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
Coventry Health Care (CVH) Q2 2011 Earnings Call July 29, 2011 8:30 AM ET
Operator
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 weighed 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.
On the subject of M&A, we continue to actively seek opportunities in businesses that we understand at the right price. And finally, these businesses must be ones that we can grow and improve. As we've often said in the past, these opportunities present themselves at unpredictable times, timeframes. And we do not have anything specific to report on that front today.
On the topic of growth opportunities, some of you may recall that in our Q1 2009 conference call, which is my first since returning to the company as CEO, I told you that we were going to focus on Medicaid growth. And reading from that text, I said that we had been in this business for over 15 years. It's a business that we understand and one that's treated as well in the past. That time, I told you our problem is that we have not been successful in winning enough new significant contracts in this area for far too many years. One necessary decision was at that time, therefore, to put substantially more resources and effort into winning this business as a part of the everyday process in the company with the resources, effort, commitment, long-term focus to be competitive with specialty companies and other competitors. Our Medicaid business is an important part of a diversified portfolio, where we can bring our total tools, resources and capabilities to provide an attractive value proposition value for states seeking to better manage their Medicaid cost programs while improving managed care for Medicaid eligibles. While I don't usually talk about the 2-year-old comments but it's important for our management group to do what we tell you we're going to do. And since we made that commitment, we have several substantial accomplishments. First, you may recall that we're one of 2 winners in the Nebraska RFP, which commenced in August of 2010. We qualified for and entered Southeastern Pennsylvania in 2010. And just this week, we were notified that we qualified to enter Southwestern Pennsylvania in 2012. Now in July 7, the Commonwealth of Kentucky announced the award for Coventry to provide services for the Commonwealth Medicaid program of 7 of 8 regions. We're very pleased with the efforts of our Medicaid team lead by Ken Burdick, as well as the hundreds of company employees involved in all aspects of pursuing the opportunity to serve the Commonwealth of Kentucky. Our team, which has been at it for a while, is still hard at work in preparing for the inception of the Kentucky contract in the fourth quarter, ending the fulfillment readiness requirements.
Well, what about our remaining 6 businesses, they're all performing well at expectation and consistent with our remarks in our Q1 call. I just have a few comments. On the subject of Part D, we didn't do well in January 2011 on the enrollment front. As a result, we quickly turned our attention to revising the enrollment results. In June, we submitted bids subject to CMS approval with an eye toward returning the growth in 2012. As of June 30, 2011, our commercial membership in the M&A -- in the commercial business of 1,648,000 members was 124,000 over the prior year's quarter and an increase of 12,000 members sequentially, with a year-to-date loss ratio of 80.7%. Our Medicare Advantage Membership of 219,000 was an increase of 27,000 members at a year-to-date loss ratio of 83.6%.
All of our products demand somewhere low cost and high value characteristics. Result will continue to work on high-performance networks. High-performance networks to us means low quality, high cost -- high-quality, pardon me, low cost, high quality. And to date, we have 12 signed contracts with ongoing efforts to enter into additional agreements. And it is a question of how many new members choose this products. So stay tuned, and as we're interesting to see where we are a year from now. As we pursue these high-performance networks, we're optimistic that it presents significant new opportunities for us.
A few comments about our succession plan. As some of you may remember about 6 months ago, I announced my commitment to remain as the Chief Executive Officer for an additional year through 2012. Our Board of Directors will be discussing future succession leadership plans next month at our August meeting beyond the year 2012. And I would expect to comment on our future plans at our next earnings call in late October. Whatever the decision is about an additional 1-year extension for my role as CEO through 2013, our company is in good hands, as we've added several very senior and very capable executives to our senior staff in the last year, all to complement are long-term experience and committed, capable managers.
Randy Giles, our CFO, will walk you through the details of the quarter. And I do want to close with my view, once again, the 7 core businesses continue to improve, are solid and performing well. This is evident if you look at certain metrics in our press release such as the loss ratio of our risk business, a sequential commercial risk enrollment. Also, the strength and stability of our fee-based businesses provide diversification of revenue, earnings and free cash.
