A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength ratings (FSR), issuer credit ratings (ICR) and debt ratings of Coventry Health Care, Inc. (Coventry) (NYSE: CVH – News) (Delaware) and its subsidiaries. (See link below for a detailed listing of the companies and ratings.)

The negative outlook reflects Coventry’s 34% decline in net income for the first nine months of 2008. The deterioration in earnings was driven by a 300 basis points increase in the commercial medical loss ratio as well as a 770 basis points increase in the Medicare Advantage medical loss ratio. Coventry implemented pricing actions and some operational improvements intended to reduce the medical loss ratio; however, earnings are not expected to return to the prior year’s level in the near term. In addition, Coventry’s financial leverage increased significantly following the Vista acquisition in 2007 and a $440 million credit facility borrowing in October 2008. The debt-to-capitalization ratio is expected to reach 35%-36% by year-end 2008 compared to 30.7% as of September 30, 2008. Earnings before interest and tax (EBIT) coverage has already declined to 7.7% as of September 30, 2008 compared to 13% as of year-end 2007 and is expected to drop further as the interest expense increases. Although the credit facility borrowing is intended to mitigate liquidity concerns related to the current economic environment, A.M. Best is concerned about the increased financial leverage combined with lower earnings and reduced dividends from the health plans.

The ratings recognize Coventry’s sufficient risk-based capitalization (RBC) level, growing business diversification and non-regulated cash flows. The company plans to support RBC levels at the subsidiaries through capital contributions as well as reduced dividends. Coventry’s historical dependency on its regulated subsidiaries has diminished following the acquisitions of First Health Group Corporation (First Health) and Concentra workers compensation business (Concentra), which added diversification to Coventry’s product portfolio and significantly expanded its geographic reach. The predominantly non-risk cash flow from First Health and Concentra have contributed to Coventry’s non-regulated earnings growth as well as non-regulated cash flows.