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Rating Action:

Moody’s affirms Bupa's A1 insurance financial strength rating; outlook changed to negative

09 April 2020

London , April 9, 2020 – Moody's Investors Service (Moody's) has today affirmed the A1 Insurance Financial Strength Rating (IFSR) of Bupa Insurance Ltd (BINS), the main UK private medical insurance business of the wider Bupa Group (Bupa, Group). In the same rating action, Moody's affirmed the backed senior unsecured (A3), backed junior subordinate (A3(hyb)), and subordinate (Baa1(hyb)) ratings of Bupa Finance Plc. The outlook has been changed to negative from stable for both entities.

A list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

RATIONALE FOR NEGATIVE OUTLOOK

The change in outlook to negative reflects the significant decline in the Group's profitability in 2019 driven by its Australian health insurance and aged care and UK dental businesses for which trading conditions, exacerbated by the coronavirus, will continue to be challenging. Furthermore, the Group's inorganic growth strategy has elevated the risk of material goodwill impairment losses as seen by the significant write downs in 2019, and Bupa has somewhat high adjusted financial leverage (c.32% at YE19). More positively, Bupa's credit profile benefits from its geographically diverse portfolio and excellent market position in private medical insurance (PMI), the relatively low risk profile of its business, and a very conservative investment portfolio.

Bupa reported a 31% decline in underlying profit in 2019 to £416 million. This was primarily driven by the Australian health insurance and aged care businesses and the Group's investment in technology. Furthermore, Bupa recorded a goodwill impairment charge of £443 million, driven by the challenged Australian aged care and UK dental businesses, with the Group recording a bottom line loss of -£211 million (YE18: +£312 million). In Australian health insurance, which is the Group's largest business segment, underlying profitability continues to be negatively impacted by affordability pressures on customers, in response to which the government has been restricting price increases at a significantly lower rate than claims inflation.

Going forward, we expect the Group's underlying profitability in Australian health insurance to remain pressured with the coronavirus economic impact potentially exacerbating existing affordability issues. The Australian aged care business also remains challenged and is currently loss-making driven by higher operating expenses and lower occupancy. These economic and regulatory-related challenges in Australia reflect the inherent and elevated social risks which Bupa and its peers face in the provision of health insurance and aged care provision. In the UK, the coronavirus will negatively impact, via practice closures, the UK dental business the profitability of which is already pressured by the shortage of dentists.

RATIONALE FOR AFFIRMATION

The ratings affirmation reflects Moody's expectation that Bupa will maintain its very strong brand name and top-tier market positions, in PMI in Australia (26% market share), the UK (37%) and Spain (20%), with geographic diversification remaining good. The group's significant concentration in PMI business (73% of YE19 revenues) is offset by its low volatility and reserving risk. Given Bupa's very strong position in its key markets and high-quality underwriting practices, we believe its product risk ranks favourably compared with that of other European health insurers.

Furthermore Bupa's combined ratio remains at a good level (YE19: 94%, YE18: 93%) and the Group's 2020 calendar year claims could be significantly lower than previous years given the postponement of elective surgery and limited coronavirus-induced claims given the role of public health services in being the main providers of treatment to those infected. However, we would expect the overall impact of the coronavirus on the Group's loss ratio to be broadly neutral over a longer-term horizon. In this regard, we note that Bupa UK has announced that it will pass on any exceptional financial benefit ultimately arising from the coronavirus to its UK health insurance customers, and the Group has also announced that it has delayed the annual 1 April premium increase for all its Australian health insurance customers for six months.

The Group's capitalization, as measured by its Solvency II ratio reduced during 2019 to 159% (YE18: 166% on a pro-forma basis) although it remains above one of Moody's potential downgrade triggers i.e. Solvency II capital coverage falling below 155% at a group level on a sustained basis. Within Bupa's capital resources is a £330 million grandfathered Tier 1 subordinated bond, callable from September 2020, which adds around 14% points to the Group's YE19 Solvency II ratio and Moody's will monitor the Group's intentions with regard to this. However, the affirmation of Bupa's ratings also reflects the Group's good capital generation, reflected by the 20 percentage point boost in the YE19 solvency ratio. Furthermore, the Group's very conservative investment portfolio means that the ratio's sensitivity to market risks remains very low which positively differentiates Bupa from many insurers.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The following factors could lead to a downgrade of Bupa: (1) a continued deterioration in underlying earnings or; (2) further material goodwill impairments negatively impacting net income or; (3) Solvency II capital coverage falling below 155% at a group level on a sustained basis or; (4) adjusted financial leverage rising above 40% or; (5) material loss of market share in Australia, the UK and/or Spain as a result of regulatory changes, political actions or reputational damage.

Given the negative outlook, there is limited upward pressure on Bupa's ratings at present, however the following factors could stabilise the outlook: (1) a cessation of the downward trend in underlying earnings with return on capital improving to mid single digit level and; (2) adjusted financial leverage remaining below 40% and earnings coverage improving to mid single digit level, and (3) maintenance of excellent market position in private medical insurance.

SUMMARY PROFILE OF AFFECTED GROUP

Bupa is a UK-based international healthcare group. At YE19, the Group had total assets of £16,106 million and total equity of £7,026 million. For 2019, the group generated gross written premiums of £9,077 million and reported a loss for the financial year of -£211 million.

LIST OF AFFECTED RATINGS

Issuer: Bupa Insurance Ltd

Affirmation:

Insurance Financial Strength Rating, affirmed at A1

Outlook Action:

Outlook: Changed to negative from stable

Issuer: Bupa Finance Plc

Affirmations:

Backed junior subordinate debt, affirmed at A3(hyb)

Backed senior unsecured debt, affirmed at A3

Subordinate debt, affirmed at Baa1(hyb)

Outlook Action:

Outlook: Changed to negative from stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Property and Casualty Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187352 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 .

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569 .

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.

Dominic Simpson
VP-Sr Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London
United Kingdom
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

Simon James Robin Ainsworth
Associate Managing Director
Financial Institutions Group
JOURNALISTS : 44 20 7772 5456
Client Service : 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
Client Service : 44 20 7772 5454

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