Fitch Affirms Bupa Insurance Ltd's IFS at 'A+'; Outlook Stable

Wed Mar 26, 2014 1:34pm EDT

Related Topics

(The following statement was released by the rating agency) LONDON, March 26 (Fitch) Fitch Ratings has affirmed Bupa Insurance Ltd's (BIL) Insurer Financial Strength (IFS) rating at 'A+' and its Long-term Issuer Default Rating (IDR) at 'A' with Stable Outlooks. Fitch has also affirmed BIL's GBP330m subordinated perpetual bond, issued by Bupa Finance plc (BF; A-/Stable/F2) and guaranteed by BIL on a subordinated basis, at 'BBB+'. BF is the immediate holding company of BIL. It is also the main holding company of the Bupa Group's other operations (see 'Fitch Affirms Bupa Finance plc at 'A-', Stable Outlook'; dated 19 December 2013 at www.fitchratings.com). Bupa Group is a private company limited by guarantee, without share capital or shareholders. KEY RATING DRIVERS BIL's ratings reflect stable underwriting profitability and capitalisation, which have both remained strong despite a challenging economic environment. BIL's profitability metrics in 2013 remained in line with its ratings, with a combined ratio of 92.6% (2012: 94.7%). Capitalisation, as measured both by the regulatory capital ratio of 187% (2012: 162%) and the agency's internal risk-based capital assessment, also remained commensurate with the ratings. Capitalisation for the Bupa group as a whole is also strong, despite a considerable amount of goodwill diluting the quality of capital and debt issue of GBP500m raising group financial leverage to 29% in 2013 (2012: 19%). Earnings generation is strong from a group perspective, despite an 8.6% decrease in net income from 2012 due to various restructuring and acquisition costs. Fitch believes that the loan through which BIL channels cash to its parent also weakens the quality of BIL's capital. The loan size has continued to grow in 2013 but Fitch expects Bupa to reduce this in the future. As the loan is already excluded from calculations of regulatory solvency this will not affect the solvency position of BIL but will reduce intercompany interest, which is currently at a rate of LIBOR +110bp. The company's key credit strengths include the insurer's leading market position in the UK, the Bupa Group's strong franchise in Spain and Australia, a low-risk investment portfolio, and strong earnings generation at the group's care-homes business. The group's lack of diversification by business line, evident in its strong reliance on medical insurance as a source of income, somewhat constrains ratings. Fitch analyses Bupa on both a BIL legal entity basis and a Bupa Group basis. The strength of BIL's financial profile means that currently its ratings are based primarily on its standalone characteristics. Fitch regards the ownership by the Bupa Group as neutral for the ratings. RATING SENSITIVITIES Fitch considers an upgrade unlikely in the near future given the company's mono-line status. However, an upgrade could be possible if there is a significant increase in the actual and target regulatory capital ratios and/or a significant increase in market share without compromising capitalisation and profitability The key rating drivers that could result in a downgrade include: - A deterioration in operating performance as evidenced by an increase in the combined ratio to over 100% for an extended period of time and earnings-based interest coverage declining to below 4x (2013: 9.2x) - Changes in government healthcare policy impacting BIL's ability to appropriately price its products or otherwise hindering the company's financial or operating profile - In the event of a weakening of BIL's standalone financial profile, Fitch would give greater consideration to the financial position of Bupa Group. In this instance, a sustained increase in Fitch calculated gross financial leverage above 30% for the group could lead to a downgrade of BIL. Contact: Primary Analyst Graham Coutts Associate Director +44 20 3530 1654 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Martyn Street Senior Director +44 20 3530 1031 Committee Chairperson Harish Gohil Managing Director +44 20 3530 1257 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Insurance Rating Methodology', dated 13 November 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Insurance Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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.

FILED UNDER: