MEXICO CITY--(BUSINESS WIRE)--AM Best has downgraded the Financial Strength Rating (FSR) to C++ (Marginal) from B++ (Good), the Long-Term Issuer Credit Rating (Long-Term ICR) to “b+” (Marginal) from “bbb+” (Good) and the Mexico National Scale Rating to “bbb.MX” (Good) from “aa+.MX” (Superior) of BUPA México, Compañía de Seguros, S.A. de C.V. (Bupa Mexico) (Mexico). The outlook of these Credit Ratings (ratings) is stable.
The ratings reflect Bupa Mexico’s balance sheet strength, which AM Best assesses as weak, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management.
The rating downgrades reflect deterioration in the balance sheet strength of Bupa Mexico, as a result of the change in the company’s retention profile, and the substantial increase in underwriting risk. The ratings also reflect the anticipated cancellation of the quota-share reinsurance agreement with the parent company, Bupa Insurance Company (BIC), in which 90% of the risk was ceded. AM Best will continue to monitor Bupa Mexico’s strategic fit within the parent organization.
Bupa Mexico is a subsidiary of Bupa Insurance Company (BIC), and is tied to the group’s commercial strategy of expanding into Mexico's insurance market, leveraging on the Bupa brand. Bupa Mexico focuses in the individual and group major medical coverage segment, and the individual represents the biggest share of business of approximately 87%. The target market used to be small clients with high net worth; however, the company now is seeking a differentiation factor by opening up to other sectors with a lower premium, but a higher volume.
The company’s historically favorable financial flexibility was achieved through the capital and reinsurance support provided by its ultimate parent, and reflected in Bupa Mexico’s strongest risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR) as of year-end 2020. Beginning October 2021, the change in the reinsurance program significantly raises the Mexican subsidiary’s underwriting risk, pressuring the BCAR scores, and the overall balance sheet assessment, in spite of the MXN 307 million capital contribution received from the parent company.
Bupa Mexico’s business volume has outpaced the market for the past five years, presenting a compound annual growth rate of 21.6%. However, an offsetting rating factor is the small size of the subsidiary, reflected in a market share of 4% as of December 2020 in an industry led by bigger participants. As of June 2021, Bupa Mexico posted a positive bottom-line result of MXN 52.7 million, which was mainly a result of a decrease in claims, as well as a transition to an internal service team, which includes areas of customer service and a core business system. The company foresees these changes reducing operating expenses in the medium term; however, a challenging and concentrated operating environment raise uncertainty over the expected success of the new business strategy.
Positive rating actions could occur as a result of sustained improvement in balance sheet strength as a consequence of the new business strategy being successfully executed. Negative rating actions could occur if the strategic importance of the company to BUPA group decreases, which could diminish AM Best’s expectations of parental support toward the Mexican subsidiary, or if its risk-adjusted capitalization declines to levels no longer supportive of the current ratings. Negative rating actions could also take place as a result of the execution risk derived from the new business strategy.
The methodology used in determining these ratings is Best’s Credit Rating Methodology (Version Nov. 13, 2020), which provides a comprehensive explanation of AM Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
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