So in summary, we have a diversified set of 7 core businesses, providing an extra foundation upon which to capitalize on growth across the managed care spectrum in both risk and fee businesses and the necessary strong balance sheet to provide the flexibility to pursue new opportunities.
Now Randy is going to walk you through the financials. And one more comment in our Q&A sessions, I usually address a lot of the questions about our commercial business and local market situations. Today, we have Mike Bahr with us who has managed this $5.5 billion block of business for the last 2 years, turned this business around from disappointing results on a membership basis in 2009. I'll let Mike answer some of those questions directly today as well. Randy?
Randy Giles
Thank you, Allen. Before I go through the detail of our results and full year outlook for each of our key businesses, I want to first start at the consolidated level. Our GAAP EPS for the quarter was $1.51, which includes 2 items I'd like to highlight: First, during the same quarter, we generated $0.03 of earnings related to the runout of the Medicare Advantage Private Fee-for-Service business. Second, as Allen mentioned earlier, we have essentially concluded the Louisiana provider litigation matter, which resulted in a favorable adjustment earnings of $0.68 in the quarter. Therefore, EPS for the quarter, adjusted for the favorable settlement, was $0.83 per diluted share. I'm pleased with this result, and I'm even more pleased to be able to increase our full year guidance excluding the favorable settlement adjustment to a range of $2.80 to $2.95, an increase of 5% at the midpoint from our prior guidance. Each of our businesses continued to perform at or above our expectations. As I will go into more detail later in my remarks, our balance sheet is very well positioned to exceed growth opportunities for the future.
But first, let me give you a little more color on the performance across our key businesses. Our Commercial Risk business, the positive membership story that we told you during the first quarter has continued with second quarter membership, up 12,000 members sequentially. On a year-over-year basis, we have grown 3% organically and 8%, if you include the impact of last year's Mercy acquisition. We are seeing positive results across a number of our geographies, with growth in both the group and individual businesses. An important topic of commercial MLR for our group business, we reported 81.1% for the second quarter for a year-to-date result of 80.7%, which keeps us right on track for our full year guidance of 81%, plus or minus 50 basis points. Our full year view of individuals also unchanged at 76% plus or minus 100 basis points with the results for the first half of 2011 is consistent with this full year expectation. We're still not assuming any benefit from the multiple states that have minimum MLR waiver requests pending with HHS.
Now let me provide you with some details on the impact of Healthcare reform and our results and expectations, and then some commentary on what we're seeing in medical trend. Starting with Healthcare reform, let me first remind you of the composition of our Commercial Risk revenues. For 2011, we expect total Commercial Risk revenues of a little more than $5.9 billion. Of that total, the individual business is expected to generate approximately $350 million in revenue, but the vast majority of this business being in a rebate position as expected. The remaining $5.6 billion group risk revenues are split roughly 40% small group and 60% large group, with a little less than half for our small group business not in a rebate position And a little more than 3/4 of our large group business not in a rebate position. I want to talk a little bit more about how we're approaching the rebate calculation before leaving this topic. As we told you previously, these projections include our estimates of rate actions, medical trend, SG&A and the non-GAAP adjustments included in the MLR calculation methodology. We are looking at numerous strategies to utilize these estimated rebates to grow to benefit our members and improve our cost structure. In addition, there are still some areas in this calculation which are open to interpretation. And in those instances, we are taking a prudent view of those potential outcomes or in other words, assuming outcomes that would increase the rebate payable.
Moving on to trend. Our view of fundamental prospective trend remains unchanged in the range of 8% plus or minus 25 basis points, almost entirely driven by unit cost trend. As we look in the rearview mirror, we continue to see a stable level of unit cost trend which, on an absolute basis, is the single most important driver of medical costs. Even though unit cost trends appear stable, they are too high on an absolute basis. We'll work on unit cost containment every market, every day. On utilization, we're beginning to see levels that are less negative than they were in the comparable prior year period. So while certain statistics remain in negative territory, it appears that utilization trends, in aggregate, has come off the lows, seen in the second half of 2010. But on an absolute basis, utilization trend continues near historical lows. For instance, days per thousand on an absolute basis are down from the second quarter of 2010 and certainly are below our assumed forward view. As we have said for a number of quarters, we have not, and still do not, expect the unusually low levels of utilization trend to continue forever. And therefore, our forecast guidance, and most importantly, pricing posture assumes higher trends prospectively similar to the last few quarters.
Moving on to the Medicare businesses, where we serve Medicare Advantage numbers in 19 markets and Medicare Part D members nationally. The result for the second quarter were favorable as membership levels have remained consistent with the first quarter and the respective MLRs of 82.9% for Medicare Advantage and 88.8% for Medicare Part D were both strong. As you can see in our Medicare Advantage yield for the same quarter, our results included reconciliation payments from CMS that we typically receive around midyear. On a full year basis, our expectation for the Medicare Advantage MLR remains in the mid-80s. And our Part D expectation continues to be roughly consistent with the prior year.
Our Medicaid results in the quarter were also a story of consistency as both membership and medical loss ratio were in line with our expectations. One of the big news items in the quarter was a contract award with the Commonwealth of Kentucky where we expect to commence operations later this year. We not only view this as an opportunity to serve the Commonwealth of Kentucky and its Medicaid recipients, we also view it as a meaningful entry into a new contiguous state with our first product being Medicaid.
As a quick recap, we were awarded a multiyear contract for 7 of the 8 Kentucky regions, with up to approximately 540,000 potential members split among 3 Medicaid organizations including Coventry. We will be providing comprehensive benefits including health care, behavioral health, pharmaceutical benefits as well as dental and vision care.
And just to build on Allen's comments, I was impressed regarding how the organization pull together our coordinated effort to drive the successful outcome. Our work is far from over leading up to our contract start date for our ninth Medicaid State, I already have a great deal of comfort that we have the right people and the right processes in place to support this growth initiative. And so far, we are on track for the necessary preparations in the advance of the contract inception.
In terms of our 2011 guidance detail, we have not included any projected operating results for the Kentucky contract in our 2011 guidance. Once the contract commences, we'll have better visibility on membership levels, resulting revenue and any impact on the fourth quarter of 2011. We have, however, included in expectations for pre-contract start-up costs, which we were able to absorb without changing our overall SG&A guidance range, given other efficiencies that we have driven throughout our existing businesses.
Our 3 base businesses were consistent with our expectations for the quarter, you will notice that we have increased our fee revenue guidance slightly for the second consecutive quarter, driven by our Workers' Compensation Services business. We continue to be pleased with this ability of these businesses and the very valuable nonregulated earnings that they produce for the company. Now let me give you some more detail around the balance sheet and cash flows.
Total cash and investments at quarter end were $4.4 billion. Our investment portfolio remains in excellent shape and is in a net unrealized gain position of $78 million as of June 30. More importantly, our deployable cash at hand now stands at $1.3 billion, which means that by mid-year, we will essentially achieve the full year target that we have laid out for you in our most recent investor presentation in June. At this point, we have collected all of our requested 2011-regulated dividends with more than 95% of that or $466 million collected during the month of June. Our 2011 dividends are great part of our cash story, as we were able to collect 50% more this year than we did in the prior year from our regulated subsidiaries. While there could be a little more growth in this balance during the remainder of the year, our focus is much more on our deployment opportunities. To that end, as Allen mentioned, we deployed $50 million during the second quarter towards share repurchase, which brings us to a total buyback deployment of $100 million year-to-date. Certainly, our busy looking for prudent acquisition is a top priority. But we will deploy capital share buyback as a secondary option as we have done in each of the past 2 quarters.
Moving on to our cash flow results. GAAP cash flow from operations for the quarter was $157.9 million. This was, of course, impacted by the litigation settlement. So after adjusting earnings for the litigation to items, our cash flow percentage of net income was a more typical 128%. On a year-to-date basis, adjusting both cash flow and earnings for the litigation items, results in $337 million of adjusted cash flows from operating activities while 144% of year-to-date net income.
The debt-to-cap ratio now stands at 28.8%, which is well within our typical leverage levels. And I was very pleased with our progress in extending the maturities of our debt portfolio at attractive rates during the quarter. During June, we issued $600 million 10-year senior notes at 5.45% coupon rate, entered into a new 5-year $750 million credit facility later in the same month. I'm pleased to essentially have the refinancing of the 2012 maturities behind us, especially in light of current and potential further market volatility while simultaneously executing on a robust Health Plan subsidiary dividends process to build free cash all in the month of June. Let me now move on to our 2011 guidance.
