12 RT 20 O ANNUAL REP LONGER, HEALTHIER, HAPPIER LIVES

bupa Annual report 2012 2012 HIGHLIGHTS

GRO UP REVENUES (UP 4%) £8.4bn

GROUP underlying profit before tax (UP 8%) £604.0m

Underlying profit is defined in the Financial review on page 19

REVENUES BY market unit profit/(loss) BY market Unit

43% 43% 48% 48% 30% 30% 19% 19% 14% 14% 19% 19% 3% 3% (2%) (2%) 10% 10% 16% 16%

Australia and New Zealand United Kingdom Spain and Latin America Domestic International Development Markets International PMI

See the full segmental results on page 69

TOTAL Customer NUMBERS (up 9%)

2012 (11.8m)

2011 (10.8m)

PROGRESS Towards OUR WELL WORLD goals

Keeping people well By 2015, we will have enabled 60 million people to make positive changes to be healthier and happier and to help protect the environment.

18 million

Supporting a healthy planet By 2015, we will have reduced our absolute carbon footprint by 20%.

4.8% Cover image: Jon Sinclair and family walking in Albert Read more about Bupa’s Well World at bupa.com/wellworld Park, Melbourne, where they took part in the 2012 Memory Walk organised by Bupa in partnership with Alzheimer’s Australia. Jon is a resident of Bupa’s Windsor Care Home in Melbourne. Bupa annual report 2012 1 S

Strategic Report t r Introduction 1 ategic Bupa at a glance 2 Our business model 3 r ep

Chairman’s statement 4 or

Chief Executive Officer’s t statement 7 Longer, healthier, happier lives: Geoff’s story 12 Gita’s story 14 Sue’s story 16 Financial review 18 Market Unit reports: Our purpose – longer, healthier, Australia and New Zealand 22 happier lives – drives everything we United Kingdom 24 Sp ain and Latin 26 do. Our new strategic vision defines America Domestic International 28 how we will bring that purpose to Development Markets benefit more people around the world. International PMI 30 Our people 32 During 2012, we developed a new vision Our Well World goals – to have enabled Risks and uncertainties 34 for Bupa in 2020 that will enable us to 60m people be healthier and to reduce

reach millions more people. our carbon footprint by 20%, both by ANCE Gov Governance report 2015 – are integral to our business, which In it, we have set out our focus on being Chairman’s introduction 38 e is why our Well World data is integrated r a healthcare partner to millions more n throughout this report. to Governance people around the world, on delivering The Board of Directors 40 extraordinary business performance, Our Annual Report and Accounts are

Governance leadership 42 R

and on being an organisation where also available online, where you can E P

people love to work. access even more information on Bupa. Effectiveness 44 O R Find out more on page 8 Go to annualreport.bupa.com Engagement 45 T Audit Committee report 46 To deliver our vision and bring us closer Risk Committee report 48 to our customers, we reorganised our business in 2012. Now operating Nomination & Governance 49 as Market Units, we are better Committee report positioned to serve our customers Stuart Fletcher Medical Advisory Panel 50 as their healthcare partner. Chief Executive Officer Remuneration Committee report 52 Find out more on page 9 Remuneration report 54 Report of the Board of Directors 59 Statement of Directors’ 60 responsibilities FINANCIAL STATEMENT FINANCIAL STATEMENTS Independent auditors’ report 62 Financial statements 63 Five year financial summary 123 International Financial 124 Reporting Standards relevant to Bupa s View our Annual Report and Accounts online For video and other additional information, go to annualreport.bupa.com 2 Bupa annual report 2012 Strategic Report

B upa AT A GLANCE International PMI °° Bupa International °° Bupa Latin America Our 11.8 million customers live in over 190 countries. Our services include health insurance and other Total customers: 0.7m funding products, hospitals and primary care centres, Total employees: 1,600 chronic disease management, home healthcare, dental centres, prevention and workplace health, and care services, including residential and nursing homes and retirement villages. Our business is managed in five Market Units.

United Kingdom International °° Bupa Health and Wellbeing Development Markets °° Bupa Care Services UK °° Bupa Arabia °° Bupa Home Healthcare °° Max Bupa, India °° Bupa Cromwell Hospital °° Bupa Hong Kong °° Bupa China Total customers: 2.8m °° Bupa Thailand °° Health Dialog, USA Total employees: 31,700 °° New Market Development

Total customers: 2.2m

Total employees: 800

Tousttal c omers Snpain a d Latin Australia and New Zealand America domestic °° Bupa Australia 11.8m °° Sanitas Seguros °° Bupa Care Services Australia °° Sanitas Hospitales and New Services °° Bupa Care Services New Zealand Total employees °° Sanitas Dental Total customers: 3.5m °° Sanitas Residencial 54,000 °° Latin America Domestic Development Total employees: 10,400 Total countries Total customers: 2.6m

190 Total employees: 8,400

Market Unit customers or employees Total customers or employees Bupa annual report 2012 3 Strategic Report

Providing healthcare S t

We deliver healthcare to customers r

O UR BUSINESS MODEL ategic in our own hospitals, clinics, dental centres and primary care centres, and

Bupa is a global healthcare company. We fund and in a range of other settings. Our chronic r disease management services help ep provide quality healthcare around the world in a range individuals make and sustain lifestyle or of settings, including clinics, dental centres, hospitals changes to manage their condition and t and care homes. Our services span complex acute improve their health. We also provide treatment to patients at home, which care to preventative wellbeing and we engage millions can improve patient experience while of people in their health, providing them with trusted also reducing costs. information and advice. Bupa is a leader in care services, providing nursing and residential care to over 30,000 residents in the UK, Spain, Australia and New Zealand. Our business model is shaped by Funding healthcare Our dementia expertise is world-leading. our commitment to serve customers Through insurance, subscriptions We are setting best practice in person- as their healthcare partner. and other funding solutions, we fund centred care, including through our healthcare on behalf of our 11.8m We are focused on creating person- dementia care nursing training. customers across the globe. centred health systems that deliver the Engaging people and right intervention in the right place at the We have a network of 7,500 hospitals supporting behaviour change right time. We are committed to meeting and clinics and more than 200,000 Our services also include preventative customers’ needs across life stages. medical providers worldwide. healthcare, including identifying high As an expert in funding and in providing We partner with healthcare professionals risk groups and providing support healthcare, we are able to deliver high to help us deliver the right treatment to and advice to improve their health. quality patient care while managing patients and to design patient-centred We reach out beyond our customers to costs, essential to keeping high quality care pathways. provide health information, advice and care accessible. support to people across the world. This includes our online resources which were accessed by 12m people in 2012. In 2012, our Global Challenge helped O UR bUSINESS model 97,000 people to get walking, a simple way to improve health. Under our Well World goals, we will have enabled 60 million people to make positive changes to be healthier and happier by 2015. We will also reduce our carbon footprint by 20% by 2015. We fund Foundations in Australia, ENGAGE Spain and the UK which provide grants PEOPLE AND for healthcare research. Our total SUPPORT charitable donations in 2012, including BEHAVIOUR to our Foundations, was £4.1m. CHANGE

A n iNTEGrated MODEL While we adapt our business model Lg, ali, to reflect individual markets’ needs and opportunities, we believe that happi an integrated approach – combining healthcare funding and provision – offers FUND li PROVIDE significant advantages to customers. It brings better oversight of the patient HIGH QUALITY, HIGH QUALITY, AFFORDABLE AFFORDABLE journey and this helps us to make HEALTHCARE HEALTHCARE better healthcare more accessible and affordable. This has been demonstrated in our work in Valencia, Spain on behalf of the Valencian regional government. Find out more on page 6 4 Bupa annual report 2012 Strategic Report

I am more convinced than ever that Chairman’s our status – without shareholders and therefore free to reinvest profits into more and better healthcare – is critical Statement to the relationship we have with our customers and business partners. 2012 was a year of considerable change for Having no shareholders, we are held Bupa, and at the same time we also reaffirmed to account by independent Association Members, who receive no financial our enduring purpose. In the year, pressure benefit from Bupa. They are committed on healthcare spending – and on provision to seeing us discharge our purpose models – remained intense. We also saw effectively. Our status is of particular value when trends in health further converge across trust in other organisations has been developed and developing economies. questioned and eroded. People are looking for new models and changed cultures for value creation in society as well as a different kind of accountability.

Boig ard H hlights from 2012 °° Stuart Fletcher and Evelyn Bourke joined the Board as CEO and CFO respectively. New to Bupa, they bring with them rich experience and expertise. They underwent a detailed induction programme, including one-to-one meetings, site visits and detailed briefings on Bupa’s performance and history. As a Board, we welcomed Stuart Fletcher as he took the role of Chief °° To strengthen our governance and Executive Officer. Along with his oversight, we split our Audit, Risk Executive Team, he undertook extensive & Compliance Committee in two. work in developing a vision for Bupa’s The Audit Committee now focuses future. We now have a clear definition of on financial statements, and the how we will pursue our purpose – longer, effectiveness of internal controls healthier, happier lives – to benefit many systems and of auditors; the more people across the world. Risk Committee focuses on risk appetite, risk management To position us better to deliver our vision, and compliance. we reorganised the business around Market Units, bringing us closer to our °° Succession planning was a key customers. We also welcomed a new theme for 2012, with three Board Chief Financial Officer, Evelyn Bourke, members nearing the end of their to the Board. term. Retirement dates have been phased to ensure an orderly Lord Leitch On governance, the Board made a series succession. Chairman of changes to strengthen our oversight of the business. Following a review, we °° The Remuneration Committee separated our Audit, Risk & Compliance undertook a review with external Committee in two. We implemented support to benchmark its activities an enhanced Corporate Governance and developed an action plan. Statement, which includes more We adopted a new Corporate disclosures. The Remuneration °° Governance Statement with the Committee also undertook a review aim of increasing the disclosure with support from external advisors. of our governance arrangements Combined, these and other actions and the workings of each of the further strengthen Bupa’s governance Board’s Committees. and transparency, both of which are essential to safeguarding trust in Read more in Governance on page 38 our organisation. Bupa annual report 2012 5 Strategic Report

These are areas where I believe Bupa’s Globally, the number of individuals S t model has a lot to offer. with diabetes is projected to rise to Projected rises in r ategic 552m by 2030, or 10% of the world’s noncommunicable diseases Bupa is at an inflection point in terms of adult population, 80% of which will be Diabetes2 the healthcare services that people need 2 in developing countries. Latin America, 371m r

and in Bupa’s development in meeting ep the Middle East and sub-Saharan Africa those needs. The Board is excited about or are predicted to see a near tripling of 552m

the impact the new vision – Bupa 2020 – t ischemic heart disease and stroke will have, and the step change in delivery 7 mortality over the next two decades.3 Dementia it signifies. In 2008, cancer accounted for the 35.6m Our Marketplace deaths of 7.6m people – 13% of all 65.7m Bupa serves customers living in almost deaths worldwide. More than 30% every country around the world. Across of these could be prevented, mainly markets, we are seeing a number by reducing tobacco usage, but also global deaths caused of key trends that drive individuals’ through a healthy diet and lifestyle and 4 healthcare needs. They are shaping moderating the consumption of alcohol.4 Cancer our marketplace today and will see 7.6m Growing global middle class it radically transform over time. As well as this convergence in health 13.1m Converging global health risks risks, we are seeing a growth in middle Health risks are converging across the classes in developing economies and an Heart disease8 world and across economies, underpinned associated trend of urbanisation, which 17.3m by common risk factors, principally an itself can be a driver for behaviours 23.3m unhealthy diet and physical inactivity. which negatively impact health. More Changes to lifestyles and diets as people than ever now live in cities and by Current 2030 societies industrialise have significant 2050, around two thirds of the world’s implications on populations’ health. population is expected to be urban.5 The impact is immense. By 2030, it is Middle class consumers have increased estimated that chronic diseases will expectations of the services they want, cost US$47trn and will represent a including from healthcare, as they developmental as well as health challenge.1 become more aware of their needs and their ability to afford choice. Ageing and ageless societies The global population is ageing sharply. “Chronic diseases The percentage of those aged above 60 represent a years at the turn of the millennium was around 10% – this is projected to rise to developmental, 20% by 2050.6 This phenomenon is not as well as health, confined to developed economies, with challenge.” many developing economies being only a few decades behind as birth rates decrease and life expectancy increases. This demographic shift represents both the success of, and a challenge to, healthcare systems. The critical challenge it presents is the increase in the number of people living with dementia. By 2050, more than 115m Urbanisation and health people across the world are projected The number of people living in cities is to have the condition, raising massive set to rise to 5bn worldwide by 2030. challenges in care, treatment and cost.7 This growth will largely be unplanned. A key trend that we are seeing 1 ‘The Global Burden of Noncommunicable Diseases’, People who move to cities increase World Economic Forum, 2011. associated with the ageing population 2 their chance of developing chronic ‘Atlas 5th Edition’, International Diabetes is that people are thinking more about Federation, 2012 Update. 2012 data. conditions, such as diabetes, through 3 ‘The Global Burden of Chronic Diseases: the kind of old age they want. In reality, greater exposure to risk factors including Overcoming impediments to prevention they want to be ageless – they want to and control’, Derek Yach, 2011. greater use of motor transport, too 4 ‘Cancer Factsheet’, World Health Organization, keep well and they want to preserve little physical activity and unhealthy 2013. 2008 data. the independence and lifestyle they 5 ‘World Urbanization Prospectus: The 2011 Revision’, diets, as well as increased exposure United Nations, 2011. enjoyed while younger. There is a 6 to greenhouse gas emissions. ‘World Population Ageing 1950-2050’, United growing need for care solutions that Nations, 2002. 7 ‘Dementia: A public health priority’, World Health preserve individuals’ independence. Organization, 2012. 2010 data. Read more in Bupa’s Win-Win report on 8 ‘Cardiovascular Conditions Factsheet’, World bupa.com/wellworld Health Organization, 2012. 2008 data. 6 Bupa annual report 2012 Strategic Report

CHAIRMAN’S Changing family structures Implications for Bupa The impact of ageing populations, The challenge to deliver better health STATEMENT combined with increased expectations to more people has never been greater. continued around lifestyle and independence, In each of these areas, we see huge is exacerbated by changes in family potential for our business – to deliver structures. At a time when growing the services that individuals need in a numbers need support, family support way that they want at a price they can is declining. This is not just for the elderly afford, be that directly, through their but also for those with chronic conditions employer or via government. or disabilities. These factors are creating The great risk, which is not confined a need for alternative care solutions. to Bupa but extends across healthcare, Price sensitivity is that a broad spectrum of quality Increasingly, consumers only want to pay care ultimately becomes unaffordable. for services that are relevant to them. This We are addressing this challenge head desire for more personalised services on, as can be seen in the strategic vision is linked to a focus on seeing value for Stuart sets out for the business. I believe money. New technologies contribute to that our potential to make a significant this growing expectation as individuals difference to millions of people’s lives have ever greater power to access the across the world has never been greater information and services they want. and our focus never sharper. Environmentalism and sustainability Board news Finally, consumers want to make I want to take this opportunity to thank sustainable choices. There is a much the Board for the past twelve months – greater understanding that lifestyle particularly for their energy and passion impacts the environment and that this, in a year of huge change. Particular in turn, impacts health and wellbeing thanks go to Baroness Bottomley, whose – from water use to food scarcity to six year tenure on our Board concludes in air pollution. Consumers increasingly April 2013. She has been a great source want to know that the products and of wisdom and her contribution to this services they use are economically business has been invaluable. and environmentally sustainable and Shifting the value from cure do not adversely impact on health. Finally, I want to thank our people. There to prevention in Valencia, Spain is a shared value of care – for customers, A shift in value for healthcare In Spain, Bupa’s Manises hospital covers their families and each other – and I One consequence of these trends 14 towns and a population of 195,000 regularly see our people going well is a shift from treatment to prevention. people in Valencia, on behalf of the beyond what is expected and required. We are beginning to see health systems region’s government. We also manage This commitment is what makes Bupa assessing healthcare risk and aligning 20 primary health centres and two extraordinary. I’m very proud of what incentives to produce the best outcomes speciality centres. we have achieved together and excited at an affordable price. In Spain, for about what is ahead. As well as providing world class, example, we have seen the effective innovative hospital care, Sanitas operation of an innovative Public-Private works with the local population to Partnership (PPP) in Valencia which keep them well and diagnose and has moved health management from treat conditions early. the public to the private sector. The Valencian government has reformed Lord Leitch This can reduce the likelihood of health Chairman issues becoming critical and improve the funding and provision of care – and health outcomes. For example, we have Bupa is at the heart of this partnership. improved our performance in controlling With the increased prevalence of chronic the risk factors for cardiovascular diseases, managing health risk involves conditions, compared to 2011. helping individuals to take steps to reduce their risk indicators – namely to be healthier. While breakthroughs in areas like robotic surgery get headlines, in many countries 70% of healthcare costs are driven by chronic disease and the most important levers to improve outcomes and reduce costs are not necessarily clinically sophisticated.9 They can, however, be challenging to deliver as they require individuals to make and 9 ‘The almanac of chronic disease’, Partnership to sustain significant lifestyle changes. Fight Chronic Disease, 2009. Bupa annual report 2012 7 Strategic Report

We also announced our intention to S t

acquire Innovative Care’s care homes. r

CHIEF EXECUTIVE ategic Now completed, the deal added more officer’S STATEMENT than 1,100 beds and made us Australia’s largest private care services provider. r ep

Organic growth in our development or

We launched a new strategic vision, Bupa markets continued apace, with Bupa t 2020, accelerating our pace of growth and Mexico, one of our health insurance operations, driving good growth in delivery. In the year, we delivered strong customer numbers as a result of growth, with revenues up 4% and underlying opening six new sales offices and profit up 8%, maintaining our record of launching new products. We also accelerated our plans to make year-on-year growth since the start of quality healthcare more affordable and the global downturn. accessible, and ensure health insurance delivers tangible value for money. In the UK, we provided detailed evidence to the Competition Commission to call for remedies that deliver greater competition, efficiency and transparency in the private healthcare provision market. There are no easy solutions, but a lack of competition between hospitals and information on quality of care is pushing up the cost of insurance premiums, which continue to rise at unsustainable levels. Also in the UK, we made changes to address excessive claims inflation driven both by private hospital and consultant fees and practices. The changes, while Bupa’s performance in 2012 was not always popular, are necessary to particularly strong given the economic ensure more UK customers are able to conditions in a number of our markets, access affordable, high quality private especially in Europe. healthcare. There is still much to do but We created new, innovative, lower we have created a foundation to turn cost products for corporate customers, this market around. for the self-employed and for individuals. We grew our business in ways that, we Our international private medical believe, allow us to deliver quality health insurance business developed products outcomes. In Spain, our integrated that are more flexible and tailored health funding and provision model to the needs of the individual. continued to provide differentiation in In Australia we supported families and the market, enabling growth. This model, niche groups with specialist services based on quality of health outcomes, is, and advice. we believe, a good model for the future We expanded dental provision in of sustainable quality healthcare. Stuart Fletcher Spain and the UK and are currently We acquired the remaining 40% share Chief Executive Officer in negotiations with the shareholders in our Public-Private Partnership (PPP) of Dental Corporation, Australia and in Valencia and purchased a 50% stake New Zealand’s largest dental business, in Torrejón Hospital in Madrid, our to purchase the business’s 190 clinics. second PPP. The business performed The transaction is subject to the majority very well despite a challenging of shareholders voting in favour of a economic environment. scheme of arrangement. In December 2012, we announced our Also in Australia and New Zealand, intention to acquire LUX MED, Poland’s we extended our retail offering with largest private healthcare company. two new dental centres providing eye Subject to regulatory approval, care, health screenings and nutrition LUX MED will make Bupa the largest and wellbeing advice. New care homes company in Poland’s private healthcare were opened or acquired across the funding and provision markets, adding two countries adding 640 beds. 1m new customers. 8 Bupa annual report 2012 Strategic Report

CHIEF ageing populations, rising levels of chronic disease, and new treatments EXECUTIVE will continue to fuel demand for OFFICER’S healthcare and drive our growth. STATEMENT Around the world, our combination of healthcare funding and provision continued expertise, our integrated model, and our international operations will continue to differentiate us. A new vision for Bupa In 2012, the newly created Bupa Executive Team focused on creating an ambitious vision for what Bupa will look like in 2020. The development of Bupa 2020 was a major area of work. This new strategic vision sets our direction and In health funding, LUX MED is Poland’s As an executive team, in asking ourselves focus for the next decade. market leader in medical subscriptions. how Bupa will better fulfil its purpose, In provision, it has a national network Bupa is a great company with a rich we challenged ourselves to identify of outpatient clinics and diagnostic heritage. As CEO, I see my role as how to accelerate our growth to reach centres, as well as a day hospital and a providing the leadership that will enable us millions more people in more places large nursing and residential care home. to realise Bupa’s full potential; in essence, to more effect. Its model aligns with Bupa’s ambition to fulfil our distinctive and inspiring We also asked how we will make our to see greater integration between purpose – longer, healthier, happier lives. purpose count in the eyes of customers, healthcare funding and provision. An important enabler of our delivery healthcare systems and the communities We are in a good position to grow our of that potential is our status, which within which we operate, and with our business in 2013 through a combination was a great attraction for me when own people, the ingredient which truly of organic growth, acquisition and deciding to join Bupa. It maximises makes Bupa special. partnership. Difficult economic the degree to which we can pursue We believe that the conclusions we conditions will continue in Europe but growth opportunities for the benefit reached are exciting and motivating for increasing consumer expectations, of customers and society more broadly. all our stakeholders around the world. The key elements of Bupa 2020 are Bupa 2020 summarised here: We will deliver our purpose through being a healthcare partner to millions ADVICE S TO AND more people around the world. ES CA CC RIGHT FO R We intend millions more customers will A AT’S R M E TH E enjoy better health because of Bupa. To achieve this goal, trust is essential, TO and we intend our customers to trust R E E us and recommend us unreservedly. N PL L T O O R E LD V P We will also engage tens of millions A P R E E P O O E A W more people around the world in their E R W T P O L

H R O E B health and wellbeing. Under our Well E

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V F A A E We will reach millions more people E F I H A A C D as we deliver extraordinary business happi li F B F T A O performance. O S U E G R We will build on our success to deliver T H N D I E A M X Y G K strong and sustainable revenue and T R U B A RA NA A ORDI O profit growth, which will ultimately L K M E I B S T N USINES E – provide the means for us to reach more A G P E H E N ERF NC T D Q ORMA R people and better fulfil our purpose. To U G A A AL IN C support our efforts, we will be financially C IT KL TH CE Y AC L disciplined and ensure we invest to S T EA SI H BLE IN create long-term economic value. As we can have a big impact on the world’s health, we are also committed Bupa annual report 2012 9 Strategic Report S t “As an executive team, r ategic we asked ourselves to

identify how to accelerate r ep

our growth to reach or millions more people t in more places to more effect – in essence, to fulfil our distinctive and inspiring purpose.”

to having a positive impact on the We will be obsessive about making Reorganising our business environment as we believe that good quality healthcare affordable to deliver Bupa 2020 health and the environment are and accessible. Until October 2012, the business was interdependent. We remain committed As an executive team, and throughout organised in a number of divisions, to our Well World goal of reducing the business, we are utterly committed each run from the UK. our carbon footprint by 20% by 2015. to tackling rising healthcare costs while ensuring better health outcomes. To bring us closer to our customers, We will excel when our people Affordability is essential for good we restructured the divisions into love working at Bupa. healthcare to be accessible, and it Market Units – Australia and New We will cultivate an extraordinary culture is fundamental to our commitment Zealand, UK, Spain and Latin America and organisation. And we will practise to democratise good healthcare. Domestic, International Development what we preach, which means Bupa Markets, and International Private employees being healthier as a result Among Bupa’s 54,000 people, we Medical Insurance. of working at Bupa, as well as making have considerable and world-leading a big impact in their communities. healthcare expertise. We will harness Market Units are now the operating this knowledge to greater effect for units through which we run our business. We believe that when we do these customers and their communities, Within these are business structures things, we will make a difference that through taking a greater role in shaping which allow us to focus on specific matters to people – our customers, patients’ healthcare journey and opportunities in the market. our employees and well beyond. by working with health systems to While each market is now run locally We will be giving more people shape health policy in the interests of and has greater autonomy, the executive access to advice and care that communities. Increasingly, we are seeing team takes accountability for the whole is right for them as an individual. the powerful benefits of integrated of Bupa and ensures we work together We will be trusted by our customers healthcare – funding, commissioning across the business to realise our Bupa to be there for them when they need it, and provision. Patients report higher 2020 intentions. providing support through their lives. levels of satisfaction and we can deliver it at lower cost. We believe greater I am inspired by the many stories of integration will be key to giving more customers who, at very difficult times people access to quality healthcare. during their lives, have found Bupa’s support invaluable, and appreciate that We will tackle the toughest challenges they were cared for as an individual in healthcare – and make a difference. rather than as “a medical condition”. Our Good health is essential – to happy aim is to do more of this for more people. families, to thriving communities, to efficient economies. The challenges to While support is most acutely valued “We believe integrated securing good healthcare are immense. when a person is facing a life-threatening healthcare delivers better illness or a debilitating condition, we will As populations age, more and more go beyond these boundaries to help people are expected to live with outcomes at lower cost more people take steps to improve their dementia and require support to and will be key to giving overall health and quality of life, and maintain their quality of life. Bupa is more people access to reduce their risk of developing serious already a global leader in dementia care conditions such as diabetes, cancer or and we have leading experts who have quality healthcare.” heart disease. been helping us to set new standards in person-centred care for older people for We will partner with the best to be the many years. We will stand up for the frail best at providing advice and care that and elderly in our society to protect their is world-leading, innovative and, above interests and safeguard their wellbeing all, effective. and dignity. 10 Bupa annual report 2012 Strategic Report

CHIEF leading experts and advocacy groups This past year has genuinely exceeded to gather together expertise and bring my expectations and it is an absolute EXECUTIVE about change at system level and privilege to, with them, lead Bupa to OFFICER’S with individuals. reach more people with our purpose of longer, healthier, happier lives. STATEMENT Cancer remains the condition most continued feared across the world by individuals, and is a leading cause of death worldwide. We will take a truly holistic approach to cancer – from prevention and treatment, to surviving well and dying with dignity. We are committed Stuart Fletcher to partnering with people and their Chief Executive Officer families through this very difficult illness to give them greater control and improve outcomes. By 2030, deaths due to noncommunicable This is a big vision. It builds on what has diseases are projected to rise substantially made Bupa successful so far and it is and will be the most common cause of underpinned by our heritage, history death. We will use our expertise to help and capabilities but it is a major step- individuals take steps to reduce their change in our ambitions and defines risk of developing a chronic condition, much more clearly and precisely what starting with diabetes and cardiovascular we are committed to becoming and disease. We will also help people who what we are aiming for – to colleagues, have a condition to manage their health, customers, partners and healthcare reduce their risk factors and improve systems. It also fully aligns our Well their quality of life. World sustainability agenda – keeping people well and supporting a healthy Changing behaviour, and sustaining that planet – with Bupa’s strategic vision. change, is rarely sophisticated but it is always difficult. We will partner with We are still in the early stages of this new phase in our development. Starting in 2013, we will be tracking our progress “Bupa’s founding principle against a scorecard and we will report A Shared Vision on the progress we are making in our for the Future back in 1947 was to 2013 Annual Report and Accounts. Discussions about our strategic ‘prevent, relieve and cure The challenges we have set ourselves are vision were initiated in the Bupa sickness and ill health immense, but in the year I have been at Executive Team in April 2012. Bupa, the appetite, ambition and passion We then shared those discussions of every kind’. Today, that I find in my colleagues has fuelled with the Board in June 2012, where these areas remain the vision we have developed together our conclusions were tested and and I am excited by the potential that further developed. essential as we pursue I see around me to make an enduring our purpose – ‘Longer, difference. Having finalised our Bupa 2020 work in September, we took the healthier, happier lives’.” Realising that potential and bringing it vision to 200 of our most senior to life I see as my purpose as leader of managers in a workshop, where we this business. Reflecting on the past shared the vision and strategic goals year, the scale and pace of change that and how together we would each we have embraced together has been take accountability for inspiring, remarkable. There is huge ambition and engaging and energising our people we are already starting to see the impact to deliver them. on our results. We are now engaging people at all I thank every single one of our 54,000 levels of the business to have them people for their commitment and contribute to how we will together dedication. They make Bupa special. fulfil our purpose and make a huge I also want to take this opportunity impact on the health and wellbeing of to thank my Bupa Executive Team millions of people around the world. colleagues, each of whom share with me the vision for Bupa and a passion to create a truly extraordinary organisation. Bupa annual report 2012 11 Strategic Report

BUPA EXECUTIVE TEAM S t

The Bupa Executive Team takes r ategic collective responsibility for Bupa’s purpose and for Bupa

2020. This means working across r accountabilities and addressing ep challenges together so that Bupa or t is better able to serve more people. Stuart Fletcher Evelyn Bourke Dean Holden Richard Bowden Chief Executive Chief Financial Managing Director, Managing Director, Officer Officer Australia and New United Kingdom Zealand

Iñaki Ereño Alison Platt Robert Lang Denise Collis Yasmin Jetha Paul Zollinger-Read Managing Director, Managing Director, Managing Director, Chief People Officer Chief Information Chief Medical Officer Spain and Latin International International PMI Officer America Domestic Development Markets

We announced the appointment of Theresa Heggie to the Bupa Executive Team as Chief Marketing and Strategy Officer on 8 March 2013.

