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Press release from Business Wire

Coventry Health Care Reports Third Quarter Earnings

Friday, October 26, 2012

Coventry Health Care Reports Third Quarter Earnings06:30 EDT Friday, October 26, 2012 BETHESDA, Md. (Business Wire) -- Coventry Health Care, Inc. (NYSE: CVH) today reported consolidated operating results for the quarter ended September 30, 2012. Operating revenues totaled $3.5 billion for the quarter with net earnings of $105.3 million, or earnings per diluted share (EPS) of $0.78. For the nine months ended September 30, 2012, total operating revenues were $10.7 billion with net earnings of $367.7 million, or $2.64 EPS. “I am pleased with the Company's strong third quarter results including the fifth consecutive quarter of membership growth, revenue growth of nearly $500 million from the prior year quarter, MLR improvement across all of the health plan businesses from the prior quarter, continued progress in the Kentucky Medicaid program, and successful implementation of SG&A initiatives driving a low cost operating structure,” said Allen F. Wise, chairman and chief executive officer of Coventry. “The strength of these results has allowed the Company to move to the top end of its EPS guidance range. More importantly, I believe the pending combination with Aetna will build upon the strengths of each company and further our shared commitment to improving the health and well-being of our members.” Consolidated Highlights Total revenues up 16% from the prior year quarter Growth of 120,000 members across the Company's Government Programs businesses of Medicare Advantage Coordinated Care Plans (MA-CCP), Medicare Part D, and Medicaid from the second quarter of 2012 Awarded a contract with the Commonwealth of Kentucky to provide Medicaid services in Region 3 of the Commonwealth's Managed Medicaid Program which is expected to commence in the first quarter of 2013 1 of 4 participants awarded a contract to provide services to approximately 170,000 eligible members Selling, general, and administrative expense (SG&A) of 15.1% of total revenue, a decline of 150 basis points (bps) from the prior year quarter SG&A expense in the third quarter includes costs of $6.5 million, or $0.03 EPS, associated with the pending Aetna transaction Increased MA-CCP Star ratings, as publicly released by the Centers for Medicare & Medicaid Services (CMS) on October 13, 2012 50% of the Company's current MA-CCP membership now resides in contracts rated 4.0 Stars 11 of the 19 MA-CCP contracts that received Star scores increased by at least 0.5 Star in the recently released 2013 plan ratings Recent Star rating increases will impact bonus payments for the 2014 MA-CCP program year and were driven by continued investments and commitment to improving quality of care for our members Third Quarter 2012 HighlightsMedicare Advantage As of September 30, 2012, MA-CCP membership was 256,000, an increase of 36,000 members, or 16%, from the prior year quarter and an increase of 3,000 members from the second quarter of 2012 The MA-CCP MLR was 83.1% in the quarter and 80.1% year-to-date Excluding the impact of the Risk Adjustment Data Validation (RADV) audit reserve reduction during the first quarter of 2012, the year-to-date MLR would be 320 bps higher at 83.3% which is consistent with full year MLR guidance of low to mid 80%'s Medicare Part D As of September 30, 2012, Medicare Part D membership was 1,545,000, an increase of 397,000 members, or 35%, from the prior year quarter and an increase of 51,000 members from the second quarter of 2012 The Medicare Part D MLR was 84.2% in the quarter, and 90.0% year-to-date, consistent with the Company's full year MLR guidance of low to mid 80%'s Medicaid As of September 30, 2012, Medicaid membership was 998,000, an increase of 531,000 members, or 114%, from the prior year quarter and an increase of 66,000 members from the second quarter of 2012 The Medicaid MLR was 93.0% in the quarter, a decrease of 30 bps from the second quarter 2012, and 95.3% year-to-date, consistent with the Company's full year MLR guidance of mid 90%'s The Company commenced operations in the Nebraska expansion area effective July 1, 2012, giving Coventry the only statewide Medicaid physical health managed care presence in Nebraska The Company's Kentucky Medicaid business produced an MLR of 108.4%, an improvement of 240 bps from the second quarter