CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'A+' Insurer Financial Strength (IFS) ratings of Kaiser Foundation Health Plan, Inc. (KFHP) and subsidiaries (see full rating list at the end of this release). The Rating Outlooks are Stable.
Today's affirmations follow completion of Fitch's periodic review of KFHP's IFS ratings. The ratings continue to reflect strengths derived from KFHP's major market position in California and smaller, but still meaningful shares in other markets, as well as significant scale and overall solid financial trends.
The ratings also reflect benefits derived from KFHP's relationship with affiliated company Kaiser Foundation Hospitals (KFH) and the Permanente Medical Groups, which together do business as Kaiser Permanente. Fitch believes that Kaiser Permanente constitutes 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 resulting business model and financial results it generates as key factors underlying KFHP's ratings.
The primary weaknesses considered in the ratings are risks associated with KFHP's membership and revenue concentration in California and the large capital needs necessitated by KFHP's and KFH's business model, which requires significant capital investments in hospitals and other physical facilities that are partially funded by debt. While the vast majority of the Kaiser organization's outstanding debt has been incurred and funded by KFH, KFHP has guaranteed KFH's obligations under various debt issues.
KFHP has approximately 8.9 million members in its various health plans, 77% of which are located in California where it has a leading market share. The company's subsidiary health plans conduct operations in another eight states throughout the U.S. where they maintain smaller, but still meaningful market shares. In these states, KFHP's subsidiaries generally do not have the same type of access to affiliated hospitals and exclusive providers as KFHP enjoys in California and as a result, Fitch believes that their ability to control and project provider-network costs is less than KFHP's.
KFHP and KFH report financial results on both an individual company basis and on a consolidated basis. Fitch's analysis on KFHP considers both the company's individual financial statements, and given KFH's importance to KFHP's integrated business model and KFHP's guaranty of KFH's obligations under its debt issues, the companies' combined financial statements.
Fitch views the Kaiser organization's earnings profile as solid characterized by a large revenue base and reasonable margins that generates large amounts of EBITDA. From 2007 through 2011 KFHP's annual EBITDA and net income averaged $942 million and $572 million respectively. Combined EBITDA and net income, which include KFH's results, are more impressive as KFH typically generates the majority of the organization's earnings. From 2007 through 2011 average combined EBITDA and net income were $3.0 billion and $1.5 billion respectively.
KFHP utilizes a modest amount of financial leverage while on a combined basis the organization's leverage ratios are much higher. At year-end 2011, combined financial leverage totaled $5.7 billion resulting in a debt-to-EBITDA ratio of 1.5 times (x) and a debt-to-capital ratio of 31%. KFH recently issued $2 billion of senior unsecured notes that were assigned 'A+' ratings by Fitch. On a pro-forma basis this issue increases the organization's year-end 2011 consolidated debt-to-EBITDA and debt-to-capital ratios to 2.1x and 38% respectively.
At year-end 2011, the Kaiser organization's capital structure included $3.5 billion of securities that, at the holder's option, may be required to be repurchased prior to stated maturity. Fitch believes that Kaiser maintains the liquidity and capital market access to adequately offset the risks associated with this financing. At year-end 2011 the organization's combined balance sheet included $5.9 billion of current invested assets consisting principally of high-quality corporate debt securities, U.S. government and government agencies' securities, and RMBS securities.
KEY RATING TRIGGERS:
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 company's key California market that diversifies the company'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;
--A reduction in the financing needs of KFHP's affiliated company, Kaiser Foundation Hospitals, Inc.;
--Continued on-going favorable performance trends demonstrated by reductions in consolidated run-rate operating and financial leverage metrics.
Key rating triggers that could lead to a downgrade of KFHP's and its subsidiaries' ratings include:
--Combined run-rate EBITDA/Revenue margins less than 7%;
--Combined ratios of managed care premiums-to-net worth in excess of 5.0x,
--Combined debt-to-EBITDA ratios greater than 3.0x,;
--Combined debt-to-capital ratios greater than 40%.
Fitch has affirmed the following 'A+' Insurer Financial Strength ratings with Stable Rating Outlooks:
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
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' (Sept. 22, 2011);
--'Health and Managed Care (U.S.) Sector Credit Factors Special Report' (March 28, 2012).
Applicable Criteria and Related Research:
Insurance Rating Methodology
Health Insurance and Managed Care (U.S.) Sector Credit Factors
Brian Bertsch, +1-212-908-0549
Media Relations, New York
Mark Rouck, +1-312-368-2085
70 West Madison Street
Chicago, IL 60602
Secondary Analyst (Insurance):
Brad Ellis, +1-312-368-2089
Julie Burke, +1-312-368-3158
KEYWORDS: United States North America California New York
INDUSTRY KEYWORDS: Health Hospitals Professional Services Finance Insurance