Steve John Nicholas Beazley Corporate Affairs Company Secretary Director

OUR VISION WILL ACCELERATE OUR GROWTH TO REACH MORE PEOPLE IN MORE PLACES TO MORE EFFECT. Read about what we are already doing to realise our ambitions and reach more people with our purpose – longer, healthier, happier lives. 12 Bupa annual report 2012 Strategic report

Access to advice and care thats’ right for me

Making and sustaining positive lifestyle changes is difficult. With soaring rates of chronic disease, we believe that helping people adopt a healthier lifestyle is the single most effective way we will help people live longer, healthier, happier lives. In Australia, our Integrated Osteoarthritis Management Programme is helping customers to improve their health by providing them with a tailored programme that helps increase their mobility, manage pain, lose weight and improve fitness. It is designed to be simple, home-based and flexible. Geoff started the programme on the recommendation of his orthopaedic surgeon. Weighing 110kg, the pressure on his knees was a major cause of pain. Through the programme, Geoff lost 23kg, saw his knee pain significantly reduce and has taken up running. Bupa annualannual reportreport 2012 13 Strategic report S t r 97,000 ategic PEOPLE ACROSS THE WORLD r ep

TOOK PART IN BUPA’S 2012 or

GLOBAL CHALLENGE ON t WALKING. Walking is the most accessible form of activity for all ages and abilities. Walking an extra 15 minutes a day can extend a person’s life by up to three years. Source: Get Walking, Keep Walking, Bupa & C3

12m PEOPLE ACROSS THE WORLD ACCESSED OUR HEALTHCARE INFORMATION ONLINE IN 2012. In addition, 530,000 downloaded our healthy apps, which help people take simple steps to be healthier and reduce their risk of developing a chronic condition, such as diabetes or heart disease.

883,000 PEOPLE WE HELPED TO BE HEALTHIER THROUGH OUR COMMUNITY PARTNERSHIPS. Initiatives ranged from providing health risk assessments to shoppers in malls with Diabetes UK, to encouraging commuters to walk to work with the Pedestrian Council Geoff Russell of Australia. Integrated Osteoarthritis Management Programme customer

1.1m PEOPLE WE health COACHED IN 2012. Health coaching helps people improve their health and reduce the risk of developing chronic conditions. 14 Bupa annual report 2012 Strategic report

Obsessive about making quality healthcare affordable and accessible

Access to healthcare services is severely limited for many millions of people. In rural India, many families live below the poverty line and diseases of poverty, such as pneumonia and diarrhoea, are leading causes of death for children in the country. Bupa is working with Bihar’s regional government to implement Rastriya Swasthya Bima Yogna (RSBY), or National Health Insurance Programme. Funded by the government, the scheme provides low cost health insurance to families living below the poverty line. Families are recruited via community road shows, with up to 3,000 people joining the scheme daily. This initiative is transformational. It is also a first step. Utilising the experience gained from RSBY, Bupa is developing new micro health schemes that can be taken to scale in India and beyond. Strategic report 15

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O SS O O O 25% LO AT 90% of patients treated would and, hospital the recommend compared all to Spanish public hospitals, nearly patients rate all medical areas as above average. H CO IN Health Dialog’s shared decision making significantly delivered programme lower hospitalisation rates as well as 5.3% lower healthcare costs compared with usual levels of support. This is another way we are making quality accessible. more healthcare We have beenWe working with our network of provider hospitals in India since assessments undertaking quality 2010, and providingadvice on and standards raise to how improve the quality of care patients.to 12.5% L 800 H A

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Tackling the toughest challenges in healthcare – making a difference

At Bupa, we will focus on where we believe we can make the greatest difference – in cancer care, diabetes, heart disease and dementia. For cancer care, this means taking a truly holistic approach and caring for the whole person – from swift diagnosis to leading treatment and care. Our approach made all the difference to Sue. Diagnosed with advanced facial skin cancer, Sue decided to opt for radical surgery. Although this meant removing a quarter of her face, she knew this surgery would give her the best chances of survival. Sue then had facial reconstruction surgery by a leading specialist. Bupa was by her side all the way. Today, her scarring is hardly noticeable. Bupa annualannual reportreport 2012 17 Strategic report S t r 75,000 ategic health assessments r ep

provided in Bupa or

wellness centres. t In addition, over 85,000 individuals completed online risk assessments which help people learn more about their body and reduce their risk of developing conditions such as Type 2 Diabetes.

7,500 UK BUPA CARE HOME STAFF who received SPECIALIST ‘PERSON FIRST, DEMENTIA SECOND’ TRAINING. Pioneered by Bupa’s Prof Graham Stokes with the University of Bradford, the programme is helping care home staff provide leading person-centred care to our residents.

5,000 AU STraLIAN CUSTOMERS TREATED BY THE GENESIS HEART CARE NETWORK IN 2012. Bupa has a partnership with the Genesis network of cardiologists to provide quality, evidence-based care to customers with heart disease as well as support to help them Sue McIntosh-Gibbs understand their condition, Bupa UK customer treatment and care options. and cancer survivor

450,000 patients treated in our hospitals in 2012. Among these were cancer patients receiving care in our Oncology Advice and Care Units in Spain. The units combine the most advanced treatment with emotional support for the patient and their family. 18 Bupa annual report 2012 Strategic report

FINANCIAL REVENUE BY MARKET UNIT REVIEW

43% Strong international performance in 2012 30% 14% has driven good growth in revenue and 3% 10% underlying profit. We are laying the 43% 30% foundations for Bupa 2020 with prudent 14% management of our balance sheet and 3% finances, along with increased investment. 10% 43% PROFIT/(LOSS) B30%Y MARKET UNIT 48%14% 19%3% 10%19% (2%) 16% 48% 19% 19% (2%) 16%

48% 19% 30%19% (2%)24% 22%16% 18% Number of cust6%omers BY MARKET UNIT30% We have delivered a good set of 24% financial results in 2012, with strong 22% 18% international growth. Revenues were 4% 6% ahead of last year and underlying profit before tax was up 8%. These results 30% were delivered against a backdrop of 24% 22% continuing economic and regulatory 18% pressures in Europe, as well as a 6% continued decline in the UK health insurance market that has been evident for a number of years. 2012 also marked the start of a journey for Bupa. We set ourselves an ambitious Australia and New Zealand vision for 2020, a key component of United Kingdom Spain and Latin America Domestic which is delivering strong and International Development Markets sustainable revenue and profit growth Evelyn Bourke International PMI Chief Financial Officer and ensuring our investments create long-term economic value. Through extraordinary business performance, we will have the resources to become Summary of results a healthcare partner to millions more 2012 2011 people around the world. £m £m We have started to make progress Total revenues 8,373.9 8,018.1 towards achieving our vision. In 2012, we Underlying profit invested in new and existing businesses, before tax 604.0 559.0 with capital investment up 16% to Non-underlying items (20.4) (339.0) £246.5m. Our people also secured five Profit before taxation 583.6 220.0 significant acquisitions; two completed Taxation (134.9) (84.1) in 2012; one completed in early 2013; and Profit for the year 448.7 135.9 Bupa annual report 2012 19 Strategic report

to our vision of making quality S t

underlying profit healthcare affordable and accessible r before tax for even more people around the world. ategic We also had strong growth in our Asian £604.0m r

and Middle East insurance businesses, ep

with Bupa’s healthcare expertise a key or 2012 £604.0m

differentiator in these markets. t 2011 £559.0m 2010 £464.9m Sustained weak economic conditions 2009 £428.2m adversely impacted profits from our UK business. In this market, we are actively 2008 £413.4m managing the rising costs of healthcare, looking at ways to combat lower consumer confidence and identifying efficiencies in a customer centric manner to offset the impact of real term declines the remaining two are expected Underlying profit before tax increased in fees from local authorities. to complete in Q2 in 2013, subject by 8% to £604.0m with reported profit Health Dialog also faced continuing to regulatory approval. before tax up 165% to £583.6m. challenges from the changing USA During the year we successfully An enhanced focus on operational healthcare landscape. The business is renegotiated a five year £800m efficiencies, combined with our growth better placed to deliver on opportunities committed bank facility. With our in customers has delivered strong profit in 2013, following restructuring in 2012. ownership structure, the availability of performances in our Australian, Spanish non-underlying profit items this facility is important in supporting and International PMI businesses. For underlying profit, to reflect the our ambitious growth targets. This has enabled us to reinvest into our trading performance of the business In addition, robust cash flow from our businesses through the development of in a consistent manner, we adjust operations and prudent management of new products tailored to our customers’ profit before tax for impairment and our strong balance sheet has contributed changing needs and investment in the amortisation of intangible assets to Bupa maintaining a low leverage and quality and capacity of our care home arising on business combinations, a solid credit rating. This will support portfolio. Such investment contributes net revaluation and impairment charges our future ambitions. on property, gains or losses on return seeking assets, foreign exchange, Operating results profit or loss on sale of business and Our continuous product and service “Our strong focus on one-off items. innovation and our strong focus on being a healthcare being a healthcare partner has grown partner has grown 2011 was impacted by the significant our customer base by 9% to 11.8m. impairments on our Health Dialog our customer base business and the impairment of the MBF On the back of this customer growth, brand, following the transition to the revenues increased 4% to £8.4bn. This by 9% to 11.8m.” Bupa brand in Australia. In 2012, the increase was driven by our Australian, launch of Bupa 2020 and the associated Spanish and International PMI Market reorganisation of our business resulted Units. 70% of Bupa’s revenues now come in some one-off costs being incurred. from international operations and this will continue to grow as we expand our Find out more on page 9 global footprint.

GROUP revenue Non-underlying profit items

2012 2011 £8.4bn £m £m Restructuring costs 23.2 – 2012 £8.4bn Impairment of intangible assets arising on business combinations – 299.5 2011 £8.0bn Amortisation of intangible assets arising on business combinations 26.8 34.9 2010 £7.6bn Net property revaluation and impairment charge 5.1 17.5 2009 £6.9bn Gains on return seeking assets, net of hedging (26.1) (6.6) Other (8.6) (6.3) 2008 £5.9bn Total 20.4 339.0 20 Bupa annual report 2012 Strategic report

FINANCIAL Solvency II In 2012, the FSA acknowledged a delay REVIEW to the implementation of Solvency II CONTINUED and set out a new planning horizon of 31 December 2015. Two years ago, we set up a programme to assist all our businesses with the implementation of Solvency II. This activity has now been transitioned into business-as-usual activities in a disciplined and controlled way. From January 2013, Bupa’s state of readiness for Solvency II will be regularly assessed by our Solvency II Committee. CONCLUSION Balance sheet, Bupa delivered good results in 2012 NOTES funding and solvency despite some significant challenges Financial income We seek to manage our business within in our European markets. We remain and expenditure financial ratios that support a solid cautious about the economic outlook Net financial income investment grade credit rating, providing although we are confident that Bupa increased to £54.8m (up a secure platform for our sustainable will continue to deliver growth in 2013. 167%), primarily due to the growth ambitions. We have worked hard during 2012 to strong performance on the Our principal debt ratings relate to Bupa make sure we are in a strong financial return seeking asset portfolio Finance plc’s senior unsecured bond. position to take advantage of future (up £19.5m to £26.1m). During the year, Fitch and Moody’s growth opportunities, which will Tax both reaffirmed their ratings in relation contribute to our ambition of positively Bupa’s taxation expense to this debt at A- (stable) and Baa2 impacting millions more lives. We will represents a headline rate (stable) respectively. maintain a strong focus on delivering of 23.1%, which is lower than sustainable growth to support Leverage reduced to 19% following the UK corporation tax rate Bupa’s purpose of longer, healthier, the repayment of short-term borrowings as a result of prior period happier lives. in 2011. tax credits. We continuously monitor the solvency The Budget statement in position of our regulated companies December 2012 announced and for the group as a whole. We that the UK corporation maintained strong solvency headroom tax rate will reduce to 21% by 2014. throughout 2012. Evelyn Bourke Cash flow Chief Financial Officer Cash and other We generated £742.9m in operating financial assets cash flows, up 44% and the fourth Totalled £3,559.9m (up 14%). consecutive year in which we have Our exposure to Eurozone delivered operating cash flows in bank deposits has been excess of £500m. reduced over the course of 2012 as part of our ongoing The significant uplift in cash generated risk management. was in part due to the advance payment of premiums in Australia as a result Foreign exchange of regulatory changes on 1 July 2012. Approximately 65% (down Excluding the impact of this, the robust “Bupa is in a strong 1%) of net assets are performance has contributed to a financial position to take denominated in foreign solid foundation to grow our business advantage of future currencies, primarily in a sustainable manner. Australian Dollars and Euros. growth opportunities.” We invested £246.5m in capital expenditure, continued to repay interest bearing liabilities and held the rest in cash and lower risk assets such as corporate bond funds. Aside from operating cash flows, Bupa’s main source of liquidity comes from the £800m committed bank facility, which remains almost entirely undrawn. Bupa annual report 2012 21 Strategic report S t “In 2012 we reorganised r ategic our business to support

Bupa 2020. We now r ep

operate our business or around five Market Units, t which comprise individual businesses that reflect our product offerings.”

Market unit highlights

AUSTRALIA AND NEW ZEALAND Revenue This Unit comprises the largest privately owned health insurance provider in Australia and privately owned care home operations in Australia and New Zealand. It delivered very strong growth in £3,554.0m revenue, profit and customers, driven by investment in new products and homes. The business has 2011: £3,252.8M (UP 9%) also had to manage the impact of government reforms to social care funding and private health Profit insurance legislation. In 2013, we will focus on growing our care home portfolio, maintaining our healthcare partner proposition and looking at opportunities to continue to invest in our largest £278.3m Market Unit. 2011: £249.0M (UP 12%) Find out more on page 22

UNITED KINGDOM Revenue The UK Market Unit comprises private health insurance, wellbeing services, care homes, out of hospital healthcare services and a complex care hospital in London. In 2012, these businesses £2,528.8m operated in very challenging conditions, which restricted growth in revenues and led to a 2011: £2,506.2M (UP 1%) disappointing profit performance. Continued pressure both on funding and costs, including Profit medical claims costs, is expected in 2013. To combat this we are investing in new products, focusing on operational efficiencies and delivering excellent customer service to drive growth. £109.7m 2011: £140.9M (DOWN 22%) Find out more on page 24

SPAIN AND LATIN AMERICA DOMESTIC Revenue Bupa’s Spanish operations provide an integrated private health insurance and provision model, operate Public-Private Partnerships, a network of care homes for the elderly, dental centres and £1,190.8m other health and wellbeing services. Despite a tough economic environment with unemployment 2011: £1,212.6M (DOWN 2%) reaching 25%, the business delivered a strong performance with growth in customers and profit. Profit Revenues also grew 5% when the impact of foreign exchange movements is removed. In 2013, we will maximise efficiencies and explore opportunities in Latin America. £113.4m 2011: £106.1M (UP 7%) Find out more on page 26

INTERNATIONAL DEVELOPMENT MARKETS Revenue International Development Markets is focused primarily on investments in markets with significant future growth potential. The existing insurance businesses have shown strong growth in customers £227.3m and revenue, as we focus on healthcare expertise to differentiate Bupa from our competitors. The 2011: £244.2M (DOWN 7%) overall decline in the year was as a result of the challenges faced in Health Dialog and restructuring Profit/(LOSS) costs incurred to reposition it for 2013. In 2013, we will continue to expand this Market Unit. Find out more on page 28 £(11.5m) 2011: £(9.1M) (Down 26%)

INTERNATIONAL PMI Revenue IPMI is our global Market Unit, providing a tailored insurance proposition to a growing mobile workforce. This business delivered very strong growth in customer numbers, revenue and profit £872.0m driven by Asia, the Middle East and North Africa. Product innovations, an emphasis on efficiencies 2011: £795.9M (UP 10%) and the ability to respond swiftly to the changing needs of our customers has driven this growth. Profit We anticipate that the good momentum the Market Unit finished 2012 with will continue into 2013. Find out more on page 30 £96.2m 2011: £84.9M (UP 13%) 22 Bupa annual report 2012 Strategic report

Recognition of the Bupa brand in AUSTRALIA AND Australia, following the rebrand of MBF, HBA and Mutual Community in 2011, is now higher than these legacy brands. NEW ZEALAND We also won a ‘Your Life Choices’ Award for being the most trusted health brand In a challenging economic and regulatory for over 50s. environment, performance was very strong, In our care services business, we announced in December our intention with growth in revenue and profit across the to acquire ten care homes from private health insurance and care services Innovative Care, located in Victoria, Queensland and New South Wales, businesses. In our health insurance business, adding more than 1,100 beds to Bupa’s this was driven by an expansion of corporate portfolio. This acquisition completed business, new products, additional marketing in February 2013 and, as a result, we became the largest private care investment and new retail centres. For care services provider in Australia with services, growth came from the addition more than 5,600 beds in 60 homes. of 640 care home beds and 95 assisted Health insurance Our health insurance business performed living units. well in 2012 with revenue and profits up, driven by strong growth of share in the corporate market and the successful launch of products designed to support families. In July 2012, the Australian government introduced changes to legislation for private health insurance (PHI), leading to the means-testing of the PHI rebate, a subsidy paid by the government to individuals to support PHI uptake. In Australia and New Zealand, consumer confidence and retail The reform caused some customers spending continued to weaken. to become more price-sensitive, The business environment was a trend that is expected to continue further challenged in Australia in 2013. Price increases, which are with reductions by the government government regulated, were also in health and social care funding. lower than expected. This put pressure on our customers’ Despite some customers downgrading budgets across our insurance and care their cover as a result of the rebate services businesses. In this context, reform, the PHI market continued to our performance was good and grow with the Market Unit growing customer numbers grew strongly. customer numbers by 4%. We achieved a higher share of PHI customer growth We continued to expand our retail than any of our competitors in the presence, opening stores in Gladstone 12 months to June 2012. and Brisbane in Queensland and in Dean Holden Sydney’s China Town, providing MD of Bupa Australia and New Zealand customers with rapid access to eye care, “In both Australia and Market Unit health screenings, and nutrition and wellbeing advice on the high street. New Zealand, consumer confidence continued We are currently in negotiations with the shareholders of Dental Corporation, to weaken but our Australia and New Zealand’s largest performance was good dental business, to purchase the business’ 190 clinics, which, when and customer numbers complete, will strengthen and diversify grew strongly.” our existing healthcare offer. The transaction is subject to the majority of shareholders voting in favour of a scheme of arrangement. Bupa annual report 2012 23 Strategic report

In New Zealand, revenue increased S t revenue as both capacity and the number of r ategic residents grew. Profit growth was helped £3,554.0m by higher property investment gains.

While occupancy remained high, rates r Up 9% slipped slightly to 92.8% in care homes ep and 91.7% in villages as capacity grew or more swiftly than resident numbers. t profit They still compared very well against the market. £278.3m During the year, we acquired a brain Up 12% injury rehabilitation business, a 65-bed care home, and we continued to invest both in villages and care homes, more customers than doubling our capital spend to deliver additional capacity at new and Expanding our care homes existing sites. This spend will increase network in Australia 3.5m further in 2013. Up 4% In December, we announced our Outlook intention to acquire ten new care homes, In insurance, we anticipate growth levels making Bupa the largest private care to be maintained although we also services provider in Australia. The care employees anticipate continued pressures due to homes, consisting of over 1,100 beds, government restraints on price increases are located in Queensland, New South 10,400 and the ongoing impact of customers Wales and Victoria. being more price-aware. The acquisition, which received Australian social care reforms regulatory approval in February 2013, announced in 2012 are expected to put followed the purchase of two care pressure on our care services business homes earlier in 2012 and the opening in 2013. We will continue to invest in of a new development, Bupa Bankstown. developing our portfolio and operational performance while keeping our customers Following the acquisition, Bupa’s The quality of the business was also at the centre of everything we do. Australian care services portfolio now recognised when we received an consists of 60 homes and more than Outstanding Value Health Insurance In New Zealand, we will invest significantly 5,600 beds across the country. award at the CANSTAR Awards. in organic development in 2013, with a strong focus on developing new sites. care services Gains both in revenue and profit in We remain committed to developing the Australian business were driven by our employees through continued acquisitions and investment in facilities. investment in qualifications and training. Occupancy remained high, declining marginally by 0.5% to 92.8% (2011: 93.3%) despite growth in resident numbers as a consequence of a significant increase in capacity. We opened a new home in Sydney, adding 144 beds, while our acquisition of two homes in Hobart and Toowoomba added a further 249 beds. Social care reforms by the Australian government in April 2012 reduced the funding of care services in a bid to limit government subsidies, which placed pressure on margins. We continued to innovate to improve the care we provide to our residents. We agreed a research programme, in partnership with the University of Tasmania, which will see the introduction of General Practitioners into our care homes in 2013 to provide an enhanced level of care to our residents. 24 Bupa annual report 2012 Strategic report

The Bupa Cromwell Hospital delivered UNITE D kINGdom double digit growth in revenue due to growth in outpatient services such as diagnostics scans and Cromwell Direct, Challenging trading conditions continued, a new rapid referral service for GPs. adversely impacting customer numbers and In July, we announced our intention to profit, particularly in our health insurance make a multi-million pound investment to expand our chain of dental centres business where low consumer confidence, with the ambition of having 50 dental rising healthcare costs and market issues centres by 2015. The new dental centres will provide high quality, affordable had a significant impact on performance. dentistry in major cities. Health insurance and wellbeing services Profits were down due to a decline in customers and higher claims costs. Customer numbers fell 6% to 2.69m (2011 2.87m) while the average claims costs per customer increased by 6%. Customer satisfaction remained steady in 2012 with 68% of personal health insurance customers rating our quality of service as very good or excellent. BHW also won ‘Health Insurer of the year’ at the Financial Advisor Life and Pensions awards. During 2012, several new products were brought to market to respond to customer demand for more affordable healthcare solutions. These include Trading conditions continued to be Bupa on Demand, a self-pay option for challenging with slow economic growth people to access one-off, non-urgent and sustained public funding pressures procedures such as hip replacements, on health and social care. Individuals and Bupa Business Health Solutions, a and corporates remained highly price low cost suite of products for corporate sensitive. customers, created to enable businesses to offer more employees the benefits of As the leading provider of health private healthcare. Products for small insurance, we responded to market and medium-sized enterprises were issues by innovating with new, more also enhanced and this segment of the affordable products, and continued market grew in the last quarter of 2012. to take action to reform the market in an effort to make health insurance We acted to address market issues and more affordable for the long term. deliver value for money for customers. As well as keeping tight control of our Our care services business remained operating costs, we negotiated with under pressure as fees from local hospitals and reviewed consultants’ pay Richard Bowden authorities and Primary Care Trusts for treating Bupa customers to reflect MD of Bupa United Kingdom Market Unit largely remained stagnant. A hoped-for current complexity of procedures and government solution to fix the chronic to champion quality healthcare. underfunding of social care was not forthcoming in the draft Bill, published in The Competition Commission launched 2012, nor in the government’s response its investigation into the provision of to the ‘Dilnot Commission’ in 2013. private healthcare in 2012. BHW support this investigation, which has the Our Home Healthcare business grew potential to drive greater accountability its services as a result of more patients among consultants for the quality and using our medical management, home value of care they provide, see hospital Total Parenteral Nutrition and home chains competing also on quality and oncology services, firmly establishing value, and end the practices that create us as the UK market leader. conflicts of interest for doctors and unnecessarily drive up costs. Bupa annual report 2012 25 Strategic report

We announced a partnership with the S t revenue Co-operative Pharmacy for outpatient r dispensing and with BlueBird Care to ategic £2,528.8m enable the delivery of domiciliary care

alongside home healthcare. We also r Up 1% acquired GEM, a family-run business ep providing out-of-hospital chemotherapy or services for oncology patients. We t p rofIT delivered high patient satisfaction; 95% rated our service very good or excellent. £109.7m The Bupa Cromwell Hospital saw double Down 22% digit growth in revenue as a result of growth in inpatients, day-cases and outpatients, particularly pathological customers and diagnostic scans. A new admission service, Cromwell WORKING WITH GLASGOW 2.8m Direct, exceeded expectations with CITY COUNCIL TO REDUCE 830 patient appointments booked, SICKNESS ABSENCE Down 6% generating new revenue. International Glasgow City Council (GCC) is a large and consultant revenues also grew organisation, employing directly and significantly. indirectly around 36,000 people. employees In 2008/9, sickness absence accounted We achieved high customer satisfaction; for an average of 12.5 days per employee, 96% of patients said they were likely amounting to a huge cost to GCC. 31,700 to recommend the hospital to others. We began working with GCC in 2010, We opened a lung function laboratory, helping them implement workplace which has seen month-on-month wellness initiatives, rehabilitate those increases in activity, and a new Women’s on long-term sick leave, and speed up Health Centre. We also invested £8.9m appointments so staff could access on the hospital’s redevelopment. treatment promptly. A year on, sickness Outlook absence had fallen to 8.1 days, saving cae re s rvices The trading environment is expected GCC £9m, and in the financial year Occupancy was stable at 87.3% but the to remain challenging with continued 2011/12, it fell further to 7.4 days, saving business saw a small decline in profit pressure on funding and cost inflation. GCC a further £3.4m. due to inflationary cost pressures which were compounded by below-inflation In health insurance, we will focus on “Our policy isn’t just driven by sickness fee increases from local authorities customer retention and delivering new absence but also a desire to improve and Primary Care Trusts, who provide products to our core small and medium- staff health, wellbeing and productivity.” funding to more than 70% of our sized enterprises and other corporate Alan Taylor, Senior HR Officer, GCC residents. We also invested £45m to customers. We will continue to drive open new homes as well as extend and the healthcare reform agenda. We also refurbish existing homes in the portfolio. anticipate cost efficiency savings as a result of operating within the Market In November, we made a commitment Unit construct. to open the first dementia teaching care home in the UK. We were also the first In our care services business we will large care home operator to be awarded focus on investing in our staff to ensure the Investors in People Gold award for we continue to provide excellent care. our commitment to develop our people. We will also open three new homes, providing a platform for profit growth We continued to deliver exceptional over the coming years. resident satisfaction scores. 95% of residents rated the quality of care as We will position our Home Healthcare good or excellent. business to take advantage of NHS healthcare reforms designed to reduce Home healthcare and costs and increase care at home, where hospital services we know people prefer to be treated. We Our home healthcare business saw will leverage new technology to improve significant growth in patient numbers as efficiencies and create new propositions. a result of more patients using the core home Total Parenteral Nutrition services We also have plans to invest in the Bupa and expansion of the home oncology Cromwell Hospital to become a leader in service, owing to strong relationships oncology, cardiac services, paediatrics with consultants. and complex surgery. 26 Bupa annual report 2012 Strategic report

Partner Programme was praised by the Snpain a d leading business magazine, Actualidad Economica, as one of the Most latin America Innovative Ideas in Spain. We established an early-diagnosis DOMESTIC dementia team while a new ‘Customer Eye’ programme was created to focus solely on improving the customer Despite a tough economic environment, experience in our care homes and making them feel more homely. Over performance was strong, with continued £1m was invested to refurbish interiors growth in customers and profit. Growth in and gardens. health insurance was driven by successful The Avedis Donabedian Foundation, product launches, an effective customer part of the University of Barcelona, awarded Sanitas an Excellence in Quality retention strategy and ongoing management prize for the quality, management and of medical costs. Higher levels of activity in service of care homes. our three private hospitals and 17 medical Our Public-Private Partnership (PPP) with the regional government of centres reflects our differentiated service. Valencia performed well as did our dental business, where growth was driven by the rapid expansion of clinics and the launch of a new low cost product. In December, we secured a second major PPP in Spain with the acquisition of 50% of the 250-bed Torrejón hospital in Madrid. We will be responsible for the medical management of the hospital for the community for a 30 year period, The economic environment in 2012 was serving a population of 138,000. very tough. Unemployment in Spain In October, we established a new reached 25% and government austerity business unit, Latin America Domestic. measures impacted health and social We are developing a domestic market care funding. Our performance strategy for Latin America and will demonstrates the strength of our explore opportunities in 2013. integrated model which differentiates us in a highly competitive market, keeps Health insurance costs affordable and service quality high. We performed well with a double digit growth in profit, adding more than Excluding the impact of foreign exchange 44,000 health insurance customers. movements, our revenue grew by 5% Growth was driven by the launch of and customer satisfaction scores a suite of more affordable products improved across all of our Spanish targeting specific customer segments. businesses compared to 2011. Other drivers of growth included an A new centre was opened in Alcobendas, effective customer retention strategy, Iñaki Ereño a suburb of Madrid, offering customers and the enhancement of our multi- MD of Spain and Latin America Domestic both wellbeing and medical services channel sales model. Market Unit in the same location for the first time. hospitals and provision This approach allows shared service Profit growth was strong, driven by the synergies to be realised between integration of our funding and provision these two business areas. services, which offers differentiation in We expanded the Healthcare Partner a highly competitive market. Programme, offering customers a The benefits of the Spanish integrated differentiated set of services, beyond model were also seen through increasing cardiology, gynaecology and new baby numbers of insurance customers using checks-ups. We now include young CIMA, our private hospital in Barcelona, children, adolescents and men to help acquired in 2011. We boosted our support customer retention, drive expertise at the hospital in thoracic activity across hospitals and operate surgery, oncology and haematology. as a leader in prevention. The Healthcare Bupa annual report 2012 27 Strategic report

second half of 2012, Sanitas opened S t revenue a total of 41 additional dental centres new Public-private r ategic taking the total to 112. partnership in spain In 2012, Sanitas took on the management £1,190.8m care services

of the 250-bed Torrejón Hospital on r

Down 2% A decline in public expenditure on social behalf of Madrid’s regional government. ep

services due to austerity measures put or The PPP covers 138,000 people living pressure on the business but revenues t in Madrid and the surrounding region profit remained stable as a result of an increase in occupancy. Profits decreased for a 30 year period. The deal will marginally due to an increase in build on the success of Sanitas’ PPP in £113.4m operating costs. Valencia, which has demonstrated that Up 7% public-private collaborations can reduce Occupancy increased as the business healthcare costs while maintaining and continued to focus on differentiation advancing the quality of the service. and attracting more self-funded customers residents in response to cuts in public funding, although the self-pay market 2.6m was also depressed. Up 28% outlook We expect the economy to continue to struggle, with record highs in employees unemployment unlikely to improve quickly. We will focus on consolidating and leveraging the strength of our 8,400 existing provision to generate growth in contribution and new customers amid increasing competitive pressure and government austerity measures. For our health insurance business, we will focus on retaining valuable customers and maximising efficiencies Activity at La Zarzuela and La Moraleja from our multichannel sales model, hospitals in Madrid increased complementing this with new, more following investment in technology, affordable propositions. refurbishment and services expansion. For our hospitals and provision At La Moraleja hospital, we opened a businesses, we will develop customers’ new dermatology unit. understanding and appreciation of our Our PPP with the regional government healthcare excellence and utilise our of Valencia continued to perform well, new services to deliver more services with the hospital extending its services to customers. to serve citizens better and attract more Following the success of Dental XXI, patients from outside the locality. Tight we will continue to grow our non-private cost control also enabled the business to medical insurance customer base improve profitability while improving while expanding our dental provision clinical outcomes, such as better control to increase the number of owned of chronic conditions compared to 2011. dental centres. In May, we opened a paediatric Regarding the Latin American Domestic neuro-rehabilitation centre, attracting market, we will explore opportunities acclaimed medical practitioners to for our participation in this region Manises. In December, we acquired during 2013. the remaining 40% minority stake in the hospital. Dental More than 183,000 dental insurance customers were added in 2012, driven by the launch of a new low cost product, Dental XXI, the development of new sales channels, and the expansion and improvement of our existing dental centres, which also drove sales. In the 28 Bupa annual report 2012 Strategic report

