Coventry Health Care's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Coventry Health Care (CVH)

Q1 2012 Earnings Call

April 27, 2012 8:30 am ET


Drew Asher - Senior Vice President of Corporate Finance

Allen F. Wise - Executive Chairman and Chief Executive Officer

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


Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division

Joshua R. Raskin - Barclays Capital, Research Division

Charles Andrew Boorady - Crédit Suisse AG, Research Division

Scott J. Fidel - Deutsche Bank AG, Research Division

Carl R. McDonald - Citigroup Inc, Research Division

Douglas Simpson - Morgan Stanley, Research Division



Good morning, and welcome to Coventry Health Care's First Quarter 2012 Earnings Conference Call. Today's conference is being recorded [Operator Instructions] Today's call will begin with an opening remarks by 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, 2011, may materially impact those statements and could cause actual future results to differ materially from those anticipated and discussed. Allen?

Allen F. Wise

Good morning, and thank you for your interest in Coventry Health Care. Earlier today, we reported the best quarter in the history of our company both in terms of revenue and earnings per share. Q1 revenue was $3.7 billion, and that's up 21% from the first quarter of last year. And earnings per share of $1.20 driven by strength across 6 of our 7 businesses, specially our Medicare Advantage business.

As you can see in our current Medicaid medical loss ratio, we had some serious work to do in our recently added Medicaid business, but all of Coventry's other businesses: Commercial, Medicare Advantage, Medicare Part D and our Fee-based businesses were on track or ahead of plan for the quarter. With regard to SG&A, we closed at a very strong result with the rate of 13.6%, which is down 280 basis points from the first quarter of 2011.

Today, I'd like to touch on each of our businesses and share with you our current perspective and probably more importantly where we're heading. And let's start with Medicare. The strength of the quarter in terms of Medicare Advantage was primarily driven by 3 factors: A very successful open enrollment season, which resulted in sequential membership growth of 13% or 28,000 members. The second was a very favorable outcome from the risk adjustment data validation audit process proceed to methodology changes issued by CMS during the quarter enabling us to reduce our related reserve that were built over the last several years. And third, strong operating results in Medicare Advantage even absent the operating earnings driven by the RADV reserve release.

I believe it's worth a moments staying on Medicare Advantage. We operate Medicare Advantage Health Plans in 15 states. 14 of these states growing coming into 2012. We're pleased with the momentum of this business and expect to continue to expand our footprint and membership base over the next few years. We have taken what we believe was a prudent posture over the last few years and accruing our best estimate of RADV liability even in the absence of perfect clarity.

The update in guidance from CMS were able to reflect the reduction in the RADV reserve of $133 million or $0.58 per share contributing to the strong Medicare operating results in the quarter. This is important for a couple of reasons. First of all, it should give you insight into the prudence in reserving for this type of exposure, which I believe was not necessarily consistent industrywide. And perhaps more important, we were able to substantially reduce a headwind in our Medicare Advantage bids since we'll now adapt to the updated CMS RADV guidance.

As we look ahead, this, along with strong execution and performance of our Medicare business to continue to support the competitiveness of our Medicare Advantage products.

Other Medicare business, Part D, also had a very good first quarter. Coventry has a national Part D footprint and is #5 nationwide in market share. As you may recall from the open enrollment period coming into 2012, we're able to expand our auto-assigned footprint from 15 to 23 regions and launched a third product with a preferred network creating attractive value proposition for seniors. And the results were very satisfying. We grew 28% sequentially in the first quarter 2012, ending 315,000 members. Our Part D medical loss ratio is consistent with prior year Q1 and on track for the first full year forecast of low to the mid-80s of medical loss ratios.

Our combined and Medicare business represents approximately $4.3 billion of annual revenue or about 30% of the company's total revenue. From our perspective, Medicare has an attractive growth and margin profile and where all did an excellent start in 2012.

Moving on to our Fee-based businesses, Coventry's diversified across 3 business signs: Workers' Compensation service, better employee administration and Rental Network. Our Fee businesses produced over $1.1 billion in free revenue with higher-margin characteristics than our Risk business. First quarter of 2012, was slightly ahead of our previous plan and as you can see, we increased our forecast of fee revenue for the full year. These Fee businesses are important part of our diversified portfolio and they generate strong earnings upon unregulated cash flow.

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