OREANDA-NEWS. September 15, 2015. 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 'Bupa Finance plc; dated 06 November 2014 at www.fitchratings.com).

KEY RATING DRIVERS
BIL's key credit strengths include the insurer's strong underwriting profitability as well as its leading market position in the UK and Bupa's strong franchise. Fitch also believes that capital is supportive of the rating level and this somewhat offsets the relatively high leverage for the rating category.

BIL's underwriting profitability remained strong in 2014, despite challenging economic conditions, supported by expanding overseas operations. Earnings generation is also strong from a group perspective, with a 27% increase in net income from 2013, with a particularly strong performance in Australia and New Zealand.

The GBP672.8m dividend paid in 2014 has increased financial leverage in BIL to 32% from 22% as a result of reduction in equity. The strength of BIL's financial profile means that its rating is based primarily on its standalone characteristics; however, if leverage continues to increase the rating of BIL may become more reliant on support from the parent.

BIL's capitalisation, as measured by Fitch's internal risk-based capital assessment, is strong and commensurate with the ratings. BIL's regulatory capital ratio also remained strong with a regulatory solvency ratio of 174%, down 13% on prior year following the payment of dividend to the parent. Capitalisation for the group as a whole is 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 is detrimental to the quality of its capital. The loan was reduced to GBP400m at end-2014 from GBP793m in 2013. The proceeds were used to part-fund the dividend payment. Fitch expects that BF is likely to further reduce the value of the loan within the next one year.

Bupa's vertically integrated value chain with care homes, hospitals and primary care centres complement the main private medical insurance (PMI) business. 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 PMI as a source of income, constrains ratings. PMI makes up more than 70% of Bupa's revenue and profits.

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 to 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% (2014: 92.6%) for an extended period and earnings-based interest coverage declining to below 4x (2014: 9.2x)
- 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)