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

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'A+' Insurer Financial Strength ratings assigned to Kaiser Foundation Health Plan, Inc. and its insurance company subsidiaries (collectively KFHP). The Rating Outlooks are Stable.

KEY RATING DRIVERS

Today's rating actions follow a periodic review of KFHP's ratings. The ratings reflect the company's strong business profile and capitalization, very strong debt service capabilities and adequate financial flexibility.

Fitch views KFHP's Business Profile as Strong ('a' category). Key factors underlying this characterization are KFHP's leading market share in California and solid market shares in seven other states, diverse product lines that include meaningful enrollment from employer group, Medicare and individual products, and significant size/scale characteristics. The company's Business Profile also reflects KFHP's heightened exposure to economic and regulatory issues derived from the geographic concentration of its enrollment, approximately 80% of which is from California.

Other key considerations include operational, competitive and financial benefits derived from the organization's vertically integrated business model. KFHP and associated company Kaiser Foundation Hospitals (collectively Kaiser) along with the Permanente Medical Group constitute a unique vertically integrated system that provides health care services and health insurance under the trade name Kaiser Permanente. Fitch believes that this vertically integrated model eliminates many of the inherent conflicts that typically exist between health insurance payers and health care providers and is a key factor supporting the organization's strong business profile.

KFHP maintains Strong ('a' category) Capitalization and Financial Leverage characteristics. Key considerations include Fitch's expectations that Kaiser's debt-to-EBITDA and financial leverage ratios (FLR) will range from 2.0x-2.5x and 20%-30%, respectively, over the next 12-24 months. Fitch notes that hospital and clinic construction and capital maintenance requirements associated with Kaiser's vertically integrated business model can generate high financing needs as can potential expansion plans into current or existing markets. As a result, Fitch's current ratings incorporate FLRs as high as 40%. Fitch also notes that the company's capital position is subject to significant change from variations in pension and other retirement benefit obligations that are underfunded or unfunded, and whose balance sheet valuations are subject to changes in discount rates and, ultimately, market interest rates.

Kaiser's consistent and very strong interest coverage ratios are important factors underlying the company's Very Strong ('aa' category) Debt Service Capabilities and Financial Flexibility. The organization's operating EBITDA-based interest coverage ratios averaged 24x from 2013 through the first half of 2016 (1H16). Fitch believes that Kaiser maintains adequate financial flexibility characterized by large liquid sources of funding and capital whose favorable flexibility attributes are partially offset by large potential liquidity needs. Primary sources of financial flexibility include a $2.4 billion credit facility that expires in September 2021, a $2.4 billion commercial paper (CP) program and a large liquid investment portfolio (including $4.5 billion of U.S. government securities at June 30, 2016) that is a meaningful multiple of the organization's insurance-related and debt obligations. The company also has proven access to the debt capital markets. At June 30, 2016 there were no amounts outstanding under the company's credit facility and there was $1.8 billion outstanding under its CP program.

Kaiser's large revenue and earnings bases are key considerations supporting its Very Strong ('aa' category) Financial Performance and Earnings. The company's revenues totaled $61 billion in 2015 and EBITDA and net income averaged $4.8 billion and $2.5 billion, respectively, from 2013 through 2015. The company's financial performance through 1H16 has been pressured by higher cost trends and losses from derivative contracts and equity method and alternative investments. EBITDA and net income through 1H16 was $2.4 and $1.2 billion, respectively, compared with $3.2 billion and $2.1 billion in the prior year period. Nevertheless, Fitch continues to believe that Kaiser retains a strong earnings profile reflecting efficiencies from the company's vertical business model which enhances KFHP's ability to manage medical costs.

RATING SENSITIVITIES

The primary factors preventing KFHP's IFS rating from reaching the 'AA' category are its geographic concentration in California and potential capital requirements and resulting high financial leverage targets.

Key rating triggers that could overcome these constraints and lead to an upgrade of KFHP's and its subsidiaries' IFS 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 KFHP's CA-based membership, Fitch believes such growth would take a comparatively long time to emerge;

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

--Meaningful reductions in the underfunded status of the organization's pension plans and reductions in potential capital volatility from the company's pension and retirement liabilities;

--Continued ongoing favorable financial performance trends demonstrated by EBITDA-based margins of approximately 8.5%.

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 unplanned liquidity needs derived from mandatory pension plan funding requirements;

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

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

Fitch has affirmed the following ratings with a Stable Outlook:

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+'.

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

Applicable Criteria

Insurance Rating Methodology (pub. 15 Sep 2016)

https://www.fitchratings.com/site/re/887191

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013506

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013506

Endorsement Policy

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT 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 MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

View source version on businesswire.com: http://www.businesswire.com/news/home/20161021005701/en/

Fitch Ratings

Primary Analyst

Mark Rouck, CPA, CFA

Senior Director

+1-312-368-2085

Fitch Ratings, Inc.

70 West Madison Street

Chicago, IL 60602

or

Secondary Analyst

Brad Ellis, CFA

Director

+1-312-368-2089

or

Committee Chairperson

Jeff Mohrenweiser, CFA

Senior Director

+1-312-368-3182

or

Media Relations:

Hannah James, New York, + 1 646-582-4947

Email: [email protected]

Source: Fitch Ratings