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Rating Action:

Moody's changes Coventry Health Care's outlook to positive

06 Oct 2006
Moody's changes Coventry Health Care's outlook to positive

Approximately $760 million in outstanding debt affected

New York, October 06, 2006 -- Moody's Investors Service today affirmed Coventry Health Care, Inc.'s (Coventry's, NYSE:CVH) ratings -- senior unsecured debt at Ba1 -- and changed the outlook to positive from stable. Moody's explains that this action is based on Coventry's continued improvement in after-tax earnings margin, increased capital strength, and continued progress made in the integration of First Health.

The last rating action on Coventry occurred on November 17, 2005 when the outlook was changed to stable from negative. The rating agency noted that since then, Coventry has continued to stabilize the First Health business and integrate operations. In particular, Moody's noted that Coventry has been successful in addressing many key operational issues, including system conversions, consolidation of medical management operations, renegotiation of vendor contracts, staff reductions, network enhancements, and growth in some of First Health's businesses. While some of the First Health businesses have experienced run-off, overall revenue is stable and the company is meeting expectations. Although the integration is not complete, the rating agency noted that the progress to date is substantial, and the company is well positioned to grow the First Health business segments.

Another driver of the outlook change, according to the rating agency, is the company's M&A strategy, which is now focused on developing a national diversified benefits company. Under this more focused strategy, Moody's expects future acquisitions to concentrate on expansion in key markets and adding specialty business and core competencies needed to offer comprehensive products on a national basis.

Moody's added that Coventry has continued to report solid earnings results with enhanced levels of cash flow from both regulated and unregulated sources. Membership in the company's core healthcare business has been stable during this period without a reliance on growth in Medicare or Medicaid segments. In addition, since the end of 2004, Coventry has maintained its consolidated NAIC risk based capital (RBC) above 200% of company action level (CAL). It is anticipated that the company's RBC will be maintained above this level at the end of 2006. However, Moody's noted that growth in Medicare, other business segments, and acquisitions, may cause a drain on RBC in 2007, but is reflected in the ratings.

Offsetting these positive developments, the rating agency stated, the company is faced with the challenge of managing, growing, and unifying its 17 distinct health plans into a national company. In addition, there are the added concerns that are common to the healthcare sector, including increased competition, the management of healthcare costs, pressures to develop and service new products, and the threat of government regulation.

The rating agency commented that if Coventry balances its RBC level within the 200% CAL range with reasonable and profitable growth, maintains annual net margins of at least 4%, and achieves consistent annual membership growth of 3%, the ratings could be upgraded. However, Moody's also said that if Coventry's acquisition strategy changes from its new focus, future upward ratings movement would be unlikely. The rating outlook may also be moved back to stable if Coventry were to make a large acquisition involving significant debt financing or integration challenges, increase its financial leverage above 25%, experience a decrease in commercial membership, a 5% drop in First Health revenues, or if annual net margins fall below 3%.

Ratings affirmed with a positive outlook:

Coventry Health Care, Inc.: senior unsecured debt rating at Ba1; corporate family rating at 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 2.5 million and Part D Medicare membership of approximately 660,000 as of June 30, 2006. The company reported net income of $256 million on revenues of approximately $3.9 billion for the six months ending June 30, 2006.

Moody's insurance financial strength ratings are opinions of the ability of insurance companies to repay punctually senior policyholder claims and obligations.

For more information, visit our website at www.moodys.com/insurance

New York
Stephen Zaharuk
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Riegel
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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