This rating action relies significantly on the strength of the new parent, Coventry Health Care Inc. (Coventry). Coventry acquired First Health Group Corp., the former parent, in January 2005. Coventry has had consistent consolidated earnings growth and improved capitalization. An offsetting factor includes increased financial leverage. The ratings of the insurance subsidiaries reflect their good capitalization and improved performance, offset by the relatively nominal proportion of consolidated business.
The consolidated Coventry organization has had strong earnings growth for the past several years, with net income tripling from 2001 to 2003. A.M. Best does expect the earnings trend to moderate, as most of the poor performing acquisitions have been integrated, and become profitable. Capitalization has improved at all subsidiaries. Coventry is committed to maintaining a minimum 250% of risk-based capital (RBC) at each entity and 300% in aggregate, with consolidated RBC approaching 400% at year-end 2004. The three acquired insurance subsidiaries are strongly capitalized, given the level of business risk.
As a result of the First Health acquisition, leverage has increased at Coventry. A.M. Best believes Coventry's holding company has become slightly weaker as a result of the acquisition. The debt-to-capital ratio increased above 35%, and goodwill to equity grew to more than 80%. However, A.M. Best expects Coventry's debt-to-capital ratio to decrease below 25%, and goodwill to equity to decline below 70% by year-end 2005. Revenues and earnings from the three insurance subsidiaries comprise approximately one percent of Coventry's total premiums and net income.
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