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

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 75% of its total premiums.

Capitalization and Leverage: Fitch views KFHP's capitalization and leverage profile to be consistent with the 'A' IFS rating category. The company's current debt-to-annualized EBITDA ratio and financial leverage ratio (FLR) of 1.2x and 23%, respectively, are stronger than Fitch's median 'A' rating category guidelines. However, Fitch believes that hospital and clinic construction and capital maintenance capital needs 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 has significant pension and other retirement benefit obligations that are underfunded or unfunded, and whose balance sheet valuations are subject to discount rates tied to 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 EBITDA-to-revenue and annualized net return on average capital ratios were 11.0% and 13.2%, respectively, for the first nine months of 2014 and averaged 8.4% and 11.6% from 2011-2013. Fitch believes that KFHP's strong earnings profile reflects efficiencies from the company's vertical business model which enhances KFHP's ability to manage medical costs.

Debt Service Capabilities/Financial Flexibility: Fitch considers KFHP's debt-service and financial flexibility characteristics supportive of 'AA' category IFS ratings. The company consistently generates very strong EBITDA-based interest coverage ratios in the 20x-30x. KFHP maintains liquid assets that Fitch estimates were equal to 1.1x potential liquidity needs generated by the put-able nature of certain of the company's debt obligations at Sept. 30, 2014. Additionally, KFHP's maintains access to $1.5 billion under a 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 and Managed Care (U.S.) Sector Credit Factors Special Report' (Aug. 28, 2014).

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.) (Sector Credit Factors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=766788

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=940115

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