The rating agency A.M. Best Co. has revised its outlook for all the debt ratings and the majority of the health care subsidiaries of Coventry Health Care, Inc. (CVH), while reiterating the financial strength ratings (FSR) and issuer credit ratings (ICR) of Coventry subsidiaries and the debt ratings.
Coventry Subsidiaries
A.M. Best has affirmed the FSR of A- (Excellent) and ICRs of “a-” for the Coventry subsidiaries, including Coventry Health and Life Insurance Company, Carelink Health Plans, Inc., Group Health Plan, Inc., HealthAmerica Pennsylvania, Inc., HealthAssurance Pennsylvania, Inc. and Coventry Health Care of Georgia, Inc.
In addition, the rating agency reiterated the FSR of B++ (Good) and ICRs of “bbb+” for the following subsidiaries of Coventry – PersonalCare Insurance of Illinois, Inc., Southern Health Services, Inc., Altius Health Plans, Coventry Health Care of Iowa, Inc. and WellPath Select, Inc.
The FSR of B++ (Good) and ICRs of “bbb” have been affirmed for the following subsidiaries of Coventry – Coventry Health Care of Kansas, Inc., First Health Life & Health Insurance Company and Cambridge Life Insurance Company.
Additionally, A.M. Best maintained the FSR of B+ (Good) and ICRs of “bbb-” for these subsidiaries – Coventry Health Care of Louisiana, Inc., Coventry Health Care of Delaware, Inc., OmniCare Health Plan, Inc., Coventry Health Care of Nebraska, Inc., Mercy Health Plans of Missouri, Inc. and Mercy Health Plans.
Finally, the rating agency affirmed the FSR of B (Fair) and ICRs of “bb+” for the following subsidiaries of Coventry – Coventry Health Care of Florida, Inc., Coventry Health Plan of Florida, Inc. and Coventry Summit Health Plan, Inc.
However, A.M. Best has raised the FSR to B++ (Good) from B+ (Good) and ICRs to “bbb” from “bbb-” of HealthCare USA of Missouri, LLC, owing to its improved operating performance and capitalization.
Outlook: The outlook for most of Coventry’s subsidiaries has been revised to stable from negative, while the outlook for HealthCare USA of Missouri was upgraded to stable from negative.
Debt Ratings
A.M. Best has maintained the following debt ratings of Coventry, including “bbb-” on $400 million 6.3% senior unsecured notes, due 2014; “bbb-” on $250 million 5.875% senior unsecured notes, due 2012; “bbb-” on $250 million 6.125% senior unsecured notes, due 2015; and “bbb-” on $400 million 5.950% senior unsecured notes, due 2017.
Also, the rating agency has revised the outlook to stable from negative for all debt ratings of Coventry.
Coventry recently reported its fourth-quarter adjusted earnings of $142.1 million or 96 cents per share, exceeding the Zacks Consensus Estimate of 89 cents. Full year 2010 earnings were $546.4 million or $3.70 per share, which also surpassed the Zacks Consensus Estimate of $3.61.
Coventry’s results improved due to continued emphasis on cost containment throughout the organization and excellent liquidity position.
Rival company, Unitedhealth Group, Inc. (UNH) reported fourth-quarter income from continuing operations of 94 cents per share, substantially better than the Zacks Consensus Estimate of 90 cents. While Aetna Inc. (AET) reported fourth-quarter profit from continuing operations of 63 cents per share, well ahead of the Zacks Consensus Estimate of 61 cents.
Coventry has a solid fundamental business and continues to grow with all seven core businesses performing at or above internal expectations. Further, we believe that Coventry is also growing on the acquisition front, as it is making continuous efforts to expand its footprint in Missouri and Arkansas.
On October 1, Coventry completed the acquisition of Mercy Health Plans (“MHP”) and its subsidiaries from Sisters of Mercy Health System for an undisclosed amount. Coventry said the acquisition is expected to be slightly accretive to its 2011 earnings and will serve more than 1.2 million members in its six-state Midwest region.
We believe that Coventry’s acquisitive growth strategy will help it to leverage its regional service centers and improve operating efficiencies, largely through economies of scale.
However, A.M. Best is concerned that Coventry’s future regulated earnings may decline driven by mandatory rebates and eventually a higher medical loss ratio. In addition, earnings may be pressured by a growing share of lower margins in the Medicare and Medicaid businesses, as Coventry’s commercial membership, though improved in 2010 compared to 2009, declined as a share of total enrollment over time.
We maintain a Neutral recommendation on Coventry in the long term. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.
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