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Executives

Allen Wise - Executive Chairman and Chief Executive Officer

John Stelben - Interim Chief Financial Officer, Senior Vice President and Treasurer

Drew Asher - Senior Vice President of Corporate Finance

Analysts

Joshua Raskin - Barclays Capital

Peter Costa - Wells Fargo Securities, LLC

Justin Lake - UBS Investment Bank

Charles Boorady - Crédit Suisse AG

Joshua Kaplan-Marans

John Rex - JP Morgan Chase & Co

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

Doug Simpson - Morgan Stanley

Coventry Health Care (CVH) Q1 2011 Earnings Call April 29, 2011 8:30 AM ET

Operator

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

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, 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 again for your interest in Coventry Health Care. We're pleased to announce a strong quarter and provide an updated view on 2011.

As many of you saw this morning, we reported $0.74 per diluted share for the first quarter, and we're now forecasting $2.65 to $2.85 per diluted share for the full year, which is up $0.15 from our previous midpoint of $2.60. Importantly, much of the improvement in our forecast is due to the improved revenue picture. We've increased both our risk and fee revenue guidance, adding about $135 million to our revenue forecast, while holding our SG&A forecast flat creating SG&A leverage.

Consistent with our comments in prior conference calls, across-the-board, the financial performance of all 7 core businesses are on track. And for some specific comments on our core businesses and where we're heading, the membership in our largest business, Commercial Risk, was better than we had previously forecast. Our historical concentration in small and midsized group, as in the past, made Q1 a membership challenge. And by this, I mean, that historically, we've had some large group turnover in January, and worked on making up the deficit during the year with small and midsized groups. However, in the first quarter of 2011, we're basically stable in Commercial Group Risk membership, and this is the best sequential result we've had in the first quarter of a year since 2003, and better than we budgeted.

Our health plans continue to be well positioned in the local markets from a cost structure standpoint, and I'm pleased with the operating improvements and the focus, which has been gained during the last 2 years. Margins were on track in the quarter.

Minimum loss ratio accounting, obviously, both new this year and complicated, will be carried by John Stelben in more detail. To round our comments on the Commercial Risk business, the individual membership was down a little in the quarter, as we're transitioning off about 6,000 members in discontinued products from our last acquisition.

Turning to our Medicare Advantage and Medicare Part D business, we're on track with our previous forecast, both on in terms of membership and performance. However, having said that, our Part D membership results as we entered 2011 were disappointing. And we learned an important lesson from this, and I am personally leading the effort, along with many of our senior executives, to improve Part D enrollment results in 2012.

We continue to feel confident that serving the senior populations is an attractive long-term opportunity and that Managed Care is the best solution to provide value to both the seniors and the Federal Government. We like our Medicare Advantage positioning in our health plan markets and are actively working on growth opportunities for the future.

Medicaid was stable in the quarter, and we're satisfied with the 2 new markets we entered in 2010, Nebraska and Pennsylvania. We're currently evaluating several opportunities, and will be devoting more resources in our company to grow this area. Today, the Medicaid business represents 11% of our company's revenue, and we're committed to growing this business in the future.

As you probably have seen in our press release, our fee-based businesses as a whole were on track contributors in the first quarter. Based on our view of the positioning and level of activity forecast in these businesses, we were able to increase the midpoint fee revenue guidance for 2011 by $10 million.

In the area of expense management, we're reducing our 2011 SG&A rate from 17.2% to 17%, essentially holding forecast SG&A flat, while increasing revenue. We're also revisiting many areas of the expenses, which is an ongoing effort and we look forward to updating you throughout the year on these efforts.

Our capital position continues to be outstanding. We ended the quarter with $750 million of deployable cash on hand, and that was after making a litigation payment of $150 million into escrow in February and repurchasing $50 million of shares during the quarter.

With regard to our balance sheet, M&A opportunities, as I will discuss in a minute, continues to be our preferred use of capital. Even so, as we work the pipeline of potential transactions, we'll also see share buyback as a way to deliver value back to our shareholders, and we'll continue to evaluate share repurchase as one of our alternatives.

As John Stelben will address, we've also included in our updated guidance additional interest expense in the likely event we decide to refinance our 2012 debt maturities during 2011.

Visiting the future, and although we are pleased with the first quarter and the early read of 2011, we spend most of our time focusing on the next few years and continuing to lay the foundation to seize opportunities created by Health Care Reform and by being well positioned to deliver attractive and valued products to our customers. We said earlier we feel good about the results and positioning of our health plans, and we continue to feel that ultimately, the cost structure and our local markets would drive the value proposition for our customers, whether they're individuals, employer groups, states or the Federal Government.

Coventry's low-cost mentality is alive and well, and we believe this will continue to differentiate us as we look ahead. Our local based Health Plan model and marketplace presence goes hand-in-hand with low cost structure. With a true local commitment to each market, we're able to gain market knowledge, experience and insights that allow us to react to a rapidly changing landscape.

