Coventry Health Care Reports Record Third Quarter Earnings of $0.92 per Diluted Share

Coventry Health Care, Inc. (NYSE:CVH) today reported operating results for the quarter ended September 30, 2006. Operating revenues totaled $1.91 billion for the quarter with net earnings of $147.5 million, or $0.92 per diluted share. "We are right on track with another quarter of record earnings,” said Dale B. Wolf, chief executive officer of Coventry. "The strength and breadth of our businesses provide a solid foundation as we work on growth initiatives for 2007 and beyond.” Third Quarter Highlights Revenues up 14.0% over the prior year quarter Consolidated operating margin of 11.7% Medicare Part D membership of 687,000 Year-to-date GAAP cash flows from operations of $750.5 million or 186% of net income. For the quarter, cash flows from operations as adjusted for the timing of Medicare-related payments of 192%. To provide further detail regarding the timing of Medicare-related payments, a cash flow reconciliation to GAAP data is presented on page 8. Operating Highlights Health Plan Membership. As of September 30, 2006, Coventry had total health plan membership of 2.52 million members. This represented an increase of 11,000 members over the prior year quarter. Health Plan Insured Commercial Trends. Commercial premium yields showed a favorable price-to-cost spread in the third quarter. Reported commercial yields rose to $261.05 PMPM (per member per month) in the quarter, an increase of 5.4% over the prior year quarter. Reported commercial medical expense was $202.29 PMPM in the quarter, an increase of 5.0% over the prior year quarter. Health Plan Medical Loss Ratio (MLR). Health plan MLR was 78.9%, a 40 basis point improvement over the prior year quarter. Commercial MLR of 77.5% improved 30 basis points, Medicare MLR of 81.2% improved 70 basis points, and Medicaid MLR of 85.1% improved 40 basis points from the prior year quarter. Selling, General & Administrative (SG&A) Expenses. Consolidated SG&A expenses were 16.9% of operating revenues for the quarter, a decrease of 130 basis points from the prior year quarter. Stand-Alone Medicare Part D(1). Medicare Part D contributed $0.07 of GAAP EPS per diluted share for the third quarter. As of September 30, 2006, Coventry had Part D membership of 687,000 members. Total Part D revenue for the quarter was $149.0 million, including a reduction to revenue of ($41.0) million for CMS risk-sharing adjustments and ($20.9) million for revenue ceded to insurance company distribution partners. Premium yield, excluding the effect of CMS risk-sharing adjustments and ceded revenue, was $101.87 PMPM for the quarter. The Part D MLR was 76.7% for the quarter. Balance Sheet. Health plan net accounts receivable of $96.9 million represent 5.7 days of sales outstanding (DSO). Health plan days in claims payable (DCP) for the quarter were 56.0, up 2.2 days from the prior quarter of 53.8 and consistent with the prior year quarter. (1) Represents the Medicare Part D Prescription Drug Plan and excludes the health plan Medicare Advantage business. Consolidated Guidance Details Q4 2006 Guidance Total revenues of $1.92 billion to $1.96 billion Earnings per share (EPS) on a diluted basis of $0.96 to $0.97 2007 Full Year Guidance Risk revenues of $7.80 billion to $8.15 billion Management services revenues of $860.0 million to $880.0 million Consolidated revenues of $8.66 billion to $9.03 billion Consolidated medical loss ratio (MLR%) of 79.6% to 80.0% Consolidated selling, general, and administrative expenses (SG&A) of $1.41 billion to $1.44 billion Depreciation and amortization expense of $118.0 million to $124.0 million Investment income of $100.0 million to $120.0 million Interest expense of $50.0 million to $53.0 million Tax rate of 38.0% to 38.4% Diluted share count of 154.0 million to 162.0 million shares Earnings per share (EPS) on a diluted basis of $3.82 to $3.95 Mr. Wolf will host a conference call at 8:30 a.m. ET on Friday, October 27, 2006. To listen to the call, dial toll-free at (877) 502-9273 or, for international callers, (913) 981-5582. Callers will be asked to identify themselves and their affiliations. The