(The following statement was released by the rating agency)
CHICAGO, April 08 (Fitch) Fitch Ratings has affirmed the Insurer Financial
Strength (IFS) ratings of Kaiser Foundation Health Plan, Inc. (KFHP) and its
subsidiaries at 'A+' (see full rating list at the end of this release). The
Rating Outlooks are Stable.
KEY RATING DRIVERS
The ratings reflect benefits from KFHP's unique business model and strong
competitive position in California, smaller but still meaningful positions in
other states, and overall solid 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 and comparatively high financial leverage resulting from KFHP's business
model, and the funding and capital requirements resulting from the
organization's pension plans.
KFHP and its subsidiaries along with associated companies Kaiser Foundation
Hospitals (KFH) and the Permanente Medical Groups collectively conduct business
as Kaiser Permanente. Kaiser Permanente is 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 approximately 9.1 million members
in its various health plans, 78% of which are located in California.
KFHP's subsidiaries conduct operations in another eight states throughout the
U.S. where they maintain smaller, but still meaningful, market shares. In the
majority of these states, the companies do not own hospital facilities but
rather contract with local acute care providers for inpatient service. As a
result, Fitch believes that their ability to manage provider-network costs is
typically less robust than it is in California.
Fitch views the Kaiser organization's earnings profile as solid characterized by
a large revenue base and margins that generate significant EBITDA. From 2008
through 2012 Kaiser Permanente's annual operating (excluding net realized gains
and losses and impairment charges) EBITDA and net income averaged $3.4 billion
and $1.6 billion respectively. EBITDA-based margins averaged 7.0% from 2008
through 2012 approximating Fitch's median guideline for the 'A' rating (IFS)
Kaiser Permanente's business model requires significant capital investments in
hospitals and other physical facilities that are partially funded by debt.
Therefore, the organization's debt-to-capital ratios are generally much higher
than those of other not-for-profit peer health insurance companies and modestly
higher than those of large publicly-traded health insurers. While the vast
majority of the 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, 2012 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 35% and the
organization's ratio of debt-to-EBITDA at 1.7x. Fitch's rating expectation is
that Kaiser Permanente's FLR will be managed below 40% and its ratio of
debt-to-EBITDA will be in the range of 1.7x to 2.5x.
The organization's interest coverage is very strong with an operating
EBITDA-based interest coverage ratio of 28.9x in 2012 and an average ratio of
28.5x from 2008 through 2012
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.
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 demonstrated by declines in the organization's
run-rate Financial Leverage Ratio and debt-to-EBITDA ratios to approximately 25%
and 1.5x respectively;
--Meaningful reductions in the under-funded status of the organization's pension
--Continued on-going favorable financial performance trends demonstrated by
EBITDA-based margins and absolute levels of annual EBITDA approximating 8.5% and
$3 billion respectively;
Key rating triggers that could lead to a downgrade of KFHP's and its
subsidiaries' ratings include:
--Sustained Financial Leverage Ratios and debt-to-EBITDA ratios greater than 40%
and 3.0x respectively;
--Material mandatory pension plan funding requirements;
--Deteriorating run-rate financial performance evidenced by EBITDA-based margins
and absolute levels of EBITDA approximating of 5% and $1 billion respectively;
--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 Foundation Health Plan of Ohio;
Kaiser Permanente Insurance Company
--IFS at 'A+'.
The Rating Outlooks are Stable.
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Secondary Analyst (Insurance)
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email:
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:
--'Insurance Rating Methodology' (Jan. 11, 2013);
--'Health Insurance and Managed Care (U.S.) Sector Credit Factors Special
Report' (Jan. 29, 2013).
Applicable Criteria and Related Research
Insurance Rating Methodology ?????? Amended
Health Insurance and Managed Care (U.S.)
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