Fitch Upgrades Bupa Finance Plc's IDR to 'A'; Affirms IFS Ratings; Outlook Stable

Fitch Ratings has upgraded Bupa Finance Plc's Long-Term Issuer Default Rating (IDR) to 'A' from 'A-'. It has simultaneously affirmed Bupa Insurance Limited's (BIL) Insurer Financial Strength (IFS) Rating at 'A+' and its Long-Term IDR at 'A'. The Outlooks are Stable.

The upgrade of Bupa Finance Plc's IDR reflects our revised view that the holding company (holdco) has strong access to its cross-border cash flows, as demonstrated by resilient repatriation from cross-border subsidiaries, and therefore the capacity to service holdco debt using funds repatriated from other jurisdictions, specifically Australia. This results in our application of the 'Group Solvency' notching approach between the IDR of the insurance operating company and the holdco, leading to a narrowing of the notching by one notch.

The IFS Rating continues to reflect Bupa's very strong capitalisation and leverage, strong company profile and stable underwriting earnings. These are in part offset by the concentration of Bupa's operations and earnings in private medical insurance (PMI) and associated businesses.

Key Rating Drivers

Holdco IDR Notching Narrowed: Fitch has revised its assessment of Bupa's capacity to service holdco debt using funds repatriated from overseas, specifically Australia, where 37% of its insurance revenue was generated in 2023. Improved contributions from overseas over the past two years indicate strong capital fungibility between operating subsidiaries and the holdco. Cash repatriation sources are diversified across several jurisdictions, with about 78% of the group's insurance revenues coming from markets classified as group solvency regulatory environments under Fitch's Insurance Rating Criteria.

As a result, we have revised our notching approach between the IDR of the insurance operating company and the holdco to 'Group Solvency', from 'Ring fencing' based notching. Fitch also views the close cooperation between the insurance regulatory bodies that supervise Bupa's overseas subsidiaries and the UK's Prudential Regulatory Authority, the group's lead regulator, as supportive of this approach. Bupa Finance Plc is the main holdco of Bupa insurance and non-insurance operations. BIL is Bupa's main insurance operating entity in the UK.

Strong Company Profile: Fitch's assessment of Bupa Finance Plc's and BIL's business profiles are supported by the group's strong presence in its chosen markets. Bupa has a market-leading position in PMI in Australia, Spain and the UK. The group is well-diversified by geography and is one of the world's largest providers of expatriate health insurance. Its care homes, hospitals, dental clinics and primary care centres complement its core PMI business.

PMI Business Dominates: Bupa is heavily reliant on the performance of the PMI business, which constrains our assessment of its company profile. At end-1H24, about 71% of overall revenue was generated by its health insurance business.

Strong Profitability: Bupa's strong financial performance is underpinned by robust underwriting results. Its combined ratio has been stable within the low-mid 90s range since 2020, and Fitch views its record of stable insurance earnings as positive for its credit profile. Although non-insurance earnings remain volatile, improved customer numbers in health provision and higher occupancy rates in aged-care businesses are expected to contribute to the gradual recovery of non-insurance business profitability over the medium term.

Bupa reported a profit before tax of GBP564 million in 2023 versus a GBP390 million net loss in 2022. The latter was primarily driven by GBP1 billion in asset impairments, which have reduced to nearly zero in 2023. As a result, the net return on equity for Bupa increased to 6.1% at end-2023 from -7.2% at end-2022.

Very Strong Capitalisation: Bupa's capitalisation is very strong, despite a high amount of goodwill on its balance sheet. Bupa's Solvency II (S2) coverage ratio fell to 167% at end-1H24 from 175% at end-2023, due to a majority stake purchase in Indian subsidiary Niva Bupa. This corresponds to Fitch's 'aa-' rating guidelines and is towards the upper end of the group's target range of 140%-170%. Bupa's Prism Global score remained unchanged at 'Extremely Strong' at end-2023, reflecting its low-risk, short-tail business, which receives low-risk charges for premiums and reserves.

Low Financial Leverage: Bupa's financial leverage ratio (FLR) improved to around 18.3% at end-1H24 from 20% at end-2023 and 19.2% at end-2022. This was driven by the repayment of a GBP300 million senior bond in April 2024. The repayment was financed by a EUR500 million senior bond issued in October 2023. The group's GBP900 million revolving credit facility (RCF) was extended to 2028. At end-1H24, the RCF was drawn by GBP150 million (end-2023: untapped). Fitch expects the FLR to remain broadly stable in the medium term.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

-A deterioration in operating performance, as demonstrated, for example, by a combined ratio above 100% on a sustained basis

-A S2 ratio below 130% on a sustained basis

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

-A significant diversification of the group's business mix, with stable, very strong capitalisation and leverage. However, we deem this unlikely in the near-to-medium term

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision.