Coventry Health Care (CVH)

Q2 2011 Earnings Call

July 29, 2011 8:30 am ET

Executives

Allen Wise - Executive Chairman and Chief Executive Officer

Michael Bahr - Executive Vice President of Commercial Business

Randy Giles - Chief Financial Officer, Executive Vice President and Treasurer

Drew Asher - Senior Vice President of Corporate Finance

Analysts

Joshua Raskin - Barclays Capital

Peter Costa - Wells Fargo Securities, LLC

Matthew Borsch - Goldman Sachs Group Inc.

Charles Boorady - Crédit Suisse AG

Thomas Carroll - Stifel, Nicolaus & Co., Inc.

Ana Gupte - Sanford C. Bernstein & Co., Inc.

Kevin Fischbeck - BofA Merrill Lynch

Presentation

Operator

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Good morning, and welcome to Coventry Health Care's Second Quarter 2011 Earnings Conference Call. Today's conference is being recorded [Operator Instructions]. Today's call will begin with opening remarks by the Chief Executive Officer of Coventry Health Care, Mr. Allen Wise, after a brief forward-looking statement read by Mr. Drew Asher. please go ahead, Drew.

Drew Asher

Ladies and gentlemen, during this call, we will make forward-looking statements. Certain risks and uncertainties, including those referenced in our press release and described in the company's filings with the SEC on Form 10-K for the year ended December 31, 2010, and Form 10-Q for the quarter ended March, 31, 2011, may materially impact those statements and could cause actual future results to differ materially from those anticipated and discussed. Allen?

Allen Wise

Good morning, and thank you for your interest in Coventry Health Care. I'm pleased to share with you not only our results for the quarter, but I believe more importantly, the progress we've continued to make over the past few months.

As you saw this morning, the company performed well in the quarter across all of our businesses. In total, we reported $1.51 per diluted share including the favorable settlement adjustment relating to a Louisiana litigation, or $0.83 per diluted share excluding the favorable settlement adjustment. This, coupled with our outlook for the remainder of 2011, enabled us to increase our 2011 EPS guidance for the second time this year. Our current forecast for 2011 is for EPS in the range of $2.80 to $2.95, which excludes the $0.68 favorable adjustment to earnings.

A couple of remarks on how I'd like to spend my time with you today. First, a few comments on the quarter. But I'll spend most of my time this morning on our longer-term accomplishments during the past few months. And second, while Randy Giles, our CFO, will discuss balance sheet items in detail, I do have a few comments because of how important some of the Q2 events are to our company's future.

First of all, we received final court approval of the Louisiana litigation as we reported earlier in the second quarter. The settlement was significantly less than the original judgment. The details of which are in the May 31 8-K. In short, we recognized a favorable, non-recurring pretax adjustment to earnings of $159 million or $0.68 per diluted share after tax during the second quarter.

We were also busy in the financing market during the quarter, taking advantage of a favorable rate environment. As you will recall, entering the quarter, we had $614 million of debt maturities in 2012, $234 million in January of 2012 and $380 million in July of 2012. As we looked at the broad financial markets and laid the risks, including varying European crisis, the end of Q82 [ph] and the U.S. debt ceiling issues just to name a few, and compare that to the rate opportunity presented as an issuer in the U.S. bond market, we decided to be opportunistic and address our 2012 maturities, all consistent with our comments in Q1 call.

As you saw in early June, we were successful in placing $600 million in 10 years senior notes at Coventry's lowest coupon rate by far in our history, 5.45%. This is not only attractive cost of capital for us, but more importantly, it enables us to essentially push out our 2012 maturities to 2021. We repaid our $380 million outstanding credit facility with the proceeds and plan to pay off a $234 million in 2012 notes bond maturity in January. Beyond that, we have no scheduled debt maturities until 2014.

While we have the attention of the lending banks, I took the opportunity to simultaneously renew our credit facility in late June. We closed on a new $750 million 5-year facility expiring in June of 2016. And today, it sits undrawn. Coventry package is largely consistent with what we were able to previously achieve in the very robust credit markets of 2007.

During the quarter, we experienced excellent results in receiving dividends from our regulated businesses such that we have already virtually achieved our year-end 2011 free cash goal of just over $1.3 billion. During the quarter, our legal and financial teams were able to receive approvals and cash dividends to our corporate parent of $466 million. And it's obvious that the strength and diversity of the underlying businesses over the past year and a half drove the generation of the free cash.

Our priorities for free cash have not changed. We would like to deploy our capital to build our businesses for the long run through acquisitions to complement organic growth opportunities. And our secondary free use of cash is share buyback. On this topic, we bought back 1.5 million shares during the quarter for $50 million. And while we seek out strategically attractive and reasonably priced acquisitions consistent with our core businesses, we will likely continue to deploy capital to share buyback. And also, don't forget that we have $234 million of 2012 bonds to repay in January of 2012.

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