Fitch Affirms Kaiser's Ratings Following Acquisition Announcement

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'A+' Insurer Financial Strength (IFS) ratings assigned to Kaiser Foundation Health Plan, Inc. (KFHP) and its insurance company subsidiaries (collectively Kaiser). The affirmations follow Kaiser's Dec. 4, 2015 announcement that it has entered into a definitive agreement to acquire Seattle-based Group Health Cooperative (GHC).

KEY RATING DRIVERS

The affirmation reflects Fitch's belief that the acquisition will have a modest effect on Kaiser's operating and financial profile. Kaiser has approximately 10.2 million members, primarily in California but also in six other states and through Sept. 30, 2015 generated $45.8 billion of revenues. Group Health has approximately 590,000 members concentrated in the Seattle area and through Sept. 30, 2015, Group Health generated $2.8 billion of revenues. Fitch's expectation is that Kaiser will fund the acquisition with internal resources.

Going forward, Fitch anticipates Kaiser integrating Group Health and operating it as a regional subsidiary, similar in many respects to the way the company's subsidiaries in geographic regions outside Kaiser's core California market are operated. In the agency's view, Group Health's integrated health care delivery and insurance model is similar in many respects to that of Kaiser's, increasing the likelihood that the acquisition will be successfully integrated and ultimately be favorable from an operational and financial perspective. Based on enrollment, Fitch estimates that Group Health will be Kaiser's largest subsidiary outside of California.

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 the company's 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.

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

Applicable Criteria

Insurance Rating Methodology (pub. 16 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=996144

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=996144

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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 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.

View source version on businesswire.com: http://www.businesswire.com/news/home/20151207006303/en/

Fitch Ratings
Primary Analyst
Mark Rouck, CPA, CFA
Senior Director
+1-312-368-2085
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst (Insurance)
Brad Ellis, CFA
Director
+1-312-368-2089
or
Committee Chairperson
Jeff Mohrenweiser, CFA
Senior Director
+1-312-368-3182
or
Media Relations:
Hannah James, New York, + 1 646-582-4947
Email: [email protected]

Source: Fitch Ratings

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