MLR of 110.8% Fourth quarter financial results for the Company's Kentucky Medicaid business will benefit from a scheduled contract rate increase of 5.3% effective October 1, 2012, and from the removal of the limitations on risk adjustment effective October 1, 2012, which is expected to increase premium rates by an additional 2.0% to 2.5% based on the current membership mix Effective November 1, 2012, the Company has implemented co-payments in the benefit design structure and has also continued to make progress on contracting initiatives including the removal of certain high-cost health systems from the network which are expected to cause membership attrition during the recently completed open enrollment period While we expect significant MLR improvement in the fourth quarter, the Kentucky Medicaid program remains challenging and continues to underperform our original expectations The Company expanded into the Far Southwest Region of the Virginia Medicaid Program during the third quarter of 2012, launched operations in the New West Zone in Pennsylvania effective October 1, 2012, and will begin operations in the New East Zone in Pennsylvania during the first quarter of 2013 Commercial Risk As of September 30, 2012, commercial risk membership was 1,489,000, a decrease of 30,000 members, or 2%, from the second quarter of 2012 The commercial risk medical loss ratio (MLR) was 81.5% in the quarter, a decrease of 60 bps from the prior year quarter, and 81.5% year-to-date Consistent with the Company's prior view, the Company forecasts full year 2012 commercial risk MLR to be in the range of 81.5% to 82.5% Consistent with the Company's prior view, and based upon observed trend in the mid 7%'s, the Company currently forecasts fundamental prospective medical trend in a range of 8% plus or minus 50 bps Balance Sheet Investment portfolio in a net unrealized gain position of $129 million as of September 30, 2012, an increase of $21 million from the second quarter of 2012 Health plan Days in Claims Payable (DCP) of 50.90, an increase of 1.13 days from the prior quarter $850 million in free cash at the parent at quarter-end Board of Directors approval of the Company's third quarterly cash dividend paid on October 8, 2012 2012 Full Year Guidance Risk revenue of $12.88 billion to $12.98 billion Management services revenue of $1.18 billion to $1.19 billion Consolidated revenue of $14.06 billion to $14.17 billion Consolidated MLR of 83.9% to 84.3% Cost of sales expense of $264.0 million to $268.0 million SG&A of $2.09 billion to $2.11 billion Depreciation and amortization expense of $152.0 million to $153.0 million Other income of $105.0 million to $115.0 million Interest expense of $99.0 million to $100.0 million Tax rate of 37.7% to 38.3% Diluted share count of 136.5 million to 137.5 million GAAP EPS of $3.25 to $3.30, which includes SG&A expense of approximately $0.06 EPS from costs associated with the pending Aetna transaction Important Information for Investors and Stockholders This press release does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval. On August 20, 2012, Coventry announced that it had entered into a definitive agreement with Aetna Inc. (“Aetna”) pursuant to which Aetna will acquire Coventry. Aetna has filed with the Securities and Exchange Commission (“SEC”) a registration statement on Form S-4 (File No. 333-184041), including Amendment No. 1 thereto, in connection with the proposed transaction with Coventry containing a definitive proxy statement/prospectus. Coventry has also filed the definitive proxy statement/prospectus with the SEC. The registration statement was declared effective on October 18, 2012. Aetna and Coventry commenced mailing the definitive proxy statement/prospectus to Coventry stockholders on or about October 19, 2012. INVESTORS AND SECURITY HOLDERS OF COVENTRY ARE URGED TO READ THE DEFINITIVE PROXY STATEMENT/PROSPECTUS AND ANY OTHER DOCUMENTS FILED OR THAT WILL BE FILED WITH THE SEC CAREFULLY AND IN THEIR ENTIRETY BECAUSE THEY CONTAIN OR WILL CONTAIN IMPORTANT INFORMATION. Investors and security holders may obtain free copies of the registration statement and the definitive proxy statement/prospectus and other documents filed with the SEC by Aetna or Coventry through the website maintained by the SEC at http://www.sec.gov. Copies of the documents filed with the SEC by Aetna are available free of charge on Aetna's internet website at