As we have demonstrated in the past, we will remain nimble. In many of our existing markets, as well as a handful of new markets, we're in active discussion with health systems to jointly create collaborative models of care, which we are calling high-performance networks. We have mentioned these efforts in this area in the last couple of quarters. And today, we have approximately 10 of these high-performance networks in place. And we continue to be optimistic about how receptive the provider partners are informing these innovative models of care that will ultimately be rewarded for quality and performance and create a stronger value proposition for the member and the patient.

These relationships are typically bid on a foundation of 4 basic pieces: it's a unique network configuration; a collaborative enhanced model of care; aligned incentives between our company and our provider partners; and data sharing and connectivity. Just like much of our work in local markets, we consider our work here as a current investment that should bear fruit down the road and enhance our product portfolio, especially as we look toward 2014 Health Care Reform opportunities.

Staying on the topic of Health Plans, M&A opportunities are often the result of our local market health plan presence and willingness to collaboratively form relationships with providers. We found increased receptivity in the past 9 months from health plans who are wrestling with how to prepare for reform and how to best position their businesses, not to mention the significant amount of capital and investment that will be necessary to operate small to midsize plans in the future.

In the case of provider-owned plans, Coventry is able to help providers continue to realize many of the benefits of being tightly aligned with a health plan without the provider having to own, operate and dedicate the significant capital necessary to run these health plans. We were able to achieve these goals of 2 sophisticated health systems in 2010, and although timing is always unpredictable in M&A, we're actively talking with other owners that could bring opportunities for the future. Our M&A efforts are focused in the areas of our core businesses, including Commercial, Medicare and Medicaid, as well as fee-based businesses that fit into our core competencies.

Despite our enthusiasm when pursuing these strategic transactions, we will be patient, we will be prudent and wait to find the right opportunities that fits very well into our core businesses. I need to mention that, again, the timing of when these opportunities may materialize is unpredictable.

There's not too much new to report on the management front, which is good news. The team that has been assembled over the past 2 years is well entrenched and focusing on our long-term objectives. Randy Giles, who I previously announced as the permanent CFO-in-waiting will officially take the role, Monday, May 2. Randy has spent the last 4 months full-time engaged in learning our workers comp area and in getting up to speed on Coventry as a whole. The transition from John to Randy should be seamless, as the entire corporate finance team remains intact. Randy looks forward to spending time with you, our investors, and you'll hear from him during the second quarter earnings call, if not sooner.

While we've all learned that one quarter doesn't make a year, we're off to a good start. So what does this do to position us for the future? In that regard, I'd like to leave you with 7 thoughts: the one is obvious that our current businesses are performing well; second thought is that I believe that we have the best human resources to address the future opportunities in the history of our company; third point is our cash point is excellent and improving; four, we're a diversified business; fifth, we have a history of making prudent acquisitions and we've a history of knowing how to implement them; same on the cost front, which is sixth, we know how to control costs and we will; seventh thought that drives us every day, we understand there's pressures on the margins of our business, we clearly understand our future depends on developing more prudent revenue, revenue that we know how to manage and as the Brits would say, we're going to set about doing just that in the next 24 months. We can and will grow this business, and with these thoughts, I'll close and have John Stelben present financial details.

John Stelben

Good morning. Our GAAP EPS for the first quarter is $0.74, which includes $0.08 of earnings related to the run-out of the Private Fee business. In addition, we are increasing our full year guidance to a range of $2.65 to $2.85, an increase of $0.15 at the midpoint of the range to prior guidance. Overall, our 7 businesses performed in line with our margin expectations for the quarter, and continued to build upon the financial and operational success we experienced in 2010.

Commercial Risk revenues of $1.49 billion or an increase of 13% over the prior year quarter. Group Risk Membership, which represents $1.45 million of our total Commercial Risk membership of $1.64 million was essentially flat to year end, and our best January sequential result since 2003 due to strong sales, as well as improved performance on renewing existing customers.

Commercial Group Risk loss ratio of 80.2% was in line with our expectations for the quarter. Our accounting and reserving processes have not changed from prior periods for purposes of recording current period results, excluding the impact of minimum MLR calculations.

In order to account for potential minimum MLR liabilities, we went through a detailed projection process to estimate full year results across all our 113 minimum MLR cells. These projections include our best estimates of the prospective impact of previous or future rate actions, medical trend, SG&A and other components included in the prescribed MLR calculation methodology.

We then accrued a liability for 1/4 of the projected full year liability. These projections will be updated every quarter with any resulting changes in the projected liability recorded on a pro rata year-to-date basis. Potential rebate liabilities are recorded in the accounts payable and other accrued liability line on our balance sheet. The expense side of the entry is an in contra revenue account on the income statement in the appropriate line of business.

Given that it is very early in the year and annual projections will surely change over time, we do not believe providing point estimates of rebate liability is prudent at this time. There are just too many variables this early in the year. By way of example, if projected trends in sales that are in a rebate position are lower than projected, it will serve to increase the potential rebate with no impact on overall earnings.

