Following the impressive first-quarter earnings results and improved 2011 earnings outlook of Coventry Health Care Inc. (CVH), the rating agency Moody's Investors Service has kept its debt ratings under review.
According to Moody’s, it will seek Coventry's ability to sustain and grow its profit margins and membership for an upgradation of its rating.
Currently, Coventry's senior unsecured debt, senior unsecured credit facility and corporate family debt, which are currently rated “Ba1,” including approximately $1.6 billion in debt, are under review. In addition, Moody's is reviewing ratings on Coventry health care plans HealthAssurance Pennsylvania Inc., HealthAmerica Pennsylvania Inc. and Group Health Plan Inc., which are currently rated as “Baa1.”
Coventry posted strong first-quarter adjusted earnings of 66 cents per share, exceeding the Zacks Consensus Estimate of 53 cents and excluding the favorable impact of 8 cents from the Medicare Advantage Private Fee-for-Service (MA-PFFS) product.
Total membership in the quarter also increased 6.0% to 4.6 million from the prior quarter.
According to Moody’s, membership in Coventry's commercial and Medicare segments have stabilized, and the company has opportunities to grow its Medicare and specialty businesses.
Coventry has also raised its fiscal 2011 earnings expectation to range between $2.65 and $2.85 per share.
The solid performance of Coventry across all lines of its businesses generated improved results and 2011 guidance. Besides, continued emphasis on cost containment throughout the organization and excellent liquidity position resulted in positive results.
However, Coventry expects the slow economic recovery to continue to pressurize membership. Moreover, the implementation of minimum medical loss ratio regulations may pose serious threats to the company.
Nonetheless, Coventry’s continued improving financial profile and its access to cash from its non-insurance subsidiaries has strengthened its financial flexibility.
Coventry had approximately $1.36 billion of cash and cash equivalents at the end of the first quarter of 2011, and had approximately $750 million of deployable free cash at the parent.
In addition, Coventry repurchased 1.7 million shares for $50.2 million during the quarter, and has the remaining share repurchase authorization of 11.0 million at quarter end. Coventry’s board has increased the share repurchase authorization by 7.5 million.
Besides Moody’s, the rating agency A.M. Best Co. had also revised its outlook to stable from negative. It is same for all debt ratings and the majority of the health care subsidiaries of Coventry as of March 2011, while reiterating the financial strength ratings (FSR) and issuer credit ratings (ICR) of Coventry subsidiaries and the debt ratings.
However, A.M. Best remains 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.
Coventry has a solid fundamental business and continues to grow with all seven core businesses performing at or above internal expectations. Major competitors of Coventry are Unitedhealth Group Inc. (UNH), Aetna Inc. (AET) and WellPoint Inc. (WLP). Moreover, 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.
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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