Fitch Affirms Kaiser's IFS Ratings at 'A+'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the Insurer Financial Strength (IFS) ratings of Kaiser Foundation Health Plan, Inc. (KFHP) and its subsidiaries at 'A+'. The Rating Outlooks are Stable. A full list of ratings follows at the end of this release.

KEY RATING DRIVERS

Key strengths supporting KFHP's and its subsidiaries' ratings include the organization's unique business model and leading health insurance market share in California; smaller but still meaningful competitive positions in other states; and overall strong financial results and operating performance.

The primary weaknesses considered in the ratings are risks associated with KFHP's membership and revenue concentration in California; the large capital needs resulting from KFHP's business model; and the funding and capital requirements derived from the organization's large pension and other employee benefit obligations.

KFHP and its subsidiaries along with associated companies Kaiser Foundation Hospitals (KFH) and the Permanente Medical Groups collectively conduct business as Kaiser Permanente. Fitch considers Kaiser Permanente a unique vertically integrated health-care delivery network of KFH-owned hospitals and facilities staffed by physicians who contract exclusively with KFHP.

Fitch views the Kaiser Permanente business model as a key contributor to KFHP's leading market share and strong competitive position in the large California health insurance market. Kaiser Permanente has 9.2 million members in its various health plans, approximately 78% of which are located in California.

Fitch believes that Kaiser Permanente's earnings profile characterized by a large revenue base and margins that generate large amounts of absolute EBITDA, is strong for the rating category. In 2013 the company generated $4.8 billion of EBITDA and the company's margin of EBITDA-to-revenues was 8.8%. Longer term financial results are also favorable with 2009 through 2013 annual operating (excluding net realized gains and losses and impairment charges) EBITDA averaging $3.6 billion. The company's EBITDA-based margin averaged 8.4% from 2009 through 2013 modestly better than Fitch's median guideline for the rating category.

Kaiser Permanente's business model requires significant capital investments in hospitals and other physical facilities that Fitch anticipates will be partially funded by debt. As a result, the organization's financial leverage ratios are generally higher than those of other not-for-profit peer health insurance companies and comparable to those of large publicly-traded health insurers. While the vast majority of Kaiser Permanente's debt has been incurred by KFH, KFHP has guaranteed KFH's obligations under various debt issues.

Fitch calculates Kaiser Permanente's Dec. 31, 2013 Financial Leverage Ratio (FLR), which is derived from GAAP-basis reported net worth excluding after-tax net unrealized gains (losses) on fixed maturity investments, at 25% and the organization's ratio of debt-to-prior four quarter's aggregate EBITDA at 1.6x. Fitch's rating expectations are that Kaiser Permanente's FLR will be managed below 40% and the company's ratio of debt-to-EBITDA will be in the range of 1.5x to 2.5x.

Kaiser Permanente's interest coverage is very strong for the rating category with an operating EBITDA-based interest coverage ratio of 27.0x in 2013 and an average ratio of 27.8x from 2009 through 2013.

KFHP has guaranteed the obligations of its subsidiaries that are rated by Fitch with the exception of 50%-owned Kaiser Permanente Insurance Company. Fitch has used a group rating approach due to the guarantees and its belief that KFHP would have the ability and willingness to support these subsidiaries under reasonably foreseeable circumstances.

RATING SENSITIVITIES

The primary factors preventing KFHP's rating from reaching the 'AA' category, is the company's geographic concentration in California and potential capital requirements, and thus high financial leverage targets, derived from its integrated business model. Key rating triggers that could lead to an upgrade of KFHP's and its subsidiaries' ratings include:

--Measured and profitable growth in member enrollment in markets outside the organization's key California market that diversifies the organization's revenue and earnings base. Given the large size of the organization's California-based membership in relation to its membership in other markets, Fitch believes that such growth would take a comparatively long time to emerge;

--Lower financial leverage ratio targets demonstrated by sustained declines in the organization's run-rate FLR and debt-to-EBITDA ratios to approximately 25% and 1.5x, respectively;

--Meaningful reductions in the Dec. 31, 2013 under-funded status of the organization's pension plans;

--Continued on-going favorable financial performance trends demonstrated by EBITDA-based margins approximating 8.5% respectively;

Key rating triggers that could lead to a downgrade of KFHP's and its subsidiaries' ratings include:

--Sustained FLRs and debt-to-EBITDA ratios greater than 40% and 2.2x, respectively;

--Material mandatory pension plan funding requirements;

--Deteriorating run-rate financial performance evidenced by EBITDA-based margins and absolute levels of EBITDA approximating 5%;

--Material reductions in liquid assets supporting the put-able components of the organization's capital structure.

Fitch has affirmed the following ratings:

Kaiser Foundation Health Plan, Inc.;

Kaiser Foundation Health Plan of the Northwest;

Kaiser Foundation Health Plan of Georgia, Inc.;

Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc.;

Kaiser Foundation Health Plan of Colorado;

Kaiser Permanente Insurance Company

--IFS at 'A+'.

The Rating Outlooks are Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Nov. 13, 2013);

--'Health and Managed Care (U.S.) Sector Credit Factors Special Report' (Dec. 18, 2013).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=824190

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Contacts

Fitch Ratings
Primary Analyst
Mark Rouck, CPA, CFA, +1 312-368-2085
Senior Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst (Insurance)
Brad Ellis, CFA, +1 312-368-2089
Director
or
Committee Chairperson
Jeff Mohrenweiser, CFA, +1 312-368-3182
Senior Director
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Mark Rouck, CPA, CFA, +1 312-368-2085
Senior Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst (Insurance)
Brad Ellis, CFA, +1 312-368-2089
Director
or
Committee Chairperson
Jeff Mohrenweiser, CFA, +1 312-368-3182
Senior Director
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com