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

'Scores' assigned to factors underlying Kaiser's ratings, their relative influence on the ratings and the factors' forward trends are discussed below under Key Rating Drivers. Collectively, these scores support Kaiser's ratings and their Stable Outlooks.

KEY RATING DRIVERS

Market Position and Size/Scale scored 'a+' with a 'higher' influence on the ratings and a stable forward trend. Key factors underlying this score are Kaiser's leading market position in California and solid market shares in the seven other states it competes in, diverse product line that includes meaningful enrollment from employer group, Medicare and individual products, and significant size/scale characteristics. The score also reflects the company's heightened exposure to economic and regulatory issues derived from the geographic concentration of its enrollment, approximately 77% of which is from California. Other key considerations considered in this score are operational, competitive and financial benefits derived from the organization's vertically integrated business model. Kaiser, along with associated company Kaiser Foundation Hospitals (KFH) and the Permanente Medical Groups (PMG), 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.

Capitalization and Financial Leverage scored 'a' with a 'higher' influence on the ratings and a stable forward trend. Key considerations underlying this score are Fitch's expectations that Kaiser's debt-to-EBITDA and financial leverage ratios (FLR) will approximate 2.2x and 25%-30%, respectively, over the next 12-24 months. However, Fitch believes that hospital and clinic construction and capital maintenance requirements associated with Kaiser's vertically integrated business model can generate high financing needs. 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. Another factor underlying this score is the insurance companies' organization-wide risk-based capital (RBC) ratio. Fitch estimates the year-end 2014 ratio at 200% to 225%, which is generally consistent with Fitch's 'A' rating category guidelines. Fitch notes that KFHP is not required to report a RBC ratio as part of its statutory filing. As a result, the agency's estimated organization-wide RBC includes non-risk-adjusted proxies for KFHP's authorized control level and total adjusted capital.

Financial Performance and Earnings scored 'aa' with a 'moderate' influence on the ratings and a stable forward trend. The company's earnings profile is characterized by a large revenue base that totaled $58 billion in 2014 and EBITDA and net income that averaged $4.4 billion and $2.5 billion respectively from 2010-2014. Fitch anticipates Kaiser's financial performance will be moderately pressured over the next 12-24 months reflecting competitive pressures and rising cost trends, including higher pharmaceutical costs. The company's EBITDA-to-revenue margins are expected to be in the range of 7%-8% over the next 12 to 24 months compared with a 2010-2014 average of 8.6%. Nevertheless, Fitch continues to believe that KFHP retains a strong earnings profile reflecting efficiencies from the company's vertical business model which enhances KFHP's ability to manage medical costs. Through the first six months of 2015, Kaiser generated $3.2 billion of EBITDA and $2.1 billion in net earnings.

Debt Service Capabilities and Financial Flexibility scored 'aa' with a 'moderate' influence on the ratings and a stable forward trend. Fitch anticipates EBITDA-based interest coverage to approximate 16x over the next 12-24 months, a meaningful decline from KFHP's 2010-2014 average of 30x but well in excess of 'A' rating category guidelines. KFHP maintains liquid assets that were in excess of 1.25x potential liquidity needs generated by the put-able nature of certain of the company's debt obligations at Dec. 31, 2014. Additionally, the company maintains liquidity through access to a $1.5 billion bank credit facility. Through the first six months of 2015, Kaiser's operating EBITDA-based interest coverage was a very strong 33.2x.

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 the resulting high financial leverage targets derived from its integrated business model.

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 California-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;
--Continued on-going favorable financial performance trends demonstrated by EBITDA-based margins approximating 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 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.