In December 2012, we announced, International subject to regulatory approval, our intention to acquire LUX MED, the largest private healthcare provider in development Poland, to deliver on our strategy of delivering more affordable, accessible Markets healthcare. Arabia Our insurance businesses delivered strong Our associate company in Saudi Arabia grew revenue, profit and customer growth in customers and revenue across numbers as a result of expansion in the our markets, but we saw an overall decline field sales force. This was despite a very in performance due to challenges faced by challenging year in which aggressive competition pushed prices downwards. our health analytics business in the USA. We opened five new retail outlets and new products were launched, aimed at families and domestic workers, such as drivers and maids. We also won several awards, including Best Company to Work For for Women in Saudi Arabia, and Best Call Centre in the Middle East. India Our joint venture with Max India grew revenues and customer numbers as a result of improved sales management and productivity. We won the right to provide health insurance to the population of two health districts under a government scheme. Nine Revenues and profits grew strongly in small branches opened and Max Life Thailand and Hong Kong, where double Synergy, a pilot partnership in which digit growth in customer numbers was our representatives were based in driven by significant contract wins our partner’s, Max Life, offices, was and growth in corporate customers. expanded to 25 locations following Our joint venture in India achieved a initial success. material increase in customer numbers and won contracts to provide micro Hong Kong health insurance products to low- Hong Kong delivered a strong income people as part of a government performance driven by growth in partnership. Bupa Arabia, our associate corporate customers, as the buoyant company in Saudi Arabia, continued economy saw companies expand their to grow customer numbers in an workforce, boosting the number of increasingly competitive market. Our lives covered. For individual customers, health coaching and analytics business new more flexible product options faced continuing challenges from Alison Platt the changing healthcare landscape MD of International Development Markets in the USA. “Bupa’s healthcare Market Unit We have a strong focus on the expertise is a key healthcare needs of customers in emerging economies, utilising our driver for growth – it experience from developed markets. differentiates us from Our healthcare expertise is a key driver of growth as it differentiates us from local market competitors local market competitors who are who are primarily primarily multi-line insurers. multi-line insurers.” Our insurance business saw a 24% increase in customer numbers, driven by our healthcare expertise and international reputation in customer service and delivery. Bupa annual report 2012 29 Strategic report

We are piloting a programme with S t revenue clients to deliver health coaching r ategic in the provider setting rather than £227.3m through insurers. r

Down 7% Outlook ep

In 2013, we will continue to focus on or

development opportunities in new t profit/(Loss) markets and continued growth in existing markets, directly supporting our vision to become a healthcare partner to £(11.5m) millions more people around the world. Down 26% In Arabia, we anticipate continued improvement despite expectations that the market will remain challenging. customers We anticipate sustained growth in Hong d evelopING our micro health Kong in 2013 and will invest in brand insurance offering 2.2m awareness activity, improvements to the Building on the experience we have customer experience and in operational Up 24% gained in India, we are now developing efficiencies. a range of micro health services to Sustained growth is expected in Thailand enable low income consumers to employees and we will continue to invest in service access high quality care at prices improvements and our healthcare they can afford. partner initiatives. 800 This includes the creation of new micro We anticipate continued growth in India health insurance models that can and we will maintain our focus on be delivered with strategic partners. delivering a market-leading service We are designing commercially experience. sustainable, low cost models with the potential to be taken to scale In the USA, pressures from large regional across multiple geographies. insurers who are in-sourcing disease performed well. Brand awareness management are expected to continue This will create the opportunity reached 84% and customer satisfaction to impact our health analytics business. to reach millions more people with hit an all-time high of almost 80%. We will focus on meeting the changing quality healthcare, in line with our needs of our customer base, and we Bupa 2020 ambitions. Thailand will pilot a programme to deliver our Revenue and profit were up due to services in the provider setting. double digit growth in customer numbers driven by significant contract We will continue to focus on business wins and improved retention. development in China and channel the appropriate resources required to Revenue from smaller companies support ongoing operations. increased significantly due to our development of a new product package and a restructure of our sales process. Health Analytics (USA) Revenue was significantly down as a result of large regional insurers in- sourcing disease management. We continued to build our Total Population Health solution through a partnership with Limeade, a leading provider of online wellness, which helped client retention in some areas. The programme gives employers the opportunity to target each employee with tailored, relevant health solutions from online exercise tips to intensive telephone coaching support. 30 Bupa annual report 2012 Strategic report

we operate around the world. The International PMI programme has now assessed 100 hospitals in 23 countries and increasingly we are seeing hospitals in developing New partnerships, the development of countries look to us for guidance on raising quality and measuring clinical innovative products, enhanced direct sales outcomes. capability and improved customer service We invested in infrastructure to improve drove very strong growth in revenue, profit our online sales capability with the and customer numbers in Asia, the Middle launch of our Quick Quote website in October, making purchasing East and North Africa. products through tablet and mobile devices possible. We also delivered a new administration system to improve the efficiency and scale of our 24/7 medical support service which enables patients to be evacuated and repatriated wherever they are in the world to a country where they can receive high quality healthcare. We won The International Assistance Group award for our Lifestraws programme, which supplies portable water filtration devices to families in Kenya for each sale of a Vital Africa product, an emergency-only policy for people working in Africa. A claims service centre in the Dominican Republic was established to improve customer service and We proved particularly successful reduce operating costs. in 2012 at responding quickly to the inTernational medical healthcare needs of an increasingly insurance mobile workforce. Continued We delivered a strong performance as a investment in operations included result of rapid growth in individual and the roll out of new sales offices and corporate customers, a new partnership the launch of a marketing campaign in Libya and expansion into new in Mexico. territories, working with businesses in Customer loyalty and satisfaction scores the International Development Markets for our international private medical and Australian Market Units. insurance (IPMI) continued to improve Customer loyalty and retention throughout 2012 and in Latin America remained major themes for the business. they increased for a third successive Investment was made in creative year with 74% of customers rating customer communications, we launched service as very good or excellent, reflecting the overall investment and Robert Lang improvements in service delivery. MD of International PMI Market Unit “We continued to expand We launched Bupa Flex, allowing customers to buy IPMI for a period our network of assured of less than a year, the usual minimum hospitals, helping to policy length. drive up clinical quality A series of specialised products and in the countries in which services were also introduced for small and medium-sized businesses we operate around in the oil and gas, maritime and the world.” exploration sectors. We continued to expand our network of assured hospitals, helping to drive up clinical quality in the countries in which Bupa annual report 2012 31 Strategic report S t revenue rapid growth in libya r ategic Libya became one of Bupa £872.0m International’s biggest markets in 2012

with 40,000 customers. r

Up 10% ep

This has been achieved in partnership or

with Sahara Insurance Company. t profit With them, we targeted local Libyan businesses and started to attract multinational companies back to Libya £96.2m by providing high quality medical cover. Up 13% The partnership attracted 18,000 new customers during 2012. customers We anticipate growth from our 0.7m international private medical insurance business as we continue to invest in Up 5% new offerings to meet the needs of our customers where the focus is increasingly on affordable healthcare. employees In Latin America, we will maintain our focus on investing in new products and 1,600 in increasing access to our markets to support growth, particularly in Mexico, where we will introduce new products and further distribution channels. New management teams have been introduced into Ecuador, Bolivia and the Dominican Republic operations with a Bupa Rewards programme that offers new product launches planned for 2013. health-related gifts at renewal, and Pursuit of further new market entries online claims processing was improved. are also being planned for 2013. Latin America We delivered a good performance in a very competitive market while continuing our strong development agenda, which is focused on improving customer service and entering new markets. During 2012, we launched a new website offering health and wellbeing information as well as interactive guides to Bupa products, which generated additional sales in the months following the launch. outlook There was good momentum towards the end of 2012 and we expect this to have a continuing positive impact in 2013. We will continue to bring focus to new product propositions and local partnerships to ensure we continue to meet our customers’ needs. 32 Bupa annual report 2012 Strategic report

Leadership OUR PEOPLE Embedding this mindset in our culture begins with our most senior people. In 2012, we initiated a programme based We are a people-based organisation. around a philosophy of “breakthrough leadership”. The concept behind it is the We are investing in, and developing, our transformation of how both individuals people to realise our ambitions and we and teams lead in the relentless pursuit are working to create an extraordinary of outcomes in service of our purpose. culture and organisation where people As part of the programme, we invested in 200 of our most senior leaders, love to work. building capability in breakthrough leadership via residential programmes, coursework, workshops and coaching. We have introduced a biannual performance diagnostic to provide leaders with insights into the environment they are creating for breakthrough thinking and performance. We are also creating an aspirational profile describing the leadership it will take to deliver Bupa 2020 which we will align to our leadership effectiveness and development efforts, along with reward and talent management. Communication Delivering our purpose requires all of our employees to connect with our vision and see the part they can play in delivering it. To do that, we created a range of communication and We are proud of the affinity our staff discussion tools to help team leaders have with Bupa’s purpose and the share the vision with their teams customer care our people provide every through two-way dialogues. day. We are committed to building on this foundation to cultivate a truly This approach is part of a wider step- extraordinary culture and organisation change in how we engage our people. so that we can reach millions more Throughout the business, we are striving people in more places, fulfilling to build and embed a breakthrough our purpose. culture where everyone contributes to our growth and development. Our new vision is shaping our culture – how we lead, how we communicate Also in 2012, we administered a new and how we work with each other version of our online employee survey and our partners. – the Global People Survey (GPS). It allows our whole workforce to Culture contribute to the conversation about Our culture will facilitate and reflect our future and suggest areas where Denise Collis our ambitions. We have been working we can improve. Insights provided Chief People Officer with our people to foster a mindset of by employees are now driving changes “possibility and accountability”. This to enhance our overall performance. is about creating a culture in which our people are empowered to explore Making an impact new ways of doing things and to in our communities work collaboratively to achieve better Our people do incredible things in the outcomes which they ‘own’. communities in which they work. In September, as part of our Well World The ultimate goal is always our purpose programme, the Bupa Global Challenge – having all our people fully aligned saw 97,000 people put on their walking behind delivering it, seeing how their shoes to improve physical and mental role contributes, and knowing that they health and boost environmental can change how we do things to make sustainability. us more effective and efficient. Bupa annual report 2012 33 Strategic report

orientation or any other individual S t

characteristic. employee engagement index r ategic Wellbeing, Health and Safety As a healthcare business, we intend r

our people to be healthier because ep

they work for Bupa. To do that, we or 75%

need to ensure their safety at work 72% t and enable them to live healthier lives. (Favourable) (Favourable) During the last year, we have strengthened our Wellbeing, Health and Safety capability and processes. Board member, Professor Sir John Tooke, assumed the role as Champion Engagement is when our people for Wellbeing, Health and Safety and understand and feel holistically in March we appointed a new Global connected to our purpose and All our businesses engaged their Director of Wellbeing, Health and are motivated to contribute communities with the walking challenge, Safety and Diversity. to Bupa’s success. from a walk along sections of the Great Changes were implemented in the Wall of China to a Walkathon in India. Health and Safety management system, Bupa Latin America and the Caribbean controls and governance. Leading and performance coordinated eleven events across five lagging indicator scorecards were excellence INDEX cities in five countries and Care Services introduced across all businesses and a UK partnered with Alzheimer’s Society global audit was conducted by Marsh and Alzheimer’s Scotland to engage Consulting across 15 locations and eight local communities in Memory Walks. businesses. Findings included good compliance to local legal requirements Smartphone apps were developed for 72% 75% and evidence of strong leadership. Bupa Hong Kong and Bupa Arabia to (Favourable) (Favourable) encourage colleagues, customers and In 2012, there were 3,889 employee other walkers to track their progress. incidents and 115 RIDDOR1 incidents, equating to incidence rates (per 100 Diversity and Inclusion hours) of 7.9 and 0.23 respectively, Our inclusive approach makes us a more which is an improvement on our effective organisation and we are proud incidence rates in 2011. Performance excellence is our that a third of the Bupa Executive Team people’s perception of our is female. Our efforts were recognised commitment to delivering in Saudi Arabia this year by the Minister exceptional products, services of Labour as an exemplar for recruiting 1 Within the UK, the ‘Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 1995’ and healthcare to our customers. and developing Saudi national women. require more serious categories of incidents and accidents to be reported to the Health and Safety We are committed to treating all our Executive or to Local Authorities. people fairly and with respect, making decisions for recruitment, training, development and promotion on ability and aptitude, and giving all people equal opportunity regardless of gender, ethnic origin, physical or mental ability, sexual

Healthier working at Bupa °° Bupa Care Services New Zealand We have implemented numerous achieved 50% engagement in its initiatives around the world to help ‘B-fit’ programme, designed to our people to be healthier, including: help staff make healthy choices.

°° In the UK, we rolled out ‘Positive °° 80% of Health Dialog staff engaged Health’ in partnership with Diabetes in Wellness Dialog. The programme UK and Bupa Health Coaches. 1,390 combines health assessment and employees participated and over one-to-one coaching to support 1,000 diabetes risk assessments and employees to be healthier. cholesterol tests were conducted. 34 Bupa annual report 2012 Strategic report

Risks are measured in terms of Risks AND significance to the business and its stakeholders in the context of Bupa’s strategy, its operations and the Board’s Uncertainties risk appetite. A top-down, annual assessment of With a broad portfolio and a global reach, our key risks was led by the Chief Risk Bupa’s risks are diverse and complex. But Officer in January 2012. This was supplemented by quarterly, bottom-up we do not think just in terms of the financial risk assessments across the whole risk to our business. Our focus is on the portfolio to produce reports which are shared with relevant management millions of people who trust us to care for committees and the quarterly Bupa them and the thousands of people in our Risk Committee. organisation who provide customer The principal role of the Committee, support at all levels. as detailed in the annual Director’s Statement, is to assist the Board in its leadership and oversight of risk across the Group. This includes understanding and, where appropriate, optimising the current risk exposures and the future risk strategy, determining overall risk appetite and tolerances, building the risk management framework, including risk policies, process and controls, and the promotion of a risk awareness culture throughout Bupa. 2012 Key Developments We continually seek improvements to our Risk Management Framework and outputs generated to ensure it remains The Bupa Risk Management Framework relevant. Activities in 2012 focused on: is approved by the Board and outlines Bupa’s approach to risk management 1. Creating a Bupa Risk Committee across Market Units, businesses and During 2012, we split the Audit, Risk and the Corporate Centre. The Risk team, Compliance Committee into two Board led by our Chief Risk Officer, reports sub-committees, namely the Audit to our Chief Financial Officer. Committee and the Risk Committee. This took effect from June. Risk Management Framework At the heart of the framework is the Find out more on page 48 requirement for the functions to identify and quantify periodically the key risks 2. Refreshing the Risk they face and to assess the effectiveness Management Framework of control strategies to mitigate them Changes to the framework made during to an acceptable level. the year included: °° implementing revised assessment scales to take account of the size of Evelyn Bourke Chief Financial Officer Risk Management Framework each of our businesses; °° reviewing the “detailed risk category model” to ensure continuing relevance n Ide tify and consistency across Bupa; and

°° aligning with other governance r A o t s improvements made, including linking i s

n e

o s with the Bupa Governance Policy suite

s M Quarterly Risk and capital assessments. Assessment 3. A new global Risk Portal We have a network of Risk Managers C o around the world who drive n e t r ro su l ea improvements in risk culture and M assessments within the businesses. Bupa annual report 2012 35 Strategic report S t r ategic r ep or t

°° Operational Activities: the Board Australian Brand Migration “By understanding our requires businesses to put in place What happened? appropriate processes, systems and Due to growth through acquisitions, risks and managing trained staff to prevent customer Bupa Australia was operating under them effectively we detriment, reputational damage, three brands – MBF, HBA and Mutual can be confident that adverse regulatory and legal scrutiny Community. The strategy was to migrate or financial consequences due to our lead brand, Bupa. we will meet our to operational activities. What were the risks? strategic objectives.” We have in place detailed qualitative The three existing brands held statements and preferences to considerable equity. MBF alone was support these statements, which valued at £57.3m. The risk was that the are accompanied by a suite of brand roll out would fail to gain traction governance policies and guidance. with consumers and impact customer numbers and business growth. As our business funds and delivers healthcare, the inherent risks we How were they managed? In 2012, we implemented a global Risk manage vary considerably. A dedicated, cross-functional project Portal. This application facilitates quicker team was created, overseen by the The key risks we face, along with reporting of risks and includes enhanced local Executive Leadership Team. mitigating actions, have been mapped analytic tools. It further allows close Implementation of the strategy was against our six risk categories, namely: monitoring of key risks and the actions phased to allow the team to incorporate Strategic Risk, Financial Risk, to mitigate them. During the year, we lessons learnt into the process. The initial Commercial Risk (Insurance), reviewed the effectiveness of Bupa’s focus was on a campaign to associate Commercial Risk (Non-Insurance), risk management arrangements via a the existing brands with the Bupa Operational Risk and Clinical Risk. maturity assessment and provided the brand. Regular assessments of brand results to the Bupa Risk Committee awareness were performed to monitor for recommended actions. the programme. The Bupa Risk 4. Annual review of our risk appetite Committee received frequent progress Our risk appetite is defined by the Board reporting through regular Risk reports. in a set of risk appetite statements. These statements are reviewed annually with regular reporting to the Risk Committee of performance against each individual statement. The key elements of our risk appetite show a keen focus on our financial strength, risk exposures and the provision of high quality service to our customers: °° Economic Capital: we maintain a prudent capital buffer such that we have a high degree of confidence that we have sufficient capital to meet our liabilities in extreme scenarios. °° Funding and Liquidity: the Board requires that at all times sufficient facilities are available to fund the operations of the Group and to meet obligations as they fall due. 36 Bupa annual report 2012 Strategic report

Risks AND Uncertainties CONTINUED

The table below sets out further details of the key risks Decreasing trend in 2012 faced by Bupa along with the mitigating actions that have Increasing trend in 2012 been taken to address these. These have been mapped Static trend in 2012 against six risk categories driven by Bupa’s Internal Risk Framework, namely: Strategic Risk, Financial Risk, Commercial Risk (Insurance), Commercial Risk (Non-Insurance), Operational Risk and Clinical Risk.

Trend Description Mitigating activity within year

Strategic Risk Business environment The geographic spread of our operations reduces our exposure to significant Many governments are reviewing policies on changes in government healthcare policy within any one country. We actively healthcare provision and the role of the private monitor the changing political environment across all areas of operation and, sector, which may impact Bupa in a number of where possible, engage with relevant governments. geographies and sectors.

Economic market conditions We seek to minimise the impact of external economic events through the diversified Challenging economic conditions, particularly in nature of our operations. Our governance structures and policies seek to protect the Europe, increase the risk we face. Rising inflation, business from excessive exposure to specific external risks while seeking to achieve prolonged periods of low interest rates, credit growth targets. Management teams are responsible for considering the potential rating reductions for investment counterparties impact of macroeconomic events in terms of impacts on individual business and reduced GDP can impact our businesses and plans, including the use of stress testing to consider potential consequences investment strategies. of specific events.

Expansion All major acquisitions and strategy decisions are approved by the Board. Rapid growth into new markets and expansion The decisions are supported by thorough due diligence and consideration in existing markets exposes us to new potential of the impact on our operations in line with our Mergers and Acquisition policy. financial, regulatory and reputational risks. We seek to integrate acquisitions into existing management and governance structures within the first 100 days to enable appropriate oversight and control.

Financial Risk Capital and solvency The Bupa Group and our individual insurance legal entities seek to maintain a Against the backdrop of changing regulations, prudent buffer over and above the regulatory capital requirement. This amount there is a risk that we could be required to hold is regularly reviewed in light of regulatory changes, economic conditions and the more capital which could otherwise be used to effect of ongoing business activities. fund growth.

Investment Most of the investments are centrally managed by Corporate Centre Finance Failure to manage financial assets (valued at under the supervision of the Treasury and Investment Committee, chaired by £3.56bn) effectively could result in a financial Evelyn Bourke. Most of the investments are held in cash; exposure to individual loss and reduction in Group solvency. We hold counterparties is restricted. The widespread downgrading of financial institutions a small return-seeking portfolio which is exposed has required us to accept deposits being held with institutions whose two credit to market volatility. ratings are below AA-/Aa3 by the major credit rating agencies. The Treasury and Investment Committee addresses these breaches on a case-by-case basis in order to maintain a balanced portfolio. The return-seeking asset portfolio is managed within a risk budget framework using Value at Risk methodology.

Funding We commit to maintaining an appropriate level of undrawn headroom through We need to maintain good access to a variety an £800m committed bank facility which was successfully refinanced in 2012. of funding sources to ensure that short-term In addition, we have access to a variety of debt capital markets including the and long-term liquidity is maintained to support senior and hybrid bond markets. We are committed to maintaining an appropriate current operations and future growth. investment grade rating and we continuously monitor key financial ratios, such as gearing and interest cover. Bupa annual report 2012 37 Strategic report

Trend Description Mitigating activity S t

within r year ategic

Commercial (Insurance) r

Insurance risk The Group manages its insurance risks by the use of advanced analytic models of ep Unexpected variations in claims can lead to products, pricing, and sectors, controls on underwriting and claims settlement, policy or

reductions in financial returns. Factors affecting clarity and contract certainty, internal and external actuarial reviews and, in respect t insurance risk include macroeconomics, medical of US claims, the use of reinsurance to transfer risk. The Group’s insurance business inflation, demographic shifts, changes in is for short-term medical costs, enabling regular re-pricing in the event of changes population health, developments in healthcare in claims trends. delivery and technology, and statistical fluctuation.

Provider costs Our policy is to work with our providers to maintain and improve quality while In the face of inflationary pressures, there is a risk containing the cost of procuring medical services. This includes, where possible, the that increasing provider charges will lead to use of contracts, preferred supplier arrangements and case management techniques. substantial increases in premium rates and In more established markets, we can leverage our market position to drive efficiency. customer dissatisfaction.

Competition We welcome any activities that promote healthy competition and seek to work with Effective competition among healthcare providers the authorities to secure a fair outcome. In the UK, we recognise that the Competition is essential for controlling price inflation. Failure Commission investigation is necessary to secure the long-term sustainability of the to secure competitive medical services leads private healthcare market. We continue to submit data and information to the to higher premiums. The UK’s Competition investigation and await the publication of the provisional findings in 2013. Commission’s is currently investigating the private healthcare provision market.

Commercial (Non-Insurance) Pricing and utilisation In order to limit our exposure to lower occupancy rates and fees, we are targeting A significant proportion of revenues for our care the private market to achieve a higher conversion rate and increased fees per bed. services businesses comes from the government. Expenditure cuts increase pressure on our ability to achieve desired utilisation rates and pricing targets.

Operational Regulatory We operate to high regulatory standards and maintain an awareness of and, where Changes in financial, clinical and health and safety possible, seek to anticipate regulatory change. Our principal financial regulator is regulations in any of the countries where we have the UK Financial Services Authority, with which our senior managers and directors customers can affect the way we carry out maintain a close working relationship. They seek to maintain strong relationships business, increase costs or reduce revenues. with all local regulators.

Change management We mitigate the risk inherent in change by having stringent change management We have an ongoing development programme procedures. Major project expenditure on new developments is approved by the to drive improvement in products and services. Board following rigorous assessment. Professional programme management Should these changes be managed ineffectively, resources are used and the internal audit function reviews the impact of major the risk of failure to deliver the intended benefits changes on operational controls. Progress on key projects is reviewed by the may be increased. Risk Committee.

Information technology We have a number of dedicated IT teams who are responsible for the development, Our services are underpinned by IT systems maintenance and monitoring of IT services. We have a dedicated information and infrastructure. System failures may impact technology risk management function which monitors and manages specific risks products and services or risk information security across the information technology estate, reporting to both senior management and breaches. Lack of integration of systems across the Group Risk on a routine basis. We continually undertake work to integrate systems Group could also impact operations and profits. and in 2012, a “cloud” based platform to host applications globally was launched.

Business continuity Each of our businesses has detailed Business Continuity Plans overseen by the Group The geographic diversification of our operations Business Continuity Management (BCM) Committee. These plans include response significantly increases our exposure to business plans for specific incidents such as pandemics or significant events and are tested on disruption, natural disasters and other catastrophic a regular basis. Business continuity issues are reported to the Risk Committee which events. is responsible for ensuring appropriate controls are in place to mitigate potential risks. As a result of the governance structures and controls in place, we were not significantly impacted by any business disruption event during 2012.

Clinical Clinical governance All Market Units have a Medical Director responsible for ensuring clinical quality and We are dedicated to evidence-based best governance within the business. They are professionally accountable to the Chief practice and high patient safety and clinical Medical Officer (CMO) for clinical governance; the CMO is a member of the Bupa standards. Failure to fulfil these obligations Executive Team and is the senior manager, independent from the businesses, with could have significant financial, regulatory overall responsibility on behalf of Bupa for the oversight of systems and controls and reputational impact. relating to clinical governance. The Board has a Medical Advisory Panel (MAP) chaired by Professor Sir John Tooke, which advises it on medical issues and considers external perspectives from a number of leading clinicians and health professionals to help inform and develop our approach. 38 Bupa annual report 2012 governance REPORT

fulfil a critical oversight role, providing Chairman’s challenge to the Board on matters of strategy and performance as well as Introduction business focus and development. 2012 Developments to governance As part of our commitment to applying sound corporate governance principles, we improved our governance systems Bupa’s structure enables us to and structures where appropriate and necessary to keep up to date with focus on long-term strategy emerging best practice. In 2012, we and sustainable growth. separated the Audit, Risk & Compliance Committee into individual Audit and Risk Committees with clear, distinct remits and different chairmen. This enables each committee to focus fully on its particular remit. There is common membership across both committees to avoid overlap and duplication in their activities and ensure that they operate effectively. The activities of each Committee are reported on pages 46 to 58. Also, in 2012, all Directors put themselves forward for re-election by the Association Members. We will continue this practice of annual re-election. Finally, this has been a year of change for Bupa with Stuart Fletcher joining as our new Chief Executive Officer in March and Evelyn Bourke as our new Chief Financial Officer in September. O ur corporate structure is special. I am delighted to see the impact they are We were founded in 1947 as a both making in bringing their experience company limited by guarantee with no to bear on best practice governance shareholders. This structure has served at Bupa. Bupa well since then, enabling us to focus completely on the original objects The Future to “prevent, relieve and cure sickness Bupa’s policy is to seek continual and ill health of every kind”. Today these improvement in governance arrangements and this will continue in objects are expressed in our purpose 2013. During 2012, the Board as a whole as “longer, healthier, happier lives” considered Non-Executive Director with Bupa’s structure continuing succession and set out succession plans to underpin its exclusive focus on up to 2015, which will ensure an orderly delivering that purpose. transition and ensure continuity when We recognise the importance of good Non-Executive Directors come to the governance and we aim to operate end of their tenure. to standards of governance expected L ord Leitch °° one Director is scheduled to retire Chairman of large, global public companies. in 2013; Bupa complies with the UK Corporate a new Senior Independent Director Governance Code and associated °° will be appointed on 1 May 2013; guidance. We continually review our governance arrangements in line with °° two Directors are scheduled to retire changes in best practice. With no in 2014; and shareholders, the role of the Bupa Board °° one Director is scheduled to retire is even more material from a Governance in 2015. perspective. The Board comprises eight The recruitment of successors for independent Non-Executive Directors appointment in 2013 is now under way. and two Executive Directors. Bupa has around 100 Association Members who We will also conduct our second are independent and hold the Board to externally facilitated Board evaluation account. These Association Members in 2013, the results of which I will share with you in the 2013 Annual Report. Bupa annual report 2012 39 governance REPORT

We recognise the importance of maintaining effective relationships with our Association Members. In keeping with the full spirit of the Code, great effort is made to engage fully with our Association Members, particularly through the constructive use of the AGM each year and briefing sessions organised each Autumn. We ensure that Association Members are kept informed of strategy and performance and that their views are communicated to the Board. The publication in September 2012 of revisions to the Code have also been taken into account when considering compliance with the Code S tatement of Compliance and what action would be needed to Our stated aim is to operate with the enable Bupa to comply with these new “Bupa exists for the benefit same governance standards as any provisions, as appropriate, into 2013. of its customers – present FTSE 100 company. I am pleased to This report, together with the report that we have applied the main and future.” Remuneration report on pages 52 to 58, principles, and have complied with all describes how we have applied the main of the relevant provisions, of the UK principles of the Code during the year. Corporate Governance Code published in June 2010 (the “Code”) throughout the year except Code Section E: Relations with Shareholders, which is not wholly applicable for a company L ord Leitch without shareholders.

Chairman vernan G o c

RemCo REVIEW e

The Remuneration Committee REPORT commissioned an externally facilitated review of the current executive remuneration arrangements and processes to determine their effectiveness and alignment with Bupa’s strategy and goals. The review found that the overall reward structures were broadly in line with market practice with some improvements in the design of remuneration structures being recommended. iMPROVED OVERSIGHt OF RISK The Audit Committee, chaired by We decided to split the Audit, Risk & John Lorimer, focuses on reviewing Compliance Committee into separate accounting policies and financial Audit and Risk Committees in early 2012. statements, the provision of both internal and external audit and This change was implemented in the overseeing the effectiveness of summer and the two new Committees the internal control framework. held their first meetings in June 2012. The Risk Committee, chaired by Lawrence Churchill, focuses on risk management frameworks and risk appetite and provides oversight on risk management practices deployed in the business. 40 Bupa annual report 2012 governance REPORT

T he board roles at Procter & Gamble and United & Nephew plc. Currently Chancellor of Glass. Stuart has over 25 years’ the University of Hull, Pro-Chancellor of of directors experience in senior management and the University of Surrey, a Governor of a strong international track record. He the London School of Economics and is accomplished in setting and executing a Trustee of The Economist. She has in growth strategies, developing strategic depth knowledge of healthcare policy partnerships and embedding employee and regulation gained from 25 years in engagement and team capability the British Parliament, including three development across complex and years as Secretary of State for Health. international businesses. 8. George Mitchell, CBE Re/A/N/Ri 4. Evelyn Bourke, Chief Financial Officer Joined the Board in May 2007. George Appointed CFO in October 2012. Evelyn is currently Chairman of The Malcolm joined from Friends Life where she was Group and non-executive director of Chief Executive Officer of its Heritage Intrinsic Financial Services. Previously division. Previously at Friends Provident, he was an executive director of HBOS plc she was the Executive Director and the former Governor of the Bank of NON-EXECUTIVE CHAIRMAN responsible for strategy, capital and risk Scotland plc. George has worked in 1. Lord Leitch, Chairman N(Chair)/Re and, before that, Chief Financial Officer. financial services for over 40 years and Joined the Board in May 2005; appointed A qualified actuary, Evelyn is also a brings an in depth knowledge of capital Chairman in November 2006. Previously non-executive director of the IFG Group management and banking, including Deputy Chairman of Lloyds Banking in Ireland. Evelyn has a strong track financial discipline and control, to the Group plc, Chairman of Scottish Widows record and extensive experience in Board. He chairs the Board of Bupa’s plc, Senior Independent Director at financial services, risk and capital Regulated Entities in the UK. United Business Media plc, Chairman and management, operations, and mergers 9. Rita Clifton Re/M Chief Executive Zurich Financial Services and acquisitions. UK, Ireland, South Africa and Asia Pacific, Joined the Board in July 2010. Formerly and Chairman of the Association of INDEPENDENT NON-EXECUTIVE DIRECTORS Chief Executive and then Chairman of British Insurers. Currently Chairman of 5. Lawrence Churchill, CBE Ri(Chair)/A Interbrand UK, Rita is currently on the Intrinsic Financial Services, Chancellor Joined the Board in July 2009. Lawrence board of DSG international, Nationwide of Carnegie College and member of the is Chairman of the NEST Corporation and Building Society and Chairman of House of Lords. Lord Leitch has a deep Chairman of the board of the Financial Populus. Previously on the board of and broad knowledge of insurance and Services Compensation Scheme. Judge Business School in Cambridge and financial services gained over 40 years Previously Chairman of the Pension EMAP plc, she served on the Sustainable as a senior executive in a number of Protection Fund, a member of the Board Development Commission, is a Trustee major international businesses. for Actuarial Standards, Chief Executive of WWF-UK and a visiting Professor of Zurich Financial Services UK, Executive of Henley Business School. Rita is SENIOR INDEPENDENT DIRECTOR Chairman of UNUM and CEO of NatWest an expert in brand management, 2. Peter Cawdron Re(Chair)/A/N Life and Investments. Lawrence brings marketing, strategy and sustainability. Joined the Board in May 2007; appointed considerable expertise from operating A(Chair)/Ri Senior Independent Director in January 10. John Lorimer in large, complex organisations and has Joined the Board in July 2011. John is 2009. Peter is a former Chairman of extensive knowledge of financial services, currently a non-executive director of Punch Taverns plc and has held non- risk management, general management International Personal Finance plc and executive director roles at ProStrakan and public policy. Aberdeen New Dawn Investment Trust Group plc, The Capita Group plc, plc. Of his extensive commercial career Compass Group plc, ARM (Holdings) plc, 6. Professor Sir John Tooke M(Chair) of over three decades, 22 years were Johnston Press plc and GCap Media plc. Joined the Board in July 2009. A consultant spent in financial services, including time Previously the Strategy Director for physician, Sir John is President of the with Standard Chartered and Citigroup. Grand Metropolitan plc, Peter is a Academy of Medical Sciences and holds He has considerable experience working chartered accountant and has a number of positions at University in Asia and Australasia. John brings considerable financial and business College London, including Vice-Provost expertise in governance and oversight, expertise gained over many years, with (Health), Head of the School of Life regulation, risk management and in depth knowledge of audit, strategy, and Medical Sciences and Head of the financial services. marketing and brand development. Medical School. Currently non-executive director of UCL Hospitals NHS Foundation COMPANY SECRETARY EXECUTIVE DIRECTORS Trust. Sir John brings his medical expertise, 11. Nicholas Beazley 3. Stuart Fletcher, Chief Executive gained over 40 years, to advise the Board Joined Bupa in 1993, appointed Group Officer N/M on clinical governance and advances in Strategy Director in June 2000 and Appointed CEO in 2012. Stuart joined healthcare practices and treatments. became Bupa’s Company Secretary from Diageo where, most recently, he N/M in June 2005. was President of Diageo International. 7. Rt Hon Baroness Bottomley, DL Joined the Board in May 2007. Baroness Other senior management positions at Bottomley is Chairman of the Odgers Diageo include Global Finance Director Berndtson Board and CEO Practice of Guinness. Previously, he held financial and a non-executive director of Smith Bupa annual report 2012 41 governance REPORT

1 2 3 vernan G o 4 5 6 c e

REPORT

7 8 9

Committee KEY A Audit Committee Ri Risk Committee N Nomination & Governance Committee M Medical Advisory Panel Re Remuneration Committee

10 11 42 Bupa annual report 2012 governance REPORT governance The Role of the Board The Board of Directors is responsible LEADERSHIP for the oversight of the management of Bupa. The Board is responsible for: °° agreeing Bupa’s long-term direction and objectives; °° determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives; °° oversight of Bupa’s operations; °° setting Bupa’s values and standards; and °° ensuring that the necessary financial and people resources are in place to meet Bupa’s objectives. Bupa’s governance framework to its Committees, executive committees Bupa’s Board normally meets ten times In addition, the Board has a responsibility or subsidiary company boards. a year and at other times as required. to ensure that the highest standards of The Role of the Senior Independent It devotes much of its time to overseeing corporate governance are followed. Director (SID) Bupa’s strategy and policies, the The Role of the Chairman The role of the SID includes the following approval of business plans and Lord Leitch is responsible for the key elements: significant capital expenditure, leadership of the Board and is pivotal in acting as a sounding board for the acquisitions and disposals as well as the creation of the conditions necessary °° Chairman and CEO on Board and monitoring business performance. for overall Board and individual Director Association Member matters; Minutes of all Board and Committee effectiveness, both inside and outside meetings are recorded and reflect the the boardroom, including: °° leading the Non-Executive Directors substance of the discussion, as well as in the annual review of the Chairman’s constructive relations between the decisions made. °° performance; Non-Executive and Executive Bupa has a schedule of matters reserved Directors; °° being the focal point for Board members for any concerns regarding for the Board’s approval and all other °° setting agendas; items are delegated to the CEO and the the Chairman, or the relationship ensuring adequate time in meetings Bupa Executive Team. The levels of °° between the Chairman and the CEO; to discuss agenda items, in particular authority delegated to management are acting as a trusted intermediary strategic items; °° regularly reviewed and were updated for Non-Executive Directors; and ensuring clear and accurate during 2012. The roles of the Board, the °° being available to Association information is provided to the Board °° Chairman and the CEO (including the Members. division of responsibilities), the Senior in a timely manner; Independent Director, and the Non- °° facilitation of contributions from The Role of the Non-Executive Executive Directors are clearly defined Non-Executive Directors; Directors (NEDs) and set out in detail on bupa.com. The role of the NEDs has the following °° effective Board Governance; The role of the Chairman and the CEO key elements: succession planning and recruitment are clearly separated and defined. °° strategy and direction: constructively of Non-Executive Directors; °° challenge and help develop proposals Bupa’s governance structure is designed °° management of the CEO; and on longer term direction and strategy; to enable the Board to lead the oversight of major subsidiary Chairmen. Company within a framework of prudent °° °° performance: scrutinise the and effective controls which enables risk It is also the Chairman’s role to ensure performance of management in to be assessed and managed. All Board effective communication with the meeting agreed goals and objectives and Committee members are provided Association Members and to chair and monitor the reporting of with sufficient resources to undertake General Meetings. performance; their duties, including both internal and °° audit and risk: satisfy themselves on The Role of the CEO external specialist advice. The Directors the integrity of financial information Stuart Fletcher is responsible for the individually and collectively act in and that financial controls and day-to-day leadership and management accordance with their duties under systems of risk management are of the business, in line with the strategy the Companies Act 2006. Bupa has robust and defensible; and and long-term objectives approved by a directors’ and officers’ insurance the Board. The CEO may make decisions °° people: determine appropriate levels policy in place. in all matters affecting the operations, of remuneration of Executive performance and strategy of the Group’s Directors, and have a prime role in businesses, with the exception of those appointing and, where necessary, matters reserved for the Board or removing them and in succession specifically delegated by the Board planning. Bupa annual report 2012 43 governance REPORT

The Board as a whole reviewed Board COMPOSITION succession plans for Non-Executive Directors during 2012 and a phased replacement of Non-Executive Directors coming to the end of their second three Executive year term was agreed. This approach 2 gives continuity to the Board and a Independent phased succession process as well 8 as maintaining an appropriate balance of skills and experience on the Board and its committees. A policy on Board diversity was adopted by the Board in 2012, in which it sets outs that “Diversity E xecutive: CEO and CFO in Bupa embraces knowledge and Independent: Chairman, SID and NEDs understanding of relevant diverse geographies, peoples and their length of tenure A copy of the standard Non-Executive backgrounds including race, disability, (years) Director Terms of Appointment, which gender, sexual orientation, religion, set out their expected time commitment, belief and age, as well as culture, 1–3 4 is available for inspection at Bupa’s personality and work-style.” 4–6 5 registered office and during the AGM. Following appointment, the Company 7-9 1 Board Composition, Secretary facilitates a personalised TENURE and Diversity induction programme for all new Stuart Fletcher, Evelyn Bourke, Bupa’s Board primarily consists of Directors which includes Bupa-specific John Lorimer, Rita Clifton L awrence Churchill, Prof Sir John Independent Non-Executive Directors, knowledge building, site visits to Bupa’s Tooke, George Mitchell, Peter outnumbering the Executive Directors businesses in both the UK and overseas, Cawdron, Baroness Bottomley with a ratio of four to one. The information and discussion on strategy Lord Leitch independence of the Non-Executive and development plans for the business

Directors from management and any and meeting Association Members. vernan G

As at 31 December 2012 o other business or relationship which Board and Committee members could materially interfere with their also receive specific training and S ector experience independence is considered and development on topics which are of

4 confirmed annually. All Directors are relevance during the year. This can take c e

subject to annual re-election by the the form of presentations on specific REPORT 2 Association Members, which is subject market economics from leading 4 to satisfactory performance. The Board academics and economists, to more introduced the requirements of annual detailed training on forthcoming Financial Services Clinical & Health System Governance re-election in 2012. changes to financial reporting and regulation. During 2012 this included Strategy & Development Lord Leitch, Bupa’s Non-Executive sessions on both the Spanish and UK Chairman, who was independent on economic situations. appointment, holds a number of other appointments, none of which are considered to impede his role at Bupa. Details of his other appointments are set out on page 40. The only significant change to his appointments during 2012 was his retirement as Deputy Chairman of Lloyds Banking Group. An annual review of all Directors’ actual or potential conflicts of interest is undertaken. Any conflicts must be authorised and a Director would abstain from discussions on any matter where there may be a conflict. Many of Bupa’s Non-Executive Directors hold appointments at other organisations, as set out in their profiles on page 40. Each Non-Executive Director annually confirms that they are able to devote sufficient time to perform their role effectively. 44 Bupa annual report 2012 governance REPORT

Eff ectiveness °° greater access to international business °° a growing international knowledge experience on the Board; and and experience on the Board. °° the use of technology in the These recommendations will be dissemination of information. monitored throughout 2013 by the Performance against each of these Nomination & Governance Committee recommendations is regularly reviewed and we will report progress against by the Board and its Committees these recommendations in our 2013 throughout the year and action taken as Annual Report and Accounts. necessary, such as improved succession The Board intends to conduct another planning and the appointment in 2011 externally facilitated review process in of John Lorimer, who brings greater 2013 and the Nomination & Governance international experience to the Board Committee has initiated the search for from his time working in Asia Pacific, a suitable firm to conduct this work. as well as in risk management. The implementation of the electronic Attendance at Board meetings The Board holds ten scheduled meetings Board performance distribution of Board papers has also each year and convenes others as and evaluation improved the speed of dissemination necessary. In addition to the scheduled In 2010, the Board underwent an and accessibility of Board materials. meetings, there is an annual strategy externally facilitated Board Evaluation The results of the Board’s most recent day, which in 2012 was held in June. process which took the form of one-to- evaluation, which were reviewed by one interviews, culminating in a group the Board as a whole in December Set out below are some examples of the discussion at the December Board 2012, have shown that the Board and routine items discussed over and above meeting that year. The Evaluation its Committees continue to operate standing items of minute review and concluded that Bupa’s Board was effectively with a small number of areas approval, CEO Report, CFO Report and extremely effective and identified identified for further improvement. reports from the Committees. Also set some areas for further development. These centred on two key factors: out below is a table of attendance at These included: Board meetings held during 2012. °° greater information on the competitive °° the development of appropriate environment in each of the key succession plans; markets in which Bupa operates; and

A ttendance February March April June July August September October November December Lord Leitch Rnay Ki g1 – – – – – – – – Stuart Fletcher2 – – Eelynv Bourke 3 – – – – – – – – B aRONESS Bottomley Peter Cawdron laencewr churchill Rita clifton Jnoh lorimer George Mitchell Prrof Si John Tooke A

February: Bupa Well World Programme/Board Diversity Policy March: Approval of Annual Report and Accounts April: Brand Update June: Sanitas Update/Approval of Delegated Authorities July: Bupa International Update/NED fees August: Approval of interim results September: Business Development Update/GTIS Update October: Chief Medical Officer’s Annual ReportNovember: Wellbeing, Health & Safety Update December: Approval of Annual Budget and Three Year Plan/Board Effectiveness Review 1 Ray King stepped down from the Board on 14 March 2012 2 Stuart Fletcher joined the Board on 13 March 2012 3 Evelyn Bourke joined the Board on 12 October 2012 A Apologies Bupa annual report 2012 45 governance REPORT

Engagement The AGM is well attended by Association Members and is attended by all members of the Board. At the AGM, the Company proposes a separate resolution on each substantially separate issue, including a resolution on the Annual Report and Accounts. Voting at the AGM is conducted on a show of hands with the numbers of votes for, against or withheld on each resolution being made available on bupa.com as soon as practicable after the AGM. The questions raised by Association Members at the 2012 AGM covered areas such as financial performance, healthcare funding, exposure to worldwide economic Who Bupa engages with conditions and the UK Competition Other Stakeholders Association Members Commission Inquiry into private provision. Across our markets, we engage regularly Bupa has around 100 Association with policymakers and regulators, Bupa also runs a series of autumn Members who perform the governance healthcare professionals, consumer briefing sessions for the Association role that would normally be undertaken groups, NGOs and other key Members which gives another by shareholders in a FTSE 100 PLC. They stakeholders. This engagement enables opportunity for engagement with generally serve for a period of between us to contribute to health policy debate representatives of the Board on matters five and ten years. The key difference for and build understanding of issues of strategy and performance. These Bupa is that these Association Members relevant to our customers and sessions are well attended and include have no equity interest and, consequently, healthcare generally. We also partner rigorous challenge and questioning no right to dividends. with a number of bodies, largely NGOs, by the Association Members with a to campaign on specific health issues The Association Members are eminent summary of the questions circulated to as part of our commitment to help individuals in their own field, coming all Association Members, as well as to vernan G more people access better healthcare. o from a diverse range of sectors, the Board, to ensure that Association including health and social care, Member views are well communicated business, regulators, academia, as and understood. These more formal well as the public sector and charities. sessions are combined with regular c

engagement with e

Their expertise enables them to provide correspondence on key changes and Association Members REPORT significant challenge to the Board on developments within Bupa, such as AGM seminar and AGM matters of performance and strategy on major acquisitions. In 2012 the seminar was provided as well as to draw upon their skills, °° We run induction sessions for new by Bupa Australia and presented knowledge and experience to help Association Members. This is an the growth and development inform future strategy and development. opportunity for newly appointed of that business including the Fundamentally, their role is to hold the Association Members to gain further re-branding from three brands Board to account in delivering on our understanding of Bupa and its strategy to Bupa. purpose of longer, healthier, happier lives. and their role in the governance of Bupa. 44% of Association Members Also in 2012, Stuart Fletcher met with a °° Bupa’s Association Members have attended the 2012 AGM (2011: 45%). number of Association Members in small opportunities to engage with the entire groups and on an individual basis as part Autumn briefing sessions Board, including at the AGM held in May of his induction to Bupa. This provided Three briefing sessions held in which is preceded by seminar updates °° another opportunity for both the October to which 10-15 from two of Bupa’s businesses. Association Members and the new CEO Association Members attended to engage on key issues such as strategy. each session together with the Chairman, CEO, CFO and Bondholders Bupa also has a number of debt Company Secretary. securities in issue by subsidiary °° Presentation on our Half Year companies and, therefore, operates in results and learning about Bupa’s accordance with the UK Listing Rules in 2020 ambitions. respect of its announcements of results and operations. Bupa’s bondholders Induction – new for 2012 and other interested parties are formally °° A briefing session was run in made aware of the half-year and full-year July to induct new Association results via briefing calls and have the Members on the role that they opportunity to question management perform and how they can assist on the financial performance and us to achieve our purpose. strategy of Bupa. 46 Bupa annual report 2012 governance REPORT

°° ensuring that the financial assessment A udit Committee of Bupa’s position and prospects presented by the Board is balanced Report and understandable; °° engaging the Institute of Internal Auditors to conduct a benchmark The Audit, Risk & Compliance Committee, review of internal audit practices; chaired by George Mitchell, split its role in °° reviewing the preliminary announcement, Annual Report and June 2012 when the Risk Committee was Accounts, interim announcement, established. George, Lawrence Churchill including the going concern statement; and John Lorimer remain members of °° considering reports from the external auditors reviewing any accounting or both the Audit and Risk Committees judgemental issues requiring its which brings continuity. attention as well as any other matters the external auditors wished to bring to the Committee’s attention; °° approving audit plans for the external and internal auditors; °° considering reports from the Chief Internal Auditor on the results of internal audit reviews, significant findings, management action plans, and timeliness of resolution; °° reviewing the Company’s internal financial controls; °° meeting privately with the external auditors; °° monitoring and reviewing the effectiveness of the internal From June, the remit of the Audit audit activities and reviewing Committee was revised to concentrate the independence and performance on monitoring the integrity of the of the external auditors; and Group’s financial statements and °° reporting to the Board on how it the effectiveness of internal control has discharged its responsibilities. systems and monitoring the effectiveness, performance and The Committee undertook a review of objectivity of the internal and external its effectiveness and found it continued auditors. The current Terms of to work effectively. The key area Reference are available on bupa.com. for continued improvement was the provision and format of information All members of the Committee are to enable the Committee to use its Non-Executive Directors and this time most effectively. This has been applied throughout the year both before addressed with the introduction of and after the establishment of the a new Committee paper template. Risk Committee. All members of the Committee have recent and relevant External Auditors John Lorimer financial experience. The CEO, CFO, In relation to the external auditors, KPMG Committee Chairman Chief Internal Auditor and Chief Risk Audit Plc, the Committee assesses the Officer are routinely invited to attend scope, fee, objectivity and effectiveness meetings. The Committee also holds annually. In line with professional discussions with the external auditors standards, KPMG has a policy of rotating without management present. partners every five years. Mary Trussell has been the audit partner since 2010. 2012 Activities The Committee will consider the The Committee met six times during the appropriateness of placing the external year (twice as the combined Audit, Risk audit out to tender in the coming years. & Compliance Committee and a further four times as the Audit Committee). The Committee has a formal policy on In addition to ensuring the integrity Bupa’s relationship with KPMG, which of the annual and interim accounts the includes financial approval limits for Committee was also active throughout non-audit services and restrictions the year in other key areas, including: on the nature of work that can be Bupa annual report 2012 47 governance REPORT

The Board confirms that there is an Bupa’s Internal Audit team acts in ongoing process for identifying, accordance with the Global Institute evaluating and managing significant of Internal Auditors’ professional risks faced by Bupa. This process was in standards and has unrestricted access place throughout the year under review to the Chairman of the Committee. and up to the date of approval of the Where specific skills are not available Annual Report and Accounts and in-house, the Chief Internal Auditor accords with the revised guidance on and Committee Chairman have the internal control published in October ability to procure the services of 2005 (the ‘Turnbull Guidance’). Risk expert external advisors. Management processes are discussed in The system of financial control includes: the Risk Committee Report on page 48. °° a comprehensive system for The Committee carried out a review budgeting and planning together of the effectiveness of the system of with monitoring and reporting the internal control during the year which performance to the Board; considered all significant aspects of performed to ensure that their appraising major investment projects; internal control arising during the period. °° objectivity and independence are not This included the work of internal audit °° key controls over major business risks compromised. This policy is reviewed and operation of material controls including reviews against performance annually. As part of the evaluation of (financial, operational and regulatory indicators and exception reporting, the external auditors, the Directors compliance). During this review, the and the preparation of monthly confirmed that they were satisfied that Committee did not identify, nor was it management accounts; and the external auditors had maintained advised of, any failings or weaknesses monthly reporting of treasury activities their independence. In addition, KPMG °° which it determined to be significant. and risks, for review by senior executives. also annually reports on whether and why it deems itself to be independent. Key features of our internal controls are: Additional non-financial controls include: Further, the Committee is also satisfied °° a framework of internal controls °° a Risk Management team, working that KPMG continues to provide an covering both financial and non- with the business to assess risks and effective audit service and has financial controls, the effectiveness introduce systems to mitigate them. vernan G o recommended to the Board that they be of which is regularly reviewed by Details of major business incidents re-appointed. A resolution to re-appoint executive management and the are reported to the Risk and Audit KPMG will be proposed at the AGM. Fees Board; and Committees and all notified accidents are investigated; paid to KPMG for non-audit services are °° the ‘three lines of defence’ model. c e shown in Note 2.3 to the Accounts. The Risk Management function, °° a commitment by Bupa to ensure REPORT under the leadership of the Chief that its personnel meet high standards Internal Control and Risk Risk Officer, acts as the second line of integrity and competence as well Management assurANCE of defence. Internal Audit acts as as systems covering recruitment, The Board has overall responsibility for a third line of defence. It provides training and development and maintaining Bupa’s system of internal independent and objective assurance the communication of policies control and risk management and for to the Committee over the adequacy and procedures throughout the reviewing its effectiveness. of systems of internal control, organisation; Such a system is designed to manage risk and governance established °° Business Continuity Plans to enable or mitigate rather than eliminate the risk by management (the first line of the business to continue with of failure to achieve business objectives, defence) and monitored by the Risk minimum disruption to customers and can only provide reasonable and Management function based in the in the event of a disaster; and not absolute assurance against material Corporate Centre and Market Units. strict guidelines for the use of misstatement or loss. °° confidential customer data.

A ttendance Internal Audit provides assurance over adequacy in the operation of financial March1 April1 June August October December controls. It reviews the effectiveness of John lorimer2 – – those controls by undertaking an agreed Peter Cawdron A A schedule of internal audits each year lawrence churchill and reporting its findings to executive 3 greo ge mitchell management and the Committee. March: Approval of Annual Report and Accounts April: Internal Audit Update/Risk Update/Compliance Update The schedule of internal audits forms June: Internal Audit Update/Interim External Audit Plan/Half Year Reporting Update August: Approval of part of an annually approved audit plan. interim results/Audit fee proposal October: Internal Audit Update/Accounting and reporting issues for year end/External Quality Assurance Review December: Internal Audit Update/Accounting and reporting issues Plans for 2013 for year end/External Audit Status/Committee effectiveness survey/Internal Audit Plan for 2013 The Committee plans to focus on the 1 Meetings of the combined Audit, Risk & Compliance Committee risk and compliance culture, ethics, the 2  John Lorimer was appointed Chairman of the Audit Committee in June 2012 3 G eorge Mitchell was formerly Chairman of the combined Audit Risk & Compliance Committee until it split in June 2012 adequacy of the second line of defence A Apologies and future financial reporting changes. 48 Bupa annual report 2012 governance REPORT

appetite statements, the assessment of Risk Committee governance arrangements and specific thematic reviews on key areas of risk to the organisation. During the year Report the Committee reviewed the outputs on the Company’s risk management The Risk Committee was established in processes, reviewed the management of specific areas of risk including Strategic, June 2012 following the separation of the Financial, Commercial (Insurance), Audit, Risk & Compliance Committee. Commercial (Non-Insurance), Operational and Clinical and reviewed specific incidents along with the corrective actions taken to address them. The Committee undertook a review of its effectiveness as part of the overall Board Evaluation Process. The review noted A ttendance that the Committee was satisfied with June October December quality of the materials received, the level of debate and the focus of the lawrence churchill Committee. However the Committee Jnoh Lorimer has asked for greater focus on emerging greo ge mitchell risks which will be actioned in 2013. June: Risk and governance framework/Quarterly risk report/Group Risk Appetite/Stress testing approach October: Quarterly risk report/Review of second line assurance structures/Review of: Risk Management process Financial risk, Insurance risk, Bribery Act Update December: Quarterly risk report/Group Risk The key features of the risk management Appetite/Clinical Governance/Group Insurance programme process are as follows:

°° the Committee is responsible for monitoring the nature and extent of the risks across the business;

°° the business conducts half yearly risk assessments based on identified The principal role of the Committee is business objectives which are to assist the Board in its leadership and reviewed and agreed by its executive oversight of risk, regulatory compliance management. Risks are categorised and financial crime across the Group. and evaluated in respect of their potential impact and likelihood. These This includes the understanding and, risk assessments are reviewed and where appropriate, optimisation of updated quarterly by the Committee current risk exposures and future and are reported to and reviewed risk strategy, determining overall risk by executive management; and appetite and tolerance, building the risk management framework including °° the results of the business risk risk policies, process and controls, assessment form one of the bases and the promotion of a risk awareness for determining the internal audit plan. culture throughout the Group. A copy Internal Audit reports in relation to of the current Terms of Reference is the areas reviewed are discussed with available on bupa.com. the Committee and agreed with the Audit Committee. L awrence Churchill The Committee membership has Committee Chairman remained unchanged since its formation Plans for 2013 in June 2012 and all members have In 2013, the Committee plans to focus been in attendance at all meetings. on the continued execution of risk The members of the Committee are management activities, development Non-Executive; the Chief Executive of risk appetite in the face of the Officer, Chief Financial Officer and deferment of Solvency II and Chief Risk Officer are routinely invited opportunities for value creation to attend meetings. through mergers and acquisitions. 2012 Activities The Committee will continue to receive In the first six months of operation, the regular reports on Bupa’s risk profile and Committee focused on the continued will continue the programme of thematic development of the Risk Management risk reviews instigated in 2012. Framework including refining Bupa’s risk Bupa annual report 2012 49 governance REPORT

