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Coventry Health Care Reports Third Quarter Earnings

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 Highlights

Medicare 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.

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