From Chairman Dale Wolf’s desk

When a high-flying stock hits the tank, owners get nervous. In some cases (Enron and Bear Stearns come to mind) that is an appropriate reaction. In others, the only reaction is to look with incredulity at the behavior of the ‘markets’ and the wise ones who steer their course.
Health plan stocks have taken a beating of late, a beating that in my mind is (for most companies) wholly unjustified. One of those with black and blues is Coventry. Here’s one perspective on that situation from the desk of Dale Wolf, Chairman and CEO of Coventry – (slimmed down for your reading efficiency) to Coventry employees, with my commentary interspersed.
“…Year-to-date stock prices in the U.S. are down by 8.1% as measured in the S&P 500 and 5.4% in the Dow Jones Industrial Average. On world markets, declines are even greater, as demonstrated by the 17.8% decline in the Dow Jones Euro Stock Index. Closer to home, our own stock is off 28.1% since the beginning of the year, as compared to a 35.3% decline for our peer group in managed care.
What’s driving all this?
Obviously, on the national and world scene, it’s a compilation of the factors outlined above, including the mind-boggling repercussions of previous irrational exuberance in housing prices and lending practices…
The managed care industry has been hit harder than overall equity markets. While one never knows for sure, it is clear that an upcoming election, and its prospects for how health care is financed in the future, clearly weighs on the minds of investors. (I agree with Mr. Wolf; although the future of health care reform is indeed cloudy, what is crystal clear is health plans will play the central role in any reform initiative that gets through Congress and is signed into law. Why investors don’t or won’t or can’t see this is puzzling). Notwithstanding all the other turmoil, this single fact was likely to have had a dampening effect on sector stock prices in 2008. (On top of that, the announcement two weeks ago by one of our competitors of an earnings shortfall sent investors into a tizzy about price discipline, reserve adequacy, the “underwriting cycle”, etc. While most of the companies in the industry have indicated they are not experiencing similar issues, it has been confusing to investors, and hence a major sell off.
(Coventry has been dinged for a failure to adequately forecast and price for this year’s particularly rough flu season. Flu, unlike overall medical trend, is a wild card, and by definition can’t be ‘predicted’ or priced for with a high degree of accuracy. Investors and analysts might as well blame crop insurers for damage caused by falling meteors)
So what happens next?
In the short run, I could speculate. (and does…) Certainly stable first and second quarter earnings will be positively viewed by investors. Encouraging prospects for 2009 will also be favorably viewed by investors. But, fears of the shifting political winds will continue to be a headwind. These various data points make it pointless for me to speculate when our company’s stock, and indeed that of the managed care industry, will return to normalcy…whatever that is.
But what I can be highly confident of is that, in the longer run, equity values will follow the fundamentals. Investors look for growth in earnings – over simplified, that is more or less all that matters. Our job, as stewards of their money, is to produce earnings growth. If we, as an industry but, more importantly, we as a company, continue to produce earnings growth north of 10% a year, we will be recognized by investors through appreciation in our share price. While I don’t know when and to what degree, I feel very confident that our current stock price is disjointed from the performance of our company, and if we continue to perform as we have, these will realign.
More importantly, other than buying back our stock with our free cash, which we have been doing as a company, there’s absolutely nothing we can do about our share price except to take care of our customers, find new sources of revenue, and thereby continue to grow the earnings of this company. While I understand completely that many of you have felt the sting of our declining equity prices in terms of your own financial security, I can assure you that there are many others in this country for whom the economy over the next number of months will produce a far worse result… ”
Disclosure – I don’t own Coventry stock. But with a PE of 10, I may well buy it.
One observation re Coventry – this is a company that, justifiably, prides itself on its ability to predict and price for medical trend. It is not expert in nor does it even emphasize medical management, chronic care management, outcomes assessment, provider profiling, or any other form of ‘managed care’. Coventry is expert at managing the balance between pricing and reimbursement.
If and when true reform with universal coverage becomes the law of the land, health plans will no longer be able to win by underwriting; they must be able to deliver a lower medical cost for their population along with higher levels of member satisfaction. This will be a problem for Coventry – a potentially big problem.