OREANDA-NEWS. Fitch Ratings has affirmed Bupa Insurance Ltd's (BIL) 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; 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 75 EMEA Consumer & Healthcare Ratings'; dated 27 October 2014 at www.fitchratings.com).

Fitch analyses Bupa on both a BIL legal entity basis and a Bupa Group basis. The strength of BIL's financial profile means that its ratings are currently based primarily on its standalone characteristics. Fitch regards the ownership by Bupa Group as neutral for the ratings.

KEY RATING DRIVERS
Bupa Group's key credit strengths include its leading market position in the UK and strong franchise, as well as BIL's stable underwriting profitability and capitalisation. Although Fitch views positively Bupa Group's focus on its chosen markets, the ratings are constrained by the group's lack of diversification by business line, evident in its strong reliance on private medical insurance (PMI) as a source of income.

BIL's regulatory solvency fell to 174% at end-2014 (end-2013: 187%) and leverage increased to 32% (end-2013: 22%). This was caused by BIL paying a dividend of GBP673m in the year, funded by cash deposits and a GBP393m loan payback from BF, which reduced equity capital to GBP0.7bn at end-2014 (end-2013: GBP1.2bn). In contrast, Bupa Group's financial leverage reduced slightly to 27% (2013: 29%) and Insurance Groups Directive-based solvency remained strong at 319% (2013: 309%).

BIL reduced the amount of the loan to Bupa Group by GBP393m to GBP400m in 2014. Fitch believes that the loan, through which BIL channels cash to its parent, reduces the quality of its capital. The size of the loan had increased significantly in recent years to GBP793m in 2013 from GBP511m in 2009. Fitch expects BIL's earnings will reduce on a standalone basis in 2015 due to the reduced interest income from the intercompany loan to BF. There will be no impact on a group basis.

BIL's earnings improved in 2014, with a 9.7% growth in profit before tax to GBP182m, driven mainly by a reduction in operating expenses and an increase in net unrealised gains on investments, with a net unrealised gain of GBP6.6m in 2014 (2013: net loss of GBP2.5m). BIL's combined ratio remained stable at 93% despite an increase in the loss ratio to 72% (2013: 68%) due to higher claims costs on certain large accounts. This was offset by reduced acquisition costs and expenses payable to Bupa Group.

RATING SENSITIVITIES
Fitch considers an upgrade unlikely in the medium term given the company's mono-line status. The key rating triggers 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 rating action commentary on BF for its rating sensitivities).