London, 27 September 2016 -- Moody's Investors Service (Moody's) today upgraded to A1 from A2
the Insurance Financial Strength Rating (IFSR) of Bupa Insurance Ltd (BINS),
the main UK private medical insurance business of the wider Bupa Group
(Bupa). In the same rating action, Moody's upgraded
all debt ratings on securities issued by Bupa Finance Plc, a full
list of which is provided below. The outlook of all entities is
stable.
RATINGS RATIONALE
The ratings upgrade reflects (i) Bupa's geographically diverse portfolio
and excellent market position in private medical insurance (PMI);
(ii) the relatively low risk profile of PMI; and (iii) very good
capitalisation together with a strong track record in generating capital
via retained earnings. These strengths are somewhat tempered by
Bupa's active inorganic growth strategy, which results in
an elevated amount of goodwill on the balance sheet and somewhat high
financial leverage.
Bupa benefits from a geographically diverse earnings profile thanks to
its leading market positions in PMI in Australia, the UK and Spain.
Furthermore, the group has taken and continues to take various portfolio
actions. These include exiting non-strategic markets and
re-pricing of loss-making accounts in Bupa Global,
the recent sale of Bupa Home Healthcare and many cost efficiency and transformation
initiatives across the group.
In Moody's opinion, Bupa's recent expansion into various
new markets, such as Poland, Chile and Saudi Arabia,
also strengthens the group's ability to continue to grow profitably.
However, as a result of the group's inorganic growth strategy,
goodwill and intangibles are, and will remain, relatively
high at 54% of shareholders' equity as at 31 December 2015.
The high level of goodwill elevates the risk of material impairment losses,
such as those witnessed in 2010, 2011 and 2015.
The group also benefits from the low volatility and short tail nature
of PMI (71% of Bupa's 2015 revenues), which is reflected
in the stability of the group's underwriting results and operating
cash-flows, and Bupa's gross underwriting leverage,
which remains consistently low (below 2x).
Moody's views Bupa's capitalisation as supportive of an A1
rating, as reflected in the group's strong Solvency II ratio
of 180% as at HY2016. Bupa is making use of the Solvency
II standard formula but, given the low risk nature and size of its
portfolio, the UK regulator has approved the replacement of the
standard premium risk charge with a parameter specific to the group,
which reduces the overall capital requirements. The sensitivity
of the group's Solvency II ratio to market risks, including
a fall in equities, interest rate changes and credit spreads widening
is very low given the group's conservative investment strategy (close
to 70% of the portfolio held in cash deposits). However,
since Bupa's non-insurance operations include care homes,
hospitals and health clinics, the key risk to Bupa's capital
is a decrease in property values.
While the Group's legal structure does not allow it to access public
equity markets, Moody's notes that Bupa has an established
track record of accessing debt markets, and has continuously demonstrated
a strong ability to generate capital via retained earnings.
Moody's acknowledges that Bupa faces operating challenges on several
fronts, including somewhat more moderate GDP growth in Australia
than in the last ten years, political uncertainty in Spain,
and funding pressure experienced by local authorities in the UK.
These trends have had a negative impact on the group's 2015 underlying
pre-tax profits, which declined by 2% to GBP583 million,
despite the 12% growth in customer numbers. Furthermore,
the introduction of the UK national living wage, which resulted
in a partial write-down of Bupa's UK care homes business
in 2015, reduced statutory profit before tax by a meaningful 39%
on a consolidated group level. These headwinds, together
with the potential adverse implications for the UK medium-term
growth outlook following the decision to leave the EU, will continue
to pressure the Group's earnings prospects.
Bupa also has a relatively high financial leverage position of 34%
as at YE2015, following the debt-funded acquisitions in 2013
and 2014. Moody's expects Bupa's leverage and earnings
coverage metrics to improve as the group continues to grow, and
particularly following the early repayment of Bupa's GBP235 million
secured loan during 2016. However, incorporated into the
ratings is Moody's expectation that leverage will remain in the
25%-35% range, as a result of the Group's
inorganic growth strategy.
OUTLOOK
The outlook is stable, which incorporates Moody's expectation
that, notwithstanding difficult market conditions in a number of
the group's core segments, Bupa will continue to grow profitably
while maintaining strong and stable capital levels.
WHAT COULD MOVE THE RATING UP / DOWN
While there is unlikely to be positive rating pressure on Bupa's
rating over the near-to-medium term, the following
factors could positively influence the group's credit profile:
(1) continued improvements in geographic and/or business line diversification;
(2) improved statutory profitability metrics with returns on capital in
the low double digit percentage range; (3) maintaining adjusted financial
leverage below 25% with EBITDA coverage above 7x.
Conversely, the following factors could lead to a downgrade:
(1) a material loss of market share in Australia, the UK and/or
Spain as a result of regulatory changes, political actions or reputational
damage; (2) Solvency II capital coverage falling below 155%
at a group level on a sustainable basis; and/or (3) a sustained deterioration
in the underwriting profitability of Bupa's core insurance operations
with a meaningful reduction in operating cash-flows; and/or
(4) adjusted financial leverage greater than 40%.
The following ratings were upgraded:
Bupa Insurance Ltd -- insurance financial strength rating to A1 from
A2
Bupa Finance Plc -- guaranteed junior subordinated debt to A3(hyb)
from Baa1(hyb)
Bupa Finance plc -- guaranteed senior unsecured debt to Baa1 from
Baa2
Bupa Finance Plc-- unguaranteed subordinated debt to Baa2(hyb)
from Baa3(hyb)
The outlook has been changed to stable from positive.
Bupa is a global health care organisation headquartered in London.
At HY16 it had total assets of GBP 11,821 million and shareholders'
equity of GBP 5,450 million. For 2015, the group generated
gross written premiums of GBP 7,139 million and net income of GBP
278 million.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Global Property and
Casualty Insurers published in June 2016. Please see the Ratings
Methodologies page on www.moodys.com for a copy of this
methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Helena Kingsley-Tomkins
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Antonello Aquino
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
