[March 18, 2015]

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

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 comment). The Rating Outlooks are Stable.

KEY RATING DRIVERS

Market Position and Size/Scale: Fitch believes that Kaiser Foundation Health Plan Inc. and its subsidiaries (collectively KFHP) maintain 'medium-sized' market position and size/scale characteristics. The IFS ratings of health insurers with these characteristics are typically in the 'BBB' to 'A' IFS rating categories.

Key factors underlying KFHP's 'medium-sized' categorization are the company's leading market share in the California health insurance market, very large size and scale benefits, and geographically concentrated membership in California from which the company generates roughly 77% of its total operating revenues.

KFHP along with associated company Kaiser Foundation Hospitals (KFH) and the Permanente Medical Groups (PMG (News - Alert)) constitute a unique, vertically integrated system that provides health care services and insurance under the trade name Kaiser Permanente. Fitch believes that Kaiser Permanente derives competitive, operational and financial benefits from its integrated model primarily by better aligning the interests of healthcare providers, health plans, and healthcare facility owners.

Capitalization and Leverage: Fitch views KFHP's capitalization and leverage profile to be consistent with that expected at the 'A' IFS rating level. Over the next 12-24 months, Fitch expects the company's debt-to-EBITDA and financial leverage ratios (FLR) to approximate 2.2x and 25%-30%, respectively, which are broadly consistent with Fitch's median 'A' rating category guidelines.

However, Fitch believes that hospital and clinic construction and capital maintenance requirements associated with KFHP'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.

Financial Performance and Earnings: Fitch believes that KFHP's financial performance and earnings profile is consistent with that expected at the 'AA' IFS rating category. 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 KFHP'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 a 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.

Debt Service Capabilities/Financial lexibility: Fitch considers KFHP's debt-service and financial flexibility characteristics supportive of 'AA' category IFS ratings. The agency anticipates EBITDA-based interest expense coverage approximating 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, KFHP maintains liquidity through access to a $1.5 billion bank credit facility.

RATING SENSITIVITIES

The primary factors preventing KFHP's IFS rating from reaching the 'AA' category, is the company's geographic concentration in California and potential capital requirements, and thus 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 the organization's California-based membership, Fitch believes that such growth would take a comparatively long time to emerge;

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

--Meaningful reductions in the Dec. 31, 2013 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.

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

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Sept. 4, 2014);

--'Health Insurance and Managed Care (U.S.) Sector Credit Factors Special Report' (Jan. 21, 2015).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Health Insurance and Managed Care (U.S.)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=855328

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981539

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 (News - Alert) 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 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.

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