2012 Activities Nomination & During the year, the Committee undertook significant work on Board recruitment. Following Stuart Fletcher’s Governance appointment, the Committee focused on recruiting a new CFO; Evelyn Bourke was Committee Report appointed in October 2012. This process was led by the Committee with assistance from JCA Group who also The Nomination & Governance provide other recruitment services to Committee has two functions: Bupa. The process involved establishing a role specification, followed by a formal, overseeing appointments to the Board rigorous interview process of shortlisted and Bupa’s governance arrangements. candidates against set objective criteria. The appointment of Evelyn to the role followed an extensive search and review process and was based on her abilities, A ttendance skills, knowledge and experience. February April September December The Board as a whole reviewed the Lord leitch succession plans as each member of the 1 Rnay Ki g – – – Committee was the subject of the review stuart fletcher2 – and therefore conflicted. The Committee baroness bottomley considered the role specification for peter cawdRon the recruitment of new Non-Executive George mitchell Directors to maintain the diversity of skills, knowledge and experience, February: Corporate governance statement approval/Board committee composition/CFO recruitment April: NED reappointment/CFO recruitment September: NED role specification/2012 particularly seeking further international Board Evaluation/Association Member recruitment December: NED recruitment/Corporate experience. Ridgeway Partners LLP, who Governance Code compliance/Committee Evaluation/Association Member recruitment

also provide other executive recruitment vernan G 1 Ray King stepped down from the Board/Committee on 14 March 2012 services to Bupa, was retained to o 2 Stuart Fletcher joined the Board/Committee on 13 March 2012 provide a shortlist of candidates who met the role specification, which was T he Committee leads the process discussed at their meeting in December. c

for Board appointments and makes e

recommendations, together with The formalisation of the process for REPORT reviewing the balance of skills, identification and selection of new experience, knowledge, structure Association Members has also been and composition of the Board and a key activity during 2012, with 14 new its committees. Association Members appointed during the year. This recruitment exercise has The Committee keeps governance been a major part of the programme under review and makes appropriate of Association Member refreshment. recommendations to ensure that Bupa’s The Committee undertook a review of arrangements are, where appropriate, its effectiveness and found it continued consistent with best practice governance to be effective. The Committee will standards. The Committee also identifies continue, on behalf of the Board, to and selects suitable Association Member monitor the actions arising from the candidates. The Terms of Reference are overall Board Evaluation process and on bupa.com. L ord Leitch make recommendations to improve Committee Chairman The only change to the membership further as appropriate, including the of the Committee during the year was recommendation of an external facilitator Stuart Fletcher’s appointment as CEO for the 2013 evaluation process. in succession to Ray King. All other Plans for 2013 members of the Committee are Non- In 2013, the Committee plans to focus Executive. The Chief People Officer is on the effectiveness of governance invited to attend meetings relating to arrangements with major subsidiary the recruitment of new Directors. From companies, the recruitment of two new 1 January 2013, Rita Clifton also became Non-Executive Directors as successors a member of the Committee. to current Non-Executive Directors when they step down in line with the approved Board succession plans, and monitoring compliance with the 2012 UK Corporate Governance Code. 50 Bupa annual report 2012 governance REPORT

academia, provide valuable support M edical and insight to the clinical governance standards and strategy at Bupa. The Panel is supported by the Chief Advisory Medical Officer. Panel Report Membership of the Panel changed considerably in 2012: Stuart Fletcher joined following his appointment as Clinical governance is the main vehicle Chief Executive Officer; Dr Zollinger- Read joined in his new capacity as of accountability for standards of Bupa’s Chief Medical Officer; three healthcare, for improving the quality of our independent members retired of services, and for creating an during the year; and Prof Aw concluded his term of membership in January 2013. environment in which clinical excellence We would like to take this opportunity can flourish. Excellence in clinical to thank the departing independent governance is a priority at Bupa. members – Tony Clayson, Prof McKee, Prof Pringle and Prof Aw – for their tremendous contribution to Bupa and for their support and guidance on our clinical governance agenda. The appointment of successors to the independent members is underway. We are focusing on ensuring sufficient diversity of expertise and specialisms. We anticipate this process will be concluded in 2013. 2012 ACTIVITIES The Panel oversaw various activities to underscore the safety mechanisms A s a provider and commissioner of in place in both our own and partner healthcare, our clinical governance facilities. aims to improve the quality of clinical We rolled out a global Clinical care across the organisation by Governance Toolkit, which includes consolidating, codifying and a Clinical Governance Quality standardising organisational policies Assurance and an Audit Programme. and approaches, particularly clinical The toolkit seeks to monitor and and corporate accountability. evaluate systematically the various the role of the Medical elements of clinical governance within advisory panel (MAP) the business units. The principal role of the Panel is to During 2012, ten audits using the toolkit advise the Board on issues relating to: were conducted. The outcomes were °° professional standards, quality reported and monitored with the of care and clinical governance; business units, discussed at the Clinical °° Bupa’s medical policy; Governance Steering Committee and P rof Sir John Tooke subsequently at the Panel. °° external oversight and assurance Committee Chairman of Bupa’s clinical governance During the process of quality assurance, arrangements; and we have sought to strengthen our ability °° building positive and productive to respond to serious incidents in an relationships with clinicians. open, timely and transparent way that promotes learning. One key quality A copy of the current Terms of initiative implemented during 2012 was Reference is available on bupa.com. the completion of the roll out of the MAP membership World Health Organization Surgical The Panel comprises the Chief Executive Safety Checklist. Officer, three Non-Executive Directors and five independent members. The independent members, highly respected individuals from medical practice and Bupa annual report 2012 51 governance REPORT

PLANS FOR 2013 We will be reviewing all our clinical governance processes with the aims of: °° consolidating and strengthening our current governance frameworks; °° strengthening our approach to clinical risk management; °° simplifying processes to improve the application of our governance framework; and °° supporting the Market Units in implementing market-specific governance practices and sharing lessons that could be applied from these innovations globally. review of the panel reviewing Bupa’s offering in the In addition, we will be: °° As part of the Board Evaluation process, area of mental health, with a view to the Board reviewed the effectiveness °° reviewing clinical governance in our identifying new products and services of the Medical Advisory Panel and its Care Services businesses globally to serve Bupa’s ambitions defined operations in 2012. to develop the current framework in Bupa 2020; and to remain abreast of emerging considering the development in As well as noting the considerable best practice; °° progress made by the Panel over many technologies for the diagnosis and adopting a “zero tolerance” approach years in the quality of clinical °° treatment of cancer, particularly to Never Events in Bupa Care Homes governance and reporting, it made in the area of genetics, to improve using an early warning system to limit recommendations to improve further effectiveness and outcomes. human error; the standard and style of reporting of These will see Bupa move towards increasing audit activity for continued issues to highlight better those matters °° a global, integrated governance requiring the Panel’s attention and focus. quality improvement; vernan G

programme with all businesses o developing Quality Improvement Plans based on outcomes. To strengthen oversight further, the A ttendance c e

number of meetings in 2013 of the Panel January June October REPORT will also increase from three to four. Panel Members: Prof Sir John Tooke (Chairman) Rnay Ki g1 A – – Stuart Fletcher2 – B aRONESS Bottomley R ita ClIFTON

Ex eCUTIVE Management: Dr Andrew Vallance-Owen3 – – Dr Paul Zollinger-Read4 – –

I nDEPENDENT Members: Prof Tar-Ching Aw MBBS PhD FFOM, FRCP, FFPHM5 Tny o ClAYSON MB, ChB, FRCS, FRCSOrth6 A A Pofrtinr Ma McKee CBE, MSc, MD, FRCP, FRCPI, FFPHM7 – – Prof Mike Pringle CBE, MD, FRCGP, FRCP8 – Prof Mary Watkins PhD MN RN RMN

January: Care Services and Health Dialog Updates June: Bupa Australia Update/Consultant Recognition/ Group Medical Director’s Annual Report 2011/Panel Member Refreshment criteria October: Sanitas Update/ Care Services Quality of Care Governance Action Plan 1 Ray King stepped down from the Board on 14 March 5 Prof Aw stepped down in January 2013 2012 6 Tony Clayson stepped down in November 2012 2 Stuart Fletcher joined the Board on 13 March 2012 7 Prof McKee stepped down in April 2012 3  Dr Vallance-Owen retired as Group Medical Director 8 Prof Pringle stepped down in June 2012 in March 2012 A Apologies 4  Dr Zollinger-Read joined as Bupa’s Chief Medical Officer in July 2012 52 Bupa annual report 2012 governance REPORT

of a similar scale and complexity to R emuneration Bupa. The annual process typically includes a review of the basic salary, annual management bonus targets and Committee Report awards, long-term incentive plan (LTIP) allocations and payments and also The principal role of the Committee is pension and other benefits. The Executive Directors are not involved in to set remuneration policy (including any discussions or decisions relating to pension rights and compensation their own performance or remuneration. payments) in respect of the Company’s The Committee also has specific ownership of the rules of the LTIP Executive Directors and senior including the responsibility to set executives. appropriate targets and determine the payout levels. Payouts are based on assessment of the achievements against objectives and performance over a three year period. The Committee also has oversight of the performance management framework and the annual management bonus for the management population. The Committee membership remained unchanged during the year and consists of four independent Non-Executive Directors. All Committee members were in attendance at all meetings during 2012. Those invited to attend include the CEO, Company Secretary, Chief People Officer and a representative from the Committee’s independent advisors T he Committee has responsibility where appropriate. The Committee also for reviewing the design of the met without the executives present. remuneration packages on an annual A copy of the current Terms of basis for the Chief Executive Officer, Reference of the Committee is the Chief Financial Officer and the available on bupa.com. Managing Directors of each Market Unit. It also agrees pay packages of 2012 Activities new recruits within this group of There were two important areas senior executives. of activity in 2012. The Committee reviewed the independent remuneration Each year, the Committee assesses the advisors and decided to change to a new appropriateness of the remuneration firm, Deloitte LLP. The Committee then package in line with its aim to deliver commissioned the new advisors to carry a competitive level and mix of out a “Health Check” on the current remuneration compared with companies remuneration arrangements and

P eter Cawdron Committee Chairman A ttendance February September December Peter Cawdron (Chairman) Lrditcho Le R ita ClIFTON George Mitchell

February: Annual Remuneration Proposals for Executives/Reminder of discretion available to the Committee/ Determining LTIP payout level for the 2009-11 plan/Review of 2012-14 LTIP performance measures and targets/2011 Directors Remuneration report September: Remuneration Committee health check/Pensions policy review/Special bonus arrangements to incentivise out-performance December: Market update: FTSE 100 Financial Analysis vs Bupa, Executive Remuneration trends/Pay benchmarking: Constituents of the comparator groups, individual market benchmarking/Initial thoughts for changes to LTIP and management bonus for 2013 Bupa annual report 2012 53 governance REPORT

packages for the senior executives T he remuneration report within Bupa to determine whether they Although not yet mandatory, in the “The Board is committed were appropriate and effective and Remuneration report on the following to achieving best practice whether they were aligned to the pages, we have aimed to apply the strategic goals set by the Board and majority of the new requirements in the determination and in line with market practice. The Check anticipated under the UK government’s implementation of Bupa’s found that the design of the current Directors’ Remuneration Reporting remuneration structures was largely regulations. Our intention is that the remuneration policy.” appropriate and recommended a review redesigned Remuneration report of the target setting methodology for provides more transparency and clarity, the LTIP. and is easier to understand. The Committee undertook a review of its The Board is committed to achieving effectiveness as part of the overall Board best practice in the determination and vernan G o Evaluation Process and found that the implementation of Bupa’s remuneration Committee was working effectively. policy. In aligning with the Directors’ However it was felt there was room for Remuneration Reporting regulations, improvement in one area relating to the this report describes the remuneration c e quality of information provided to the and benefit policies of Bupa as they REPORT Committee to enable effective decision relate to the Directors of the Company. making. The quality of information It is divided into two distinct sections improved in the latter half of 2012 and – the first on remuneration policy and this will continue to be an area for the second on the implementation of monitoring and further improvement the policy. during 2013. Plans for 2013 In 2013, the Committee plans to focus on aligning the targets for the annual management bonus and the LTIP performance objectives with Bupa’s long-term goals. 54 Bupa annual report 2012 governance REPORT

R emuneration Report

poliy c report SERVICE CONTRACTS PAY AT VARIOUS The aim of Bupa’s remuneration policy is Executive Directors have a twelve month PERFORMANCE LEVELS to provide total remuneration at a level rolling employment contract. The notice Bupa aims to provide a balance of fixed sufficient to attract and retain key requirements are twelve months on and variable compensation that provides executives and to motivate them to either side, which may be payable in stability while incentivising superior deliver strong and sustainable business lieu. The contracts also include specific performance. At target, we aim for performance. The policy is intended to post-termination restrictions. Executive at least 50% of Executive Directors’ deliver a competitive level and mix of Directors are usually permitted, subject remuneration to be based on individual remuneration compared with companies to approval, to have one Non-Executive and business performance. of a similar scale and complexity to Bupa. Director role and to accept and retain The graphs below illustrate the possible the fee for this Non-Executive Director variation in remuneration for different appointment. This is on the basis that levels of performance. any external appointment does not give rise to a conflict of interest. RELATIVE IMPORTANCE OF THE SPEND ON PAY We aim to award salary increases for the Executive Directors in line with company PAY AT VARIOUS PERFORMANCE LEVELS (£M) performance and pay increases for the general UK staff population.

36 36 As both the CEO and the CFO joined ,0 ,0

82 82 Bupa during 2012, it is not possible to

,3 ,3 provide a long-term analysis of salary 6 6 6 6 £3 £3

36 36 increases. However, it should be noted 03 03 03 03 ,0 ,0 7, 7, 3 3

7, 7, that the growth in underlying profit in 3 3 17 17 16 16 /5 /5 /5 /5 ,7 ,7 16 16 2012 was 8%, and the increase in total £2 £2 /18, /18, staff costs in 2012 was 6%. /18, /18, 0 0 0 0 8 8 50 50 210,000 210,000 50 50 210,000 210,000 / / 53 53 2, 2, / / 2, 2, 6 6 7, 7, 14 14 3 3 13 13 14 14 / / 03 03 78 78 000 000 / / 16 16 , , 000 000 7, 7, 0 0 £1, £1, 65 65 000 000 /5 /5 50 50 /18, /18, 466,9 466,9 13 13 050, 050, 5, 5, 0 0 7, 7, / / 1, 1, £1, £1, 36 36 / / 47 47 61 61 50 50 / / / / w target w target w target w target ,0 ,0 0 0 5 5 2, 2, 3 3 000 000 67 67 210,000 210,000 000 000 14 14 37 37 25 25 / / / / ,66 ,66 0, 0, £9 £9 0 0 6, 6, 4, 4, 0 0 050, 050, y belo y belo y belo y belo / / / / 1, 1, 70 70 0 0 35 35 53 53 0 0 / / / / / / / / / / / / £635 £635 m m m m mu mu mu mu 000 000 000 000 000 000 000 000 000 000 000 000 xi xi xi xi target target target target 0, 0, 0, 0, 0, 0, 5, 5, 5, 5, 5, 5, 70 70 Ma Ma Significantl 70 Significantl 70 Significantl 47 Significantl 47 On 70 On 70 On 47 On 47 47 47 Ma Ma

Chief Executive Officer Chief Financial Officer

Other benefits Pension LTIP A nnual bonus Salary Bupa annual report 2012 55 governance REPORT Business revie P ay Policy Table – Executive Directors Key Elements of Remuneration

Base Salary Annual Bonus Long Term Incentive Plan Pension Benefits

Purpose and To attract and retain, To incentivise the To attract and retain executives To provide health To attract and retain link to reflecting role and achievement of and incentivise sustainable security and family executives by w strategy contribution. annual objectives long- term growth and value protection benefits. providing health and and drive superior creation. wellbeing benefits business and providing security performance. for families.

Operation Reviewed annually Targets and As Bupa cannot provide The Company Executives are with any changes individual objectives long-term remuneration based on operates a defined entitled to private implemented in are set annually. equity plans, it provides a contribution health cover, annual April. Decision Bonus awards are deferred cash incentive in the pension scheme, health assessment, influenced by: determined by the form of an LTIP that is broadly called The Bupa life assurance, income reflective of equity-based plans in Retirement Savings protection insurance, °°level of Committee after the accountability, financial year end, comparable plcs. Plan. Executives car allowance and experience and based on A new three year rolling LTIP may have the option 30 days’ annual individual performance against performance period starts each to take this as a holiday. The CEO performance; agreed targets and year, and financial targets are cash allowance is also entitled to objectives. determined by the Committee at instead of pension. the use of a car °°benchmark median and driver. data from the start of each plan. Executives The Company has comparable pay receive an initial allocation at the closed its defined peer groups; start of the three year plan period benefit scheme which should pay out at the end of to new members. °°overall business the plan period to the extent that The former CEO performance and the financial targets are achieved. was a member average salary The plan can pay out up to a until his retirement increases for the in June 2012. rest of Bupa. maximum of 130% of the initial allocation.

Opportunity Fixed amount shown CEO CEO The CEO and CFO The value of these in the table of single Target: 100% Target allocation: 150% of salary receive employer benefits is disclosed vernan G

total figure of of salary Maximum payout: 195% of salary contributions of in the single total o remuneration. Maximum: 150% CFO 30% of base salary figure table. of salary Target allocation: 100% of salary into a pension CFO Maximum payout: 130% of salary scheme or as a cash allowance. Target: 75% of salary c e

Maximum: 112.5% The former CEO REPORT of salary participated in a 1/30th accrual, defined benefit final salary scheme.

Performance None Annual bonus Payouts are determined by the None None metrics payments are based Remuneration Committee based on achievement of on achievements against two challenging financial performance measures. 75% of and non-financial the LTIP allocation is linked to a objectives. 70% Growth in Reserves target and of the bonus 25% is linked to a Risk Adjusted opportunity is linked Profit target. to achievement 100% of the target allocation of Bupa’s annual becomes payable if the operating plan; and predetermined target is achieved. 30% is linked to key In the event of over-achievement, strategic drivers. up to 130% of the allocation may be earned. A threshold performance target is in place at which 30% of the allocation is earned. No payments are made if performance is below the threshold target.

Changes None No change has been Risk Adjusted Profit was None None in year made to measures introduced as a new performance or weighting. metric in 2012. However, a review In order to further incentivise is in progress and outperformance, the maximum changes will be award was increased from 120% made for 2013. to 130% of the allocation. 56 Bupa annual report 2012 governance REPORT

R emuneration Report CONTINUED

P ay Policy Table – Non-Executive Directors P urpose and link to Operation Opportunity Performance metrics Changes in year strategy Fees To attract and provide Reviewed annually The Chairman receives None For NEDs, excluding the stability, reflecting the with any changes an all inclusive fee. Chairman, a reduction complexity of the role and implemented in July. NEDs receive a fixed in basic fee offset by time commitment required. Decision influenced by: basic fee. Additional additional fees paid for service on each of the °°overall business fees are paid for performance; chairing and/or Board Committees and membership of Board for complexity and time °°market median fees commitment of role. for comparable roles Committees and for the and average salary Senior Independent increases for the rest Director. of Bupa; °°number of committees served on; and °°position on committee (member or Chair).

Note: During their time in office, Non-Executive Directors are also entitled to private health cover for themselves and their family and an annual health assessment for themselves and their partner. The Chairman is also entitled to the use of a car and driver. The value of these benefits is disclosed in the single total figure table.

IMPLEMENTATION REPORT The performance of the 2009-2011 LTIP, period to a total of £5,127.7m compared The Report indicates how the policy has which was based on performance in the to the predetermined target of been implemented in the reporting year. three year period to 31 December 2011, £4,961.8m leading to a possible payout As well as showing remuneration figures was assessed and payments were made at 120% of allocation. The Remuneration for the Executive Directors and Non- on 1 April 2012. The reserves grew by Committee, in reviewing the overall Executive Directors, it includes details 28% over the performance period to business performance of Bupa, used its on the degree to which performance a total of £4,591.9m compared to the discretion to cap the payout at 100% to targets have been achieved and the predetermined target of £4,445.6m, recognise the impact of some significant resulting level of annual bonus payout leading to a possible payout at 120% write-downs in 2010 and 2011. and vesting of long-term awards. of allocation. The Remuneration In respect of the management bonus, Committee, in reviewing the overall The following sections of this report Bupa achieved the annual profit targets business performance of Bupa, used contain further details of each Director’s set for these purposes and bonuses its discretion to cap the payout at remuneration, which have been audited. for the Executive Directors on both the 100% to recognise the impact of some financial and non-financial measures DETAIL OF PERFORMANCE AGAINST significant write-downs in 2010 and 2011. were fully funded. The actual bonus METRICS FOR VARIABLE AWARDS The performance of the 2010-2012 LTIP, awards were determined by the Given the change in the reporting which was based on performance in the Committee based on each Director’s methodology, details of the two LTIPs three year period to 31 December 2012, individual objectives and contribution, impacting 2012 have been included was assessed and payments will be and these are reported in the single total for completeness. made in April 2013. The reserves grew figure table. by 30% over the three year performance Bupa annual report 2012 57 governance REPORT

SINGLE TOTAL FIGURE OF REMUNERATION FOR EACH DIRECTOR Business revie In line with the UK government recommendations, a table showing a single total figure for remuneration for each Director is provided below. single total figure table (£’000)

Salary/ Annual w fees Benefits Pension bonus* LTIP* Total Total N otes 2012 2012 2012 2012 2012 2012 2011

Executive Directors Stuart Fletcher a 583 48 175 875 0 1,681 – Evelyn Bourke b 129 5 36 98 0 268 – 712 53 211 973 0 1,949 0

Non-Executive Directors c Lord Leitch (Chairman) 317 55 – – – 372 352 Baroness Bottomley d 57 0 – – – 57 57 Peter Cawdron e 85 1 – – – 86 80 Lawrence Churchill f 103 2 – – – 105 93 John Lorimer g 85 1 – – – 86 29 George Mitchell h 153 1 – – – 154 152 Prof Sir John Tooke i 77 1 – – – 78 75 Rita Clifton J 59 0 – – – 59 56 936 61 0 0 0 997 894 vernan G

Former Director o Ray King K 406 23 262 363 743 1,797 3,099** c

2,054 137 473 1,336 743 4,743 3,993 e

REPORT

* A s defined by the UK government, Annual bonus 2012 refers to bonus payments H. The fees receivable by George Mitchell include £80,000 (2011: £75,000) as earned in 2012, and LTIP 2012 refers to payouts from the plan which ended in Chairman of Bupa Insurance Limited, £10,000 as Chairman of the Audit, Risk 2012 (2010-12 Plan) & Compliance Committee, £3,000 for membership of the Audit Committee, ** 2011 numbers are restated for comparability with the new approach for 2012 £3,000 for membership of the Risk Committee, £2,000 for membership of the Remuneration Committee and £1,250 for membership of the Nomination Notes & Governance Committee. A. Stuart Fletcher was appointed as Chief Executive Officer on 1 March 2012 and I. T he fees receivable by Prof Sir John Tooke include £12,875 (2011: £10,000) figures in the table are for a part-year. as Chairman of the Medical Advisory Panel and £10,000 (2011: £8,333) as a B. Evelyn Bourke was appointed as Chief Financial Officer on 24 September 2012, member of the Cromwell Hospital Steering Committee. and figures in the table are for a part-year. J. T he fees receivable by Rita Clifton include £2,000 for membership of the C. During the year the Board reviewed the basis on which fees are calculated for Remuneration Committee, £2,000 for membership of the Medical Advisory each Non-Executive Director, and it agreed to divide the fee into a base fee Panel and £1,250 for membership of the Executive Sustainability Committee. (£52,000) with additional fee(s) for participation as a Member or Chairman K. Ray King retired from the Company on 30 June 2012. of each Board Committee. Previous year fees for Committee membership are not therefore applicable. D. The fees receivable by Baroness Bottomley include £1,250 for membership of the Nomination & Governance Committee and £2,000 for membership of the Medical Advisory Panel. E. The fees receivable by Peter Cawdron include £15,375 (2011: £13,500) as Chairman of the Remuneration Committee, £11,000 (2011: £9,000) for his role as Senior Independent Director, £3,000 for membership of the Audit Committee and £1,250 for membership of the Nomination & Governance Committee. F. The fees receivable by Lawrence Churchill include £36,500 (2011: £36,000) as a Non-Executive Director of Bupa Insurance Limited, £10,000 for Chairman of the Risk Committee (from July 2012) and £3,000 for membership of the Audit Committee. G. The fees receivable by John Lorimer include £18,500 as a Non-Executive Director of Bupa Insurance Limited (from June 2012), £10,000 for Chairman of the Audit Committee (from July 2012) and £3,000 for membership of the Risk Committee. 58 Bupa annual report 2012 governance REPORT

R emuneration Report CONTINUED

DETAIL ON VARIABLE PAY THAT HAS BEEN AWARDED long-term incentive plan IN THE REPORTING YEAR Scheme type 2012–2014 Long-Term Incentive Plan LTIP allocations for 2012-2014 were CEO CFO made to Executive Directors on their joining during 2012. The plan covers Basis of award 150% of base salary 100% of base salary pro-rated from the three year performance period date of joining plus to 31 December 2014 with a potential one-off special award payout in April 2015. The table below as part of joining shows more detail of the allocations arrangements made in the year. Face value of award £1,050,000 £238,750 SPECIAL ONE-OFF ITEMS Amount that would vest at maximum £1,365,000 £310,375 The CFO, Evelyn Bourke, joined Bupa on performance (130%) 24 September 2012. To compensate her Amount that would vest at threshold £315,000 £71,625 for the loss of certain deferred awards performance (30%) from her previous employer, Evelyn Date performance period ends 31 December 2014 31 December 2014 Bourke was awarded additional one-off awards. These include a one-off LTIP Ray King, the former CEO, retired from allocation of £120,000 under the Bupa in June 2012. His unvested LTIP 2012-2014 plan (shown in the Detail on allocations were pro-rated to his leave Variable Pay table); a one-off additional date (details disclosed in Bupa Annual allocation of £85,000 under the Report 2011) and he received a pro-rated 2013-2015 LTIP plan and an additional management bonus for 2012 which is annual bonus opportunity of up to included in the single total figure table. £202,500 (42.6% of salary) in the 2013 annual bonus scheme. PROVISION OF ADVICE The Committee takes advice on remuneration issues from independent advisors who also provide market data on levels of executive remuneration and benefits. In February 2012, the Remuneration Committee changed their advisors from Mercer Ltd to Deloitte LLP, a voluntary member of the Remuneration Consultants’ Group. During the year, Deloitte also provided other consultancy services to Bupa. The total cost of advice on remuneration in 2012 for the Committee was £109,952. This included a one-off remuneration Health Check which cost £39,000.

Bupa annual report 2012 59 governance REPORT

REPORT OF THE BOARD OF DIRECTORS

The Directors of The British United Provident Association Limited (‘Bupa’) present their report and the financial statements for the year ended 31 December 2012.

The Strategic Report on pages 1 to 37, P rincipal Risks Disclosure of information and the Governance Report on pages and Uncertainties to auditors 38 to 58, including the Remuneration The Group’s principal risks and The Directors who held office at the report on pages 54 to 58, all form part uncertainties are set out on pages date of approval of this Directors’ report of this report. The audited Financial 34 to 37 together with a description confirm that, so far as they are each Statements are presented from page 61. of how Bupa manages these. aware, there is no relevant audit information of which the Company’s Principal activities Board of Directors auditors are unaware; and each Director The principal activities of the Group are The Board is responsible for the has taken all the steps that they ought the provision of health insurance and good standing of the Company, the to have taken as a Director to make health and care facilities and services. management of its assets, including the themselves aware of any relevant audit The latter includes ownership and management of risk, and the strategy information and to establish that the management of care homes, hospitals for its future development. There are Company’s auditors are aware of that and clinics, health screening, provision ten Board meetings each year and other vernan G information. o of disease management services meetings are convened as needed. and occupational and community Auditors Biographical details of the Non- health services. In accordance with Section 485 of the Executive Chairman, two Executive

Companies Act, 2006 KPMG Audit Plc c Financial results Directors and seven Non-Executive e

offers itself for re-appointment at the REPORT The results of the Group for 2012 are Directors who currently hold office, Annual General Meeting as auditors reported on pages 63 to 110. The profit are set out on page 40. of the Company. for the financial year of £448.7m (2011: As at the date of this report, indemnities profit £135.9m) has been transferred are in force under which the Company By order of the Board to equity. has agreed to indemnify the Directors Acquisitions and disposals and certain senior managers, to the Details of the acquisitions made during extent permitted by law and the the year are shown in note 4.0. There Company’s articles of association, were no disposals made during the year. in respect of all losses arising out of, or in connection with, the execution Charitable and Stuart Fletcher of their powers, duties and political contributions Chief Executive Officer responsibilities, as Directors of the During 2012, Bupa made charitable Company or any of its subsidiaries. 11 March 2013 donations totalling £4.1m (2011: £7.3m). This included payments to The Bupa Going concern Foundation of £3.0m (2011: £2.6m), to The Directors confirm that they are the Bupa Health Foundation in Australia satisfied that the Company and the of £nil (2011: £3.4m), to the Sanitas Group has adequate resources to Foundation of £0.8m (2011: £0.8m), and continue in operation for the foreseeable to UK registered charities of £0.2m (2011: future. Accordingly, they continue £0.5m). An additional £0.1m (2011: £nil) to adopt the going concern basis in was donated to non-registered charities. preparing the financial statements. No political donations were made. Policy for paying creditors Employment policies It is Bupa’s policy to pay its providers Details of Bupa’s employment policies, and other creditors in accordance with including policies on equal opportunities agreed terms and conditions. As a for disabled employees, are included in holding company, the Company itself Our People on pages 32 and 33. has no trade creditors. 60 Bupa annual report 2012 governance REPORT

S tatement of directors’ responsibilities

In respect of the annual report the Companies Act 2006. They have and the financial statements general responsibility for taking such The Directors are responsible for steps as are reasonably open to them preparing the Annual Report and the to safeguard the assets of the Group Group and Parent Company financial and to prevent and detect fraud and statements in accordance with other irregularities. applicable law and regulations. The Directors have decided to prepare Company law requires the Directors voluntarily a directors’ remuneration to prepare group and parent company report in accordance with Schedule 8 to financial statements for each financial the Companies Act 2006 The Large and year. Under that law, they have elected Medium-sized Companies and Groups to prepare the Group and the Parent (Accounts and Reports) Regulations Company financial statements in 2008, as if those requirements were accordance with IFRS as adopted by to apply to the Company. the EU and applicable law. The Directors have also decided to Under company law, the Directors must prepare voluntarily a corporate not approve the financial statements governance statement as if the unless they are satisfied that they give Company were required to comply with a true and fair view of the state of affairs the Listing Rules and the Disclosure of the Group and Parent Company and Rules and Transparency Rules of the of their profit or loss for that period. Financial Services Authority in relation In preparing each of the Group and to those matters. Parent Company financial statements, The Directors are responsible for the the Directors are required to: maintenance and integrity of the °° select suitable accounting policies corporate and financial information and then apply them consistently; included on the Company’s website. °° make judgements and estimates Legislation in the UK governing the that are reasonable and prudent; preparation and dissemination of financial statements may differ from °° state whether they have been prepared in accordance with IFRS legislation in other jurisdictions. as adopted by the EU; and °° prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Parent Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial statements comply with Bupa annual report 2012 61

FINANCIAL Independent Auditors’ report 62 STATEMENTS Primary statements 63 Section 1 – Basis of preparation 68

