Fitch Rates $2B Kaiser Permanente 2012 Revs ‘A+/F1’; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned the following ratings on the expected issuance of up to $2 billion of revenue bonds issued by or on behalf of Kaiser Permanente (Kaiser) as follows:

--California Statewide Communities Development Authority series 2012A, 'A+';

--California Statewide Communities Development Authority series 2012B-E 'A+/F1';

--Kaiser Permanente taxable series 2012A 'A+'.

In addition, Fitch affirms the 'A+' and 'A+/F1' ratings on Kaiser's approximately $5.7 billion in outstanding parity debt and affirms the 'F1' rating on the Kaiser Foundation Hospitals commercial paper program. The 'F1' short-term rating is based on Kaiser's self liquidity.

The Rating Outlook is Stable.

At the time of this release, the 2012 financing is expected to consist of $1.5 billion of series 2012A tax exempt fixed rate bonds and $500 million of series 2012 B-E multi-modal variable rate bonds and taxable fixed rate bonds. The final structure and par amounts will be determined at the time of pricing reflecting market conditions and investor demand. Bond proceeds will be used to reimburse the company for prior capital expenditures as well as fund current construction costs related to Kaiser's seismic hospital replacement program. The series 2012A tax exempt and taxable bonds are expected to price the week of April 2 while the series 2012B-E multi-model bonds are expected to price the week of April 16.

In addition to the series 2012 bonds, Kaiser expects to re-market the following issues currently outstanding into a long term mode:

--$100 millionCalifornia Statewide Communities Development Authority series 2002C;

--$100 millionCalifornia Statewide Communities Development Authority series 2009E-1 and E-2.

SECURITY:

The 2012 revenue bonds will be secured by a guaranty from the Kaiser Credit Group, defined as Kaiser Foundation Hospitals, Kaiser Foundation Health Plan, Inc., Kaiser Hospital Asset Management and Kaiser Health Plan Asset Management, Inc. The guaranty is an unsecured general obligation of the Credit Group.

KEY RATING DRIVERS:

Unique Business Model: Kaiser's vertically integrated, closed health maintenance organization (HMO) is unique among the health care and health insurance and managed care companies rated by Fitch. Combined with its exclusive contract with the Kaiser Permanente Medical Groups, Fitch believes that Kaiser's fully integrated model allows the company a higher level of control over its pricing and cost structure relative to Fitch's other rated hospitals and health insurance companies.

Leading Position, Significant Scale: Based on premium revenues, Kaiser maintains the largest market share in the large and important California health insurance and managed care market. Using other metrics such as revenues, capital, and annual earnings as benchmarks, Kaiser is the largest not for profit health care system and is among the largest health insurance and managed care organizations in Fitch's rating universe.

Strong Financial Profile: Certain of Kaiser's liquidity and capital related ratios are among the strongest among all of Fitch's rated hospital and health care systems entities. Moreover, historical profitability has been solid with operating and operating EBITDA margins averaging above 3% and 7%, respectively, over the last five years.

Sizable Pension Liability: Kaiser's pension and post retirement liabilities increased to $12.3 billion at fiscal year-end 2011 (Dec. 31) from $9.745 million the prior year. Under the defined benefit pension plan the fair value of plan assets at Dec. 31, 2011 was $5.4 billion, which represents a weak 51% of Kaiser's projected benefit obligation (PBO) and 68% of accumulated benefit obligation (ABO).

Business Risk Concentrated in California: With 77% of revenues and 79% of membership generated in California, Kaiser's results are heavily influenced by changes in the economic, political, regulatory and competitive environment in the State of California.

Multiple Rating Criteria Used: Recognizing Kaiser's unique business model, Fitch's ratings on Kaiser incorporates aspects from Fitch's nonprofit hospital and U.S health insurance and managed care criteria. The ratings place a heavier emphasis on the hospital criteria since Kaiser's hospital operations represent the majority of the organization's earnings ands assets.

CREDIT PROFILE:

The 'A+' rating is supported by Kaiser's consistent operating profitability, robust liquidity and light debt burden and the underlying strength of Kaiser's integrated healthcare delivery system. Given its operating platform, Fitch believes Kaiser will have continued success in a post healthcare reform environment. For 2011, fiscal year end Dec. 31, Kaiser's profitability improved compared with the prior year's results. In 2011, Kaiser generated operating income of $1.5 billion on total revenues of $47.9 billion (operating and operating EBITDA margins of 3.1% and 6.8%, respectively) as compared to operating income of $1.1 billion on total revenues of $44.2 billion (operating and operating EBITDA margins of 2.5% and 6.4%, respectively) in 2010. The 8.2% growth in revenues in 2011 reflects solid membership growth and improved pricing.

Relative to Fitch's hospital medians, Kaiser's liquidity and capital related indicators are the strongest among all of Fitch's healthcare credits. However, due to Kaiser's insurance operations and attendant actuarial risks, a higher rating is precluded. In spite of heavy capital spending of $3.2 billion in fiscal 2011, Kaiser's cash and investments position increased to $21.9 billion at Dec. 31, 2011 from $20.4 billion at the prior year end. While days cash on hand (DCOH) remained unchanged at 179 days, cushion ratio (based on pro forma maximum annual debt service) strengthened to 29.4 times (x) from 27.3x and cash to long-term debt ratio improved to 384% from 367%. Kaiser's liquidity ratios compare favorably to Fitch's nonprofit hospital 2011 'A' category medians of 194.1 DCOH, 15.3x cushion ratio and 113.8% cash to long-term debt ratio.