As detailed in our press release, we're increasing our 2011 GAAP EPS guidance to a range of $3.48 to $3.63 and prior guidance of $2.65 to $2.85. This new range includes a $0.68 adjustment earnings related to the Louisiana provider class-action litigation which was not in the prior quarter's guidance. So the comparable adjusted EPS guidance range would be $2.80, $2.95, which, as I noted earlier, is an increase of 5% at the midpoint.
Let me now walk you through some of the major pieces that drive this increase. For the same quarter in a row, we're pleased to increase our revenue guidance as one of the drivers was the Commercial Risk membership that I highlighted earlier, which continues to be a positive growth story for both our group and individual business. The Medical Loss Ratio, as I described, while walking through the lines of business, our view this quarter really isn't different than our view when we updated you in April. We continue to build into our forecast an expectation arising utilization for the second half of the year. We also hope to have some more clarity on certain Healthcare reform topics, which is the status of pending individual waivers by our next earnings call. SG&A for the second quarter in a row, we were able to maintain our guidance range while growing revenue. This leverage was the largest driver of our increased EPS guidance. Just to put this into context, our current revenue expectations are a little more than $200 million higher than our original 2011 revenue range without any projected increase to SG&A spent. Current SG&A guidance, as a percentage of revenue, is 16.9%, a 30 basis improvement from our original 2011 guidance and consistent with a strong results from 2010.
But just to recap, the drivers of our guidance increase. Growth in revenue while driving SG&A leverage contributed $0.05. Private Fee-For-Service run out during Q2 contributed $0.03, an improved view of other income was worth $0.02, with the remainder driven by a strong Q2 Medicare Advantage MLR as well as other minor puts and takes.
So in conclusion, after my first quarter as a CFO, I'm very pleased with the operational financial results across our core businesses and improved overall guidance for the year. I'm excited about the potential growth opportunities that our well-positioned balance sheet presents. And I can assure you that choosing the right deployment avenues for our shareholders is something that I work on every day. Our portfolio businesses continues to provide nice diversification between risk and fee-based products, which should provide us the opportunity for earnings stability, as we adopt to healthcare reform changes, and our Health Plan footprint across 26 states to provide us geographical regulatory product and customer diversification on one hand, but also a sizable penetration and expansion opportunity on the other. We are continuing our goal of being a low-cost operator in all of our existing and some new markets. And as you have heard from us many times before, we are focused on growing our revenues across all of our core businesses, both organically and through the right acquisition opportunities. Commentary to our size and positioning has the ability to move the needle via growth opportunities both organic and acquisition. And we certainly have the wherewithal and drive to pursue both. Furthermore, our diversification across 7 core businesses expanding commercial, Medicaid, Medicare and multiple fee-based businesses gives us wide playing field to deploying resources and capital to cease opportunities. While the recent new business win with Kentucky Medicaid provides great momentum, do not think that we are by any means satisfied.
Operator, this now concludes our prepared remarks and we're ready to open the line for questions.
Drew Asher
Operator, we're ready for questions.
Question-and-Answer Session
Operator
[Operator Instructions] We'll take our first question from Charles Boorady from Crédit Suisse.
Charles Boorady - Crédit Suisse AG
Your comments on medical cost trend were generally encouraging. But can you comment by end market Medicare, Medicaid and commercial leasing similar trends in all 3?
Randy Giles
In general, we are seeing trends in all 3 that are similar and so the comments I made earlier really are consistent across all 3 segments.
Charles Boorady - Crédit Suisse AG
And in terms of it sounds like things have bottomed out, ticked up little bit but remained well below historic growth rates. Are there specific components that are starting to tick up more than others such as emergency room, inpatient, outpatient, maternity or any other granularity you can give us?
Randy Giles
In terms of what we're seeing in -- I'll give you some statistics around inpatient utilization. Inpatient utilization is year-over-year negative, it's just less negative than in the prior year on a percentage basis.