Our view of annual guidance related to loss ratios for the Commercial Risk lines is the best indicator we can provide of where we believe we will perform for the entire year. At this point, our 2011 guidance for Commercial group loss ratio is at 81%, plus or minus 50 basis points, and this guidance is unchanged from our initial guidance given on the Q4 earnings call.

For the Individual business, our membership is down about 4,000 from December, due to the planned exit from the Individual product in Northwest Arkansas as part of the Mercy acquisition. Our loss ratio guidance of 76% plus or minus 100 basis points is unchanged from our initial guidance given on the previous earnings call. Again, fundamental performance in all Commercial Risk lines was in line with our margin expectations for the quarter, within the context of annual guidance.

Our view of fundamental prospective long term trend is right around 8% plus or minus 25 basis points. In the rearview mirror, we would see this number in the low 6s. The difference between the two is our forward view that utilization will increase across Inpatient, Outpatient and Physician categories.

Medicare CCP revenues of $580 million or an increase of 16% over the prior year quarter. Consistent with our initial guidance, Medicare CCP membership of 219,000 is down slightly from December across several markets. Overall loss ratio of 84.2% was at the low end of our expected range in Q1 and 150 basis points favorable to the prior year quarter driven by lower inpatient admission rates. Risk scores are in line with bid expectations.

Medicaid revenues of $311 million or 17% increase over the prior year quarter. Medicaid membership of 468,000 is flat to December, and Medical Loss Ratio of 86% is in line with our expectations for the quarter.

Part D membership of 1.16 million is down 469,000 or 29% versus December due to the previously announced product consolidation. Loss ratio of 95.8% is in line with expectations for the quarter and risk scores are consistent with bid expectations.

Workers comp revenues of $191.6 million or 4% increase over the prior year quarter. The Medicare Advantage Private Fee product, which we exited in January 2010, produced $0.08 in the quarter due to favorable prior period reserve development and receipt of 2009 final year end reconciliation payments.

Turning to the balance sheet and cash flows, total cash and investments stand at $4.02 billion. Our investment portfolio is in excellent shape, and is in a net unrealized gain position of $57 million as of March 31.

GAAP cash flow from operations for the quarter was $29 million. During the quarter, we placed $150.5 million into escrow to fund a preliminary settlement of the Louisiana provider class action charge as disclosed in the Q4 2010 . Adjusting for this one-time event, adjusted cash flow from operations would've been 163% of net income. Days in claims payable stand at 50.4 days versus 48.6 at the end of Q4, the increase of 1.8 days is due to normal seasonal timing.

Free deployable cash at parent now stands at $750 million. It is important to note this is after we put $150 million into the litigation escrow and after we repurchased 1.7 million shares for a little over $50 million in the quarter. Debt to cap ratio now stands at 27.3%, down slightly from the prior quarter due to earnings.

Turning to guidance. As listed in our press release, we're increasing the 2011 EPS guidance range to $2.65 to $2.85 from prior guidance of $2.50 to $2.70 given on the fourth quarter earnings call. This range includes $0.08 of private fee earnings in Q1, but does not include any further private fee earnings for the remainder of the year. The guidance also does not include any impact related to the potential final settlement of the Q2 2010 Louisiana provider class-action charge.

We expect Commercial Risk revenues to be nearly $6 billion, up about $70 million at the midpoint from previous guidance based on an improved outlook of membership, including a better start to the year than anticipated. As you can see, we are basically flat sequentially from year end and are not forecasting a significant change throughout the remainder of the year.

The medical loss ratios are consistent with prior guidance in the range of 81% plus or minus 50 basis points for Group, 76% plus or minus 150 basis points for Individual. We are proactive in the individual waiver process in all our individual states. Our guidance, however, does not assume any relief for potential individual waivers. We expect Part D revenues in the range of $1.15 billion to $1.17 billion, with a loss ratio in the mid-80s consistent with prior guidance.

Our Medicare Advantage CCP business, we expect revenues in the range of $2.2 billion to $2.3 billion, with the loss ratios in the mid-80s as developed in our bids. This view is unchanged from prior guidance. For Medicaid, we expect revenues in the range of $1.3 billion, with the loss ratio in the upper 80s, and this is unchanged to prior guidance.

On SG&A, the midpoint of our 2011 guidance range remains at $2.02 billion. This does not mean we're standing still on continuing to make our administrative costs more efficient. We have undertaken a number of initiatives to reduce costs, but are reinvesting those savings into other initiatives that we believe will drive future profitable growth. These initiatives include technology, care management, HEDIS and STAR initiatives, network building and back-office process improvements.

It's important to note here that our overall guidance includes $135 million of revenue increase at the midpoint, with no additional SG&A spent. The leverage created here is worth $0.10 of our increase in guidance at the midpoint. This continues to be a work in progress, and we will make progress.

