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Coventry Health Care Inc. reported fourth-quarter 2012 operating earnings per share of 88 cents, which surpassed the Zacks Consensus Estimate of 67 cents as well as the prior-year earnings of 60 cents. Coventry reported net income of $119.3 million compared with $85.7 million in the prior-year quarter.

Operating revenues in the reported quarter increased 10% year over year to $3.4 billion, lagging the Zacks Consensus Estimate of $3.51 billion. Managed care premiums increased 11% year over year to $3.17 billion, while revenues from management services declined 1% to $284 million.

Coventry’s total operating expenses expanded 9.6% year over year to $3.27 billion. Additionally, medical costs, the major component of operating expenses, increased to $2.61 billion from $2.33 billion in the prior-year quarter.

Likewise, Coventry’s selling, general and administrative (SG&A) expenses increased to $551.8 million from $539.7 million recorded a year ago, while depreciation and amortization (D&A) expenses increased to $36.5 million from $34.7 million in the year-ago quarter. However, cost of sales declined to $65.4 million from $73.9 million in the fourth quarter of 2011.

Total membership witnessed a decline of 12,000 from the third quarter of 2012 to 5,362,000 in the reported quarter.

Commercial Risk: The Commercial Risk membership for the reported quarter was 1,474,000, down 15,000 members from the prior quarter. Commercial Risk Medical Loss Ratio (MLR) in the reported quarter came in at 82.2%.

Medicare Advantage Coordinated Care Plans (MA-CCP): Coventry reported MA-CCP membership of 259,000, showing an increase of 37,000 members from the fourth quarter of 2011. The MA-CCP MLR came in at 83.9%.

Medicare Part D: Medicare Part D membership stood at 1,578,000 at the end of the reported quarter, up 435,000 members from the prior-year quarter. The Medicare Part D MLR in the quarter came in at 70.7%.

Medicaid: The Medicaid membership at the end of the reported quarter stood at 974,000, up 282,000 members over the fourth quarter of 2011. The Medicaid MLR in the quarter came in at 90.4%.

Full-Year 2012 Highlights

For full-year 2012, Coventry reported operating income of $3.52 per share against $3.67 in 2011. Earnings per share surpassed the Zacks Consensus Estimate of $2.80. Reported net income came in at $487.1 million against $543.1 million in 2011.

Coventry’s operating revenue amounted to $14.11 billion in 2012, showing a year-over-year increase from $12.19 billion, while staying in line with the Zacks Consensus Estimate. Additionally, total expenses increased to $13.35 billion from $11.32 billion.

Balance Sheet and Capital Structure

Coventry ended the reported quarter with approximately $1.40 billion in cash and cash equivalents, down from $1.58 billion at the end of 2011. Deployable cash at the parent company stood at $950 million at the end of 2012. Operating cash flow totaled $249.4 million in the reported quarter and $470.6 million in 2012.

As of Dec 31, 2012, Coventry had total assets of $8.75 billion and shareholders’ equity of $4.72 billion. The company exited 2012 with $1.59 billion in long-term debt, inching up from $1.58 billion at 2011 end.

Share Repurchase Update

Coventry spent $328 million to repurchase 9.9 million shares during 2012.

Dividend Update

On Jan 7, 2013, Coventry paid a quarterly cash dividend of 12.5 cents per share to shareholders of record as of Dec 21, 2012.

Results at Other HMOs

Another health maintenance organization (HMO), WellPoint Inc. (WLP - Analyst Report) reported fourth-quarter 2012 adjusted income of $1.03 per share, beating the Zacks Consensus Estimate of 95 cents. Adjusted income also surpassed the year-ago earnings of 99 cents per share by 4%.

UnitedHealth Group Inc. (UNH - Analyst Report) reported fourth-quarter 2012 earnings of $1.20 per share, in line with the Zacks Consensus Estimate. Earnings, however, increased 2.6% on a year-over-year basis.

Zacks Rank

Coventry carries a Zacks Rank #4 (Sell). Another HMO, Health Net Inc. (HNT - Analyst Report), carrying a Zacks Rank #2 (Buy), is worth considering.

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