Charles Boorady - Crédit Suisse AG
And then just switching gears to the Kentucky win, one of the company's that did not win in Kentucky just commented this morning on their earnings call that they said, they could not get comfortable with the rates. And I'm wondering if you can comment on that, how you might be able to get comfortable with the rates when somebody else couldn't? And if there is something about your cost structure that would allow you to operate more profitably or do you think you might have just targeted lower margin in them?
Allen Wise
We don't have any idea what thought process or what medical management resources or why another company would reach that conclusion. We reached it independently. We started off, Charles, by thinking that in the Medicaid arena, where historically, there's been some states where there were very good margins and some tighter states. Our view of the future, and this is consistent with the last few years, that you're going to have to do a much better job taking care of the patients and controlling your SG&A costs and be bigger rather than smaller. And that revenues are going to be everywhere in the future. And we not only used our internal resources, but went to external consulting actuarial people. And immediately, before the first patient shows up, we've put a very heavy resources on the patient management side. You'll never know till you know, but we are very pleased with the win and comfortable with what our position is. If you would go back to the history of our company, for almost a decade and a half now. We did this the way we do things and felt the opportunity outweigh the risk just as we did in Nebraska.
Charles Boorady - Crédit Suisse AG
And then in Louisiana, just finally, were you disappointed to not win there? And is there anything you could do to appeal, do you know why you didn't win?
Allen Wise
Well, it's interesting. A lot of people answer that question. I couldn't answer it the first time I'm thinking about it for 10 seconds, but the answer is yes, we were disappointed but not necessarily surprised. That's the Medicaid business. We are evaluating the public information and trying to learn from our experience there. It's moving on to the future. We didn't see anything an initial review that would remotely conclude that it wasn't a fair RFP process and if there's any basis for an appeal and nor are we thinking along those lines. We're evaluating where we are weaker than the winners and we'll learn from than and move on.
Operator
We'll take our next question from Joshua Raskin from Barclays Capital.
Joshua Raskin - Barclays Capital
Two questions for you. First on state waivers, Randy, I think, you mentioned that your assumptions for the full year are not assuming any states actually received those waivers. We've got a double-digit number of states that have actually applied. Have you guys put any sort of pen to paper and try to figure out what the actual potential impact is? And then if the waivers are actually granted, I'm just curious, how would that come in through the income statement? Would you just take sort of a onetime true up at the end of the year or would you kind of do that as you found out about approvals, I'm just sort of curious around the accounting?
Randy Giles
As we look at the rebates and terms of the waiver process, we reflect, in our annual projection of what the rebate accrual needs to be. We reflect known waivers that have been approved. So as those approvals come in, we will begin to immediately factor that into our core view of the calculation. So as we think about, we have quantified by state what the rebates are. So we are aware of what the potential impacts are and turned the waiver process on the remaining states that are pending. So we do have visibility into that. Our rebate is really concentrated to have 113 rate sales. But our rebates are really concentrated within 15 of those sales. So it really comes down to what happens in those 15 rate sales. And that's what we're focusing on managing.
Joshua Raskin - Barclays Capital
Is it possible you could give us a hint as to which states are the most important to watch from a waiver perspective?
Randy Giles
The 2 states are the most important for us to watch are Florida and Georgia.
Joshua Raskin - Barclays Capital
Okay, that's very helpful. And just a second question, I know it's a little early and it's not the biggest part of your book but ASO, commercial ASO membership as we think about 2012, there's been a lot of commentary this earnings season around sort of movement in that market. I'm just curious what you're expectations are. Your fee revenue is holding up or slightly up this year. I think it's doing a little bit better than I was anticipating. It sounds like it's probably more workers comp than anything. But just curious what you're seeing on the commercial and national accounts, what you got left there?
Randy Giles
I mean, we don't have a lot of national account business. There are [indiscernible] so we're not really impacted and we're not seeing significant [indiscernible] at this point in time.
Operator
We'll take our next question from Ana Gupte from Sanford Bernstein.
Ana Gupte - Sanford C. Bernstein & Co., Inc.
My first question was around prior period development, both from 2010 and then first quarter of 2011. Have you included that in your -- is that included in the current earnings and can you give us any disclosure on what that might have been?
