Fitch Ratings has affirmed Bupa Insurance 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, rated ‘A-‘/Stable/’F2’) is the holding company for BIL and an intermediate holding company for the Bupa Group (see ‘Fitch Affirms Bupa Finance Plc at ‘A-‘; Outlook Stable; dated 13 May 2011).
The rating rationale primarily reflects BIL’s strong and stable underwriting profitability, which has held up comparatively well despite the challenging economic environment; solid capitalisation that is supportive of the current rating level; strong franchise and leading market position in the UK; and the low risk nature of the short-tail medical insurance class of business which can be re-priced in a timely manner in response to a deterioration in profitability. Offsetting these positives is the company’s reliance on a single line of business as well as the loan to its parent, which Fitch believes negatively affects the quality of its capital.
Fitch recognises management’s continued focus on profitability. As a result the loss ratio declined to 74.3% at year-end 2010 from 76.0% at the prior year-end. Fitch believes earnings generation will remain strong in 2011 and 2012.
BIL’s capitalisation is supportive of the current rating level and shareholders’ funds have increased in recent years due to high retained earnings. Fitch notes that the loan that BIL is providing to BF increased to GBP575m in 2010 from GBP511m in 2009. The loan, which is almost entirely deducted from available capital for regulatory solvency purposes, is expected to further increase in 2011 as Bupa targets a regulatory solvency position of at least 150% at the BIL level. Fitch recognises that parts of this loan could be repaid at anytime should BIL require additional capital. From the Bupa Group perspective, capitalisation is equally strong and improved in 2010. Although high levels of goodwill at the group level impair the quality of capital to a certain extent, capital remains supportive of the current rating level.
Fitch considers the risk profile of the investment portfolio to be consistent with the rating level. At year-end 2010, 85% of BIL’s portfolio consisted of highly rated cash and cash equivalents which reflect the short-term nature of BIL’s liabilities. Following losses in 2008, BIL de-risked the asset side of its balance sheet by selling a portion of its return-seeking portfolio and at year-end 2010 this portfolio represented 15% of total investments.
The group’s ultimate parent, British United Provident Association Ltd, is a company limited by guarantee with no external shareholders. Activities include the private medical insurance (PMI) business in the UK, Australia and Spain amongst other countries, care services ownership and operation of UK and Spanish private hospitals, and PMI-orientated activities in other countries including Australia and Spain. BIL’s gross written premiums amounted to GBP2.2bn in 2010, and shareholder funds had risen to GBP842m at year-end 2010 from GBP773m in 2009.
Given the company’s current lack of business line diversification evident in its almost complete reliance on medical insurance, Fitch does not anticipate an upgrade in the near future.
The key rating drivers that could result in a downgrade include:
–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 4-8x level;
–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.
Source : Fitch Press Release