Coventry Health Care Reports First Quarter Earnings

  Coventry Health Care Reports First Quarter Earnings

Business Wire

BETHESDA, Md. -- May 1, 2013

Coventry Health Care, Inc. (NYSE: 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,            134,300       140,167
diluted

                                                            
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                509,930         488,175
liabilities
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             132,516
period
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       1,404                        1,474         1,489         1,519         1,549
Risk
Health Plan
Commercial       778                          730           736           729           725
ASO
Medicare         309                          259           256           253           250
Advantage
Medicaid         892                          974           998           932           924
Risk
Other            339                          347           350           354           356
National ASO
Medicare        1,450                    1,578       1,545       1,494       1,458
Part D
Total           5,172                    5,362       5,374       5,281       5,262
Membership
                                                                          
Revenues by
Product Type                                                               
(000s)
Commercial     $ 1,322,718   $ 5,737,626    $ 1,403,010   $ 1,409,863   $ 1,443,478   $ 1,481,275
Risk
Commercial
Management      108,084     429,209      100,736     101,138     113,558     113,777
Services
Total
Commercial       1,430,802     6,166,835      1,503,746     1,511,001     1,557,036     1,595,052
Products
                                                                                      
Medicare         831,378       2,912,143      695,815       697,724       684,291       834,312
Advantage
Medicaid         690,800       2,809,579      712,845       730,996       697,679       668,060
Risk
Medicare        406,548     1,514,518    363,032     343,185     394,877     413,423
Part D
Total
Government       1,928,726     7,236,240      1,771,692     1,771,905     1,776,847     1,915,795
Programs
                                                                                      
Workers’        175,488     757,779      183,289     187,992     194,576     191,922
Compensation
Corporate
and             (14,781)    (47,491)     (12,910)    (13,115)    (10,663)    (10,802)
Eliminations
Total          $ 3,520,235   $ 14,113,363   $ 3,445,817   $ 3,457,783   $ 3,517,796   $ 3,691,967
Revenues
                                                                          
Consolidated                                                               
Coventry
                                                                                      
Operating
Income % of      6.1%          5.4%           5.2%          4.6%          4.1%          7.5%
Revenues
                                                                                      
SGA % of         14.8%         14.7%          16.0%         15.1%         14.3%         13.6%
Revenues
                                                                                      
Total Health
Plan Medical   $ 1,322,392                  $ 1,258,279   $ 1,321,436   $ 1,315,078   $ 1,313,458
Liabilities
(000s) ^ (1)
Health Plan
Days in
Claims           51.43                        49.04         50.90         49.77         49.47
Payable
(DCP) ^ (1)
                                                                                      
Total Debt     $ 1,585.3                    $ 1,585.2     $ 1,585.1     $ 1,584.9     $ 1,584.8
(millions)
Total
Capital        $ 6,421.3                    $ 6,308.1     $ 6,211.4     $ 6,091.2     $ 6,287.5
(millions)
Debt to          24.7%                        25.1%         25.5%         26.0%         25.2%
Capital

                                                                
COVENTRY HEALTH CARE, INC.
SELECTED REVENUE AND MEDICAL COST STATISTICS
(Unaudited)
                                                                       
                           Total
              Q1 2013   2012      Q4 2012   Q3 2012   Q2 2012   Q1 2012
Revenue PMPM                                                
Commercial      $ 306.18   $ 310.15   $ 310.27   $ 308.42   $ 309.91   $ 311.92
Risk
Medicare        $ 899.28   $ 938.71   $ 897.31   $ 908.57   $ 902.61   $ 1,048.93
Advantage^(2)
Medicare Part   $ 81.10    $ 85.94    $ 84.58    $ 86.24    $ 87.55    $ 85.44
D^(3)
Medicaid        $ 266.74   $ 242.35   $ 240.38   $ 241.92   $ 248.48   $ 238.74
                                                                       
                                                           
MLR%                                                        
Consolidated      83.0%      84.0%      82.7%      84.4%      85.9%      82.9%
Total
                                                                       
Commercial        77.9%      81.7%      82.2%      81.5%      83.0%      79.9%
Risk
Medicare          84.6%      81.1%      83.9%      83.1%      84.1%      74.1%
Advantage^(2)
Medicare Part     93.4%      85.4%      70.7%      84.2%      90.0%      94.9%
D
Medicaid          86.4%      94.1%      90.4%      93.0%      93.3%      100.0%

    
      “Total Health Plan Medical Liabilities” and “Health Plan Days in Claims
(1)   Payable” exclude the impact of the Kansas Medicaid business for the
      first quarter of 2013 as the contract with the State of Kansas ended
      effective December 31, 2012.
      
      First quarter 2012 Medicare Advantage statistics for Revenue PMPM and
      MLR% include the favorable impact from the release of MA-CCP RADV audit
(2)   reserves. Excluding this impact, the comparable Revenue PMPM was $923.87
      and the comparable MLR% was 82.9% for the first quarter 2012. For the
      full year, the comparable Revenue PMPM was $907.99 and the comparable
      MLR% was 83.5%.
      
(3)   Revenue PMPM excludes the impact of CMS risk-share premium adjustments
      and revenue ceded to external parties.

Contact:

Coventry Health Care, Inc.
Randy Giles
EVP, Chief Financial Officer
301-581-5687
or
Drew Asher
SVP, Corporate Finance
301-581-5717
 
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