The presentation of the financial Section 2 – Results for the year statements has been refreshed Operating segments 69 Revenues 71 in 2012 to reduce complexity and Insurance claims 72 to provide greater clarity to readers. Other operating expenses 73 Accounting policies that are relevant Other income and charges 74 to the financial statements as a whole Financial income and expenses 74 Taxation expense 75 are described in Section 1 ‘Basis of Section 3 – Operating assets preparation’. Thereafter, the notes to and liabilities the financial statements have been Working capital 76 presented under five key headings: Intangible assets 78 ‘Results for the year’, ‘Operating assets Property, plant and equipment 81 and liabilities’, ‘Business combinations Investment properties 84 and disposals’, ‘Risk management and Provisions under insurance 85 contracts issued Capital management’, and ‘Other notes’. Provisions for liabilities 87 and charges For the British United Provident Post employment benefits 88 Association Limited on a standalone Deferred taxation assets basis (the ‘Company’) primary and liabilities 92 statements and associated notes Section 4 – Business combinations and are set out in Section 7. disposals Each section sets out the relevant Acquisitions 93 accounting policies applied in Disposals 94 Equity accounted investments producing the notes, along with 95 disclosures of any key judgements Section 5 – Risk management and Capital management and estimates used. Financial investments 96 Borrowings 98 Derivatives 100 Capital management 100 Risk management 101

Section 6 – Other notes Related party transactions 110 FINANCIAL STATEMENT Commitments and contingencies 110

Section 7 – Company primary statements and associated notes 111

Section 8 – Five year financial summary 123 s International Financial Reporting 124 Standards relevant to Bupa 62 Bupa annual report 2012 independent Auditors’ report

INDEPENDENT AUDITORS’ REPORT To the members of The British United Provident Association Limited

We have audited the financial statements of The British United Opinion on other matters prescribed Provident Association Limited for the year ended 31 December 2012 by the Companies Act 2006 and under set out on pages 63 to 122. The financial reporting framework that has the terms of our engagement been applied in their preparation is applicable law and International In our opinion: Financial Reporting Standards (IFRSs) as adopted by the EU and, °° the part of the Directors’ Remuneration report which we were as regards the Parent Company financial statements, as applied engaged to audit has been properly prepared in accordance with in accordance with the provisions of the Companies Act 2006. Schedule 8 to the Companies Act 2006 The Large and Medium- In addition to our audit of the financial statements, the Directors have sized Companies and Groups (Accounts and Reports) Regulations engaged us to audit the information in the Directors’ Remuneration 2008, as if those requirements were to apply to the Company; and report that is described as having been audited, which the Directors °° the information given in the Report of the Board of Directors for have decided to prepare (in addition to that required to be prepared) the financial year for which the financial statements are prepared as if the Company were required to comply with the requirements of is consistent with the financial statements. Schedule 8 to The Large and Medium-sized Companies and Groups Matters on which we are required (Accounts and Reports) Regulations 2008 (SI 2008 No. 410) made to report by exception under the Companies Act 2006. We have nothing to report in respect of the following: This report is made solely to the Company’s members, as a body, Under the Companies Act 2006 and under the terms of our in accordance with Chapter 3 of Part 16 of the Companies Act 2006 engagement we are required to report to you if, in our opinion: and, in respect of the separate opinion in relation to the Directors’ Remuneration report and the reporting on corporate governance, °° adequate accounting records have not been kept by the Parent on terms that have been agreed. Our audit work has been undertaken Company, or returns adequate for our audit have not been received so that we might state to the Company’s members those matters we from branches not visited by us; or are required to state to them in an auditors’ report and, in respect of °° the Parent Company financial statements and the part of the the separate opinion in relation to the Directors’ Remuneration report Directors’ Remuneration report which we were engaged to audit and reporting on corporate governance, those matters that we have are not in agreement with the accounting records and returns; or agreed to state to them in our report, and for no other purpose. °° certain disclosures of directors’ remuneration specified by law are To the fullest extent permitted by law, we do not accept or assume not made; or responsibility to anyone other than the Company and the Company’s we have not received all the information and explanations we require members, as a body, for our audit work, for this report, or for the °° for our audit. opinions we have formed. In addition to our audit of the financial statements, the Directors have Respective responsibilities of Directors and auditor engaged us to review their Corporate Governance Report as if the As explained more fully in the Statement of Directors’ Responsibilities Company were required to comply with the Listing Rules and the set out on page 60, the Directors are responsible for the preparation of Disclosure Rules and Transparency Rules of the Financial Services the group financial statements and for being satisfied that they give a Authority in relation to those matters. Under the terms of our true and fair view. Our responsibility is to audit, and express an opinion engagement we are required to review: on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards °° the Directors’ statement, set out on page 59, in relation to going require us to comply with the Auditing Practices Board’s Ethical concern; and Standards for Auditors. °° the part of the Corporate Governance Report on pages 38 to 53 Scope of the audit of the financial statements relating to the Company’s compliance with the nine provisions of A description of the scope of an audit of financial statements is the UK Corporate Governance Code specified for our review. provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. Mary Trussell Opinion on financial statements (Senior Statutory Auditor) In our opinion: for and on behalf of KPMG Audit Plc, Statutory Auditor °° the financial statements give a true and fair view of the state of Chartered Accountants the Group’s and of the Parent Company’s affairs as at 31 December 15 Canada Square 2012 and of its profit for the year then ended; London °° the Group financial statements have been properly prepared E14 5GL in accordance with IFRSs as adopted by the EU; 11 March 2013 °° the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and °° the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Bupa annual report 2012 63 Primary statements

CONSOLIDATED INCOME STATEMENT for the year ended 31 December 2012

2012 2011 Section £m £m Revenues Gross insurance premiums 2.1 6,692.8 6,379.9 Premiums ceded to reinsurers 2.1 (29.2) (34.4) Net insurance premiums earned 6,663.6 6,345.5

Revenues from insurance service contracts 2.1 11.4 11.9 Care, health and other revenues 2.1 1,698.9 1,660.7 Total revenues 8,373.9 8,018.1

Claims and expenses Insurance claims incurred 2.2 (5,187.9) (4,948.5) Reinsurers’ share of claims incurred 2.2 15.5 29.0 Net insurance claims incurred (5,172.4) (4,919.5) Share of post-taxation results of equity accounted investments 2.9 (2.4) Other operating expenses 2.3 (2,672.4) (2,574.3) Impairment of goodwill 3.1 – (165.8) Impairment of other intangible assets arising on business combinations 3.1 – (133.7) Other income and charges 2.4 (3.2) (22.9) Total claims and expenses (7,845.1) (7,818.6)

Profit before financial income and expenses 528.8 199.5

Financial income and expenses Financial income 2.5 124.6 95.0 Financial expenses 2.5 (69.8) (74.5) 54.8 20.5

Profit before taxation expense 583.6 220.0

Taxation expense 2.6 (134.9) (84.1)

Profit for the financial year 448.7 135.9

Attributable to: Bupa 438.2 131.1 Non-controlling interests 10.5 4.8 Profit for the financial year 448.7 135.9 FINANCIAL STATEMENT s

Sections 2 to 6 form part of these financial statements. 64 Bupa annual report 2012 Primary statements

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December 2012

2012 2011 Section £m £m Profit for the financial year 448.7 135.9

Other comprehensive (expense) / income Unrealised loss on revaluation of property 3.2 (17.0) (31.1) Actuarial gains / (losses) on pension schemes 3.6 18.5 (93.0) Foreign exchange translation differences on goodwill 3.1 (40.7) 3.4 Other foreign exchange translation differences (39.4) (5.8) Net gain on hedge of net investment in overseas subsidiary companies 5.4.2 5.3 7.8 Realisation of cash flow hedge – (1.3) Change in fair value of underlying derivative of cash flow hedge (0.8) (1.0) Loss on cash flow hedge on UL X MED acquisition 5.4.2 (2.2) – Acquisition of subsidiary companies attributable to non-controlling interest 4.0 5.8 – Acquisition of non-controlling interest in subsidiary company 4.0 (5.3) – Taxation credit on income and expenses recognised directly in other comprehensive income 2.6 8.2 33.2 Other comprehensive expense for the year, net of taxation (67.6) (87.8)

Total comprehensive income for the year 381.1 48.1

Attributable to: Bupa 381.7 43.9 Non-controlling interests (0.6) 4.2 Total comprehensive income for the year 381.1 48.1

Sections 2 to 6 form part of these financial statements. Bupa annual report 2012 65 Primary statements

CONSOLIDATED BALANCE SHEET as at 31 December 2012

2012 2011 Section £m £m Non-current assets Intangible assets 3.1 2,146.1 2,208.8 Property, plant and equipment 3.2 2,323.4 2,272.5 Investment property 3.3 159.9 132.5 Equity accounted investments 4.1 34.2 43.3 Financial investments 5.0 1,086.1 661.5 Derivative assets1 5.2 84.0 76.7 Assets arising from insurance business 3.0.2 0.6 4.9 Deferred taxation asset 3.7 2.6 – Other receivables1 3.0.1 121.9 55.7 Restricted assets1 3.0.4 44.0 39.4 Post employment benefit net assets 3.6 104.9 68.1 6,107.7 5,563.4 Current assets Financial investments 5.0 1,165.4 1,221.6 Derivative assets1 5.2 1.6 5.0 Inventories 3.0.5 19.9 16.5 Assets arising from insurance business 3.0.2 870.4 828.8 Trade and other receivables1 3.0.1 404.7 303.8 Restricted assets1 3.0.4 8.7 5.9 Cash and cash equivalents1 3.0.3 1,255.7 1,183.1 3,726.4 3,564.7 Total assets 9,834.1 9,128.1

Non-current liabilities Subordinated liabilities 5.1 (451.2) (428.9) Other interest bearing liabilities 5.1 (667.3) (669.4) Derivative liabilities1 5.2 (4.5) (5.0) Provisions under insurance contracts issued 3.4.1 (24.8) (25.7) Post employment benefit net liabilities 3.6 (62.5) (65.1) Provisions for liabilities and charges 3.5 (26.3) (26.6) Deferred taxation liabilities 3.7 (158.3) (174.7) Other payables1 3.0.6 (19.9) (12.3) (1,414.8) (1,407.7) Current liabilities Subordinated liabilities 5.1 (6.0) (5.9) Other interest bearing liabilities 5.1 (21.4) (24.3) Derivative liabilities1 5.2 (3.7) (3.8) Provisions under insurance contracts issued 3.4 (2,355.2) (2,136.5) Other liabilities under insurance contracts issued 3.4.2 (16.8) (13.7) Provisions for liabilities and charges 3.5 (58.5) (55.9) Current taxation liabilities (157.4) (135.8) Trade and other payables1 3.0.6 (982.4) (900.6) (3,601.4) (3,276.5) Total liabilities (5,016.2) (4,684.2) Net assets 4,817.9 4,443.9

Equity FINANCIAL STATEMENT Property revaluation reserve 631.9 642.7 Income and expenditure reserve 3,544.9 3,075.9 Cash flow hedge reserve 25.1 29.0 Foreign exchange translation reserve 590.1 662.7 Equity attributable to Bupa 4,792.0 4,410.3 Equity attributable to non-controlling interests 25.9 33.6 Total equity 4,817.9 4,443.9 s 1 These balance sheet items have been re-presented, further details are provided in Section 1.7

Approved by the Board of Directors and signed on its behalf on Lord Leitch Evelyn Bourke 11 March 2013 by Chairman Chief Financial Officer 66 Bupa annual report 2012 Primary statements

CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 31 December 2012

2012 2011 Section £m £m Operating activities Profit before taxation expense 583.6 220.0

Adjustments for: Net financial income and expenses (54.8) (20.5) Depreciation, amortisation and impairment 196.8 493.5 Other non-cash items 1.2 23.9

Changes in working capital and provisions: Increase in provisions and other liabilities under insurance contracts issued 260.3 4.6 Increase in assets under insurance contracts issued (47.3) (47.2) Change in net pension asset / liability (20.9) (31.4) (Increase) / decrease in trade and other receivables, and other assets (74.1) 45.3 Increase / (decrease) in trade and other payables, and other liabilities 26.6 (53.1) Cash generated from operations 871.4 635.1

Income taxation paid (121.1) (109.7) Increase in cash held in restricted assets 3.0.4 (7.4) (9.9) Net cash generated from operating activities 742.9 515.5

Cash flow from investing activities Acquisition of subsidiary companies, net of cash acquired 4.0 (21.6) (11.7) Acquisition of equity accounted investments (3.7) (5.6) Acquisition of non-controlling interest in subsidiary company (3.9) – Dividends received from associates – 1.5 Disposal of subsidiary companies, net of cash disposed of 4.0 – 171.7 Disposal of equity accounted investments 25.1 – Purchase of intangible assets 3.1 (67.6) (63.9) Purchase of property, plant and equipment (178.0) (147.2) Proceeds from sale of property, plant and equipment 4.2 1.5 Purchase of investment property (19.3) (7.4) Purchase of financial investments, excluding deposits with credit institutions (149.9) (258.6) Proceeds from sale of financial investments, excluding deposits with credit institutions 222.5 321.4 Net (investment into) / withdrawal from deposits with credit institutions (425.0) 224.7 Interest received 58.8 61.5 Net cash (used in) / generated from investing activities (558.4) 287.9

Cash flow from financing activities Repayment of interest bearing liabilities (26.7) (205.4) Interest paid (65.8) (63.1) Receipts from / (payments for) hedging instruments 10.6 (6.3) Dividends paid to non-controlling interests (7.1) (0.3) Net cash used in financing activities (89.0) (275.1)

Net increase in cash and cash equivalents 95.5 528.3 Cash and cash equivalents at beginning of year 1,183.0 654.8 Effect of exchange rate changes (25.1) (0.1) Cash and cash equivalents at end of year 3.0.3 1,253.4 1,183.0

Sections 2 to 6 form part of these financial statements. Bupa annual report 2012 67 Primary statements

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2012

Cash Foreign Property Income and flow exchange Total Non- revaluation expenditure hedge translation attributable controlling Total reserve reserve reserve reserve to Bupa interests equity Section £m £m £m £m £m £m £m 2012 At beginning of year 642.7 3,075.9 29.0 662.7 4,410.3 33.6 4,443.9 Retained profit for the financial year – 438.2 – – 438.2 10.5 448.7

Other comprehensive (expense) / income Unrealised loss on revaluation of property 3.2 (17.0) –– – (17.0) – (17.0) Realised revaluation surplus on disposal of property (1.3) 1.3 – – ––– Actuarial gain on pension schemes 3.6 – 18.5 – – 18.5 – 18.5 Foreign exchange translation differences on goodwill 3.1 – –– (40.7) (40.7) – (40.7) Other foreign exchange translation differences (1.6) –– (37.0) (38.6) (0.8) (39.4) Net gain on hedge of net investment in overseas subsidiary companies 5.4.2 – –– 5.3 5.3 – 5.3 Loss on cash flow hedge on UL X MED acquisition 5.4.2 – – (2.2) – (2.2) – (2.2) Change in fair value of underlying derivative of cash flow hedge – – (0.5) – (0.5) (0.3) (0.8) Acquisition of subsidiary companies attributable to non-controlling interest 4.0 – –– – – 5.8 5.8 Acquisition of non-controlling interest in subsidiary company 4.0 – 12.0 (1.4) – 10.6 (15.9) (5.3) Taxation expense and credit on income and expenses recognised directly in other comprehensive income 2.6 9.1 (1.0) 0.2 (0.2) 8.1 0.1 8.2 Other comprehensive (expense) / income for the year, net of taxation (10.8) 30.8 (3.9) (72.6) (56.5) (11.1) (67.6)

Total comprehensive income / (expense) for the year (10.8) 469.0 (3.9) (72.6) 381.7 (0.6) 381.1

Contributions to non-controlling interests Dividends paid to non-controlling interests – –– – – (7.1) (7.1) Total contributions to non-controlling interests for the year – –– – – (7.1) (7.1) At end of year 631.9 3,544.9 25.1 590.1 4,792.0 25.9 4,817.9

2011 At beginning of year 660.5 3,019.1 30.7 656.1 4,366.4 29.7 4,396.1 Retained profit for the financial year – 131.1 – – 131.1 4.8 135.9

Other comprehensive (expense) / income Unrealised loss on revaluation of property 3.2 (31.1) –– – (31.1) – (31.1) Actuarial loss on pension schemes 3.6 – (93.0) – – (93.0) – (93.0) Foreign exchange translation differences on goodwill 3.1 – –– 3.4 3.4 – 3.4 Other foreign exchange translation differences (0.4) –– (5.1) (5.5) (0.3) (5.8) Net gain on hedge of net investment in overseas subsidiary companies – –– 7.8 7.8 – 7.8 Realisation of cash flow hedge on impairment of intangibles arising on acquisition – – (1.3) – (1.3) – (1.3) Change in fair value of underlying derivative of cash flow hedge – – (0.6) – (0.6) (0.4) (1.0) Taxation expense and credit on income and expenses FINANCIAL STATEMENT recognised directly in other comprehensive income 2.6 13.7 18.7 0.2 0.5 33.1 0.1 33.2 Other comprehensive (expense) / income for the year, net of taxation (17.8) (74.3) (1.7) 6.6 (87.2) (0.6) (87.8)

Total comprehensive (expense) / income for the year (17.8) 56.8 (1.7) 6.6 43.9 4.2 48.1

Contributions to non-controlling interests

Dividends paid to non-controlling interests – –– – – (0.3) (0.3) s Total contributions to non-controlling interests for the year – –– – – (0.3) (0.3) At end of year 642.7 3,075.9 29.0 662.7 4,410.3 33.6 4,443.9

Sections 2 to 6 form part of these financial statements. 68 Bupa annual report 2012 notes to the financial statements

Notes to the financial statements for the year ended 31 December 2012

Basis of preparation in brief This section describes the Group’s significant accounting policies and accounting estimates 1.0 and judgements that relate to the financial statements and notes as a whole. Where accounting basis of policies relate to a specific note, the applicable accounting policies and estimates are contained preparation within the note.

1.1 Basis of preparation 1.3 Accounting estimates and judgements The British United Provident Association Limited (‘Bupa’ or the The preparation of financial statements requires the use of certain ‘Company’), the ultimate parent entity of the Group, is a company accounting estimates and assumptions that affect the reported assets, incorporated in England and Wales. The Company is limited by liabilities, income and expenses. It also requires management to guarantee. exercise judgement in applying the Group’s accounting policies. Both the Company financial statements and the Group’s consolidated The areas involving a higher degree of judgement or complexity, financial statements have been prepared under International Financial or where assumptions are significant to the consolidated financial Reporting Standards (IFRSs) as adopted by the EU. The appropriate statements, are set out below and in more detail in the related sections: provisions of the Companies Act 2006 applicable to companies °° Insurance accounting (Section 3.4) reporting under IFRSs have also been complied with. °° Deferred revenue (Section 3.0.6) A summary of IFRSs that are relevant for the Group are included °° Financial instruments (Section 5.0) on page 124. °° Pension assumptions (Section 3.6.2) The financial statements were approved by the Board of Directors on °° Intangible assets and goodwill impairment (Section 3.1) 11 March 2013. The Directors have reviewed and approved the Group’s Property valuations (Section 3.2) accounting policies which have been applied consistently to all the °° years presented, unless otherwise stated. For the purposes of °° Taxation (Section 2.6) consolidation, the accounting policies of subsidiary companies have 1.4 Going concern been aligned with those of the Parent Company. Management has conducted a detailed assessment on the Group’s The financial statements are prepared on a going concern basis, and going concern status based on its current position and forecast results. under the historical cost convention, as modified by the revaluation They have concluded that the Group has adequate resources to of property, investment property, financial investments at fair value operate for the foreseeable future. In making this assessment, through profit or loss, available for sale financial investments and management have considered the discussions with the relationship derivative instruments. banks as well as forecasts which take account of reasonably possible changes in trading performance and recently announced acquisitions. 1.2 Basis of consolidation The consolidated financial statements for the year ended 31 December Details of the Group’s business activities, together with the factors 2012 comprise those of the Company and its subsidiary companies likely to affect its future development, performance and position are (together referred to as the ‘Group’), and the share of results of equity set out in the Business Review on pages 2 to 37. The financial position accounted investments. of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review on pages 18 to 21. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control The Group’s £800m committed bank facility, which was renegotiated commences to the date that control ceases. Non-controlling interests in October 2012 and matures on October 2017, was undrawn at in the net assets of subsidiaries are identified separately from the 31 December 2012 with the exception of £6.4m of outstanding Group’s equity. Non-controlling interests consist of the amount of letters of credit for general business purposes. those interests at the date of the original acquisition and the non- 1.5 New financial reporting requirements controlling shareholder’s share of changes in equity since this date. All newly effective financial reporting standards applicable to the Intra Group related party transactions and outstanding balances are Group for the first time for the year ended 31 December 2012 have eliminated in the preparation of the consolidated financial statements been reviewed and it has been concluded that they have no material of the Group. impact on the financial statements of the Group. The consolidated financial statements are presented in Sterling, which 1.6 Forthcoming financial reporting requirements is the Group’s presentation currency. The following financial reporting standards have been issued but are not effective for the year ended 31 December 2012, and have not been early adopted by the Group. The Group has reviewed the effect of all other amendments to IFRSs and interpretations effective for accounting periods beginning on or after 1 January 2013 and does not expect them to have a significant impact on the financial statements. FINANCIAL STATEMENTs

69

, Spain

K

U

w Zealand, e its separately to N n U its – four geographic and one global. ng Kong, Thailand and China and Thailand Kong, ng n o U H its based on our geographic locations and n U f w Zealand -presentation of 2011 financial information e e N rie R allocated results comprise income and expenses generated from Restricted assets (2011: £45.3m) separately from cash and cash equivalents (see Sections 3.0.3 and 3.0.4). Derivative assets (2011: £81.7m) and derivative liabilities (2011:£8.8m) other and trade and receivables other and trade from separately payables respectively (see Sections 3.0.1, 3.0.6 and 5.2). w Zealand b n ° ° e A ° ° place, creating five Market During 2012, the Group underwent a reorganisation as described on page 9. A new operating model and structure was put in As a result, the segmental disclosures for the comparative period the income statement, but does impact on the segmental disclosures. and Markets Development International Domestic, America Latin and PMI. International The 2011 balance sheet has also been re-presented disclose to the following: 1.7 have been restatedreflect to the new structure. The Group reorganisation has no effect on aggregated amounts presented in The new segments reported for the first time in the segmental analysis information (see Section 2.0) are: Australia and accounted investments) before amortisation of intangible assets assets intangible of amortisation before investments) accounted income other costs, depreciation combinations, business on arising and expense taxation expenses, and income financial charges, and equity interests.non-controlling U the corporate centre which cannot be specifically allocatedto the operating segments. S N U

p O in segments erating The Group is managed through five Market customers. Management monitors the operating results segmental The of the resources. Market of allocation the about decisions make and performance assess disclosures below are reported on a basis that is consistent with the way the business is internally. reported and managed it, which form the operating n U

s t me healthcare products and services and products healthcare me rsing, residential and respite care rsing, residential and respite care in Australia and alth insurance and related products related and insurance alth alth insurance and related products sold in domestic markets within Spain alth insurance, health assessments, health coaching, international health cover and optical care sold n u u e o e e International health insurance individuals, to small businesses and corporate customers to patientsto Provision of nursing, residential and respite care in Spain India, Arabia, Saudi within products related and insurance health Domestic Care management and analytic services in the H N Management and operation of a private hospital providing medical and ancillary services patients to H H Management and operation of hospitals and dental centres in Spain providing medical and ancillary services Services and products and Services H N Retirement villages and telecare services within in the Australian market

stateme

g ial c n ts n a

n n fi

e h t

to

p egme w Zealand w tes Oerati s 2.0 e K o International PMI International International International Markets Development Spain and Latin Latin and Spain Domestic America N U Reportable segments segments Reportable and Australia or after 1 January 2013. If the amendment had been adopted for the the for adopted been had amendment the If 2013. January 1 after or year ended 31 December 2012 the profit before taxation would be increased £1.5m. by IFRSb) 10 Consolidated financial statements IFRS 10 will supersede IAS 27 ‘Consolidated and separate financial statements’ and SIC 12 ‘Consolidation – Special Purpose Entities’. a) IAS 19 Employee Benefits (Amendment) Benefits Employee 19 IAS a) benefit defined on return total the change not does amendment The plan assets, but it does change the split between what is recognised comprehensive in other in recognised is what and statement income the income changing by the way the interest expense is calculated in the income statement. A number of new disclosures are also required. on beginning periods annual for effective becomes amendment The Group the of control under are that investments requires standard The beto consolidated within the Group financial statements. IFRS 10 sets out the principles for establishing whether control exists. or on beginning periods annual for effective becomes amendment The year the for adopted been had amendment the If 2014. January 1 after ended 31 December 2012 there would be no change the to entities which are consolidated within the Group financial statements and therefore no impact the to primary financial statements. Bupa annual report 2012 n segments on which the information in this section has been prepared, are regularly reviewed the by Chief Executive Officer (the Group’s chief operating decision maker) assess to performance and make decisions about the allocation of resources. The segment results include items directly attributable a segment to as well as those that can be allocated on a reasonable basis. These results are based on profit (including share of post taxation results of equity The operating results of each Market 70 Bupa annual report 2012 notes to the financial statements

Notes to the financial statements continued for the year ended 31 December 2012

The total profit of the reportable segments is reconciled below to profit before taxation expense in the consolidated income statement. The prior period figures have been restated in accordance with the new operating structure.

Spain and International Australia and Latin America Development International New Zealand UK Domestic Markets PMI Total 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 (restated) (restated) (restated) (restated) (restated) £m £m £m £m £m £m £m £m £m £m £m £m (i) Revenues Total revenues for reportable segments 3,554.0 3,252.8 2,529.4 2,507.0 1,190.8 1,212.6 228.2 245.8 872.0 795.9 8,374.4 8,014.1 Inter segment elimination – – (0.6) (0.8) – – (0.9) (1.6) – – (1.5) (2.4) External revenues for reportable segments 3,554.0 3,252.8 2,528.8 2,506.2 1,190.8 1,212.6 227.3 244.2 872.0 795.9 8,372.9 8,011.7

Net reclassifications to other expenses or financial income and expenses 0.9 4.4 Unallocated central revenues 0.1 2.0 Consolidated total revenues 8,373.9 8,018.1

(ii) Segment result Profit for reportable segments* 278.3 249.0 109.7 140.9 113.4 106.1 (11.5) (9.1) 96.2 84.9 586.1 571.8 Amortisation of intangible assets (16.8) (16.4) (2.7) (2.7) (2.3) (2.3) – (8.5) (5.0) (5.0) (26.8) (34.9) 261.5 232.6 107.0 138.2 111.1 103.8 (11.5) (17.6) 91.2 79.9 559.3 536.9 Net reclassification to financial income and expenses (8.7) (4.1) Unallocated central expenses (18.6) (10.9) Profit** 532.0 521.9

Impairment of goodwill – – – – – – – (165.8) – – – (165.8) Impairment of intangible assets arising on business combinations – (57.5) – – – (0.9) – (75.3) – – – (133.7) Other income and charges (3.2) (22.9) Profit before financial income and expenses 528.8 199.5 Financial income and expenses 54.8 20.5

Consolidated profit before taxation expense 583.6 220.0

(iii) Other information Amortisation and depreciation costs for reportable segments 47.2 47.1 91.6 88.5 28.4 25.9 8.3 20.7 15.0 11.5 190.5 193.7 Non-cash (expenses) / income*** for reportable segments (186.6) 1.9 (80.5) (86.8) 13.1 32.1 (9.9) (6.9) (33.4) 0.1 (297.3) (59.6) Unallocated non-cash income 11.8 43.9 Total non-cash expenses (285.5) (15.7)

Notes * Profit for reportable segments includes share of post taxation results of equity accounted investments ** Profit before impairment of goodwill, impairment of intangible assets arising on business combinations, other income and charges and financial income and expenses *** Other than amortisation and depreciation costs FINANCIAL STATEMENTs

71

£m 2011

8,018.1 4,789.5

Total £m 2012 8,373.9 4,869.5

a £m 2011 619.5 146.6 (restated)

£m 2012 112.9 630.1 Rest of the World

£m 2011 363.7 1,212.6 (restated)

Spain £m 2012 453.7 1,190.8

£m 2011 1,962.8 2,933.2 (restated)

UK

f £m 2012 rie 1,953.3 b 2,999.0

£m 2011 2,316.4 SA, Saudi Arabia, Saudi Arabia, SA, 3,252.8 U (restated)

e

R The Group in venues generates revenues from its underwriting activities (insurance premiums) and trading activities through the provision of insurance management services (insurance servicecontracts) and the provision of healthcare services (care, health and other). £m Australasia 2012 2,349.6 3,554.0 b

s t n stateme

Gross insurance premiums insurance Gross Gross insurance premiums represent the premiums earned relating risk to exposure for the reported financialcompriseyear. gross They premiums written, adjusted for the change in the provision for unearned premiums forrelating premiums periods to written of risk in subsequent financialyears. Premiums are shown gross of commissions payable and net of insurance premium taxes that may apply in certainjurisdictions. reinsurers to ceded Premiums Premiums ceded reinsurers to represent reinsurance premiums payable for contracts entered into thatmitigation relate risk to for the reported financialyear. These comprise written premiums cededto reinsurers, adjustedshare offor the the movement reinsurers’ in the gross provision for unearned premiums. Premiums, losses and other amounts relating reinsurance to treaties are recognised over the period fromtreaty inception expiration to of a of the related business. Contracts entered into the by Group’s general insurance entities that do not result in the transfer of significant theto Group insurance are accounted risk for as insurance service contracts. The contracts mainly relate the to administrationfunds on behalf of claims of corporate customers. Revenues from service contracts represent the profit receivableand are recognised on such contracts as the services are provided. Some of these contracts contain financial liabilities representing deposits repayableto the customer.amortised These are measured cost. The atclaims fund deposit heldon behalf of customers is reported within other appropriate. payables, as income accruals and deferred The Group generates income from feesreceivable from the operation of its care homes, hospitals andwellbeing other healthcare centres. Revenues and are recognised in the period in which services are provided. These revenuesvalue are stated added net taxation of and other sales taxes, rebates and discounts. receivables concession Service The Group also operates two public hospitals in Spain under separate service concession arrangementslocal governments granted the by (the grantors). Revenue is recognised from the construction of infrastructure and for operationhospitals. of the Construction revenues are recognised in line with the stage of completion of the work performed.revenues are Operational recognised in the period in which the services are provided, in line with the service concessionThe arrangements. accounting policy for the service concession receivables is explained in Section 3.0.1. est of the World are operations in the operations are of the World est ial c es n a n

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e onsolidated non-current assets excludes financial investments, assets arising assets financial investments, excludes assets non-current onsolidated C and post assets restricted assets, taxation deferred business, insurance from benefit net assets. employment Included within R America. and Latin Asia Pacific Africa, tes R 2.1

o Consolidated non-current assets non-current Consolidated Consolidated total revenues total Consolidated Revenue streamRevenue Recognition policy Insurance premiums Insurance service contracts health Care, other and Notes a. b. (iv) Geographic information (iv) Bupa annual report 2012 n 72 Bupa annual report 2012 notes to the financial statements

Notes to the financial statements continued for the year ended 31 December 2012

T otal revenues 2012 2011 £m £m Gross premiums written 6,904.9 6,448.0 Change in gross provision for unearned premiums (212.1) (68.1) Gross insurance premiums 6,692.8 6,379.9

Gross premiums written ceded to reinsurers (29.2) (39.4) Reinsurers’ share of change in gross provision for unearned premiums – 5.0 Premiums ceded to reinsurers (29.2) (34.4)

Net insurance premiums earned 6,663.6 6,345.5

Revenues from insurance service contracts 11.4 11.9 Care, health and other revenues 1,698.9 1,660.7 Total revenues 8,373.9 8,018.1

Insurance Claims in brief Insurance claims relate to the Group’s insurance underwriting activities. Insurance claims 2.2 incurred are amounts payable under insurance contracts arising from the occurrence Ina sur nce Claims of an insured event.

Insurance claims Reinsurers’ share of claims incurred Insurance claims incurred comprise insurance claims paid during the Reinsurers’ share of claims incurred represents recoveries from year together with related handling costs, the movement in the gross reinsurers on claims paid, adjusted for the reinsurers’ share of the provision for claims in the period and the Risk Equalisation Trust Fund change in the gross provision for claims. levy for Australian health insurance businesses. See Section 3.4 for See ‘Assets arising from insurance business’ within Section 3.0.2 details of the claims provision. for the related balance sheet item and detail of impairments. In Australia, the Risk Equalisation Trust Fund charges a levy to all registered private health insurers and then allocates a proportion of the cost of eligible claims between all fund participants.

Net insurance claims incurred

2012 2011 £m £m Insurance claims paid 5,255.3 5,111.8 Change in gross provisions for claims 45.8 (52.4) 5,301.1 5,059.4 Risk Equalisation Trust Fund levy (113.2) (110.9) Insurance claims incurred 5,187.9 4,948.5

Recoveries from reinsurers on claims paid (20.6) (22.7) Reinsurers’ share of change in gross provisions for claims 5.1 (6.3) Reinsurers’ share of claims incurred (15.5) (29.0)

Net insurance claims incurred 5,172.4 4,919.5 FINANCIAL STATEMENTs

73

6.1 4.1 1.8 0.1 1.0 £m £m 2.7

4.3 51.1 0.2 0.2 0.2 0.3 0.8 0.6 2011 2011 87.7 (0.2) 125.8 170.8

165.3 189.2 156.0 106.0 306.4 1,216.2 2,574.3

1.3 0.1 0.1 £m £m 5.8 0.7 0.7 4.5 3.0 0.3 0.3 0.2 4.4 0.4 83.1 2012 2012 (0.8) 63.5 115.7 171.5 157.2 174.4 107.4 308.1 200.3 1,292.0 2,672.4 (c) (a) (b) ief r b udit-related assurance services assurance udit-related he audit of the Company’s subsidiaries subsidiaries Company’s the of audit he   t legislation pursuant to a

Tax advisory services Tax associates for other services: compliance servicesTax Other assurance services assurance Other Corporate finance services finance Corporate Audit of overseas subsidiary companies All other non-audit services auditors, KPMG Audit Plc and its associates audit of the Company’s annual accounts annual Company’s the of audit for: associates – – Total auditTotal fees Fees payable to the Company’s auditor andits Total auditors’ remuneration auditors’ Total Fees payable to other auditors: Total auditTotal fees payable the to Company’s non-auditTotal fees In addition, fees in respect of the audit of The Bupa Pension Scheme were £41,000 (2011: £41,000). Fees payable the to Company’s auditor for the its and auditor Company’s the to payable Fees (c) Auditors’ remuneration Auditors’ (c)

£m £m 7.9 (1.8) 2011 2011 2011 15.8 23.8 93.0 175.2

189.2 10,415 1,216.2 1,091.5 32,073 42,488 erating expenses in

p O £m £m 17.3 19.3 2012 2012 2012 (6.0) 23.7 93.7 189.0 200.3 11,830 1,155.3 33,120 1,292.0 44,950 other Other operating expenses are costs incurred the by Group as a consequence ofoperations. This includes staff costs,overheads, depreciation, amortisation of intangible transactions. exchange assets foreign on losses or and gains Operating expenses exclude finance costs and taxation.

g

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t xpe her operating expenses operating her t gain on foreign exchange transactions tes e 2.3 O t e e o O Commission for direct insurance direct for Commission H insurance alth Other acquisition costs paid Changes in deferred acquisition costs costs acquisition Total Wages and salaries salaries and Wages Social security costs Staff costs Acquisition costs Cost of sales scheme contribution defined to Contributions costs pension Other Total staff costs staff Total Directors’ Remuneration report is described in pages 54 58 to of thisreport. numbers Employee (ii) The average number of full time equivalent employees, including Executive Directors, employed the by Group during the year was: Bupa annual report 2012 n Medical supplies and fees and supplies Medical rentals lease Operating Marketing costs Marketing Care and health provision provision health and Care numbers employee Total Acquisition(b) costs Property costs (a) Staff(a) costs and employee numbers (i) Staff costs Other operating expenses (including auditors’ remuneration) auditors’ (including expenses operating Other Amortisation of intangible assets intangible of Amortisation Depreciation expense expenses operating other Total N 74 Bupa annual report 2012 notes to the financial statements

Notes to the financial statements continued for the year ended 31 December 2012

O ther income and Charges in brief Other income and charges comprise income or expenses that are not related to the operating 2.4 activities of the Group and not reported in other operating expenses, financial income or other INCOME financial expenses. and charges

Other income and charges 2012 2011 £m £m N et gain on sale of business – 0.3 Net gain / (loss) on sale of equity accounted investments 8.7 (0.4) Deficit on revaluation of property (0.7) (0.4) Impairment of property (11.0) (20.9) Net loss on disposal of property, plant and equipment (0.2) (1.5) Total other income and charges (3.2) (22.9)

Impairment of property is explained in Section 3.2.

F inancial income and expenses in brief Financial income and expenses are earned / (incurred) from the Group’s financial assets 2.5 and liabilities. F inancIAL income and Expenses

Financial income Financial expenses Interest income, except in relation to assets classified at fair value Interest payable on borrowings is calculated using the effective interest through profit or loss, is recognised in the income statement as it method. accrues, using the effective interest method. The net amount of foreign exchange differences recognised in financial Changes in the value of financial assets designated as at fair value expenses for the year, excluding those arising on financial assets and through profit or loss are recognised within financial income as an financial liabilities measured at fair value through profit or loss was £nil unrealised gain or loss while the asset is held. Upon realisation of these (2011: £nil). assets, the change in fair value since the last valuation is recognised within financial income as a realised gain or loss. 2012 2011 £m £m 2012 2011 Interest expense on financial liabilities at £m £m amortised cost 68.4 72.8 Interest income: Finance charges in respect of finance leases 0.1 0.1 Loans and receivables 84.4 81.3 Other financial expenses 1.3 1.6 Investments held to maturity 6.4 5.7 Total financial expenses 69.8 74.5 Investments designated at fair value through profit or loss 1.7 0.5 Net realised gains on financial investments designated at fair value through profit or loss – 0.7

Net increase in fair value: Investments designated at fair value through profit or loss 27.1 4.0 Investment property 6.6 3.8 Net foreign exchange loss (1.6) (1.0) Total financial income 124.6 95.0

Included within financial income is a net gain, after hedging, on the Group’s return seeking asset portfolio of £26.1m (2011: net gain of £6.6m). No financial investments designated at fair value through profit or loss are held for trading. FINANCIAL STATEMENTs

75 – – – £m £m t of 7.8 8.2 9.6 3.4 0.6 (1.3) 2011 59.1 e 84.1 (4.6) (5.3) (0.8) (47.1) 58.3 (17.4) (87.8) N

(80.8) 220.0 taxation wever o H

– – – – – – 0.1 0.1 £m £m 3.3 6.5 6.5 2.2 8.3 0.5 0.2 13.7 12.2 (9.7) 2012 12.0 33.2 (24.2) 134.9 143.0 583.6 2011

Taxation benefit / benefit (expense)

– – – – – £m 7.8 3.4 (1.3) (1.0) (5.8) (31.1) (93.0) (121.0) Before taxation

– –

£m orporation 5.3 5.8 17.5 (7.9) (5.3) (2.2) (0.6) (67.6) Net of (39.6) (40.7) K c taxation U

– – – – – – – 9.1 £m 0.1 0.1 8.2 0.2 (1.0) 2012 Taxation Taxation benefit / benefit (expense)

– – – £m 5.3 5.8 (5.3) (2.2) 18.5 (0.8) (17.0) (75.8) (39.4) (0.2) (40.7) Before n-deductible expenses taxation taxation rate of 24.5% (2011: 26.5%) in respect of prior periods asset not recognised taxation rate of 23.1% (2011: 38.2%) in respect of prior periods o ief Taxation at the domestic Effect of: jurisdictions foreign in rates taxation Different Deferred taxation adjustments adjustments taxation Deferred Changes in taxation rate N taxation deferred on Movement Taxation expense at the effective Profit before taxation expense the amount that is ultimately paid could differ from the amount initially recorded and this difference is recognised in the period in which such made. is determination rate effective Reconciliationtaxation of (ii) Current taxation is the expected taxation payable on the taxable profit for theyear, using taxation rates enacted or substantively enacted at the balance sheet date, and any adjustments taxation to payable in respect of previous years. The Group is subject tax to audits in the territories in which it operates and considers each issue on its merits when decidingwhether hold to a provision against the potential tax liability that may arise. Current income taxation adjustments adjustments taxation income Current r b

£m 8.2 0.6 2011 (2.2) 84.1 (8.4) 24.7 72.4

63.4 94.9 80.8 (19.6) (10.8) (38.7)

£m 2.2 0.4 (8.1) (1.6) (9.7) 2012 41.4 (0.6) 66.0 (24.6) 134.9 103.2 102.8 143.0

a T xation expense in taxation and considers foreign tax, double tax relief and absorbs adjustments in respect of prior periods. Taxation expense on the profit for theyear comprises current and deferred ED acquisition e X M s

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axation on income for the year axatio t gain on hedge of net investment in overseas subsidiary companies realised loss on revaluation of property tes 2.6 T differences differences non-controlling interest non-controlling comprehensive income comprehensive e K t n o Current taxation (charge) / credit in respect of: Actuarial gain on pension schemes Adjustments in respect of prior periods taxation current Total Taxation expense Current taxation expense U Foreign taxation on income for the year Deferred taxation (income) / expense temporary of reversal and Origination Adjustments in respect of prior periods rates taxation in Changes deferred consideration Total Adjustments in respect of prior periods relief taxation Double Bupa annual report 2012 n (iii) Current and deferred taxation recognised directly in other income comprehensive and deferred taxation. Income taxation is recognised in the income statement except the to extent that it relates items to recognised directly in other comprehensive income, in which case it is recognised directly in the statementof comprehensive income. (i) Recognised in the income statement The taxation expense on the profit for theyear comprises current Foreign exchange translation differences on goodwill Other foreign exchange translation differences differences translation exchange foreign Other N Realisation of cash flow hedge Acquisition of non-controlling interest in subsidiary company Acquisition of subsidiary companies attributable to to attributable companies subsidiary of Acquisition Loss on cash flow hedge on L Other movements in non-controlling interests non-controlling in movements Other Deferred taxation credit / (charge) in respect of: U Actuarial gain / (loss) on pension schemes Change in fair value of underlying derivative of cash flow hedge Taxation credit on income and expenses recognised directly in other 76 Bupa annual report 2012 notes to the financial statements

Notes to the financial statements continued for the year ended 31 December 2012

(iv) Factors that may affect future tax charges The Budget statement in December 2012 announced that the The effect of the reduction in the UK corporation rate to 21% UK corporation tax rate will reduce to 21% by 2014. A reduction would create an additional reduction in the deferred tax balance to 23% (effective from 1 April 2013) was enacted on 3 July 2012. of £5.3m. This has not been reflected in the figures above as it The company’s deferred tax balances have been provided for was not substantively enacted at the balance sheet date. at 23% (25% at 31 December 2011), being the rate that was substantively enacted at 31 December 2012.

W orking capital in brief Working capital represents the assets and liabilities arising from underwriting and trading activities. 3.0 The Group therefore defines working capital as trade and other receivables, assets arising from W oRKIng Capital insurance business, cash, restricted assets, inventories and trade and other payables.

3.0.1 Trade and other Receivables Trade and other receivables are carried at amortised cost less (a) Service concession receivables impairment losses. The Group has recognised two service concession receivables in respect of the Public-Private Partnership arrangement with 2012 2011 the Valencian and Madrid governments (the grantors). Under the £m £m arrangement with the Valencian government the Sanitas business N on-current was contracted to build and operate the Manises hospital for the Investment receivables and grantor for 15 years. In December 2012, an arrangement with the accrued investment income 2.3 2.1 Madrid government was entered into, where the Sanitas business was Other receivables 1.0 4.8 contracted to operate the Torrejón hospital for the grantor for 30 years. Service concession receivables (a) 106.3 33.7 A financial asset has been recognised for each arrangement to the Prepayments 9.3 12.0 extent that the Group has an unconditional contractual right to Accrued income 3.0 3.1 receive cash from or at the direction of the grantors for the services Total non-current other receivables 121.9 55.7 provided, per capita head of the population covered. At the end of the contracts, ownership of the hospitals reverts to the grantors. The service concession receivables are carried at amortised cost Current less impairment losses. Trade receivables – net of impairment losses (b) 126.6 122.8 (b) Impairment of financial assets Financial assets comprise trade and other receivables, investment Investment receivables and properties and financial investments. Refer to Section 3.3 for accrued investment income 0.7 0.7 investment properties and Section 5.0 for financial investments. Other receivables 74.9 35.6 Service concession receivables (a) 152.1 103.8 If they are not already held at fair value, financial assets are assessed at each reporting date to determine whether there is any objective Prepayments 46.9 36.5 evidence that they are impaired. A financial asset is considered Accrued income 3.5 4.4 impaired if objective evidence indicates that one or more events Total current trade and other receivables 404.7 303.8 that have occurred since the initial recognition of the asset have had a negative impact on the estimated future cash flows of that asset. 359.5 Total trade and other receivables 526.6 An impairment loss in respect of a financial investment measured at amortised cost is calculated as the difference between its carrying The above balance is stated net of provisions for impairment losses. amount and the present value of the estimated future cash flows Information regarding the ageing of trade and other receivables is discounted at the effective interest rate at the date the investment shown in Section 5.4.3. was made. The fair value of non-current investment receivable and accrued Significant financial assets are tested for impairment on an individual investment income is £2.1m (2011: £1.8m). The carrying value of the basis. The remaining financial assets are assessed collectively in other non-current receivable balances are reasonable approximation groups that share similar credit risk characteristics. of the fair value. All impairment losses are recognised in the income statement. Impairment losses on trade receivables amounting to £0.7m (2011: £1.7m) and on investment receivables amounting to £nil (2011: £0.1m) have been charged to other operating expenses in the income statement. FINANCIAL STATEMENTs

77

£m £m 5.9 (0.1) 2011 2011

39.4 45.3

440.1 743.0 1,183.1

1,183.0

£m £m 8.7 (2.3) 2012 2012 52.7 44.0 447.7 808.0 1,255.7 1,253.4

ssets a d cash equivalents d sh an stricte e a nventories R I C in the statement of cash flows o N assets restricted n-current Cash at bank and in hand hand in and bank at Cash deposits Short-term equivalents cash and Cash Restricted assets are amounts heldin respect of specific obligations and potential liabilities and may be used only discharge to those obligations and potential liabilities if and when they crystallise. Bank overdrafts overdrafts Bank equivalents cash and Cash subject an to insignificant risk of change in value. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management (see Section 5.3) are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. 3.0.3 Cash and cash equivalents comprise cash balances, call deposits and market money (including investments liquid highly short-term other funds) with original maturities of three months or less which are Current restricted assets assets restricted Current 3.0.4 3.0.4 6.0 (ii)). Included in current restricted assets is £2.3m (2011: £nil) Total restricted assets restricted Total The non-current restricted assets balance of £44.0m (2011: £39.4m) consists of cash deposits held secure to a charge over the non- registered pension arrangement maturing after 2022 (see Section in respect of claims funds held on behalf of corporate customers. 3.0.5 Inventories are stated at the lower of cost and net realisable value. Cost is determined using the first-in-first-out method, or methods that approximate this and includes costs incurred in acquiring the inventories and in bringing them their to current location and condition. were consumables and prostheses drugs, to relating Inventories £19.9m (2011: £16.5m). Inventory write downs of £0.1m (2011: £nil) were made during the year. The Group consumed £216.5m (2011: £176.8m) of inventories, which are recognised within other operating expenses in the income statement. Certain inventories are subject a floating to charge in respect of certain interest bearing liabilities (see Section 5.1).

3.1 1.8 £m £m

4.9

2011 2011 23.1 16.3 (2.0) 63.7 63.8 70.9 62.0 273.8 833.7 828.8 656.5 (271.7)

– £m £m 0.6 0.6 21.8 13.6 2012 2012 (0.5) 73.8 68.7 63.8 69.3 871.0 282.7 692.5 870.4 (276.7) siness u (c) (a) (a) (b) (b) (d) b

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ssets arising from insurance insurance from arising ssets A to

rrent tes insurance business insurance insurance business insurance business o u o Acquisition costs deferredAcquisition date are recognised in assets arising from insurance business. Deferred acquisition costs from arising assets non-current Total beginningAt of year Acquisition costs released income to statement At end of year debtors Insurance (c) Impairment losses in respect of insurance debtors amounting to £10.7m (2011: £13.5m) have been charged other to operating expenses in the income statement. Medicare rebate (d) In Australia, the government provides a rebate health to insurers in respect of the premiums paid for private health insurance. Rebates due from the government but not received at the balance sheet Foreign exchange exchange Foreign C debtors Insurance provisions insurance of share Reinsurers’ Deferred acquisition costs N provisions insurance of share Reinsurers’ n-current 3.0.2 3.0.2 Assets arising from insurance business are held at amortised cost less impairment losses. Risk Equalisation Trust Fund recoveries from arising assets current Total income statement on an incurred loss basis. Reinsurers’ share ofinsurance provisions are further analysed in 3.4. Section Deferred(b) acquisition costs Acquisition costs represent commissions payable and other expenses related the to acquisition of insurance contract revenues written during the financialyear. Acquisition costs that have been paid that relate Total assets arising from insurance insurance from arising assets Total The above balance is stated net of provision for impairment losses. Information regarding the ageing of insurance debtors, Medicare rebate and Risk Equalisation Trust Fund recoveries is shown in 5.4.3.Section provisions insurance of share Reinsurers’ (a) The recoverables due from reinsurers are shown within assets arising from insurance business and are assessed for impairment at each balance sheet date. Impairments are accounted for within the subsequentto periods are deferred and recognised in the income statement in the relevant period on a straight line basis. The movement in deferred acquisition costs is as follows: Bupa annual report 2012 n Medicare rebate 78 Bupa annual report 2012 notes to the financial statements

Notes to the financial statements continued for the year ended 31 December 2012

3.0.6a Tr de and other payables Trade and other payables are carried at amortised cost. (a) Deferred revenue In respect of the Group’s revenue and deferred revenue for 2012 2011 performance based health service contracts, estimates are made £m £m by the Group based on the most recent performance evaluation N on-current data available at the year end and these estimates are utilised if they Deferred income (a) 1.3 1.5 are determined to be reliable. Reliable estimates can only be made Other payables 9.0 1.7 on an individual contract basis once the results of an initial Accruals 9.6 9.1 performance evaluation are available, and revenue is deferred until the first reliable evaluation is available. Total non-current other payables 19.9 12.3 Where the results of the final performance assessment differ from the Current estimation or if an updated reliable estimate is available, the difference Trade payables 138.3 114.2 is recognised in the period in which such determination is made. Where reliable estimates are not available, the Group recognises revenue only Social security and other taxes 31.2 27.8 to the extent of the contract costs recognised that the Group believes Deferred income (a) 61.5 71.5 are recoverable. Other payables 183.0 154.3 (b) Accommodation bond liabilities Accommodation bond liabilities (b) 263.9 230.1 Accommodation bonds are non-interest bearing deposits paid by Accruals 304.5 302.7 the residents of the care homes in Australia as payment for a place in Total current trade and other payables 982.4 900.6 the care home facility. These deposits are payable when the resident leaves the facility. The bonds are recorded as the proceeds received, Total trade and other payables 1,002.3 912.9 net of retention and any other amounts deducted at the election of the bond holder. The fair values of other payables and accruals are £191.5m (2011: £156.0m) and £313.9m (2011: £311.8m) respectively. The carrying value of the other trade and other payables is a reasonable approximation of the fair value. Information regarding the ageing of trade payables, other payables, accommodation bond liabilities and accruals is shown in Section 5.4.3.

Intangible assets in brief Intangible assets, including goodwill, are the non-physical assets used by the Group 3.1 to generate revenues. Inaiblet ng assets

Goodwill Goodwill represents the excess of the cost of a business combination Intangible assets acquired separately are stated at cost less over the fair value of the Group’s share of identifiable assets, liabilities accumulated amortisation and impairment. and contingent liabilities of the acquired subsidiary company or Amortisation is charged to the income statement on a straight line associated company at the date of business combination. The carrying basis as follows: value of goodwill may be adjusted up to 12 months from the date of acquisition, as the allocation of the purchase price to identifiable °°Computer software 2 to 10 years intangible assets is finalised within that period. °°Brand and trademarks 10 years Goodwill arising on business combinations is capitalised and presented °°Technology and Databases 10 years as part of intangible assets in the consolidated balance sheet. °°Distribution networks 10 to 11 years Goodwill is stated at cost less accumulated impairment losses. °°Customer relationships 10 to 21 years Impairment reviews are performed annually or more frequently if there °°Present value of acquired in-force business 13 to 20 years is an indication that the carrying value may be impaired. Impairment °°Licences to operate care homes term of licence reviews are performed at the level of the relevant cash generating unit N on-compete agreements term of agreement (CGU). A CGU is the smallest identifiable group of assets generating °° cash inflows and outflows measured for goodwill. °°Leases term of lease Where the fair value of net assets acquired is greater than the Intangible assets that are subject to amortisation are reviewed for consideration paid, the excess is recognised immediately in the impairment if circumstances indicate that the carrying amount may income statement. not be recoverable. An impairment loss is recognised in the income statement to reduce the carrying amount to the recoverable amount. Other intangible assets Intangible assets, other than goodwill, that are acquired as part Bed licences held by the Group have been attributed an indefinite of a business combination are capitalised at fair value. useful life due to the fact that these licences, which are issued by the Australian government, have no expiry date. Assets with an indefinite useful life are subject to annual impairment reviews. FINANCIAL STATEMENTs

79 1.1 9.1 £m 6.3 6.8 83.1 (2.8) (2.9) 10.2 (0.3) 10.6 10.4 67.6 Total 63.9 301.1 (27.9) (32.7) (28.8) 835.2 1,231.1 1,231.1 2,517.2 2,146.1 1,259.9 3,352.4 3,439.9 3,439.9 2,208.8 2,208.8 3,406.0

– – – – – – – – – – 4.1 1.4 0.1 £m 7.6 87.7 0.7 6.3 (8.6) (84.2) 174.1 83.5 174.1 161.9 333.1 Other 167.5 249.6

– – – – – – – – – – 1.8 £m 0.3 0.6 (4.4) (4.2) (9.6) 37.0 67.3 22.3 ships 20.3 69.0 176.1 331.3 333.9 331.3 333.9 146.2 201.0 322.3 329.4 201.0 329.2 relation- Customer Customer

– – 1.1 9.1 1.0 2.0 £m 6.3 (6.7) (2.8) (2.9) (5.5) 31.0 (0.3) (0.6) 57.8 67.0 56.5 63.9 192.1 192.1 (27.9) 521.3 521.3 (28.8) 451.8 195.3 242.5 329.2 130.3 159.8 329.2 130.3 159.8 553.9 358.6 209.3 260.2 software Computer Computer

– – – – – – – – – – – – £m 9.3 5.8 5.8 6.3 611.8 611.8 (18.6) 165.8 (59.3) 593.2 440.2 1,798.1 1,641.6 1,641.6 1,607.2 2,238.3 2,253.4 2,253.4 Goodwill 2,200.4

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t book value at beginning of year t book value at beginning of year tes e e mortisation and impairment loss impairment and mortisation mortisation and impairment loss impairment and mortisation ost ost o n Foreign exchange exchange Foreign At end of year Other Netbook value at end of year N Disposals Disposals Impairment of other intangible assets arising on business business on arising assets intangible other of Impairment combinations During the year, impairment of other intangible assets arising on acquisitions totalled £nil (2011: £135.0m). Impairment loss loss Impairment Assets arising on business combinations business on arising Assets 2012 C beginningAt of year I tangi Additions Disposals Bupa annual report 2012 n Amortisation for year year for Amortisation Other At end of year Foreign exchange exchange Foreign Foreign exchange exchange Foreign Disposals beginningAt of year A At end of year Foreign exchange exchange Foreign Other Impairment loss loss Impairment At beginningAt of year A Amortisation for year year for Amortisation Net book value at end of year At end of year Disposals Additions Assets arising on business combinations business on arising Assets C N beginningAt of year 2011 80 Bupa annual report 2012 notes to the financial statements

Notes to the financial statements continued for the year ended 31 December 2012

Intangible assets of £2,146.1m (2011: £2,208.8m) includes £343.6m Cash flow projections beyond the forecast periods have been (2011: £375.1m) which is attributable to other intangible assets arising extrapolated by applying a terminal growth rate between 1.0% and on business combinations (included within Computer software, 3.0% (2011: 1.0% and 3.0%) for all CGUs. The terminal growth rates Customer relationships and Other) as follows: represent management’s estimate of the long-term growth rate for each of the CGUs, taking into account the future and past growth rates 2012 2011 and external sources of data. They are conservative estimates which £m £m do not exceed the long-term average growth rate for the respective Customer relationships 176.1 201.0 industries, countries or markets in which the CGUs operate. Bed licences (within Bupa Care Services The values assigned to the key assumptions are based on Australia) 101.3 100.5 management’s past experience and assessment of future trends Licences to operate care homes 45.9 50.0 in the relevant industry. Leases 12.1 12.9 Impairment of goodwill Distribution networks 6.3 8.7 At 31 December 2012, the recoverable amount of each of the CGUs Present valuation of acquired in-force business 1.3 1.4 is determined to be higher than their respective carrying amounts, Brand and trademarks 0.6 0.6 resulting in no impairment to goodwill and intangible assets with Total 343.6 375.1 indefinite useful lives.

