, WLP’s CFO expects the company will likely continue to offer the product again in2010 to generate one more year’s worth of profits, before likely exiting in 2011 when theelimination of deeming kicks in. Moreover, given WLP’s modest MA exposure, WLP’s CFOsaid that he is cautiously optimistic that the company will be able to modestly grow its MAenrollment in 2010 while maintaining margins.

On Medicaid, WLP’s CFO said that he does not expect the company will make significantinvestments here over the next few years despite some better relative near-term growthprospects due to the weak economy. He said he maintains reservations around the long-termviability and funding status of the Medicaid program, which leaves him comfortable that thecompany’s reduced footprint here is appropriate.

Valuation and rating analysisTo arrive at our price target, we assign a 9x multiple to our 2010 EPS forecast. We note thatour target multiple assumes the shares trade at a 20% premium to our target multiple for theMCOs of 8x to reflect its earnings diversity and leading market position in Blues states,

partially offset by recent execution mistakes. The primary valuation metric we use for theMCO group is P/E. Historically, the MCO group has traded at a P/E of 18-19x NTM EPS at itspeak and at 5-6x NTM EPS at its trough. We note that our target group multiple reflects ourlatest views on the industry's growth prospects and risks relative to historical P/E ranges, andis subject to revision based on any changes to our fundamental views.

RisksRisks include inability to reprice its commercial book of business for higher medical costs,slowing enrollment growth, health reform uncertainty, realized investment losses, increasedexecution risk. In addition, investors could react negatively to recent management turnover,persistent issues with systems conversions and a decline in days in claims payable.





Appendix 1Important Disclosures

Additional information available upon requestDisclosure checklistCompany Ticker Recent price* DisclosureWellPoint WLP.N 46.48 (USD) 12 May 09 1,2,6,7,8,14,15,17

*Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.

Important Disclosures Required by U.S. RegulatorsDisclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See“Important Disclosures Required by Non-US Regulators” and Explanatory Notes.1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this

company, for which it received fees.

2. Deutsche Bank and/or its affiliate(s) makes a market in securities issued by this company.

6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this companycalculated under computational methods required by US law.

7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investmentbanking or financial advisory services within the past year.

8. Deutsche Bank and/or its affiliate(s) expects to receive, or intends to seek, compensation for investment banking servicesfrom this company in the next three months.

14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company withinthe past year.

15. This company has been a client of Deutsche Bank Securities Inc. within the past year, during which time it received non-investment banking securities-related services.

Important Disclosures Required by Non-U.S. RegulatorsPlease also refer to disclosures in the “Important Disclosures Required by US Regulators” and the Explanatory Notes.1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this

company, for which it received fees.

2. Deutsche Bank and/or its affiliate(s) makes a market in securities issued by this company.

6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this companycalculated under computational methods required by US law.

7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investmentbanking or financial advisory services within the past year.

17. Deutsche Bank and or/its affiliate(s) has a significant Non-Equity financial interest (this can include Bonds, ConvertibleBonds, Credit Derivatives and Traded Loans) where the aggregate net exposure to the following issuer(s), or issuer(s)group, is more than 25m Euros.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of thisresearch, please see the most recently published company report or visit our global disclosure look-up page on ourwebsite at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=WLP.N .





Analyst CertificationThe views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subjectissuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive anycompensation for providing a specific recommendation or view in this report. Scott Fidel

Historical recommendations and target price: WellPoint (WLP.N)

(as of 5/12/2009)

131211

109

876

5

4

32

1

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

May 06 Aug 06 Nov 06 Feb 07 May 07 Aug 07 Nov 07 Feb 08 May 08 Aug 08 Nov 08 Feb 09

Date

Secu

rty Prce

Previous Recommendations

Strong BuyBuyMarket PerformUnderperformNot RatedSuspended Rating

Current Recommendations

Buy

HoldSellNot RatedSuspended Rating

*New Recommendation Structureas of September 9, 2002

1. 7/17/2006: Buy, Target Price Change USD91.00

















Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share pricefrom current price to projected target price plus pro-jected dividend yield ) , we recommend that investorsbuy the stock.Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell thestockHold: We take a neutral view on the stock 12-monthsout and, based on this time horizon, do not recommendeither a Buy or Sell.Notes:1. Newly issued research recommendations and targetprices always supersede previously published research.2. Ratings definitions prior to 27 January, 2007 were:

Buy: Expected total return (including dividends) of10% or more over a 12-month period

Hold: Expected total return (including dividends)between -10% and 10% over a 12-month periodSell: Expected total return (including dividends) of -10% or worse over a 12-month period

4%

59%

37%

38%

30%34%

0

100

200

300

400

500

Buy Hold Sell

North American Universe

Companies Covered Cos. w/ Banking Relationship





Regulatory Disclosures

1. Important Additional Conflict DisclosuresAside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

2. Short-Term Trade IdeasDeutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistentor inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link athttp://gm.db.com .

3. Country-Specific DisclosuresAustralia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the AustralianCorporations Act.EU countries: Disclosures relating to our obligations under MiFiD can be found at http://globalmarkets.db.com/riskdisclosures.Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registrationnumber - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117.Member of associations: JSDA, The Financial Futures Association of Japan. Commissions and risks involved in stocktransactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transactionamount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share pricefluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchangefluctuations.New Zealand: This research is not intended for, and should not be given to, "members of the public" within the meaning of theNew Zealand Securities Market Act 1988.Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any

appraisal or evaluation activity requiring a license in the Russian Federation.




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