Coventry Health Care Reports Fourth Quarter Earnings

Coventry Health Care, Inc. (NYSE: CVH) today reported consolidated operating results for the quarter and fiscal year ended December 31, 2012. Operating revenues totaled $3.4 billion for the quarter with net earnings of $119.3 million, or earnings per diluted share (EPS) of $0.88. For the year ended December 31, 2012, total operating revenues were $14.1 billion with net earnings of $487.1 million, or $3.52 EPS.

“I am very pleased with the Company’s strong fourth quarter and full year 2012 results, significantly exceeding our previous guidance,” said Allen F. Wise, chairman and chief executive officer of Coventry. “We continue to make progress in our Kentucky Medicaid business as evidenced by the sequential improvement in fourth quarter results. In addition, the Company recently completed the 2013 Medicare Annual Enrollment Period with an outstanding organic growth result in our Medicare Advantage Coordinated Care Plans. We look forward to combining our strengths with those of Aetna to further our shared commitment to improving the health and well-being of our members.”

Fourth Quarter and Full Year 2012 Consolidated Highlights

• Fourth quarter total revenues up 10% from the prior year quarter
  • Full year 2012 total revenues up 16% from the prior year
• Total membership of 5,362,000, an increase of 597,000 members from the prior year, driven by growth across the Company’s Government Programs businesses in Medicare Advantage Coordinated Care Plans (MA-CCP), Medicare Part D, and Medicaid
• Sequential enrollment growth in MA-CCP and Medicare Part D
• Successful execution during the 2013 MA-CCP Annual Enrollment Period resulting in growth for January 2013 of approximately 48,000 members, or 18%
• Awarded Kentucky Region 3 Medicaid contract with implementation effective January 1, 2013, representing approximately 20,000 additional members
• Awarded four regions for the Florida Long-Term Care Program to be phased in during 2013 and 2014
• Reduced selling, general, and administrative (SG&A) expense as a percentage of total revenue from 16.5% in 2011 to 14.7% in 2012
  • Fourth quarter SG&A expense of 16.0% of total revenue, a decline of 120 basis points (bps) from the prior year quarter, includes costs of $7.7 million, or $0.03 EPS, associated with the pending Aetna transaction
• GAAP cash flows from operations were $249.4 million, or 209% of net income in the quarter

Selected Fourth Quarter and Full Year 2012 Highlights

Medicare Advantage

• As of December 31, 2012, MA-CCP membership was 259,000, an increase of 37,000 members, or 17%, from the prior year quarter and an increase of 3,000 members from the third quarter of 2012
• The MA-CCP Medical Loss Ratio (MLR) was 83.9% in the quarter and 81.1% for the full year
• Excluding the impact of the Risk Adjustment Data Validation (RADV) audit reserve reduction during the first quarter of 2012, the full year MLR was 83.5%

Medicare Part D

• As of December 31, 2012, Medicare Part D membership was 1,578,000, an increase of 435,000 members, or 38%, from the prior year quarter and an increase of 33,000 members from the third quarter of 2012
• The Medicare Part D MLR was 70.7% in the quarter and 85.4% for the full year
• Reduction in Coventry’s auto-assign footprint resulted in a loss of 143,000 members for January 2013 compared to year-end 2012

Medicaid

• As of December 31, 2012, Medicaid membership was 974,000, an increase of 282,000 members, or 41%, from the prior year quarter and a net decrease of 24,000 members from the third quarter of 2012 due to membership attrition during the Kentucky open enrollment period offset by growth in other markets
• The Medicaid MLR was 90.4% in the quarter, a decrease of 260 bps from the third quarter of 2012, and 94.1% for the full year
• The Company’s Kentucky Medicaid business produced an MLR of 96.7% in the fourth quarter, an improvement of 1,170 bps from the third quarter of 2012 and an improvement of 1,990 bps from the prior year quarter. The significant sequential improvement was driven by receipt of the Company’s contractual 2012 rate increase of 5.3% effective 10/1/12, implementation of member co-payments, and the impact of the Company’s ongoing medical cost initiatives.

Commercial Risk

• As of December 31, 2012, commercial risk membership was 1,474,000, a decrease of 15,000 members, or 1%, from the third quarter of 2012
• The commercial risk MLR was 82.2% in the quarter, a decrease of 150 bps from the prior year quarter, and 81.7% for the full year

Balance Sheet

• Investment portfolio in a net unrealized gain position of $111 million as of December 31, 2012, a decrease of $18 million from the third quarter of 2012
• Repurchased 9.9 million shares, or 7% of total shares outstanding, for $328.0 million during 2012
• $950 million in free cash at the parent at year-end
• Board of Directors approval of the Company’s fourth quarterly cash dividend paid on January 7, 2013

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, such as our Kentucky Medicaid program, 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; 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.

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