Coventry Health Care Reports First Quarter Earnings

Coventry Health Care Reports First Quarter Earnings

BETHESDA, Md.--(BUSINESS WIRE)-- Coventry Health Care, Inc. (NYS: CVH) today reported consolidated operating results for the quarter ended March 31, 2013. Operating revenues totaled $3.5 billion for the quarter with net earnings of $135.4 million, or earnings per diluted share (EPS) of $1.00.

"I am pleased to report the Company's strong start to 2013," said Allen F. Wise, Chairman and Chief Executive Officer of Coventry. "These first quarter results position the Company well to achieve its financial and operational goals in 2013 as we look towards combining our strengths with those of Aetna after satisfying all remaining regulatory requirements."


First Quarter 2013 Consolidated Highlights

  • First quarter EPS increased by 61% from the prior year quarter excluding the $0.58 one-time impact from the previously disclosed Medicare Advantage Risk Adjustment Data Validation (RADV) prior period reserve release during the first quarter of 2012

  • Total revenues were down 4.7% from the prior year quarter

    • Excluding the $141.8 million favorable revenue impact of the RADV prior period reserve release during the first quarter of 2012, total revenues were down by less than 1%

  • Selling, general, and administrative (SG&A) expense of 14.8% of total revenue includes costs of $11.1 million, or $0.05 EPS, associated with the pending Aetna transaction

  • Medicare Advantage Coordinated Care Plan (MA-CCP) membership was 309,000, an increase of 59,000 members, or 24%, from the prior year quarter driven by successful execution during the 2013 Annual Enrollment Period

  • The Company's Kentucky Medicaid business generated a positive contribution to earnings with an MLR of 92.3% in the first quarter, an improvement of 440 basis points (bps) from the fourth quarter of 2012 and 2,860 bps from the first quarter of 2012

  • The Company successfully launched Medicaid operations in the New East Zone in Pennsylvania during the quarter, bringing the Company's total Medicaid membership in Pennsylvania to approximately 98,000

  • GAAP cash flows from operations were $222.2 million, or 164% of net income

Selected First Quarter 2013 Highlights

Medicare Advantage

  • Excluding the $141.8 million favorable revenue impact of the RADV prior period reserve release during the first quarter of 2012, Medicare Advantage revenue increased by 20% from the prior year quarter

  • As of March 31, 2013, slightly more than 50% of the Company's current MA-CCP membership resides in contracts rated 4.0 Stars

  • The MA-CCP Medical Loss Ratio (MLR) was 84.6% in the quarter

Medicare Part D

  • As of March 31, 2013, Medicare Part D membership was 1,450,000, a decrease of 8,000 members, or 1%, from the prior year quarter, driven by the reduction in Coventry's auto-assign footprint for 2013

  • The Medicare Part D MLR was 93.4% in the quarter, a decrease of 150 bps from the prior year quarter

Medicaid

  • As of March 31, 2013, Medicaid membership was 892,000, a decrease of 32,000 members, or 3%, from the prior year quarter. The decrease was driven by the previously announced termination of the Company's contract with the State of Kansas effective December 31, 2012, partially offset by expansion to additional regions in Pennsylvania throughout 2012 and 2013 and expansion in Nebraska effective July 1, 2012.

  • The Medicaid MLR was 86.4% in the quarter, a decrease of 1,360 bps from the prior year quarter

Commercial

  • As of March 31, 2013, total commercial membership was 2,182,000, a decrease of 22,000 members, or 1%, from the prior quarter

  • The commercial risk MLR was 77.9% in the quarter, a decrease of 200 bps from the prior year quarter

Balance Sheet

  • Investment portfolio in a net unrealized gain position of $88 million as of March 31, 2013

  • Health Plan Days in Claims Payable (DCP) of 51.43, an increase of 2.39 days from the prior quarter

  • $950 million in free cash at the parent at quarter-end

  • Board of Directors approval of the Company's first quarter 2013 cash dividend paid on April 9, 2013

  • Debt-to-Capital of 24.7%, a 50 bps reduction from the prior year quarter

Cautionary Statement Regarding Forward-Looking Statements

Among the risk factors that may materially affect our business, operations or financial condition are the ability to accurately estimate and control future health care costs; the ability to increase premiums to offset increases in our health care costs; general economic conditions and disruptions in the financial markets; changes in legal requirements and healthcare industry practices from recently enacted federal or state laws or regulations, court decisions, or government audits, investigations and proceedings; guaranty fund assessments under state insurance guaranty association law; changes in government funding and various other risks associated with our participation in Medicare and Medicaid programs; our ability to effectively implement and manage new or less seasoned markets, including the implementation of appropriate risk adjustment revenue and management of the associated medical costs and the effect on our medical loss ratio; a reduction in the number of members in our health plans; the ability to acquire additional managed care businesses, enter into new markets and to successfully integrate acquired businesses into our operations, particularly while our merger with Aetna is pending; an ability to attract new members or to increase or maintain our premium rates; the non-renewal or termination of our government contracts, unsuccessful bids for business with government agencies or renewal of government contracts, unsuccessful bids for business with government agencies or renewal of government contracts on less favorable terms; failure of independent agents and brokers to continue to market our products to employers; a failure to obtain cost-effective agreements with a sufficient number of providers that could result in higher medical costs and a decrease in our membership; negative publicity regarding the managed health care industry generally or our Company in particular; a failure to effectively protect, maintain and develop our information technology systems; compromises of our data security; periodic reviews, audits and investigations under our contracts with federal and state government agencies; litigation including litigation based on new or evolving legal theories; volatility in our stock price and trading volume; our indebtedness, which imposes certain restrictions on our business and operations; an inability to generate sufficient cash to service our indebtedness; our ability to receive cash from our regulated subsidiaries; an impairment of our intangible assets; our certificate of incorporation, our bylaws and Delaware law, which could delay, discourage or prevent a change in control of our Company that our stockholders may consider favorable; changes in government funding related to automatic spending cuts that are occurring due to federal sequestration; and our proposed merger with Aetna, including, but not limited to, risks related to our failure to complete the merger with Aetna, our ability to attract, retain and motivate our key employees and executives in light of the pending merger, and limitations on our ability to conduct our business between now and the closing of the merger.