http://www.aetna.com or by contacting Aetna's Investor Relations Department at 860-273-8204. Copies of the documents filed with the SEC by Coventry are available free of charge on Coventry's internet website at http://www.cvty.com or by contacting Coventry's Investor Relations Department at 301-581-5430. Aetna, Coventry, their respective directors and certain of their executive officers may be considered participants in the solicitation of proxies in connection with the proposed transaction. Information about the directors and executive officers of Coventry is set forth in its Annual Report on Form 10-K for the year ended December 31, 2011, which was filed with the SEC on February 28, 2012, its proxy statement for its 2012 annual meeting of stockholders, which was filed with the SEC on April 6, 2012, and its Current Report on Form 8-K, which was filed with the SEC on May 31, 2012. Information about the directors and executive officers of Aetna is set forth in its Annual Report on Form 10-K for the year ended December 31, 2011, which was filed with the SEC on February 24, 2012, its proxy statement for its 2012 annual meeting of stockholders, which was filed with the SEC on April 9, 2012 and its Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, which was filed with the SEC on July 31, 2012. Other information regarding the participants in the proxy solicitations and a description of their direct and indirect interests, by security holdings or otherwise, are contained in the definitive proxy statement/prospectus and other relevant materials filed with the SEC. Cautionary Statement Regarding Forward-Looking Statements This press release contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are defined as statements that are not historical facts and include those statements relating to future events or future financial performance, including the guidance herein and the pending merger with Aetna. Actual performance may be significantly impacted by certain risks and uncertainties including those described in Coventry's Annual Report on Form 10-K for the year ended December 31, 2011, Coventry's Quarterly Report for the quarter ending June 30, 2012, and Coventry's subsequent filings with the Securities and Exchange Commission. Among the risk factors that may materially affect Coventry's 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 the Company's health care costs; general economic conditions and disruptions in the financial markets; changes in legal requirements from recently enacted federal or state laws or regulations, court decisions, or government investigations or 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 our Kentucky Medicaid program, including the implementation of appropriate risk adjustment revenue and management of the associated medical cost and the effect on our MLR; a reduction in the number of members in the Company's health plans; the Company's ability to acquire additional managed care businesses and the Company's ability to successfully integrate acquired businesses into its operations; an ability to attract new members or to increase or maintain premium rates; the non-renewal or termination of the Company's government contracts, unsuccessful bids for business with government agencies or renewal of government contracts on less than favorable terms; failure of independent agents and brokers to continue to market the Company's 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 membership; negative publicity regarding the managed health care industry generally or the Company in particular; a failure to effectively protect, maintain, and develop our information technology systems; compromises of the Company's data security; periodic reviews, audits and investigations under the Company's contracts with federal and state government agencies; litigation, including litigation based on new or evolving legal theories; volatility in the Company's stock price and trading volume; the Company's indebtedness, which imposes certain restrictions on its business and operations; an inability to generate sufficient cash to service the Company's indebtedness; the Company's ability to receive cash from its regulated subsidiaries; an impairment of the Company's intangible assets; the Company's certificate of incorporation and bylaws and Delaware law, which could delay, discourage or prevent a change in control of the Company that its stockholders may consider favorable; and the failure to complete the merger with Aetna. Coventry undertakes no obligation to update or revise any forward-looking statements. 