OREANDA-NEWS. Fitch Ratings has affirmed Bupa Insurance Company's (BIC) Insurer Financial Strength (IFS) rating at 'BBB+'. The Rating Outlook is Stable. Today's rating actions follows the completion of a periodic review of BIC's ratings.

Fitch's 'BBB+' IFS rating on BIC reflects application of Fitch's Group Rating Methodology (GRM) where Fitch has referred financial and operational strength to BIC from The British United Provident Association Limited (BUPA), BIC's U.K.-domiciled ultimate parent company. Fitch rates BUPA's IFS 'A+'. Excluding the uplift from this group rating approach, Fitch's stand-alone assessment of BIC's IFS rating is 'BB'.

The referral of strength to BIC from BUPA considers Fitch's categorization of BIC as a "very important" subsidiary under the Fitch's GRM. The agency believes that BIC's very important categorization reflects the company's importance as a component of BUPA's strategy to provide health insurance and related healthcare services globally. In Fitch's view, BIC is particularly important to BUPA's strategy in Latin America and in the international private medical insurance (IPMI) market. Disposal of BIC, or meaningful alterations of its strategic plans or direction in Latin America or in the IPMI market, would cause Fitch to question BUPA's strategic direction.

'Scores' assigned to rating factors underlying BIC's stand-alone assessment, the factor's relative influence on the rating, and the factor's forward trend are discussed below under Key Rating Drivers. Collectively, these scores support BIC's stand-alone assessment.

KEY RATING DRIVERS

Market Position and Size/Scale scored 'bb'; 'higher' influence on ratings, stable forward trend. Fitch believes that the market for BIC's IPMI product is small in comparison with U.S. commercial and government sponsored health insurance markets. Fitch views BIC's target markets of high net worth individuals, expatriates and individuals that travel internationally in Latin American countries as comparatively small niche markets. While Fitch views these markets as relatively small, it believes that BIC maintains a strong competitive position in the IPMI market. From a size/scale perspective, BIC's primary metrics such as membership and revenues are very small in comparison to Fitch's universe of rated health insurers. At June 30, 2015, BIC had 103,356 members and in 2014 the company generated \\$413 million of revenues.

Financial Performance and Earnings scored 'bb'; 'higher' influence on ratings, stable forward trend. BIC's recent financial performance has improved relative to prior years but in Fitch's view the company's earnings are modest and exposed to potential disruptions as BIC implements a strategic change under which it will focus on assuming IPMI business from subsidiaries and affiliates. Through the first half of 2015 the company generated \\$12 million of EBIT, an EBIT-to-revenue margin of 6.3% and \\$9 million of net income. BIC's 2012-2014 average EBIT-to-revenue and net income-to-average capital ratios were (0.7%) and (15.1%) respectively and the company's 2012-2014 average net results were a loss of \\$9 million. Fitch attributes BIC's improved first half 2015 and 2014 results primarily to enhanced scale and operational improvements and heightened financial and personnel investments by the BUPA organization in BIC.

Capitalization and Leverage scored 'aa-'; 'lower' influence on rating, stable forward trend. BIC does not have any debt in its capital structure. The company's current operating leverage metrics are very strong relative to its stand-alone assessment although they have been relatively volatile in recent years. At June 30, 2015, BIC had \\$129 million of capital and surplus and its annualized premiums-to-capital and surplus ratio was 2.5x. From 2012 through 2014, the company's premium-to-capital and surplus ratio averaged 4.8x and its NAIC risk-based capital ratio (on a company action level basis) averaged 253% with a high of 324% at year-end 2014 and a low of 180% at year-end 2013. In 2013 and 2014, BIC sold shares of its stock to an affiliate company in exchange for \\$73 million.

Reserve Adequacy scored 'a'; lower' influence on rating, stable forward trend. Fitch views BIC's reserve adequacy experience to be modestly worse than that of the agency's rated health insurer universe, which typically achieves 'aa' reserve adequacy scores. Fitch notes that BIC's reported reserve adequacy metrics are generally supportive of scores higher than 'a'. However, the company's 2013 financial results included a \\$41 million premium deficiency reserve (PDR). As a result, Fitch has considered the PDR from a qualitative perspective when assessing BIC's reserve adequacy score.

RATING SENSITIVITIES

Given the referral of financial and operational strength to BIC from BUPA, BIC's rating is sensitive to changes in the relationships between (1) Fitch's stand-alone assessment of BIC, (2) BUPA's rating, and (3) BIC's strategic classification within the BUPA organization ("core", "very important", "important", or "limited importance"). Fitch believes that BIC's stand-alone assessment is the most likely of the three variables to change over the next 12-24 months.

If Fitch raised BIC's stand-alone assessment to 'BBB-' and maintained the company's categorization as a "very important" subsidiary, BIC's rating could be upgraded one notch. Fitch believes that BIC needs to demonstrate consistent profitability as the company implements a strategy under which it focuses on assuming IPMI business written primarily by subsidiaries or affiliates domiciled in Latin America, for its stand-alone assessment to be revised to 'BBB-'. Conversely, if BIC's stand-alone assessment were revised downward BIC's rating could be downgraded.