Coventry Health Care (www.coventryhealthcare.com) is a diversified national managed health care company based in Bethesda, Maryland, dedicated to delivering high-quality health care solutions at an affordable price. Coventry provides a full portfolio of risk and fee-based products including Medicare and Medicaid programs, group and individual health insurance, workers' compensation solutions, and network rental services. With a presence in every state in the nation, Coventry's products currently serve approximately 5 million individuals helping them receive the greatest possible value for their health care investment.

COVENTRY HEALTH CARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

Quarters Ended

March 31,

2013

2012

Operating revenues:

(unaudited)

(unaudited)

Managed care premiums

$

3,236,663

$

3,386,268

Management services

283,572

305,699

Total operating revenues

3,520,235

3,691,967

Operating expenses:

Medical costs

2,686,651

2,808,348

Cost of sales

59,485

67,952

Selling, general, and administrative

520,300

502,888

Depreciation and amortization

37,631

36,303

Total operating expenses

3,304,067

3,415,491

Operating earnings

216,168

276,476

Operating earnings percentage of total revenues

6.1%

7.5%

Interest expense

24,582

25,557

Other income, net

30,330

24,434

Earnings before income taxes

221,916

275,353

Provision for income taxes

86,547

104,634

Net earnings

$

135,369

$

170,719

Net earnings per share:

Basic earnings per common share

$

1.01

$

1.21

Diluted earnings per common share

$

1.00

$

1.20

Weighted average common shares outstanding, basic

133,464

139,323

Weighted average common shares outstanding, diluted

134,300

140,167

COVENTRY HEALTH CARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

March 31,

December 31,

2013

2012

(unaudited)

Assets:

Current assets:

Cash and cash equivalents

$

1,531,678

$

1,399,162

Short-term investments

120,745

121,742

Accounts receivable, net

260,809

272,077

Other receivables, net

945,218

892,815

Other current assets

195,479

196,323

Total current assets

3,053,929

2,882,119

Long-term investments

2,713,291

2,658,582

Property and equipment, net

261,668

266,818

Goodwill

2,591,488

2,591,488

Other intangible assets, net

302,118

318,592

Other long-term assets

32,783

33,389

Total assets

$

8,955,277

$

8,750,988

Liabilities and Stockholders' Equity:

Current liabilities:

Medical liabilities

$

1,476,557

$

1,418,914

Accounts payable and other accrued liabilities

509,930

488,175

Deferred revenue

150,999

137,981

Total current liabilities

2,137,486

2,045,070

Long-term debt

1,585,312

1,585,190

Other long-term liabilities

396,476

397,813

Total liabilities

4,119,274

4,028,073

Stockholders' equity

4,836,003

4,722,915

Total liabilities and stockholders' equity

$

8,955,277

$

8,750,988

COVENTRY HEALTH CARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Amounts in thousands)

(unaudited)

Quarter Ended

March 31, 2013

Cash flows from operating activities:

Net earnings

$

135,369

Adjustments to earnings:

Depreciation and amortization

37,631

Amortization of stock compensation

5,972

Changes in assets and liabilities:

Accounts receivable, net

11,268

Other receivables, net

(52,403)

Medical liabilities

57,643

Accounts payable and other accrued liabilities

20,252

Deferred revenue

13,018

Other operating activities

(6,525)

Net cash flows from operating activities

222,225

Cash flows from investing activities:

Capital expenditures, net

(15,871)

Payments for investments, net of sales and maturities

(61,321)

Net cash flows from investing activities

(77,192)

Cash flows from financing activities:

Proceeds from issuance of stock

4,397

Payments for repurchase of stock

(664)

Excess tax benefit from stock compensation

565

Payments for cash dividends

(16,815)

Net cash flows from financing activities

(12,517)

Net change in cash and cash equivalents for current period

132,516

Cash and cash equivalents at beginning of period

1,399,162

Cash and cash equivalents at end of period

$

1,531,678

Cash and Investments:

Cash and cash equivalents

$

1,531,678

Short-term investments

120,745

Long-term investments

2,713,291

Total cash and investments

$

4,365,714

COVENTRY HEALTH CARE, INC.

SELECTED OPERATING STATISTICS

(Unaudited)

Total

Q1 2013

2012

Q4 2012

Q3 2012

Q2 2012

Q1 2012

Membership by Product (000s)

Commercial Risk

1,404

1,474

1,489

1,519

1,549

Health Plan Commercial ASO

778

730

736

729

725

Medicare Advantage

309

259

256

253

250

Medicaid Risk

892

974

998

932

924

Other National ASO

339

347

350

354

356

Medicare Part D

1,450

1,578

1,545

1,494

1,458

Total Membership

5,172

5,362

5,374

5,281

5,262

Revenues by Product Type (000s)

Commercial Risk

$

1,322,718

$

5,737,626

$

1,403,010

$

1,409,863

$

1,443,478

$

1,481,275

Commercial Management Services

108,084

429,209

100,736

101,138

113,558

113,777

Total Commercial Products

1,430,802

6,166,835

1,503,746

1,511,001

1,557,036

1,595,052

Medicare Advantage

831,378

2,912,143

695,815

697,724

684,291

834,312

Medicaid Risk

690,800

2,809,579

712,845

730,996

697,679

668,060

Medicare Part D

406,548