Fitch Affirms BUPA Insurance Company's IFS at 'BBB+'; Outlook Stable
BIC's rating reflects application of a partial attribution approach where Fitch has referred financial and operational strength to BIC from its ultimate parent company, The British United Provident Association (BUPA). Excluding the uplift from this partial attribution approach, BIC's stand-alone assessment of BIC's IFS rating is 'BB'. BUPA Insurance Limited (BIL), which is rated 'A+' for IFS, is a key BUPA subsidiary.
A key consideration in Fitch's partial attribution approach is its categorization of BIC as a 'Very Important' BUPA subsidiary. In Fitch's view, BIC is particularly important to BUPA's strategy in the international private medical insurance (IPMI) market in Latin America. Additionally, the disposal of BIC, or meaningful alterations of its strategic plans or direction in the IPMI market in Latin America would cause Fitch to question BUPA's strategic direction.
BIC's 'Very Important' categorization also reflects Fitch's belief that BIC has a synergistic relationship with the BUPA organization due in part to the IPMI products marketed by BIC, the geographic diversity of the BUPA organization's operations, capital support provided to BIC by BUPA subsidiaries and common branding between BIC and the BUPA organization.
'Scores' assigned to rating factors underlying BIC's rating and the score's relative influence on the rating are discussed below under Key Rating Drivers. Collectively, these scores, along with the ratings uplift derived from being part of the BUPA organization, support BIC's rating.
KEY RATING DRIVERS
Market Position and Size/Scale: Scored 'bb' with a 'higher' influence on the rating. 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 recognizing 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 March 31, 2016, BIC's enrollment was 87,646 and in 2015 the company generated $368 million of revenues.
Financial Performance and Earnings: Scored 'bb' with a 'higher' influence on the rating. This score is heavily influenced by the small absolute amount of earnings BIC generates and to a lesser extent, net earnings volatility from a premium deficiency reserve (PDR) that BIC reported in 2013 that was largely reversed in 2015. Underwriting results are characterized by low benefit ratios and high expense ratios and rates of return are generally stronger than 'bb' category guidelines. From 2013 through 2015, BIC generated average earnings before income taxes (EBITDA) of $20 million, an average EBITDA-to-revenue margin of 5.3% and average net income of $11 million. Recent revenue trends have been negative. In the first quarter 2016, the company reported an 11.7% decline in revenues compared with the prior year period. This followed 2015's 10.9% year-over-year decline in revenues.
Capitalization and Leverage: Scored 'a' with a 'lower' influence on the rating. Fitch notes that while BIC's capitalization and leverage metrics are strong relative to the current 'a' score, the company's capitalization and leverage metrics have been somewhat volatile in recent years. At March 31, 2016, BIC had $174 million of surplus and its annualized premiums-to-capital and surplus ratio was 1.4x. From 2013 through 2015, 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 311%. At year-end 2015, the company's RBC ratio was 428%. BIC does not have any debt in its capital structure.
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) BIL'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 longer term.
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.