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

Wed Jul 16, 2014 12:02pm EDT

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(The following statement was released by the rating agency) LONDON, July 16 (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 30 May 2014 at www.fitchratings.com). KEY RATING DRIVERS BIL's key credit strengths include the insurer's leading market position in the UK and Bupa's strong franchise as well as BIL's stable underwriting profitability and capitalisation. Although Fitch views positively Bupa's focus on its chosen markets, the group's lack of diversification by business line, evident in its strong reliance on private medical insurance (PMI) as a source of income, constrains ratings. Fitch expects BIL's underwriting profitability to remain strong in 2014 despite challenging economic conditions. BIL's loss ratio fell to 68% in 2013 (2012: 73%). Earnings generation is also strong from a group perspective, despite an 8.6% decrease in net income from 2012 due to various restructuring and acquisition costs. BIL's capitalisation, as measured both by the regulatory capital ratio and by Fitch's internal risk-based capital assessment, is strong and commensurate with the ratings. The regulatory capital ratio improved to 187% in 2013 from 162% in 2012. Capitalisation for the Bupa group as a whole is also strong, despite a considerable amount of goodwill diluting the quality of capital. In 2013 BF issued debt of GBP500m, raising group financial leverage to 29% (2012: 19%) and recently completed a second, smaller issue of GBP350m in July 2014. Of the recent issue proceeds, GBP300m were used to pay down an existing bridge financing facility and the balance was used to pay down the group's main bank facility, leaving financial leverage unchanged. However, as a result of the acquisition of 56% of Cruz Blanca Salud in February 2014, financial leverage has temporarily risen above 30%. Fitch expects financial leverage to fall back below 30% by end-2014. Fitch believes that the loan through which BIL channels cash to its parent reduces the quality of its capital. The loan size has increased significantly in recent years to GBP793m in 2013 from GBP511m in 2009. Fitch believes that Bupa is likely to reduce the loan size in future, by upstreaming dividends from BIL for loan repayment. 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 earned at a rate of LIBOR+110bp. 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 Bupa Group as neutral for the ratings. RATING SENSITIVITIES Fitch considers an upgrade unlikely in the medium term given the company's mono-line status. 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 and earnings-based interest coverage declining to below 4x (2013: 9x) - Changes in government healthcare policy impacting BIL's ability to appropriately price its products or otherwise impairing the company's financial or operating profile -A downgrade of BF (see separate rating comment on BF for its rating sensitivities) 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: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@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.

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