The net of all non-operating items at the mid-point has a negative $0.04 impact in guidance. We expect a small improvement in investment income due to extending maturities in our investment portfolios that is worth $0.02. On the interest expense side, we have $614 million of debt maturing during 2012, comprised of $234 million of senior notes due in late January 2012, and $380 million on our revolver due July 2012.

We may address those maturities in 2011 and if so, would incur between $0.06 and $0.08 of interest and other debt-related expense. We have also decreased the midpoint of our share count guidance by 500,000 shares, driven by the repurchase activity that we completed in the first quarter, which would improve overall guidance by $0.01.

So let me recap guidance at the midpoint. SG&A leverage on higher revenues is worth $0.10. The prior potential interest expense is worth a negative $0.07. Interest income is worth $0.02, reduced share count worth $0.01. Private fee earnings are worth $0.08 and all other items net to $0.01 primarily in fee-based businesses.

As stated earlier, we have $750 million of deployable cash on hand at March 31, which is after the outflow of $200 million during the quarter related to the aforementioned litigation escrow and share repurchase. Despite these outflows, we're still on track to have about $1 billion of capital by mid-2011, depending on the timing of dividends from regulated entities. This is an improvement as we were expecting $1 billion prior to any potential litigation payments in share repurchases on the last call.

Our priorities for deployable cash continue to be growing our business through acquisition, followed by share repurchase. As noted in the press release, we've increased our authorization for share repurchase and currently have available authority for about 11 million shares.

To conclude, we are pleased with the operational and financial results we're seeing in our 7 businesses and the improved overall outlook for the year, as evidenced by our increase in full year earnings guidance. Our teams are hard at work in building a foundation for future profitable growth. We are investing in people and tools to manage quality and costs through partnerships with leading health system and provider groups. We are working on growing our state government revenues through participation in Medicaid RFPs. We are working on our 2012 Medicare products and developing our bids for both CCP and Part D. And as always, we are mining for the right acquisition opportunities. As we progress through this first year of reform, we see opportunities to provide more value to customers, which ultimately will fuel profitable growth.

We'll now turn the call over to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll first hear from Josh Raskin of Barclays Capital.

Joshua Raskin - Barclays Capital

I know, John, you mentioned a little bit about the impact of rebates. It sounds like on the individual book you're still expecting a 76% MLR. So I'm just curious on a GAAP basis in the first quarter, where the individual MLR came on. And then just a broader question, in terms of your pricing and your intended actions in light of some of the rebates you may be having to pay, I'm just curious if you're including that into your thoughts around pricing decisions throughout the rest of the year, and maybe are you seeing any competitors take actions that you think might be rebate related?

John Stelben

Josh, on the first one, what we told you last call was that Individual had run in the mid-60s or so on a just a pure GAAP basis. And that year-over-year, that was going to move up 10 points based on reform. So that view hasn't really changed. On the pricing side, we have said that as we looked into the future, and we look at where we stand in all our markets, that we would certainly use a potential rebate opportunity to improve our growth and try to improve our market share in our markets. And that hasn't changed. We've done some of that and we'll continue to look at that going forward.

Allen Wise

Probably 3 areas, Josh, in terms of pricing is: one, to get closer to the sweet spot in all of the locations; possible gain shares with our high-performance networks with our provider partners to put more money into care of our members; and quality initiatives to take better care of our members. I think those 3 components are how we'll get closer to the sweet spot.

Joshua Raskin - Barclays Capital

I'm sorry, did you see the rebates are in the deferred revenue account?

John Stelben

No, they're in the accounts payable and other accrued liabilities.

Joshua Raskin - Barclays Capital

So I'm just curious, that was down like $90 million or something like that sequentially. So I mean, I would assume there was an increase in rebates, what's the big offset there?

John Stelben

Yes, there's 2 things that are really going on in there quarter-over-quarter. One is paying interest expense out on notes; and the other was -- a large one was payment out of some compensation, incentive compensation.

Joshua Raskin - Barclays Capital

But it doesn't look like the rebates were really that material. Is that fair?

John Stelben

Josh, I'm not going to talk about the detail of the rebates.

Operator

Next we'll hear from Doug Simpson of Morgan Stanley.

Doug Simpson - Morgan Stanley

Could you just talk about your perspective on the demographics of the risk pool if we see any sustained change in the employment backdrop? What's your experience been in the past with employment going the other way?

John Stelben

I'd say that it has stabilized from what we had seen last year. We don't see any great upticks in the employment picture and what's going on from that standpoint as far as improving membership. I think what we've done is we've done a couple of things. We've improved our renewal rates, which is great, and keeping the better risk in the book. Certainly, our new business has a better risk profile than our terminating business, and that was one of the reasons that we're performing well in 2010 and that's continued.

Doug Simpson - Morgan Stanley

Sorry if you gave color on this earlier, I missed the first part of the call. But as you look at the capital position and think about the M&A backdrop and some of the challenges coming down the pike with reform, just how do you see that? Give us an update as to where that stands? And if you had to guess when we start to see a noticeable acceleration in terms of the next couple of years, how do you think that would play out?

John Stelben

Doug, I'm not sure I understood the question.

Doug Simpson - Morgan Stanley

If you think about 2014, you've got a lot of change coming. So should we be thinking about small plans maybe kind of hanging on to 2014 to see how this plays out or would they want to consider their options in advance of that, and obviously, you'd probably see a mix of thoughts around that? But just as you look out the next couple of years, when would you expect activity to kind of ramp on that front?

Allen Wise

We're having more discussions than we used to with plans that are evaluating their prospects for the future. So first answer is, there are more people thinking about it and there are more discussions. Where those lead, they are totally unpredictable, but our guess would be that for a lot of reasons, more of the smaller, mid-sized plans will be exiting.

Doug Simpson - Morgan Stanley

And if you had to characterize sort of the pipeline today versus back in the, call it, the '02 to '04 period, how would that stack up?

Allen Wise

I'd say that there are more discussions than there were 2 years ago. Some active, some not very active at this point. So our belief is we're able to find 2 high-quality forward thinking health systems in 2010. We think there'll be more of those. Just cannot predict when. Some of the discussions historically have gone on for -- going back to before 2004 that have really occurred over a long period of time, and you just never know what the catalyst is for people to make up their mind moving forward. But there were more than there were a couple of years ago. We think that there'll be more changes than there have been in the last couple of years.

Operator

Ana Gupte of Sanford Bernstein.

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

My questions is about again the pricing and the MLR rebate strategy in context of what employers are doing and you're very active in the small group market. So in terms of this switching behavior, are you seeing any changes that are being sparked by responses? Specifically, my question is in the old days, you would have typically, if you wanted to retain membership or grow it you would just price down. Are you seeing any move toward or are you contemplating pricing up and then you get into a rebate situation and some of your competitors are talking about premium credits to retain their groups, and so it's, in a sense, you can price up and if you don't do this rebate check 6 months down the road, you might be able to price up and still retain share, so would that change the game in any way?

Allen Wise

I don't think we're going to be able to improve much on the answer that we gave earlier in the meeting, which is the list of things that people are thinking about here is -- goes to 30 or 40 items. But I think that primarily, to compete in the marketplace and find a sweet spot that we are refining our resources toward finding the sweet spot for pricing, we are seeking more collaborative relationships with provider partners, which you can translate to mean if we have an attractive price that yields the loss ratio less than the target that we would -- that many back in the provider system take better care of the members and we are working on initiatives whether it's HEDIS or whether it's STAR or whether it's our Chronic Care model, we are putting more resources back in the medical delivery system to care better for patients. So I think it's going to be a combination of those 3 things. And that's about as close as we can come at this point.

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

So it sounds like you are not thinking about this as a particular potential option going forward. But when you look at your competition and that's the non-profit Blues and WellPoint and United, Aetna and so on, obviously a lot of them priced really high for 2011. Now looking at the utilization patterns and rebates kicking in, are you seeing any change in how the marketplace is evolving, as you get into the renewals and then into -- later on into 2012?

John Stelben

Ana, this is John. I would say that I don't want to discuss sort of publicly what our strategies are around how we price and how we think about renewals. We certainly think the pricing environment out there remains rational and competing with the Blues has always been difficult. But we are selling new business, and I think we're competing just fine now. And we will continue to implement our strategies as the year goes on.

Allen Wise

It hasn't changed much, but for the fact that we've always been around 80%. What's changed is that we weren't as precise as we needed to be on a sell-by-sell or marketplace-by-marketplace. Where we've had loss ratios that were in the mid-80s in some markets and high 60s or low 70s. We're just working hard and doing a much better job on a granular basis to refine what we do market by market. But in terms of philosophy, which is priced to our cost or priced with the long-term view in mind, it hasn't changed in any remarkable way.

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

Just one last one, you've talked about high-performance networks and you've been ahead of the curve on a lot of this stuff. Have you any thoughts on the buzzwords related to Accountable Care Organizations and with the commercial market, Medicare and exchanges. Can you provide us just an overall strategic viewpoint on that?

Allen Wise

Well, I can't say much more than we have. It varies by market, it varies between relationships and existing markets and new markets. But in general, these are going to be networks that are limited as opposed to being broad. They're going to be networks that have shared data and information to take better care of the patients, the relationships are going to be collaborative in that there may be gain sharing pricing, so that when they give us pricing, it lets us have an advantage in the marketplace, part of that gain goes back to the provider partner to take better care of the members. So the models are different, they're proprietary and would take mutual consent to talk about any specifics, which is between our partners, which isn't going to happen here. So it's an evolution of forming partnerships with people that do a better job taking care of their patients, the more efficient providers to bring better value to our customers.

Operator

Next we'll hear from Justin Lake of UBS.

Justin Lake - UBS Investment Bank

First question, I was hoping to get a little bit more color on, would you just give [indiscernible] some perspective. can you walk us through where trend was in the quarter and was it in line with your, the low 6s that you mentioned on a rolling 12-month basis?