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)(unaudited)   Quarters EndedNine Months EndedSeptember 30,September 30,   2012       2011     2012       2011   Operating revenues: Managed care premiums $ 3,168,653 $ 2,680,044 $ 9,764,584 $ 8,172,974 Management services   289,130     295,499     902,963     884,553   Total operating revenues   3,457,783     2,975,543     10,667,547     9,057,527     Operating expenses: Medical costs 2,674,787 2,185,568 8,240,205 6,709,521 Cost of sales 66,178 71,511 201,359 209,603 Selling, general, and administrative 521,022 492,855 1,528,484 1,476,325 Provider class action – release - - - (159,300 ) Depreciation and amortization   36,318     32,996     116,341     102,191   Total operating expenses   3,298,305     2,782,930     10,086,389     8,338,340     Operating earnings159,478192,613581,158719,187Operating earnings percentage of total revenues4.6%6.5%5.4%7.9%   Interest expense 24,671 28,227 74,845 70,844 Other income, net   32,271     22,913     87,137     66,201     Earnings before income taxes 167,078 187,299 593,450 714,544   Provision for income taxes   61,819     64,618     225,728     257,135   Net earnings$105,259   $122,681   $367,722   $457,409     Net earnings per share: Basic earnings per common share $ 0.79 $ 0.84 $ 2.65 $ 3.09 Diluted earnings per common share $ 0.78 $ 0.83 $ 2.64 $ 3.06   Weighted average common shares outstanding, basic 132,567 144,415 136,952 145,982 Weighted average common shares outstanding, diluted 133,251 145,579 137,675 147,165       COVENTRY HEALTH CARE, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(Amounts in thousands)   September 30,June 30,December 31,201220122011 (unaudited) (unaudited) Assets:   Current assets: Cash and cash equivalents $ 1,262,078 $ 1,515,971 $ 1,579,003 Short-term investments 165,811 177,905 116,205 Accounts receivable, net 289,951 247,248 270,263 Other receivables, net 1,014,567 960,093 717,736 Other current assets 192,203 202,141 286,301 Total current assets 2,924,610 3,103,358 2,969,508   Long-term investments 2,563,559 2,535,006 2,635,309 Property and equipment, net 258,378 258,090 255,485 Goodwill 2,590,465 2,590,013 2,548,834 Other intangible assets, net 335,103 351,603 367,533 Other long-term assets 34,548 35,373 36,863 Total assets $ 8,706,663 $ 8,873,443 $ 8,813,532       Liabilities and Stockholders' Equity:   Current liabilities: Medical liabilities $ 1,503,691 $ 1,491,359 $ 1,308,507 Accounts payable and other accrued liabilities 480,582 458,426 695,235 Deferred revenue 123,841 452,493 114,510 Current portion of long-term debt - - 233,903 Total current liabilities 2,108,114 2,402,278 2,352,155   Long-term debt 1,585,067 1,584,945 1,584,700 Other long-term liabilities 387,159 379,937 365,686 Total liabilities4,080,3404,367,1604,302,541   Stockholders' equity4,626,3234,506,2834,510,991         Total liabilities and stockholders' equity $ 8,706,663 $ 8,873,443 $ 8,813,532     COVENTRY HEALTH CARE, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Amounts in thousands)(unaudited)   Quarter EndedNine Months EndedSeptember 30, 2012September 30, 2012   Cash flows from operating activities: Net earnings $ 105,259 $ 367,722 Adjustments to earnings: Depreciation and amortization 36,318 116,341 Amortization of stock compensation 6,535 23,778 RADV Release - (132,977 ) RADV Release – deferred tax adjustment - 50,531 Changes in assets and liabilities: Accounts receivable, net (42,315 ) 4,634 Other receivables, net (55,488 ) (290,261 ) Medical liabilities 13,723 141,850 Accounts payable and other accrued liabilities 19,389 (75,364 ) Deferred revenue (328,652 ) 9,331 Other operating activities (15,058 ) 5,665   Net cash flows from operating activities (260,289 ) 221,250     Cash flows from investing activities: Capital expenditures, net (19,947 ) (61,075 ) Proceeds from sales and maturities net of payments for investments 30,238 78,250 Payments for acquisitions, net of cash acquired -   (48,480 ) Net cash flows from investing activities 10,291   (31,305 )   Cash flows from financing activities: Proceeds from issuance of stock 12,448 64,500 Payments for repurchase of stock (1,490 ) (311,215 ) Repayment of debt - (233,903 ) Excess tax benefit from stock compensation 2,195 8,542 Payments for cash dividends (17,048 ) (34,794 ) Net cash flows from financing activities (3,895 ) (506,870 )   Net change in cash and cash equivalents for current period (253,893 ) (316,925 ) Cash and cash equivalents at beginning of period 1,515,971   1,579,003   Cash and cash equivalents at end of period $ 1,262,078   $ 1,262,078                   Cash and Investments: Cash and cash equivalents $ 1,262,078 $ 1,262,078 Short-term investments 165,811 165,811 Long-term investments 2,563,559   2,563,559   Total cash and investments $ 3,991,448   $ 3,991,448               COVENTRY HEALTH CARE, INC.SELECTED OPERATING STATISTICS(Unaudited)   Total     Q3 2012   Q2 2012   Q1 2012   2011   Q4 2011   Q3 2011Membership by Product (000s)                         Commercial Risk 1,489 1,519 1,549 1,635 1,636 Health Plan Commercial ASO 736 729 725 700 710 Medicare Advantage 256 253 250 222 220 Medicaid Risk 998 932 924 692 467 Other National ASO 350 354 356 373 376 Medicare Part D   1,545       1,494       1,458           1,143       1,148   Total Membership   5,374       5,281       5,262           4,765       4,557                             Revenues by Product Type (000s)                         Commercial Risk $ 1,409,863 $ 1,443,478 $ 1,481,275 $ 6,053,178 $ 1,521,666 $ 1,508,042 Commercial Management Services   101,138       113,558       113,777       387,949       91,216       99,301   Total Commercial Products1,511,0011,557,0361,595,0526,441,1271,612,8821,607,343   Medicare Advantage 697,724 684,291 834,312 2,382,330 598,796 591,051 Medicaid Risk 730,996 697,679 668,060 1,381,706 448,597 316,255 Medicare Part D   343,185       394,877       413,423       1,226,734       280,146       271,947   Total Government Programs1,771,9051,776,8471,915,7954,990,7701,327,5391,179,253   Workers' Compensation   187,992       194,576       191,922       783,784       195,964       196,198   Corporate and Eliminations   (13,115 )     (10,663 )     (10,802 )     (28,998 )     (7,229 )     (7,251 ) Total Revenues$3,457,783$3,517,796$3,691,967$12,186,683$3,129,156$2,975,543                           Consolidated Coventry                           Operating Income % of Revenues 4.6 % 4.1 % 7.5 % 7.1 % 4.8 % 6.5 %   SGA % of Revenues 15.1 % 14.3 % 13.6 % 16.5 % 17.2 % 16.6 %   Total Health Plan Medical Liabilities (000s)(1) $ 1,321,436 $ 1,315,078 $ 1,313,458 $ 1,106,174 $ 1,088,989 Health Plan Days in Claims Payable (DCP) (1) 50.90 49.77 49.47 50.45 50.52   Total Debt (millions) $ 1,585.1 $ 1,584.9 $ 1,584.8 $ 1,818.6 $ 1,818.5 Total Capital (millions) $ 6,211.4 $ 6,091.2 $ 6,287.5 $ 6,329.6 $ 6,331.1 Debt to Capital 25.5 % 26.0 % 25.2 % 28.7 % 28.7 %             COVENTRY HEALTH CARE, INC.SELECTED REVENUE AND MEDICAL COST STATISTICS(Unaudited)   Total     Q3 2012   Q2 2012   Q1 2012     2011     Q4 2011   Q3 2011Revenue PMPM                         Commercial Risk $ 308.42 $ 309.91 $ 311.92 $ 303.69 $ 305.70 $ 303.33 Medicare Advantage(2) $ 908.57 $ 902.61 $ 1,048.93 $ 895.54 $ 896.77 $ 893.22 Medicare Part D(3) $ 86.24 $ 87.55 $ 85.44 $ 92.41 $ 90.95 $ 94.10 Medicaid $ 241.92 $ 248.48 $ 238.74 $ 228.85 $ 244.71 $ 226.39                             MLR%                         Consolidated Total 84.4 % 85.9 % 82.9 % 82.1 % 82.1 % 81.5 %   Commercial Risk 81.5 % 83.0 % 79.9 % 81.6 % 83.7 % 82.1 % Medicare Advantage(2) 83.1 % 84.1 % 74.1 % 82.9 % 82.3 % 82.0 % Medicare Part D 84.2 % 90.0 % 94.9 % 81.7 % 60.5 % 76.8 % Medicaid 93.0 % 93.3 % 100.0 % 89.4 % 94.4 % 88.1 %   (1) “Total Health Plan Medical Liabilities” and “Health Plan Days in Claims Payable” are calculated consistent with prior disclosures to exclude the effect of the Kentucky Medicaid business for the fourth quarter of 2011 due to the timing of the contract implementation (November 1, 2011) but include the effect of the Kentucky Medicaid business and the acquired Children's Mercy's Family Health Partners business beginning in the first quarter of 2012.   (2) First quarter 2012 Medicare Advantage statistics for Revenue PMPM and MLR% include the favorable impact from the release of MA-CCP RADV audit reserves. Excluding this impact, the comparable Revenue PMPM was $923.87 and the comparable MLR% was 82.9% for the first quarter 2012.   (3) Revenue PMPM excludes the impact of CMS risk-share premium adjustments and revenue ceded to external parties. Coventry Health Care, Inc.Randy GilesEVP, Chief Financial Officer301-581-5687orDrew AsherSVP, Corporate Finance301-581-5717