CHICAGO--(BUSINESS WIRE)--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
Key strengths supporting KFHP's and its subsidiaries' ratings include the organization's unique business model and strong competitive position in California, smaller but still meaningful competitive 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. 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 approximately 9.1 million members in its various health plans, 78% of which are located in California.
Fitch views the Kaiser organization's earnings profile as solid characterized by a large revenue base and margins that generate significant EBITDA. Through the first half 2013 Kaiser Permanente generated $2.5 billion of EBITDA and the company's EBITDA-based margin was 9.4%.
Longer term financial results are similarly solid with 2008 through 2012 annual operating (excluding net realized gains and losses and impairment charges averaging $3.4 billion). The company's EBITDA-based margin averaged 7.0% from 2008 through 2012 approximating Fitch's median guideline for the 'A' rating (IFS) category.
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 Kaiser Permanente's debt has been incurred by KFH, KFHP has guaranteed KFH's obligations under various debt issues.
Fitch calculates Kaiser Permanente's June 30, 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 33% and the organization's ratio of debt-to-prior four quarter's aggregate EBITDA at 1.6x. 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 23.5x through the first half of 2013 and an average ratio of 28.5x from 2008 through 2012.
KFHP's subsidiaries conduct operations in seven states throughout the U.S. where they maintain smaller, but still meaningful, market shares than KFHP's market share in California. In the majority of these seven 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.
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.
KFHP has sold its Ohio-based subsidiary Kaiser Foundation Health Plan Ohio (KFHPO) to Catholic Health Partners (CHP) in a transaction that closed Oct. 1, 2013. Fitch does not maintain IFS ratings on CHP and has withdrawn its IFS rating on KFHPO due to insufficient information.
RATING SENSITIVITIES:
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 FLR and debt-to-EBITDA ratios to approximately 25% and 1.5x, respectively;
--Meaningful reductions in the under-funded status of the organization's pension plans;
--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 FLRs 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 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 Permanente Insurance Company
--IFS at 'A+'.
The Rating Outlooks are Stable.
Fitch has withdrawn the following 'A+' IFS rating:
Kaiser Foundation Health Plan of Ohio.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Jan. 11, 2013);
--'Health and Managed Care (U.S.) Sector Credit Factors Special Report' (Jan. 29, 2013).
Applicable Criteria and Related Research:
Health Insurance and Managed Care (U.S.)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=699758
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715468
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=804186
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