Allen Wise
Yes. First of all, we're certainly seeing favorable prior year restatement and adequate levels of reserves as we looked back to the end of 2010. As you know, it's our custom to provide a reserve development update in the second quarter 10-Q. So let me give you a preview of what you will see. Setting Private Fee-For-Service aside, you will see favorable prior year statement in the zone of $92 million, relating to the 2010 year end reserves for all of our new businesses. Now if you go and step further and compare this to the 6 months ending Q2 2010, you'll see that we are down from the $121 million reported in Q2 2010, 10-Q excluding Private Fee-for-Service. Our days claims payable at year end Q4 2010 was 48.62. Q1 was 50.4, Q2 was 50.48.
Ana Gupte - Sanford C. Bernstein & Co., Inc.
And can you give any disclosure on which segments that we're seeing in for the most part of the $92 million, which probably down year-over-year?
Randy Giles
It's largely in the commercial.
Ana Gupte - Sanford C. Bernstein & Co., Inc.
Okay. And then just -- again, to follow up on that, given that you had the prior period, even though that was down about $30 million, your pricing seems fairly steady quarter-over-quarter. But the MLR has trended up unfavorably. Is that largely because just of the underlying trend or seasonality or your going more for rebates net of the favorable development?
Randy Giles
Well, certainly, as I discussed in the script as it relates to the rebate calculation, we are taking a prudent posture in areas where there's some interpretation around the individual calculations. As you mentioned, we have $29 million less positive restatement from the prior year in the first half of this year as compared to last year. And so that's -- and we are, as I just talked about, we have increased our DCP in the first half of this year. So those will be the elements that are really impacting our MLR in the first half of the year. And other than that, I see us operating consistently over a longer time horizon in a commercial business.
Allen Wise
By definition, it's going to trend toward the low 80s because in yesterday's world, we had marketplaces that had very low medical loss ratios, and they got high 60s or low 70s. So planning for the new environment, pricing for the new environment have to be much more precise than they were in the past. I'm totally satisfied with actually doing better than I thought in fine-tuning the wide diversity that we've had in the past to something closer to the sweet spot. So I take comfort in where we are risen, any concern because I think we've done a good job of being more consistent and closer to the sweet spot on our pricing point that in the past.
Operator
We'll take our next question from Tom Carroll with Stifel, Nicolaus.
Thomas Carroll - Stifel, Nicolaus & Co., Inc.
I apologize I jumped in late here. I guess 2 quick questions. On your first quarter call, you guys highlighted some concern around your Part D
business as being a potential challenge this year. It looks like second quarter is much better. So I guess, have your profit assumptions on Part D improved from first quarter? And then secondly, Coventry just has a lot of cash. And I guess, if you would just remind us of your intent to use that where you expect to deploy it, if maybe those few items have changed. And then specifically, might investors see a dividend out of Coventry like some others in the sector?
Allen Wise
Going back to the Part D business, first quarter was the concern there was our disappointing membership results, was it not? As opposed to concern about where the financial result was going to be. That's interesting, I mentioned that we had foreign enrollment results and one of my senior management group asked why do you talk about the negative. The reason for that is that we have poor results and our investors and all of you need to know that we recognize that the results weren't good and we rolled up our sleeves, not unlike we did in Medicaid 2 years ago to get a better cost structure, to get a more attractive value proposition. We have a commitment in here to go back and grow that business. The financial results have always been pretty predictable and consistent and actually are trending a bit better this year than in the past. We like this business. And we have spent a lot of work and effort to come across with a more attractive value proposition for the members and so all we can say at this point, CMS is reviewing our products and applications. But we're hopeful that those will be approved, and we'll get back in the growth business on Part D. We've said about what we can about the balance sheet and the cash position, which is we have historically acquired a lot of businesses, and we're looking every day. And if we can't put a significant part of that balance sheet together for the right acquisition. Then, we're going to do share repurchases. we really feel like that the business is changing -- has changed a lot. By definition, all of our margins are diminishing. The world run out money, and that you need to be bigger, you need to be better to business. And we feel like that the consolidation process that's on and off over 15 years and our business occurs will continue. You want to keep -- to some large extent, our powder dry to take advantage of this. And we're absolutely convinced, although we can't predict the timeframe, that we'll find things, businesses that we know how to make better at an attractive price. So I don't rule out anything. I don't think thinking about any special dividend. We're thinking about growing the business.