John Stelben

Yes, in the rearview mirror, Justin, we look at low 6s, and that's really the picture of where we see '10 emerging. I can't tell you with specificity, what the Q1 trend is yet, I need to get some more claims paid. But the difference between our rearview mirror and our long-term prospective view is really our belief that utilization will return to historical levels. And so between our rearview view and a long-term prospective view, the answer is probably somewhere in the middle, as we think about the whole year this year.

Justin Lake - UBS Investment Bank

So maybe you can just talk with...

Allen Wise

Our prospective view is not a calendar-year view.

Justin Lake - UBS Investment Bank

What is your calendar-year view?

John Stelben

We don't give one.

Justin Lake - UBS Investment Bank

Can you tell me where you might have seen -- would you see anything, from the quarter I know it's obviously not completely clear, but can you tell us anything you saw in the quarter maybe as you came out of 2010 that might have indicated anything on an inflection point, has it stopped going down for instance, have you seen it kind of turn?

John Stelben

No, we see nothing that would suggest an abrupt uptick in utilization. Utilization year-over-year in the quarter was down. So that's a positive. It was better than what we would've expected. But it's just the first quarter, and our long term view is utilization will go up.

Allen Wise

It was down last year. It was down in Q1 inpatient over the reduced numbers last year. Common sense would tell you this is not going to go to 0. So common sense would tell you this is going to flatten out, and then it's going to increase at some point. I don't see anything at this point that says it's not continuing to -- the inpatient days aren't continuing to diminish, but it's not going to go to 0. So our common sense view is to watch and understand that this is going to flatten out this year.

Justin Lake - UBS Investment Bank

That makes perfect sense. So if trend is a little bit better here, and yet you're saying Commercial MLR is pretty much in line with your expectations, that might appear to indicate that a fair amount of your book might be constrained by MLR floors? Is that a fair takeaway?

John Stelben

Well, certainly, in our Small Group business that is the largest part of our Group business that would be constrained by a minimum MLR floor. But I would go back to it's early in the year. And we've taken a prudent approach to our view and where we think this year is going to fall out.

Justin Lake - UBS Investment Bank

Just a last question on yields. If I'm calculating correctly, it looks like your yield in the quarter was, on the Commercial Risk side, was about 2.5% year-over-year, that's down from, I think, I calc-ed about 5% last year. I'm just curious if you can maybe delineate some of those points as far as what might have affected some of the right [ph]? What drove that decline in yield?

John Stelben

Well, I think there's a few things. I think if you think about -- in early in '10, we were sort of really at the end of some of the pricing corrections we had put in from earlier periods. As the trend has come down and stabilized, we need less price increase. And certainly, there is some impact of booking rebate in the quarter.

Operator

Charles Boorady of Credit Suisse.

Charles Boorady - Crédit Suisse AG

Allen, now that the turnaround is complete, what are your long-term growth goals presently in terms of your annual revenue and EPS growth that you think can be sustained? And how important will acquisitions be to achieving those goals?

Allen Wise

That's a chicken and egg, to predict the win is difficult. But as I outlined in my text, we'll take it marketplace-by-marketplace. And we've done a lot better job getting the commercial membership stabilized and back growing. We're putting more resources and developing new Medicaid opportunities than we ever have in the past. We just got our tails kicked in Part D for 2011, and we learned a lesson from that and are energized to do something about our cost structure, do something about some of the failings that we had in 2011 to get back in growth in Part D. So we can and will grow our existing block of business. On the M&A front, we've added resources to ground and kick the tires a lot of places, and we think there will be opportunities and we're pursuing opportunities, and we'll pursue them across Commercial Medicare and Medicaid, large and small. It's just impossible to -- it would be unfair to you and the investors to predict revenue growth and EPS growth. But we will promise that next 24 months, we're going to grow this thing both sides, both organically and through the M&A process. When your margins are compromised as they are with the revenues on the Government side of the business and with minimum loss ratio challenges, we've got to grow this company. And it's what we talk about every day and we have staff to do that and our balance sheet is consistent to that. But to predict the wins, you're going to get a couple of big Medicaid wins and to predict 2012 Part D growth, when the filings aren't due until the end of May, it's just not prudent.

Charles Boorady - Crédit Suisse AG

I understand the chicken and egg thing and predicting is difficult. I spend most of my days trying to figure out how much you and your competitors are going to earn over the next several years. And what's the likelihood that you're going to be sitting on $1 billion in cash, at the parent in a year from now?

Allen Wise

Not great.

Charles Boorady - Crédit Suisse AG

And is it more likely to go to...

Allen Wise

I mean it doesn't do any good. If we want to drive power, [ph] we want to be able to take care of opportunity. It doesn't do any good sitting there. So we will deploy it in opportunities that grows revenue and grows EPS, and I hate to say, last resort, but as far as I'm concerned, the last resort is share repurchase. My financial people are smiling at me because I'd rather deploy to grow the company. But I don't think 12 months from now we'll be sitting on $1 billion.

