Coventry Health Care, Inc. (CVH)

Q2 2010 Earnings Call Transcript

July 30, 2010 8:30 am ET

Executives

John Kunkle – Director, Solutions Development

Allen Wise – CEO

John Stelben – Interim CFO and Treasurer

Harvey DeMovick – Chief Information Officer and EVP of Customer Service Operations

Analysts

Doug Simpson – Morgan Stanley

Josh Raskin – Barclays Capital

Ana Gupte – Sanford Bernstein

Matthew Borsch – Goldman Sachs

Justin Lake – UBS

Christine Arnold – Cowen & Co.

Presentation

Operator

Good morning and welcome to the Coventry Health Care’s second quarter 2010 earnings conference call. Today’s conference is being recorded and all participants are in a listen-only mode. Today’s call will begin with opening remarks by the Chief Executive Officer of Coventry Health Care, Mr. Allen Wise, and after a brief forward-looking statement read by Mr. John Kunkle. Please go ahead, John.

John Kunkle

Ladies and gentlemen, during this call, we will make forward-looking statements. Certain risks and uncertainties including those described in the Company’s filings with the SEC on Form 10-K for the year-ended December 31, 2009 and Form 10-Q for the quarter-ended March 31, 2010, as may be further updated from time-to-time in our quarterly reports on Form 10-Q 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. As you saw in our press release, the Company’s core operations produced another very strong quarter. My comments today will center around what I will call the adjusted results, excluding the one-time litigation charge that we communicated to you on our July 2 press release.

We are still working hard and pursuing all avenues of appeal for the Louisiana court decision, which we believe is not supported by either the law or the facts, and you should refer to our SEC disclosures for the background on this case.

Importantly, the fundamentals of our business are very, very strong. We’ve had sharper focus over the past 18 months and the fruits of our labor have certainly been evident during the past couple of quarters.

These strong results are Companywide across our seven core businesses, and I’ll cover that in a minute. I believe we can best explain the extraordinarily strong results for the last six months in three ways.

First and most important is our focus on making our seven businesses better over the last 18 months. The last few quarters for our business were essentially better in most every way; sales, SG&A, unit cost, patient management, and all the fundamental building blocks that make a good business.

The second piece of the description is the positive reserve run-out in our Private Fee-for-Service business. It’s not every day that we close down a $3 billion block of business and when we did so, we wanted to make certain that our reserve was adequate. The result of making certain left us with a significant prior-period positive development.

Third way to explain this is medical utilization, which appears to be favorable across most, if not all, of our markets. We’ve analyzed this carefully and have some theories, but to be honest, we simply do not know why this is occurring. Some of the decreased utilization can be attributed to our focus on taking better care of our members but certainly not all of it. Unfortunately, I don’t know what the last half of this year will bring on this subject.

My comments will cover the quarter and our businesses and then I’ll provide some perspective on the remainder of 2010 and positioning for the future as we prepare for Phase I of health care reform.

In Q2, the adjusted earnings of our businesses, excluding the litigation charge, was $1.19 per diluted share and $1.01 per share when you exclude the Private Fee-For-Service contribution. This is an outstanding result and it is typical. It’s a product of many factors including medical cost management, SG&A focus and profitable growth.

Last quarter, I spoke about my satisfaction with the performance of the management team on executing and delivering the basics of the business and that certainly continued into this quarter.

More importantly, I expect this focus and execution to continue prospectively. Overall, all of our seven core businesses are performing at or ahead of plan. As you can see in press release, we experienced sequential organic growth in all of our core businesses. Our Fee-For-Service business grew as well with the exception of the fee-based business which was stable.

Turning to commercial risk, which is our largest business at about $5.4 billion in revenue. In Q2, we posted organic growth in the group risk business for the first time since Q4 2007. Our total commercial risk business grew 21,000 members or 1.4% sequentially.

As you may recall, we worked in 2009 to get the right managers in the right position. On important example was the appointment of a long-term employee Mike Bahr as the single leader and Executive Vice President of our Commercial Health business. In addition, we made the necessary internal process improvements and have much better integration and coordination between actuarial, underwriting and sales as entered into 2010.

As you would expect, we’ve continued our relentless focus on a low cost structure to provide our customers with the best possible value proposition. Overall, on all metrics, our commercial risk business produced an outstanding result for the quarter.

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