Operator
We'll take our next question from Matt Borsch with Goldman Sachs.
Matthew Borsch - Goldman Sachs Group Inc.
I just wanted to ask you about the pricing environment and the context is earlier, you talked about pricing where you built up substantial MLR rebates, reducing price or reducing the rate of increase from what it might otherwise have been proactively. Are you seeing that from others in terms of your competition? How is that flowing through in terms of stability or instability in terms of the level of pricing discipline? Sorry, if I just ask one more for this, which is as we look forward, do you think this will lead to more stability in industry margins? Or will it just take out the potential for the high end of margin?
Allen Wise
I'm going to have Mike Bahr answer that question. Mike is in an underwriter and actuarial by training. He's been with our company for a long time, and he's been responsible for the progress in our commercial block in 2010 and 2011. And Mike has a better feel marketplace by marketplace than some of the rest of us. So it's a multifaceted question, Mike. That's why I'm passing it over to you.
Michael Bahr
A couple of things on that. A very significantly, obviously, by market. We were, in some of our markets, priced where we had a very aggressive medical loss ratio. And this reform has allowed us long term to price at a fixed target than many of our competitors are shooting at. For us, if we were below them on the medical loss ratio, we've actually picked up the pricing advantage relative to them. And that's been a plus for us. And second part of this in some markets, we have seen aggressive pricing. We believe that success comes from a disciplined pricing model, strong underwriting and aggressive cost structure. And we've got -- 2 of those 3 will hold as we move into the future. And we'll continue to work and refine those. So we have a few markets where sales are slow but in general, we're viewed and actually growing pretty well relative to our competitors and their pricing structure. The other piece to your question, we are pricing long term to hit that target medical loss ratio. And to do that, we feel like that's the sweet spot that most carriers are going to be shooting for.
Matthew Borsch - Goldman Sachs Group Inc.
And can give you make any generalization about where you are seeing aggressive pricing? Does it correlate more with the heavier capitalized not-for-profit competitors you face or is it -- can you not make that generalization?
Michael Bahr
It's probably not any different than it's been for 15 years. The places that are -- the ebbs and flows and the places that are tough and there's 100 pennies in $1 prices at -- So it ebbs and flows, Western Pennsylvania is just tough today. But I can remember 6 cycles where it's been tough out there. For another one, it's reasonable and laid out when it's not reasonable but I don't think there's any substantial change in how things ebb and flow in their 20 markets over a very long period of time.
Allen Wise
And to expound on that, we're in 26 states. And there's a few states where it's competitive but we're not seeing it across the board as a pattern.
Operator
We'll take our next question from Keven Fischbeck with Bank of America Merrill Lynch.
Kevin Fischbeck - BofA Merrill Lynch
I'm glad to hear that you guys are now focused on capital deployment because I guess that is kind of where I'm focused as well. I guess, to think about what the opportunity is going forward, I'd love to kind of take a step back and see if you could give us an update on the last 2 deals that you've done, how they are tracking and I think the margins there maybe even losses before you bought and leaving a big gap in opportunity there. I mean, how have those businesses trended? And where do you see the opportunity on them going forward?
Allen Wise
They're tracking very well in the preferred care in Kansas and the Wichita area is performing extraordinary well. We had received as part of the acquisition a very attractive cost structure. And we struggled in that market along with everyone else for a decade. The small group and mid-sized group results, and Mike, don't let misspeak, I mean, it's increased. The new business increased over 18 months, more than fivefold. And so we have largely acquired a block of large group business there, which remains with the exception of interest bank, which we lost the first of the year and see if we get it back or if we don't. But in terms of medical loss ratio, in terms of having gone to the direct marketing model basically in the area, and it's probably one of the best acquisitions I can ever remember. The Mercy acquisition in St. Louis because we had a large business there together is more broadly diversified than just a small group. It's going very well, too. When I came back to work, I promised my board when I asked them to raise their hands for acquisitions that we would do updates quarterly and what the shareholders are getting for their money. And we're doing that, tracking these, and I wish I had 2 more like them. And we're looking for 2 more like them.