conference call will also be broadcast from Coventry’s Investor Relations website at www.cvty.com. Coventry asks participants on both the call and webcast to review and be familiar with its filings with the Securities and Exchange Commission (SEC). A replay of the call will be available for one week at (888) 203-1112 or, for international callers, (719) 457-0820. The access code is 9103449. This press release contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are defined as statements that are not historical facts and include those statements relating to future events or future financial performance. Actual performance may be significantly impacted by certain risks and uncertainties, including those described in Coventry’s Annual Report on Form 10-K for the year ended December 31, 2005 and Coventry’s Form 10-Q for the quarter ended June 30, 2006. Coventry undertakes an obligation to update or revise any forward-looking statements. Coventry Health Care is a national managed health care company based in Bethesda, Maryland operating health plans, insurance companies, network rental/managed care and workers’ compensation services companies. Coventry provides a full range of risk and fee-based managed care products and services, including HMO, PPO, POS, Medicare Advantage, Medicare Prescription Drug Plans, Medicaid, Workers’ Compensation services and Network Rental to a broad cross section of individuals, employer and government-funded groups, government agencies, and other insurance carriers and administrators in all 50 states as well as the District of Columbia and Puerto Rico. More information is available on the Internet at www.cvty.com.   COVENTRY HEALTH CARE, INC. HEALTH PLAN MEMBERSHIP (Amounts in thousands)     September 30, June 30, September 30, 2006  2006  2005      Health Plan Membership By Market Delaware 145  145  103  Georgia 96  88  72  Illinois 103  101  91  Iowa 63  69  66  Kansas 222  217  212  Louisiana 55  55  76  Michigan 58  59  62  Nebraska 63  64  48  North Carolina 114  125  131  Pennsylvania 690  706  736  St. Louis 434  445  447  Utah 220  214  207  Virginia 178  177  174  West Virginia 77  78  82  Total Health Plans 2,518  2,543  2,507      Membership By Product:   Fully-Insured Commercial 1,451  1,473  1,454  Medicare Advantage 79  80  74  Medicaid 373  379    397  Total Fully Insured 1,903  1,932  1,925    Administrative Services Only 615  611  582            Total Health Plan Membership 2,518  2,543    2,507  Stand-Alone Medicare Part D Membership 687  663  -    COVENTRY HEALTH CARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data) (unaudited)     Quarters Ended Nine Months Ended September 30, September 30, 2006  2005  2006  2005    Operating revenues: Managed care premiums $ 1,695,952  $ 1,434,394  $ 5,133,411  $ 4,246,314  Management services   213,184    239,795    659,351    646,032  Total operating revenues   1,909,136    1,674,189    5,792,762    4,892,346    Operating expenses: Medical costs 1,333,846  1,136,751  4,111,296  3,384,582  Selling, general, administrative 322,649  304,746  984,167  851,368  Depreciation and amortization   28,360    22,669    83,710    60,442  Total operating expenses   1,684,855    1,464,166    5,179,173    4,296,392    Operating earnings 224,281  210,023  613,589  595,954  Operating earnings percentage of total revenues 11.7% 12.5% 10.6% 12.2%   Interest expense 13,156  13,088  39,321  45,669  Other income, net   27,576    15,121    74,652    47,662    Earnings before income taxes 238,701  212,056  648,920  597,947    Provision for income taxes   91,184    78,991    244,969    222,735  Net earnings $ 147,517  $ 133,065  $ 403,951  $ 375,212      Net earnings per share, basic $ 0.93  $ 0.83  $ 2.54  $ 2.39  Net earnings per share, diluted $ 0.92  $ 0.81  $ 2.50  $ 2.33    Weighted average shares outstanding, basic 157,891  160,373  158,760  157,009  Weighted average shares outstanding, diluted 160,436  163,887  161,699  160,750    COVENTRY HEALTH CARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands)     September 30, June 30, December 31, 2006  2006  2005  (unaudited) (unaudited) Assets:   Current assets: Cash and cash equivalents $ 1,215,475  $ 904,004  $ 391,646  Short-term investments 192,105  399,142  545,615  Accounts receivable, net 201,251  200,029  228,028  Other receivables, net 161,459  179,665  76,462  Deferred income taxes 52,152  53,283  57,666  Other current assets   18,696    23,308    26,285  Total current assets 1,841,138  1,759,431  1,325,702    Long-term investments 1,107,668  1,094,703  1,125,632  Property and equipment, net 310,716  325,799  351,427  Goodwill 1,628,784  1,628,784  1,612,390  Other intangible assets, net 397,471  406,237  419,352  Other long-term assets   73,144    69,789    60,669  Total assets $ 5,358,921  $ 5,284,743  $ 4,895,172        Liabilities and Stockholders’ Equity   Current liabilities: Medical liabilities $ 1,071,525  $ 1,050,349  $ 752,774  Accounts payable and accrued liabilities 342,890  374,530  442,785  Deferred revenue 83,610  206,738  64,668  Current portion of long-term debt   10,000    10,000    10,000  Total current liabilities 1,508,025  1,641,617  1,270,227    Long-term debt 750,500  750,500  760,500  Other long-term liabilities   324,888    302,773    309,742  Total liabilities   2,583,413    2,694,890    2,340,469    Stockholders’ equity 2,775,508  2,589,853  2,554,703          Total liabilities and stockholders’ equity $ 5,358,921  $ 5,284,743  $ 4,895,172    COVENTRY HEALTH CARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (unaudited)     Quarter Ended Nine Months Ended September 30, 2006 September 30, 2006   Cash flows from operating activities: Net earnings $ 147,517  $ 403,951  Adjustments to earnings: Depreciation and amortization 28,360  83,710  Amortization of stock compensation 14,848  40,731  Amortization of deferred financing costs 433  1,297  Changes in assets and liabilities: Accounts receivable, net (1,310) 29,093  Medical liabilities 21,176  318,751  Accounts payable and other accrued liabilities (24,898) (64,526) Deferred revenue (123,128) 18,942  Other operating activities   26,108    (81,424) Net cash flows from operating activities   89,106    750,525    Cash flows from investing activities: Capital expenditures, net (7,558) (47,678) Payments for investments, net of sales and maturities 219,367  390,418  Payments for acquisitions, net of cash acquired   (3,198)   (34,872) Net cash flows from investing activities   208,611    307,868    Cash flows from financing activities: Proceeds from issuance of stock 8,350  22,201  Payments for repurchase of stock (62) (268,696) Excess tax benefit from stock compensation 5,466  21,931  Payments for retirement of debt   -    (10,000) Net cash flows from financing activities   13,754    (234,564)   Net change in cash and cash equivalents for current period 311,471  823,829  Cash and cash equivalents at beginning of period   904,004    391,646  Cash and cash equivalents at end of period $ 1,215,475  $ 1,215,475                Cash and Investments: Cash and cash equivalents $ 1,215,475  $ 1,215,475  Short-term investments 192,105  192,105  Long-term investments   1,107,668    1,107,668  Total cash and investments $ 2,515,248  $ 2,515,248    COVENTRY HEALTH CARE, INC. RECONCILIATION OF OPERATING CASH FLOWS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 (Amounts in thousands, unaudited)     Stand-Alone Medicare Part D   All Other Operations   Consolidated As Reported GAAP net cash flows from operating activities ($24,749) $113,855  $89,106  GAAP cash flows as a percentage of net earnings N/A  84% 60%   Add: July CMS premium payment received in Q2 $54,338  $62,779  $117,117  July reinsurance payment received in Q2 $35,792  $4,503  $40,295  July low-income subsidy payment received in Q2 $35,198    $851    $36,049    Adjusted operating cash flows $100,579(1)   $181,988    $282,567    Net earnings $11,618  $135,899  $147,517    Adjusted operating cash flows as a percentage of net earnings   866%   134%   192%   (1) Stand-alone Medicare Part D adjusted operating cash flows include $58.7 million in reinsurance payments received for July through September, net of claims paid subject to reinsurance.   COVENTRY HEALTH CARE, INC. RECONCILIATION OF OPERATING CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 (Amounts in thousands, unaudited)     Stand-Alone Medicare Part D   All Other Operations   Consolidated As Reported GAAP net cash flows from operating activities $232,007(1) $518,518  $750,525    Net earnings $74  $403,877  $403,951    GAAP operating cash flows as a percentage of net earnings   Not Meaningful   128%   186%   (1) Stand-alone Medicare Part D adjusted operating cash flows include $208.1 million in reinsurance payments received for January through September, net of claims paid subject to reinsurance.   COVENTRY HEALTH CARE, INC. SELECTED OPERATING STATISTICS HEALTH PLAN & MEDICARE PART D (Unaudited)     HEALTH PLANS Q3 2006   Q2 2006   Q1 2006   Total 2005   Q4 2005   Q3 2005   Total 2004   Revenue PMPM Commercial $ 261.05  $ 258.43  $ 255.96  $ 246.46  $ 251.80  $ 247.60  $ 226.59  Medicare $ 855.05  $ 854.85  $ 836.00  $ 765.58  $ 766.90  $ 761.90  $ 695.96  Medicaid $ 170.90  $ 165.53  $ 163.16  $ 157.52  $ 159.14  $ 157.10  $ 145.23  Management Fees $ 16.52  $ 16.88  $ 16.72  $ 17.60  $ 15.66  $ 18.52  $ 17.10    Medical PMPM Commercial $ 202.29  $ 199.43  $ 201.83  $ 193.37  $ 194.87  $ 192.64  $ 179.21  Medicare $ 694.50  $ 679.77  $ 684.29  $ 614.55  $ 605.33  $ 624.03  $ 579.92  Medicaid $ 145.48  $ 142.30  $ 136.81  $ 133.32  $ 139.07  $ 134.38  $ 126.88    MLR % Commercial 77.5% 77.2% 78.9% 78.5% 77.4% 77.8% 79.1% Medicare 81.2% 79.5% 81.9% 80.3% 78.9% 81.9% 83.3% Medicaid   85.1%     86.0%     83.9%     84.6%     87.4%     85.5%     87.4% Total 78.9% 78.6% 79.9% 79.5% 78.8% 79.3% 80.5%   SGA % of revenues 11.0% 11.5% 11.3% 11.4% 12.5% 11.0% 11.5% SGA PMPM $ 22.81  $ 23.64  $ 22.88  $ 22.22  $ 24.69  $ 21.42  $ 20.81    Claims Statistics Claims Inventory 125,601  138,158  148,441  137,413  133,888  149,263  Inventory Days on Hand 1.6  1.7  1.8  1.6  1.6  1.6  Total Medical Liabilities (000’s) $ 733,550  $ 709,437  $ 742,247  $ 700,066  $ 686,981  $ 660,475  Days in Claims Payable 56.00  53.84  55.17  55.58  56.04  55.80    Member Growth Same Store (25,000) (8,000) 5,000  37,000  39,000  39,000  64,000  Acquisition -  -  -  -  -  -  62,000                                    MEDICARE PART D   Membership 687,000  663,000  529,000  Revenue PMPM (1) $ 101.87  $ 104.09  $ 100.36  MLR % 76.7% 93.6% 98.0% (1) Revenue PMPM excludes the impact of CMS risk-share premium adjustments and revenue ceded to insurance company distribution partners.   COVENTRY HEALTH CARE, INC. SELECTED OPERATING STATISTICS FIRST HEALTH & CONSOLIDATED COVENTRY (Unaudited)     Q3 2006   Q2 2006   Q1 2006   Total 2005   Q4 2005   Q3 2005   Total 2004   FIRST HEALTH   Membership National Accounts n/a  On-going accounts 461,000  481,000  498,000  669,000  671,000  Run-out (1)   39,000      138,000      170,000          90,000      90,000  Total National Accounts 500,000  619,000  668,000  759,000  761,000  Mail Handlers 411,000  419,000  424,000  462,000  468,000  n/a      Revenues By Product Line (000s) National Accounts $ 27,308  $ 29,898  $ 32,808  $ 141,283  $ 35,429  $ 37,588  n/a  FEHBP 49,213  50,509  53,420  204,678  55,827  60,337  n/a  Network Rental     31,400      32,098      31,897      89,442      22,376      24,643      n/a  Group Health Subtotal     107,921      112,505      118,125      435,403      113,632      122,568      n/a  Medicaid / Public Sector 45,983  47,974  43,727  183,197  56,290  49,742  n/a  Workers’ Compensation     51,084      54,536      51,425      193,714      52,953      50,694      n/a  Specialty Business Subtotal     97,067      102,510      95,152      376,911      109,243      100,436      n/a  Total First Health Revenues   $ 204,988    $ 215,015    $ 213,277    $ 812,314    $ 222,875    $ 223,004      n/a      SGA % of revenues 64.9% 64.7% 63.2% 64.9% 65.2% 65.7% n/a                                  CONSOLIDATED COVENTRY   Operating income % of revenues 11.7% 10.6% 9.4% 12.0% 11.4% 12.5% 9.4%   SGA % of revenues 16.9% 17.1% 16.9% 17.9% 19.3% 18.2% 11.5%   Total Debt (millions) $ 760.5  $ 760.5  $ 770.5  $ 770.5  $ 770.5  $ 170.5    Total Capital $ 3,536.0  $ 3,350.4  $ 3,310.8  $ 3,325.2  $ 3,191.7  $ 1,382.9    Debt to capital 21.5% 22.7% 23.3% 23.2% 24.1% 12.3% (1) Company is still providing services to terminated customers.