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Fitch Affirms Kaiser's IFS Ratings at 'A+'; Outlook StableFitch Ratings has affirmed the 'A+' Insurer Financial Strength ratings assigned to Kaiser Foundation Health Plan, Inc. and its insurance company subsidiaries (collectively KFHP). The Rating Outlooks are Stable. KEY RATING DRIVERS Today's rating actions follow a periodic review of KFHP's ratings. The ratings reflect the company's strong business profile and capitalization, very strong debt service capabilities and adequate financial flexibility. Fitch views KFHP's Business Profile as Strong ('a' category). Key factors underlying this characterization are KFHP's leading market share in California and solid market shares in seven other states, diverse product lines that include meaningful enrollment from employer group, Medicare and individual products, and significant size/scale characteristics. The company's Business Profile also reflects KFHP's heightened exposure to economic and regulatory issues derived from the geographic concentration of its enrollment, approximately 80% of which is from California. Other key considerations include operational, competitive and financial benefits derived from the organization's vertically integrated business model. KFHP and associated company Kaiser Foundation Hospitals (collectively Kaiser) along with the Permanente Medical Group 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 and is a key factor supporting the organization's strong business profile. KFHP maintains Strong ('a' category) Capitalization and Financial Leverage characteristics. Key considerations include Fitch's expectations that Kaiser's debt-to-EBITDA and financial leverage ratios (FLR) will range from 2.0x-2.5x and 20%-30%, respectively, over the next 12-24 months. Fitch notes that hospital and clinic construction and capital maintenance requirements associated with Kaiser's vertically integrated business model can generate high financing needs as can potential expansion plans into current or existing markets. 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. Kaiser's consistent and very strong interest coverage ratios are important factors underlying the company's Very Strong ('aa' category) Debt Service Capabilities and Financial Flexibility. The organization's operating EBITDA-based interest coverage ratios averaged 24x from 2013 through the first half of 2016 (1H16). Fitch believes that Kaiser maintains adequate financial flexibility characterized by large liquid sources of funding and capital whose favorable flexibility attributes are partially offset by large potential liquidity needs. Primary sources of financial flexibility include a $2.4 billion credit facility that expires in September 2021, a $2.4 billion commercial paper (CP) program and a large liquid investment portfolio (including $4.5 billion of U.S. government securities at June 30, 2016) that is a meaningful multiple of the organization's insurance-related and debt obligations. The company also has proven access to the debt capital markets. At June 30, 2016 there were no amounts outstanding under the company's credit facility and there was $1.8 billion outstanding under its CP program. Kaiser's large revenue and earnings bases are key considerations supporting its Very Strong ('aa' category) Financial Performance and Earnings. The company's revenues totaled $61 billion in 2015 and EBITDA and net income averaged $4.8 billion and $2.5 billion, respectively, from 2013 through 2015. The company's financial performance through 1H16 has been pressured by higher cost trends and losses from derivative contracts and equity method and alternative investments. EBITDA and net income through 1H16 was $2.4 and $1.2 billion, respectively, compared with $3.2 billion and $2.1 billion in the prior year period. Nevertheless, Fitch continues to believe that Kaiser retains a strong earnings profile reflecting efficiencies from the company's vertical business model which enhances KFHP's ability to manage medical costs. 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 resulting high financial leverage targets. 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 CA (News - Alert)-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 and reductions in potential capital volatility from the compan's pension and retirement liabilities; --Continued ongoing favorable financial performance trends demonstrated by EBITDA-based margins of approximately 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 unplanned liquidity needs derived from mandatory pension plan funding requirements; --Deteriorating run-rate financial performance evidenced by EBITDA-based margins and absolute levels of EBITDA of approximately 5%; --Material reductions in liquid assets supporting the put-able components of the organization's capital structure Fitch has affirmed the following ratings with a Stable Outlook: 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+'. Additional information is available at 'www.fitchratings.com' Applicable Criteria Insurance Rating Methodology (pub. 15 Sep 2016) https://www.fitchratings.com/site/re/887191 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013506 Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013506 Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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