Kevin Fischbeck - BofA Merrill Lynch
Okay. And so do you still feel like there's some opportunity there or are they kind of running where you think that they should be?
Allen Wise
It's no different than it always has been. You just can't predict. Yes, there's opportunity, and there are discussions. I think where the total regulatory scene is and the capital where the business is going, there are a number of people that are just in a no-decision mode now that we've talked to. And some of these will move to decision because the business is going to be more difficult. The IT costs and the regulatory costs and the challenges of low-cost competition in network is just going to make it difficult for most smaller players to succeed in those market places. And I think that's not inconsistent. It's always ebbed and flowed between where people bullish about the business and then had a wake-up call and the boards decide to move another direction. So I can't predict when, but I would be surprised, if we didn't have 2 more things of that size at the minimum in the next 18 months. The priority here we think about it and we're working on the big stuff, too. Just where not unlike we've done for most of our history here is that we're going to be careful about what we do. We'll find some things that we can make more valuable.
Kevin Fischbeck - BofA Merrill Lynch
And then just when you talk about the kind of your cash grade, you kind of reminded everyone that you have this $230 million or so of debt to be paid next year. But I guess, my question there would be do you really have to repay that because you need your capital, your leverage is already kind of below average, I guess. So why the focus on paying that debt down rather than just refinancing it?
Randy Giles
Well, I think at this point, our intent was to be prepared to repay it. And I think we are prepared to repay it. Obviously, we will reassess the environment and our opportunities at that point in time. But clearly, we are earmarking for that. In terms of our debt-to-cap ratio, it's really in line as you mention with our historical kind of averages. And we feel very comfortable there.
Kevin Fischbeck - BofA Merrill Lynch
Okay. And then last question, could you give some good color on that trend? Maybe I missed, did you give an actual number for your trend outlook for 2011?
Randy Giles
Yes, our future view of that is 8% plus or minus 25 basis points.
Kevin Fischbeck - BofA Merrill Lynch
So that's the future view versus for the full year? So that's similar to what you provided last quarter.
Randy Giles
Yes.
Operator
And we'll take our last question from Peter Costa with Wells Fargo Securities.
Peter Costa - Wells Fargo Securities, LLC
Can you talk about the Pittsburgh market for a minute? A lot of changes in that marketplace, and I know it's an important market to you guys. Do you see that all the changes going on with your competitors as opportunity or risk?
Allen Wise
Well, Health America is not just a Pittsburgh marketplace. It's a Commonwealth with PA . The thing about Pittsburgh is you're caught between Highmark and UPMC, you go through some difficult times. The area is growing well for us, Central PA is growing well. We're making progress in Southeastern. But Pittsburgh is tough but there's not much new there. Highmark has been there a long time and so is UPMC. Commonwealth PA, the blues, as you know, is the first, second, third competitors. And they did a good job and have been difficult. And we have always had very good margins, and it's been a very attractive franchise for us. As I'm living on the crumbs around the edges, that's what we do and careful underwriters in the small and mid-sized cases. Not much has changed there. But that's not exactly accurate. We went through a period of time there prior to 2009 where we actually lost a lot of market share there. Tim Nolan has came back in the company and had a leadership team there that has done a remarkably good job in building a foundation for us to be extraordinarily strong there. First time in memory, we just signed a new contract with UPMC. And they have hospitals and key geography that we just haven't had. We're not able to reach agreement until very recently. So we feel like our prospects even in the Western side of the state is likely to improve. These things are always about people. And Tim Nolan and his crew there have just done a remarkable turnaround in the last 18 to 24 months. So for all of our acknowledgment of the changes, the possible acquisition or heavy investment by Highmark in the West Penn system, a lot of changes going on there, but we really feel broadly, the recognition at Western PA is tougher. We really feel better, better prospects than we have in a long time.
Thank you so much for joining us today, and people will be available for additional questions here throughout the day.
Operator
Thank you. Ladies and gentlemen, this does conclude today's presentation. We appreciate your participation, and you may now disconnect.
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