Kaiser's ability to fund a high level of capital investment while maintaining a strong balance sheet is considered a significant credit strength. Consistent cash flow generation has allowed the company to fund its sizable capital plan which includes seismic hospital replacements and upgrades, new hospital construction and investment in clinical information technology. Investment in property plant and equipment (PP&E) totaled $3.2 billion in 2011; up from $2.7 billion and $2.6 billion in 2010 and 2009, respectively. Over the last five years, net additions to PP&E have totaled $14.1 billion averaging almost 200% of annual depreciation and results in a relatively low average age of plant of 9.7 years. Over the same period, long-term debt has increased by $1.5 billion to $5.7 billion at fiscal year end (FYE) 2011 from $4.2 billion at FYE 2007. As result, Kaiser's debt and leverage metrics are light relative Fitch's hospital and health system rated entities. Because Kaiser utilizes non-amortizing bullet maturities in its capital structure, the aggregate debt service structure is not level. Incorporating the effect of the series 2012 issuance, maximum annual debt service (MADS) of $744 million occurs in 2031 while pro forma average annual debt service (AADS) is approximately $320 million. Pro forma MADS equates to a light 1.6% of Kaiser's 2011 total revenues. Historical coverage of pro forma MADS was a very solid 5.1x and 5.0x in 2011 and 2010, respectively which exceeds the 'A' category median of 3.7x Historical coverage of pro forma AADS was a robust 11.8x and 11.7x in 2011 and 2010 respectively.

Kaiser's total health plan membership increased 2.9% in 2011 to 8.9 million members compared to 1.2% in 2010 and a 0.7% decrease in 2009. Membership growth in Kaiser's core California and Hawaii markets (which comprise 79% of total covered lives) increased 3.5% in 2011 compared to a 1.5% increase in 2010 and a 0.9% decrease in 2009. Medicare Advantage enrollment showed solid growth of 5.4% in 2011 following membership increases of 5.5% and 4.9% in 2010 and 2009, respectively. However, Fitch takes a cautious view of government funded business such as Medicare Advantage due to the persistent risk of future restrictions on funding.

At FYE 2011, Kaiser's pension and post retirement liabilities increased to $12.3 billion from $9.745 million at FYE 2010. Under the defined benefit pension plan the fair value of plan assets at Dec. 31, 2011 was $5.4 billion, which represents a weak 51% of Kaiser's PBO and 68% of ABO. The decline in funding status is due primarily to reduction in the discount rate assumptions used to calculate future benefit obligations and pension expense. In 2011, Kaiser made pension contributions totaling $695 million (compared to $483 million in 2010) while the plan paid $230 million in benefits. While Fitch acknowledges that pension and post retirement liabilities are a conditional liability that is highly sensitive to changing regulatory, interest rate and actuarial assumptions, Kaiser's pension obligations are not immaterial and could hamper the company's financial profile in a sustained low interest rate environment.

Credit concerns are mostly unchanged and include the impact of the state of California's budget crisis, the intense competition among healthcare and health insurance providers, the inherent construction risk associated with the large capital program, and a heavily unionized labor force.

Kaiser's short-term 'F1' rating is supported by the strong liquid position of its investment portfolio. Upon the closing of the series 2012 issue, Kaiser will have approximately $3.1 billion of variable rate and demand debt due with a year. At Dec. 31, 2011, Kaiser had more than $5.8 billion of same-day settlement funds, which would cover Kaiser's outstanding demand debt in excess of 1.25x as required under Fitch's self liquidity rating criteria. Kaiser's $1.5 billion taxable commercial paper program is supported by a $1.5 billion line of credit provided by a consortium of banks.

The Stable Outlook reflects the expected stability of Kaiser's financial performance due to its vertically integrated, fully aligned HMO model which Fitch believes allows for better control its revenues and expenses. Kaiser's ability to fund a high level of capital investment through operations should provide the basis for a continuation of strong debt service coverage and ample liquidity.

Kaiser Foundation Health Plan, Inc. and Kaiser Foundation Hospitals are not for profit corporations operating primarily as health maintenance organizations. On a combined basis, Kaiser's total revenues in fiscal year 2011 were approximately $47.9 billion. Kaiser covenants to provide audited financial statements to bondholders within six months of the close of each fiscal year, as well as quarterly unaudited financial statements no later than 60 days after each quarter. Disclosure to Fitch to date has been excellent and includes quarterly earnings calls and subsequent distribution of detailed financial statements. Kaiser also provides a quarterly earnings press release detailing the quarterly performance.

Fitch currently has an IFS rating of 'A+' on the following:

--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 Foundation Health Plan of Ohio;

--Kaiser Permanente Insurance Company.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 20, 2011);

--'Insurance Rating Methodology' (Sept. 22, 2011);

--'Nonprofit Hospital and Health System Rating Criteria' (Aug. 12, 2011);

--'U.S. Health Insurance and Managed Care Rating Methodology' (March 31, 2011);

--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity' (June 20, 2011).

For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651018

2002 Nonprofit Hospital and Health Care Systems Outlook

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=139482

U.S. Health Insurance and Managed Care Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=613545

Criteria for Assigning Short-Term Ratings Based on Internal Liquidity

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637129

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Fitch Ratings
Primary Analyst:Jim LeBuhn, +1-312-368-2059
Senior Director
Fitch, Inc.
70 West Madison St
Chicago, IL 60602
or
Secondary Analyst:Emily Wong, +1-212-908-0651
Senior Director
or
Primary Insurance Analyst:Mark Rouck, +1-312-368-2085
Director
or
Committee Chairperson:Eva Thein, +1-212-908-0674
Senior Director
or
Media Relations:Sandro Scenga, New York, +1-212-908-0278
[email protected]

Source: Fitch Ratings