Charles Boorady - Crédit Suisse AG

As long as the last resort is really earning the interest rates that you're earning, sitting on $1 billion, and share repurchase may be a second to last, I think that'd be all right. Can you characterize the pipeline for M&A then? I mean, are there -- how many companies in the pipeline, provider owned or independent, Commercial, Medicare, Medicaid, just give us a [indiscernible] for what's there?

Allen Wise

It would be misleading because there are things that we've had one discussion on and don't know if we'll have the second one. There are things we've had 5 discussions, and that we're optimistic that, that could work in the next 12 months. But it's misleading to say any more than that, because we just don't know. The minute I know, I'll tell you. I'm anxious to get some of these done, I'm anxious to get back to work. But we disclosed the last one in October. So it hasn't been that long and we'll find some. I just can't predict when. Sympathetic about your job is to predict what we're going to look like and what I would ask you to say is look at our history, look at how many we've done over a long period of time, look at the regained focus on the Commercial side, and hopefully, you'll develop some optimism. Look at this thing going in the right direction, sooner rather than later.

Charles Boorady - Crédit Suisse AG

Just a last question, Allen, as I look forward to fine-tune my 2012, I mean, the Part D, what kind of loss ratio would you say you would target ordinarily in that business? And is there any other headwind or tailwind that I should think about in terms of building a 2012 number off of 2011?

Allen Wise

Well, on the Part D side, I think I've just told you what I know about that, which is, it's got our full attention here. We're looking at better cost structure, we're looking at the best partners to approach these challenges with. We always -- we target 5 to 6 points on Part D. If the question is would I rather have twice as much of the 3.5% margin, the answer is yes. So we'll be making that call this spring, and it's not an excuse. But if you look at 2011, we filed those -- those filings were done in May of 2009, and if you'll remember the history of our company here, 2009 was a very tough year after 2008. We had huge enrollment gains in Part D and Private Fee, we had enrollment discrepancies between our system and CMS' system. And so we were in the middle of going through a time of righting the company, getting the enrollment system, getting our records, get the revenue right, which we did in 2009. In 2009, we really lost 10% of our commercial block of membership because of basically internal problems between actuarial underwriting and the Street. And so we've made a lot of progress getting our businesses running better. And so where you're going to turn yourself to now, I have the balance sheet, I have the senior management staff, I have our existing businesses running well. So we can really focus on growing revenue profitably, both internally and M&A. And I wish I could tell you more about the M&A. But anything I would tell you would be misleading and incorrect. I just can't at this point. Except a lot of good people here that wake up thinking about this every day, and we've done this well in the past. And we'll do it again in the future. It's hard for you to put that -- plug in the numbers in your chart, and I'm sympathetic to that. But we're thinking about resourced right and doing the right things here to build a better company.

Operator

John Rex of JP Morgan.

John Rex - JP Morgan Chase & Co

So Allen, I know you've -- for a long time, a lot of your markets gone head-to-head with well capitalized non-profit Blue and you've seen the kind of membership ebb and flow and they get more aggressive and then they get less aggressive. I know your long experienced with it and handling that. But when you look at them today and you kind of see them back at I'd say kind of probably historically high surplus positions, margins, does it seem different this time in terms of how they're behaving in terms of what you're picking up in the marketplace?

Allen Wise

Not remarkably different. We always...

John Rex - JP Morgan Chase & Co

And I say, when I say different, Allen, I mean, different than past times, have you've seen with these kinds of margins and surpluses.

Allen Wise

No I don't think so. Where your price, it's a function of your cost structure, which we've always paid a lot of attention to and cost structure being the cost of the medical product in your own SG&A. And to your ability to compete in the marketplace. So no, I don't see it a lot different than it has been historically. I don't see it a lot different this year than last year. I would say that some of our health plans grew remarkably well last year. There's always -- and we have tough competitors, there's always a little pushback, it's in few of the markets, it's a little tougher than last year. But I would characterize that it is a few markets and a little, not remarkably different. I just don't see a lot of different behavior from our competitors than we have historically.

John Rex - JP Morgan Chase & Co

And I guess, part of what I mean is the east -- you would see the Highmark, someone get pretty aggressive at this point when they had margins or surplus at this level, but I -- and I just want, I don't want to put words in your mouth, but you're saying you're kind of not seeing them go that way, you're seeing them behave more like they did last year? Or they're going directionally like they used to when they had surplus and capital like this?

Allen Wise

I don't see it different than it's always been. If you take the Commonwealth of Pennsylvania, we've always lived well on the crumbs. And it's the Blues, the Blues, the Blues, and they're tough there. We make, making some inroads in Southeastern PA we're making some inroads in Medicaid, if you talk about Pittsburgh being caught between UPMC and supplementing I guess, their health plan with their earnings as a world-class tertiary medical center and caught between them and Highmark, it's just tough. Always has been tough and we do -- we're disciplined on pricing and we're doing well with a relatively small market share, that hasn't changed. We went through a period where we had top flight management in focus in Pennsylvania. We also then had a few years where we lost a considerable amount of membership. And I would say in doing the post-mortem on that when I came back to the company in January of 2009, I started working with Mike Bahr, who runs our Commercial business now. I'd say most of that was self-induced. It was our diverting from good business practices and some world-class leadership we had there in the past and returning to world-class leadership when Tim Nolan assumed the responsibility. So I just don't see a whole bunch of difference. It's always been -- we'll just talked about Penn, it's always been tough there. We regained a lot of membership last year by just doing what we do well, and Highmark is tough. IBC is tough in the east, and UPMC, with their balance sheet, hasn't made it any easier. But we do fairly well with a relatively small niche there where people prefer our company, our service levels, our consistency. And I don't see a lot of change.

John Rex - JP Morgan Chase & Co

And then I just want to clarify your utilization comments. When you talked down on utilization, just to be clear, you're seeing negative bed day trends in your population? Is that consistent across all the books of business?

John Stelben

The answer is yes and yes. And in a consistent range to last year.

John Rex - JP Morgan Chase & Co

I mean, what percentage roughly, in terms of -- are we talking about in terms of negative bed day trends? Are we talking 1%?

John Stelben

Let's call it low- to mid-single digit.

Operator

Next we'll hear from Kevin Fischbeck of Bank of America Merrill Lynch.

Joshua Kaplan-Marans

This is actually Josh Marans in for Kevin. Just going back to your comments that utilization was down in the first quarter but Commercial MLR was in line since it's still early in the year. It looks like medical claims payable was up 6% sequentially, premium growth was up 1% sequentially. Understanding that there are some seasonal timing issues there, is there any other reason to think or that would explain why the reserves have billed that way relative to premium growth?

John Stelben

You're looking at it in aggregated view. We don't quite look at it that way, but I would just say it's timing.

Joshua Kaplan-Marans

And then related to that, competitors have obviously been reporting favorable reserve development and you're now talking about 2010 trends in the low 6s versus 6% to 7% on the last earnings call. Are you seeing reserve development come in higher than expected as a result of that?

John Stelben

What I would tell you is that our reserving process has consistently produced favorable development for a long period of time. Q1 was no exception to that. But every quarter you're getting development and you're re-establishing your reserve redundancy. And so prior period did not have an outsized impact on the quarter. But we don't disclose specific levels by line of business, and you'll have a view of what reserve development is when we report Q2.

Joshua Kaplan-Marans

And then one last one, on SG&A, you spoke about the benefits from SG&A leverage in the quarter and how that flowed through to your guidance raise. But it doesn't seem like you're really rolling through the benefits of that SG&A upside for the rest of the year. Is there any reason for that? Are there any additional expenses in the second half of the year or one-time benefits in the first quarter?

Allen Wise

Yes, we're investing in future. As John or one of us have said, we're investing the money in STAR, we're investing money in HEDIS, we're investing money in a new management system for a replacement management system in technology. So we'll keep SG&A flat here, but we're making investments in the future.

John Stelben

And there's certainly some seasonality to G&A. Q4 typically has a much higher level of G&A spending. You're doing open enrollment, marketing and things like that.

Operator

Our final question for today will come from Peter Costa, Wells Fargo Securities.

Peter Costa - Wells Fargo Securities, LLC

Just back on that question about utilization. With utilization down better than expected in the quarter, and yet none of your guidance for the year increase really accounted for lower utilization, it was all other items. Would you argue that the lower utilization was countered by the higher rebate bookings in the quarter than otherwise you would've had?

John Stelben

Yes, partially.

Allen Wise

That sounds correct.

Peter Costa - Wells Fargo Securities, LLC

Was there any other offset to it?

John Stelben

No. I think, Peter, it's the first quarter. And it's our first year under reform. We're being prudent about how we view our business for the year and how we're recording our expenses. Utilization year-over-year came in a little lower. I think that's, obviously, a positive for the business long term. But our view is it will go up. The timing on how quickly that happens, that's the difficult part of this for both of us. But our view is it's going to go up.

Peter Costa - Wells Fargo Securities, LLC

So then if utilization stayed at this level, or even trended lower, we wouldn't see any incremental upside to your earnings. Is that correct or is that not correct?

John Stelben

You might see some upside. I mean, some of it will just be reflected in the loss ratio and minimum MLR for those areas, won't change you'll have better base experience but a higher rebate. Potentially, there's some upside in where you're above the minimum MLR.

Allen Wise

Well, it's common sense. If it continues to slow down, it's going to help our Medicare, it's going to help our Medicaid business, and it's going to help some of our Commercial markets. If where we're above 80% a bit so -- if it continues, that's the good news that's driven our sector here for the last 5 or 6 quarters and it will be positive. But I think it defies common sense to say that it's going to continue to go to 0. It's not. But when that flattens out or something, is an unknown. But if it does, that'll be a very nice development and will help the year. Thank you so much. Appreciate your interest on our company.

Operator

That does conclude today's conference. Thank you all for your participation.

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