Fitch Ratings has affirmed Bupa Insurance’s Insurer Financial Strength (IFS) rating at ‘A+’ and 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) and guaranteed by BIL on a subordinated basis, at ‘BBB+’.
Bupa Finance plc (BF; ‘A-‘/Stable/’F2’) is the immediate holding company of BIL. It is also the main holding company of the Bupa Group’s other operations (see ‘Fitch Affirms EMEA Retail, Leisure and Consumer Products Ratings’; dated 18 September 2012 at www.fitchratings.com). Bupa Group is a private company limited by guarantee, without share capital and without shareholders.
Fitch expects BIL’s profitability to have remained in line with the rating in 2012 and notes that earnings generation is strong from a group perspective. The ratings reflect BIL’s stable underwriting profitability and capitalisation which have both remained strong despite the challenging economic environment. BIL’s loss ratio was 73% in 2011 and has remained stable in recent years.
Fitch anticipates that capitalisation will remain commensurate with the ratings. BIL’s capitalisation improved, both when measured by the regulatory capital ratio (2011: 165%) as well as on Fitch’s internal risk-based capital assessment. Capitalisation for the group as a whole is also strong, despite a considerable amount of goodwill affecting the quality of capital.
Fitch believes that the loan through which BIL channels cash to its parent also detracts from the quality of BIL’s capital, but the agency recognises that a portion of this loan could be repaid at any time should BIL require additional capital. Fitch expects the loan, which is almost entirely deducted from regulatory capital, to increase further in 2012 as BIL targets a regulatory solvency ratio of 150%, as compared to the end-2011 ratio of 165%.
Fitch considers the risk profile of the investment portfolio to be consistent with the rating level. BIL has no exposure to equities or alternative investments but takes some credit risk. At year-end 2011, 3% of total invested assets were non-investment grade bonds. Other than that, BIL’s investment portfolio consisted of highly rated cash and cash equivalents and BIL’s loan to the parent. Exposure to troubled sovereign or bank debt is low.
Other credit strengths include the insurer’s leading market position in the UK, the Bupa Group’s strong franchise in Spain and Australia and the strong earnings generation stemming from 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. BIL’s rating is based primarily on its stand-alone characteristics; Fitch regards the ownership by the BUPA Group as neutral for the ratings.
Fitch considers an upgrade unlikely in the near future given the company’s mono-line status. However, an upgrade could be possible in the future if there were to be 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-8x level
– A sustained drop in capitalisation below management’s target of 150% of regulatory solvency
– Any changes in government healthcare policy that impact BIL’s ability to appropriately price its products or otherwise hinders the company’s financial or operating profile