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10 Jun 2009
Approximately $1.9 billion of rated debt affected
New York, June 10, 2009 -- Moody's Investors Service today affirmed Coventry Health Care, Inc.'s
(Coventry's, NYSE:CVH) ratings -- senior
unsecured debt at Ba1 and insurance financial strength ratings of its
key operating subsidiaries at Baa1-- and changed the outlook
to negative from stable.
In affirming the ratings, Moody's cited several key factors
relating to the company's financial profile that support the current
ratings. First, Coventry has a strong liquidity position
with $500 million of cash at the parent and a significant stream
of unregulated cash flows to meet its interest and expense obligations.
Second, Coventry's NAIC risk-based capital (RBC) ratio
is expected to remain strong at approximately 200% of company action
level (CAL), its level the end of 2008, despite lower earnings.
Coventry's announced exit of the Medicare Advantage (MA) private
fee for service (PFFS) business is expected to result in a release of
capital, helping the company to maintain its RBC at this level.
Third, while Coventry's financial leverage (debt to capital,
where debt includes operating leases) as of March 31, 2009 was relatively
high at 38%, the ratio is expected to be lowered to approximately
33% as Coventry has indicated that it intends to repay a portion
of its debt from free cash flow during 2009.
In addition to these financial measures, the rating agency stated
it has a positive view on the company's renewed focus on its core
business segments, which has resulted in the exit and sale of some
ancillary operations. "The course set by Allen Wise,
who replaced Dale Wolf as CEO in January 2009," noted Steve
Zaharuk, Moody's VP & Senior Credit Officer, "provides
Coventry a reasonable blueprint for re-establishing its business
and financial profile under the current challenging economic and political
However, Moody's stated that as a result of the uncertainties
and business challenges driven by the current economic and political climate,
the rating agency changed the rating outlook to negative from stable.
In particular, Coventry's commercial membership is expected
to remain pressured as a result of the high unemployment rate and increasing
healthcare premiums. In addition, reimbursement cuts for
all MA products in 2010 could suppress membership growth on Coventry's
Moody's added that the negative outlook also reflects continued
pressure on the company's earnings as a result of issues stemming
from its commercial group segment and PFFS business. The company
began to see deterioration in the results on these two blocks of business
in 2008, and although some corrective operational and pricing actions
were taken, financial results are expected to be sub-par
The rating agency indicated that given the negative outlook, a rating
upgrade would be unlikely. However, if Coventry maintains
its consolidated NAIC risk-based capital (RBC) ratio near 200%
of company action level (CAL), maintains financial leverage in the
low 30% range, improves net margins to at least 2%,
and successfully exits the Medicare Advantage PFFS business, the
outlook may be returned to stable. Conversely, the following
could result in a rating downgrade: if financial leverage increased
above 40%, if RBC fell below 150% CAL, if commercial
membership decreased by 10% or more over a twelve month period,
if annual net margins fall below 1%, or if Coventry incurred
additional operational problems beyond the pricing and underwriting issues
identified during 2008.
The following ratings were affirmed with a negative outlook:
Coventry Health Care, Inc.: senior unsecured debt rating
at Ba1; senior unsecured credit facility at Ba1; corporate family
rating at Ba1; senior unsecured shelf rating at (P)Ba1;
HealthAssurance Pennsylvania, Inc: insurance financial strength
rating at Baa1;
HealthAmerica Pennsylvania, Inc.: insurance financial
strength rating at Baa1;
Group Health Plan, Inc.: insurance financial strength
rating at Baa1.
Coventry Health Care, Inc. headquartered in Bethesda,
Maryland reported medical membership of 3.7 million and Part D
Medicare membership of approximately 1.5 million as of March 31,
2009. The company reported net income of $44 million on
revenues (including investment income) of approximately $3.6
billion for the three months ending March 31, 2009.
Moody's most recent rating action on Coventry was on August 22,
2007 when Moody's assigned a Ba1 senior unsecured debt rating to
Coventry's $300 million of new debt securities.
The principal methodology used in rating Coventry was Moody's Rating Methodology
for U.S. Health Insurers, which can be found at www.moodys.com
in the Credit Policy & Methodologies directory, in the ratings
Methodologies subdirectory. Other methodologies and factors that
may have been considered in the process of rating Coventry can also be
found in the Credit Policy & Methodologies directory.
Moody's insurance financial strength ratings are opinions about the ability
of insurance companies to punctually pay senior policyholder claims and
For more information, visit our website at www.moodys.com/insurance.
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
Moody's affirms Coventry Health Care (sr. debt at Ba1); negative outlook
Financial Institutions Group
Moody's Investors Service
No Related Data.
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