Impairment of intangible assets In 2011, the goodwill relating to the Health Dialog CGU (acquired Goodwill and intangible assets with indefinite useful lives are tested in 2008) was fully impaired, resulting in an impairment charge of at least annually for impairment by comparing the net carrying value £165.8m. Health Dialog is a US based provider of health analytics and with the recoverable amount using value in use calculations. In arriving care management services that helps health plans, public insurers at the value in use for each CGU key assumptions have been made and employers manage the cost and quality of healthcare. Due to the regarding future projected cash flows, discount rates and terminal weakening of the economic conditions in the US, the uncertainty that growth rates. The main assumptions upon which the cash flow existed in the US healthcare market arising from healthcare reform and projections are based include premiums and claims costs for an increasing trend in the market towards in-sourcing, the outlook for our PMI businesses, fee rate and occupancy for our care services the business had become more challenging. The main assumptions on businesses and revenue growth and gross margins for our Bupa which the cash flow projections were based included revenue growth Home Healthcare and Bupa Cromwell Hospital businesses. and gross margin. The key valuation assumptions used to test the carrying value of goodwill included a pre-taxation discount rate of Except for Bupa Care Services Australia, Bupa Care Services UK and 14.0% and a terminal growth rate of 2.0%. The Bupa Cromwell Hospital, cash flow projections have been based on management operating profit projections for a three year period The following table summarises goodwill by CGU as at 31 December: which have been approved by the Board. Cash flow projections for 2012 2011 Bupa Care Services Australia, Bupa Care Services UK and The Bupa £m £m Cromwell Hospital have been based on a periods of five, four and eight years respectively. A longer period was justified for these CGUs as Bupa Australia 948.3 978.7 management believes that this is an appropriate timescale over Bupa Care Services Australia 308.3 316.5 which to look at the annual cash flow projections before applying Bupa Care Services UK 178.2 178.2 the terminal growth rate to the final year. Taxation has been applied Bupa International 59.3 59.3 to the pre-taxation management operating profits based on the statutory taxation rates in the country of operation. Bupa Care Services New Zealand 34.5 31.5 Future post-taxation cash flows have been discounted at post-taxation Sanitas PMI 24.3 24.8 discount rates. Discount rates used for the value in use calculations Bupa Home Healthcare 20.7 20.5 for each of the Group’s CGUs are based on consideration of the The Bupa Cromwell Hospital 16.2 16.2 specific risks associated with the business plans of each CGU, Bupa Latin America 8.5 8.5 as well as external factors. These include the market assessment of the time value of money and the risks inherent in the relevant Other 8.9 7.4 country where the cash flows are generated. Total 1,607.2 1,641.6

The following table summarises the pre-taxation discount rates used Impairment of intangible assets with indefinite useful lives for impairment testing: There have been no impairments during the year to intangible assets with indefinite useful lives (2011: £58.6m impairment to the MBF brand 2012 2011 % % held by Bupa Australia). Bupa Australia 12.1 12.9 Sensitivity to changes in key assumptions Bupa Care Services Australia 9.2 8.9 A sensitivity analysis has been performed on the key assumptions used to determine the value in use for each CGU as at 31 December 2012. Bupa Care Services UK 8.5 9.0 Bupa International 11.2 12.3 Other than as disclosed in the following page, management Bupa Care Services New Zealand 9.4 9.6 believes that no reasonably possible change in any of the above Bupa Home Healthcare 15.6 14.4 key assumptions would cause the carrying value of any goodwill or intangible asset with an indefinite useful life to exceed its The Bupa Cromwell Hospital 12.5 14.0 recoverable amount. Other – range of discount rates 12.7–14.6 15.0–15.3 FINANCIAL STATEMENTs 81 –

£m 0.9 71.0 97.7 169.6

property

Leasehold £m 65.3 68.2 163.0 1,720.9 2,017.4 property Freehold ief r b luation – December 2011 luation – December 2010 alua a a Care homes and hospitals are valued with regard their to trading potential based on value in use techniques, the principal assumptions are: quantifying a fair, maintainable level of trade and profitability; levels of competition; and assumed ability renew to existing licences, consents,certificates or permits. The table below shows the date at which properties were last subject externalto valuation. V V 2012 December – tion V Assets held at cost valuation or Cost Gains and losses on revaluation are recognised in the revaluation reserve, except where an asset is revalued below historical cost, in which case the deficit is recognised in the income statement. Where a revaluation reverses deficits takento the income statement in prior years, then it is credited the to income statement. equipment in d

%

1.7 1.6

2.6 rate

discount

Increase in Increase

% 1.8 0.1 0.1 2.0 spital, Bupa Care Decrease r in terminal in o growth rate nd Bupa Care Services Property, plant and equipment are the physical assets utilised the by Group profits. and carry to revenues out generate and activities business The majority of the assets held relate care to home and hospital properties and equipment buildings. office and P operty, plant an H

% K a 2.4 2.0 2.0 U 3.0 3.0 rate growth Terminal Terminal

operties operties

£m 0.7 6.6 pr

t 42.6 s d 47 t 206.4 t n n ea n H droom spital, for which recoverable amount will be K o pla stateme

U

H , , easehol pme y i ial l c d n u a n n luations of office buildings are on a market value basis. q a w Zealand, Bupa Care Services a fi

e e V e d

h N t

d to

n spital w Zealand w ropert e o eehol tes a 3.2 P H N Australia r o and offices. These properties are shown at fair value based on periodic, but at least triennial, valuations performed external by independent losses. impairment and depreciation subsequent less valuers, The valuations are performed with sufficient regularity to ensure use value. Freehold and leasehold properties comprise care homes, hospitals F that the carrying value does not differ significantly from fair value at the balance sheet date. Directors’ valuations are performed in exist. impairment indicators where years interim properties of Revaluation Fair value for care homes and hospitals is considered be to existing Borrowing costs relating the to acquisition or construction of qualifying assets are capitalised as part of the cost of that asset. The revaluation of properties was carried out independently by revaluations The Surveyors. Chartered Darroch, and Frank Knight were effective as of 31 December in theyear in which they were undertaken. The fair value of corporate use properties was determined mainly referenceby active to market prices. Bupa Care Services Services The Bupa Cromwell Bupa Care Services It is possible thatchange a inassumptions key could cause the greater than carrying value with a zero terminal growth rate. impairment of goodwill for The Bupa Cromwell Bupa annual report 2012 n Bupa Care Services Australia. The table below shows the decrease required in the terminal growth rate and increase required in discount rate for the recoverable amount of goodwill equal to carrying amount, with the exception of The Bupa Cromwell 82 Bupa annual report 2012 notes to the financial statements

Notes to the financial statements continued for the year ended 31 December 2012

Historical cost of the Group’s revalued assets Impairment A net £19.4m revaluation gain (2011: £8.7m) and £36.4m impairment Impairment reviews are undertaken where there are indications that loss (2011: £39.8m) have been recognised in the property revaluation the carrying value of an asset may not be recoverable. An impairment reserve. loss on assets carried at cost is recognised in other income and charges to reduce the carrying value to the recoverable amount. An impairment In 2012, a revaluation deficit of £0.7m (2011: £0.4m) and impairments loss on assets carried at revalued amount is recognised in the of £11.0m (2011: £20.9m) were charged to the income statement revaluation reserve, except where an asset is revalued below historical (see section 2.4). cost, in which case the deficit is recognised in the income statement The entire net £18.7m revaluation surplus (2011: £8.3m) was valued within other income and charges. by external valuers. The total £47.4m property impairment arose Leased assets from internal assessments (2011: £60.7m). Leases are classified as finance leases when the terms of the lease 2012 2011 transfer substantially all the risks and rewards of ownership to the £m £m lessee. All other leases are classified as operating leases. H istorical cost of revalued assets 1,617.8 1,533.0 Assets obtained under finance leases are capitalised within property, Accumulated depreciation based plant and equipment at fair value at acquisition or, if lower, at the on historical cost (220.8) (197.8) present value of the minimum lease payments and depreciated over Historical cost net book value 1,397.0 1,355.2 the shorter of their useful economic life and the lease term. Depreciation On initial recognition, the leased asset is measured at the amount equal Depreciation charge for the year to the lower of its fair value and the present value of the minimum lease on historical cost 32.4 30.7 payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that The historical cost of all property, plant and equipment is £2,354.5m asset. Finance lease liabilities, net of finance charges in respect of (2011: £2,244.1m). future periods, are included within other interest bearing liabilities, Equipment see Section 5.1. The interest element of the obligation is allocated Equipment (including leasehold improvements) is stated at historical over the lease term to reflect a constant rate of interest on the cost less subsequent depreciation and impairment losses. outstanding obligation. Depreciation Leasehold land, where no option to obtain title exists, is treated as Freehold land and assets under construction, included within freehold an operating lease. Assets classified as being under operating lease or leasehold properties as appropriate, are not depreciated. are not capitalised and therefore not recognised within the balance Depreciation on other items of property, plant and equipment is sheet. Payments made under operating leases are recognised as calculated using the straight line method to allocate cost or revalued prepayments within trade and other receivables within Section 3.0.1 amount less residual value over estimated useful lives, as follows: and are recognised in the income statement on a straight line basis over the term of the lease within Section 2.3 other operating expenses. °°Freehold buildings 50 years The amounts included in property, plant and equipment in respect °°Leasehold buildings s horter of useful life and lease term of assets held under finance leases are as follows: °°Equipment shorter of useful life Leasehold (leasehold improvements) and lease term property Equipment Total £m £m £m °°Equipment 3 to 10 years N et book value At beginning of year 1.0 1.5 2.5 At end of year 1.0 1.0 2.0 Depreciation Charge for year – 0.5 0.5 FINANCIAL STATEMENTs

83 – £m (1.1) 0.3 (6.1) (1.3) (2.3) 16.4 (9.0) 47.8 32.7 Total 59.9 (12.5) 147.7 524.1 524.1 107.4 178.9 (92.2) (74.4) (25.6) (70.8) (20.0) 600.1 106.0 468.4 2,272.5 2,923.5 2,796.6 2,294.7 2,796.6 2,272.5 2,323.4

– – – – – £m 3.6 3.6 0.7 0.3 0.4 (0.1) (1.6) (8.7) (4.8) 711.1 (4.0) (4.1) 711.1 (0.9) 66.8 98.8 68.4 (81.7) 96.0 (80.1) (89.2) (62.8) 315.9 315.9 (64.4) 340.1 736.5 395.2 395.2 705.9 2,763.1 296.4 396.4 409.5 Equipment

– – – – – – 0.1 0.1 0.1 £m 7.8 3.6 8.8 0.2 0.2 0.2 11.4 (1.3) (1.4) (8.4) 52.1 (6.3) (0.7) (6.6) (0.3) 37.4 117.5 40.5 40.5 122.5 124.5 159.9 169.6 124.5 165.0 165.0 property Leasehold

– 0.1 £m 17.1 0.3 (0.1) (0.1) (7.7) 21.5 (2.8) (8.7) 30.1 9.1 (2.3) (3.9) (0.7) (0.6) (0.5) (0.4) 72.3 59.2 32.4 43.8 30.2 88.4 88.4 151.6 40.3 (12.6) (15.8) (20.0) 1,832.1 1,832.1 1,897.3 2,017.4 1,875.8 1,920.5 1,920.5 1,865.8 property Freehold Freehold Recognised in the carrying amount of freehold property is £14.2m (2011: £0.6m) in relation freehold to property in the course of construction. Certain property, plant and equipment is held as securitised assets under borrowing arrangements described in Section 5.1.

s t n quipment e d stateme

ial c n a n fi

e h t

to

nd of year nd of year nd of year nd of year mpairment of land arose from this review (2011: £0.8m). st or valuation or st st or valuation or st t book value at beginning of year t book value at beginning of year tes e o i e t e t e t e t e o o roperty, plant an plant roperty, o Revaluations Depreciation and impairment loss impairment and Depreciation beginningAt of year year for charge Depreciation Disposals A Depreciation and impairment loss impairment and Depreciation beginningAt of year year for charge Depreciation Disposals Impairments Disposals Revaluations Other Foreign exchange exchange Foreign Other Impairments Impairments Foreign exchange exchange Foreign Additions through business combinations business through Additions A Reclassification Net book value at end of year Additions Revaluations Foreign exchange Foreign Other 2011 At beginningAt of year N C Foreign exchange Foreign A (2011: £59.9m) arose in connection with the Directors’ impairment impairment Directors’ the with connection in arose £59.9m) (2011: review of the care home portfolio where the decline in future profitability since the last valuation is consideredto be of a long-term nature. Revaluations An impairment on freehold property and equipment of £47.8m N A N Disposals Netbook value at end of year Additions through business combinations business through Additions 2012 C beginningAt of year P Bupa annual report 2012 n Additions 84 Bupa annual report 2012 notes to the financial statements

Notes to the financial statements continued for the year ended 31 December 2012

Investment properties in brief Investment properties are physical assets that are not occupied by the Group and are leased 3.3 to third parties to generate rental income. Invstmee nt The vast majority of investment properties held by the Group relate to a portfolio of retirement properties villages in New Zealand.

Investment properties are measured at fair value, determined The remaining carrying value of investment properties of £152.5m individually, on a basis appropriate to the purpose for which the (2011: £123.4m), consisting of the Group’s portfolio of retirement property is intended and with regard to recent market transactions villages, was valued by management using internally prepared for similar properties in the same location. discounted cash flow projections, supported by the terms of any existing lease and other contracts, and when possible, by external In an active market, an independent valuer, holding a recognised and evidence such as current market rents for similar properties in the relevant professional qualification and with recent experience in the same location and condition. Discount rates are used to reflect current location and category of investment property being valued, values market assessments of the uncertainty in the amount or timing of the the portfolio annually. cash flows. The discounted cash flow projections are reviewed by an In New Zealand, the retirement village market is fragmented. Growth independent valuer, Deloitte. in new developments is also restricted due to a lack of suitable sites. Investment properties include commercial properties which are leased As a result, no active market exists for the retirement villages from to third parties. The leases contain an initial non-cancellable period of which values can be derived. These properties are valued using between one and three years. Subsequent renewals are negotiated discounted cash flow projections based on reliable estimates of with the lessee. future cash flows. (ii) Leases as lessor Any gain or loss arising from a change in the fair value is recognised The Group leases out its investment properties under operating leases. in the income statement within financial income and expenses. The future lease receipts under non-cancellable leases are as follows: See Section 3.0.1 for the impairment accounting policy for investment properties. 2012 2011 £m £m (i) Investment properties Less than one year 0.8 1.2 2012 2011 Between one and five years 0.8 2.3 £m £m Total 1.6 3.5 At beginning of year 132.5 120.3 Additions 19.3 7.4 During the year ended 31 December 2012, £1.0m (2011: £1.1m) was Increase in fair value 6.9 4.1 recognised as rental income in the income statement. Foreign exchange 1.2 0.7 At end of year 159.9 132.5

The historical cost of investment properties is £134.6 (2011: £114.2m). Of the £159.9m (2011: £132.5m) of investment properties in the balance sheet as at 31 December 2012, £7.4m (2011: £9.1m) was valued by an external valuer, Knight Frank, Chartered Surveyors. FINANCIAL STATEMENTs

85 et

£m N

(2.6) (4.0) 22.7 22.6 (60.9) 774.0 774.0 (110.9) 839.3 ief 1,346.1 1,346.1 1,287.5 2,142.8 2,142.8 2,120.2 6,331.5 (4,976.1) 5,086.6 r (6,270.3) b

– in d £m Re- 2.0 (3.1) (7.6) (7.6) 91.3 (4.6) 18.8 (3.9) (0.2) (0.8) (0.3) (11.0) (11.0) (94.1) (19.4) (19.4) (16.3) (27.6) 2011 insurance

£m (3.7) (2.4) 25.7 23.5 Gross (62.9) (110.9) 785.0 785.0 843.2 1,292.1 5,114.2 2,162.2 2,162.2 1,353.7 1,353.7 2,136.5 6,425.6 (6,361.6) (4,994.9)

£m Net 22.2 24.8 (19.7) (18.0) (53.0) (113.2) 774.0 804.0 804.0 1,346.1 2,341.6 1,540.2 1,540.2 (6,661.1) 5,336.7 6,873.2 2,366.4 2,366.4 (5,120.8) surance contracts issue n I

– – r £m e Re- 0.4 (7.6) (5.4) (5.4) 18.9 (0.7) (0.3) 27.4 d (11.0) (13.4) (13.6) (13.6) (13.6) (27.4) 2012 insurance

£m lities un i (18.1) 0.1 22.9 24.8 (20.1) Gross (52.7) b (113.2) 785.0 809.4 809.4 1,547.7 (7.5) 1,547.7 (7.5) 1,353.7 5,350.1 2,355.2 (5,139.7) 2,380.0 2,380.0 6,900.6 (6,688.5) Adjustments the to amount of claims provisionfor prior years are included in the income statement in the financialyear in which the change is made. In setting the provisions for claims outstanding, a best estimate is determinedon an undiscounted basis and then a margin of prudence is added such that there is confidence that future claims will be met from the provisions. The level of prudence set is either one required regulation by or one that provides an appropriate degree confidence.of Provision is made for unexpired risks where the claims and administrative expenses likely arise to after the end of the financial year, in respect of contracts commencing before that date, are expected exceed to the related unearned premiums, less related deferred acquisition costs. The methods used and estimates made for claims provisions are reviewed regularly. a b te o N other lia d d o PR visions an The provisions and other liabilities under insurance contracts issued arise from the Group’s underwriting activities. The provisions mainly relate unearned to premiums, which are deferred revenues that relate to future periods; and claims, where an estimate is made of theexpense required settle to existing insurance contract obligations. The other liabilities primarily consists of deposits and payable. commissions

e ed

c s t u d n n n a er insurance contracts issue contracts insurance er iss a

r d

stateme s u

s n ial c n n i liabilities a

n fi is

e tracts er h er v t

n d h rovisions un rovisions alysis of movements in provisions for claims alysis of movements in provisions for unearned premiums to

n P n t n o r A A n-current ng-term business tes u 3.4 Po IO o c o e nearned premiums nearned o o At end of year Foreign exchange exchange Foreign Foreign exchange exchange Foreign Total insurance provisions insurance Total (a) (a) At beginningAt of year Premiums deferred deferred Premiums Deferred premiums released income to Decrease for prior years’ claims Increase for current year claims Increase in Risk Equalisation Trust Fund levy Current At end of year (b) At beginningAt of year Cash paid settle to claims L Provisions for life insurance benefits provisions insurance Total N G premiums business unearned for insurance neral Provisions Provisions for claims Bupa annual report 2012 n 3.4.1 3.4.1 U The unearned premium provision represents premiums written that relate periods to of risk in futureaccounting periods. It is calculated on a straight line basis, which is not materially different from a calculation based on the pattern of incidence of risk. claims for Provision The gross provision for claims represents the estimated liability arising from claims episodes in current and preceding financialyears which have not yet given rise claimsto paid. The provision includes an expenses. handling and management claims for allowance The gross provision for claims is estimated based on current information and the ultimate liability may vary as a result of subsequent information and events. 86 Bupa annual report 2012 notes to the financial statements

Notes to the financial statements continued for the year ended 31 December 2012

Assumptions for general insurance business The process of recognising liabilities arising from general insurance Insurance provisions are estimates. Actual experience may vary, contracts requires the exercise of judgement in relation to estimating primarily as a result of claims or administrative expenses being future claims payments, claims handling expenses and unexpired risk different than expected. The following table shows the sensitivities provisions. The principal assumption affecting the measurement of to such variation from expectations. liabilities is that the nature of recent claims development profile of the Increase in Increase in Group’s insurance entities and that current claims experience will be claims expenses consistent with recent trends. Other assumptions are also applied in 2012 measuring the Group’s insurance liabilities but have a less material effect. The aim of these assumptions is to arrive at the best estimate Change in variable % 5.0 10.0 of future obligations and cash outflows of the Group. A margin for Reduction in profit net of adverse deviation is reflected within the estimates. reinsurance before taxation £m 59.8 19.0 Claims development patterns are analysed in each of the Group’s general insurance entities and, in some cases, are further sub-analysed 2011 where an entity has distinct portfolios of general insurance with Change in variable % 5.0 10.0 distinct characteristics. The characteristics may differ by product line, Reduction in profit net of risk profile, geographic sector or market sector. The analysis is used reinsurance before taxation £m 52.2 18.0 to determine a claims settlement pattern using recent experience, adjusted where appropriate by observed trends over time. Claims These variances would lower the amount of profit that would otherwise are assessed on a case by case basis. Extrapolation methods based on be expected to emerge in subsequent periods. Since premium the claims settlement pattern are used: these are recognised methods provisions include profit margins and claims provisions include margins described in the Institute and Faculty of Actuaries Claims Reserving of prudence, variance from expectations by the amounts shown will Manual (1997). Large homogeneous sections of insurance business be absorbed by these margins for the current book of business. (eg corporate business in a specific region) are often analysed by Liability adequacy tests more than one method, such as the chain ladder, Bornhuetter- Liability adequacy tests are performed for insurance portfolios on the Ferguson and paid claim loss ratio methods. Additional industry basis of estimates of future claims, costs and premiums earned. For accepted refinements are made to allow for, but not limited to, the short duration contracts, a premium deficiency is recognised if the sum treatment of large claims, claim seasonality, claims inflation and of expected claim costs and claim adjustment expenses, capitalised currency conversions. deferred acquisition costs, and maintenance expenses exceeds related While there is some diversity in the claims development profile across unearned premiums while considering anticipated investment income. the Group, the Group’s general insurance contracts principally relate to 3.4.2 OTHER LIABILITIES under insurance contract issued healthcare benefits that occur with stable frequencies and exhibit very Other liabilities under insurance contract issued consists of payables short development patterns that can be characterised in months rather to insurance creditors other than policyholders. than years. Less automated medical insurance portfolios may have development patterns extending out from 12 to 18 months, whereas 2012 2011 pre-authorisation electronic claims settlement and network provider £m £m arrangements may produce development patterns of four to Reinsurers’ deposits 4.6 4.3 six months. Reinsurance payables – 0.3 Commissions payable 8.5 6.0 Other insurance payables 3.7 3.1 Total other liabilities under insurance contracts issued 16.8 13.7 FINANCIAL STATEMENTs

87

£m 0.8 (1.5) (7.7) (5.6) Total 82.5 26.3 58.5 49.9 84.8 84.8

(33.6)

– 1.8 £m 0.7 (1.7) 11.3 11.3 15.3 (3.3) (0.5) 10.6 (0.3) Other

– – – – £m 3.8 3.8 4.5 4.5 4.5 (1.5) (1.6) provisions Regulatory

– – – £m 5.7 5.7 5.7 5.8 0.4 (0.1) (0.1) uring ief Restruct- r provisions b

– – – 1.7 1.5 £m 5.3 8.4 6.8 6.8 (0.1) (0.3) (3.2) property occupied n U

– – – charges in d £m 7.4 11.2 (5.1) 4.0 15.5 15.2 15.2 Insurance provisions payments at a pre-taxation rate that reflects current market assessments of the time value of money and, where appropriate, the risks specificto the liability. (c) Unoccupied property Unoccupied (c) In prior years, the Group entered into non-cancellable leases for property which it no longer fully occupies. The Group has provided may be increased or decreased at the discretion of the customer protection bodies. Other (f) Other provisions include amounts relating legal to claims, payments under legislation and deferred consideration. for lease obligations, net of sub-lease receivables. The lease obligations obligations lease The receivables. sub-lease of net obligations, lease for are payable monthly, quarterly or annually, within a range of one of our customers and markets. The above provision includes costs accrued for the restructuring that are be to met in 2013. Regulatory(e) provisions Regulatory provisions relate levies to payable customer to protection bodies the by Group’s various regulated entities. Such levies are generally determined on a capped percentage of revenues basis. frequency the although annually, made normally are Payments to 13to years, the average being fiveyears. The future net outflows are uncertain and are affectedby the Group’s abilityto sub-let property. unoccupied provisions Restructuring (d) During 2012, the Group was restructured enable to better alignment

– lities an i 9.1 £m (1.1) (1.1) 0.8 b 39.1 41.3 41.3 32.2 29.4 Long leave (25.8) (2.6)

annual annual

service and

r P ovisions for lia A provision is recognised when the Group is expected make to future payments as a result of a past event. charges d certainty around both the amount and and amount the both around certainty

s n

t U n d lities an i n for b

a stateme s

n ial c n a n fi ges i

e h v t

ar to

h r iabilities n-current ovisions for lia tes ilised inyear – cash ilised inyear – non-cash 3.5 Po SIO l c o t t r o At beginningAt of year Acquisitions through business combinations business through Acquisitions Bupa annual report 2012 n P These payments can result from a legal obligation or a constructive obligation, where an expectation has been set the by Group. A provision is made if the payments can be reliably estimated. If the effect is material, provisions are determinedby discounting the future Released in year U Charge for year year for Charge U Foreign exchange Foreign At end of year N Current Long(a) service and annual leave The long service leave provision relates territories to where employees are legally entitled substantial to paid leave after completing a certain service. qualifying of length timing of future outflows arises as a result of variations in employee retention rates, which may vary based on historical experience. The annual leave provision relates territories to where the annual entitlement of leave is not required be to taken within a predetermined time nor does it expire. Therefore uncertainty exists around the timing of future outflows as well as around the amount of future outflows due to wage inflation. inflation. wage provisions Insurance (b) The insurance provision is in respect of the Group’s self insurance Total provisions for liabilities and charges and covers the excess that arises on claims made in relation losses to arising from damage property, to businessinterruption and medical, employee or public liability. Any outflows relatingto this provision are dependent on the frequency and value of claims submitted as well as insurers. with policies individual within specified amount excess the The fund is actuarially assessed twice a year ensure to that the provision is adequate. 88 Bupa annual report 2012 notes to the financial statements

Notes to the financial statements continued for the year ended 31 December 2012

P ost employment benefits in brief The Group operates several funded defined benefit and defined contribution pension 3.6 schemes for the benefit of employees and Directors, in addition to an unfunded (non-registered) Psto Employment and post retirement medical benefit scheme. benefits The main defined benefit scheme is The Bupa Pension Scheme which was closed to new entrants from 1 October 2002. The principal defined contribution pension scheme is The Bupa Retirement Savings Plan.

Defined contribution pension schemes (ii) Amounts recognised directly in other comprehensive income The defined contribution schemes provide benefits based on the The amounts (credited) / charged directly to other comprehensive accumulated contributions made by Bupa and the employees. income are: The Group pays fixed contributions into the fund on behalf of the employees and these contributions are recognised as an expense in 2012 2011 £m £m the income statement as incurred. The risks and rewards of the defined contribution schemes are assumed by the members of the schemes. Actual return less expected return on assets (45.7) (31.3) Defined benefit post employment schemes The defined benefit schemes provide benefits based on final Experience losses arising on obligations 0.2 58.7 pensionable salary. The Group’s net obligation in respect of defined Changes in assumptions 27.0 65.6 benefit pension and post retirement medical scheme is calculated Total actuarial (gains) / losses (18.5) 93.0 separately for each scheme and represents the present value of the defined benefit obligation less, for funded schemes, the fair value of The cumulative amount of actuarial losses recognised directly in other scheme assets. The discount rate used is the yield at the balance sheet comprehensive income is £186.9m (2011: £205.4m). date on high quality corporate bonds denominated in the currency in 3.6.1 Group post employment benefit schemes which the benefits will be paid. When the calculation results in a benefit Defined contribution pension schemes to the Group, the recognised asset is limited to the present value of any The principal defined contribution pension plan in the UK is the Bupa future refunds from the scheme or reductions in future contributions Retirement Savings Plan. This scheme was opened with effect from to the scheme, plus the total of any unrecognised past service costs. 1 October 2002 and is available to join on a voluntary basis to The charge to the income statement for defined benefit schemes permanent employees of The British United Provident Association represents the following: current service cost calculated on the Limited and Bupa Insurance Services Limited. In 2012 £23.7m (2011: projected unit credit method; the expected return on scheme assets, £23.8m) of contributions to the defined contribution scheme were less the interest cost on scheme liabilities; and gains and losses on recognised in the income statement (Section 2.3 (i)). There are several curtailments. other contract based defined contribution arrangements run by other employers within the Bupa Group. All actuarial gains and losses are recognised in full in the statement of comprehensive income in the period in which they occur. Defined benefit post employment schemes The principal defined benefit scheme in the UK is The Bupa Pension (i) Amounts recognised in the consolidated income statement Scheme. Contributions by employees and by Bupa Group companies The amounts charged to other operating expenses for the year are: are administered by the Trustee in funds independent of the Group. The scheme was closed to new entrants from 1 October 2002, but 2012 2011 £m £m its existing members continue to accrue entitlements in respect of current service. Current service cost 19.3 20.0 Interest on obligations 52.6 51.4 Contributions by Group companies to this scheme are made in Expected return on scheme assets (52.8) (60.7) accordance with the recommendations of the independent scheme actuary. Gains on curtailments – (2.8) Past service cost 0.2 – The independent scheme actuary for the Bupa Pension Scheme Total amount charged to income statement 19.3 7.9 performs detailed triennial valuations together with annual interim reviews. Both triennial and interim valuations use the attained age

method, recognising the closure of the scheme to new entrants. Actual return on scheme assets (98.5) (92.0) The most recent triennial valuation as at 1 July 2011 was finalised during the year ended 31 December 2012. The charge to other operating expenses in respect of cash contributions to defined contribution schemes is £23.7m (2011: £23.8m). FINANCIAL STATEMENTs

89

£m 3.0 3.0 57.1 2011 68.1 (65.1) (54.1)

1,149.0 (1,091.9)

nd overseas Total r localpractice £m 2012 94.7 K a 42.4 42.4 (52.3) (62.5) 104.9 K o U U 1,260.4 (1,165.7)

– – – £m 2011 (18.0) (18.0)

– – – £m 2012 (14.9) (14.9) benefit scheme benefit Post retirement medical medical retirement Post

£m 57.1 2011 21.0 (36.1) 1,149.0 (1,091.9)

£m 2012 57.3 94.7 funded defined benefit pension arrangements exist for certain certain for exist arrangements pension benefit defined funded (37.4) n Pension schemesPension 1,260.4 (1,165.7) There are several other minor schemes operated by U subsidiaries. Of these, the defined benefit schemes are assessed by assessed are schemes benefit defined the these, Of subsidiaries. independent scheme actuaries in accordance with and under IAS 19 as at 31 December 2012 for the purposes of inclusion in the Group’s consolidated financial statements. Complete disclosure of these other defined benefit schemes is not practicable within this report but are disclosed within the financial statements of the schemes. the of employer sponsoring schemes Unfunded employees and former employees in excess of the funded pension arrangements provided the by Group. There are no separate funds or assets in the balance sheet support to the unfunded schemes; however, provisions are included in the balance sheet in respect of these liabilities. The latest valuation of these arrangements was performed as at 31 December 2012 under IAS 19 the by Group’s independent actuary. The charge the to consolidated income statement in respect of these as liability pension related the of assessment the and arrangements at 31 December 2012 have been made in accordance with this latest valuation, which used the same principle assumptions as adopted at 31 December 2012 under IAS 19 for The Bupa Pension Scheme. scheme benefit medical retirement Post The Group also provides unfunded post retirement medical benefits for certain former employees. These benefits were granted under an agreement which closed new to entrants in 1992. The latest valuation of this scheme was carried out asat 31 December 2012 an by actuary employed the by Group using the same assumptions key as adopted at 31 December 2012 under IAS 19 for The Bupa Pension Scheme. te (v) o

(iv) (iv)

N

ospitals business in 2007, K h U

s t n stateme

ial c n a n fi

e h t

to

ospitals business, assuming that the scheme would have achieved assets t assets of funded schemes t liabilities t tes e et e K h o N Fair value of scheme assets N N recognisedNet assets Present value of funded obligations funded of value Present of the last instalment. U period. that during compound annum per 7.0% of returns investment In addition, Bupa Finance Plc (which is not an employer in respect Bupa agreed or pay, to procure the payment of, a number of further contributions the to Trustee of the scheme. During 2012 the total of the additional payments made was £24.2m (2011: £24.5m). The payment made in 2012 is the final payment associated with this disposal and equates the to investment return that the scheme would have achieved had £98.0m been paid into the scheme at the time of the sale of the of the scheme) had entered into a legally binding and irrevocable guarantee for the benefitTrustee of the in respect of the payments due from Bupa as set out above. This guarantee operates for the duration of these special payments and expires on the payment Netrecognised assets / (liabilities) as: sheet balance the Represented on As recommended by the scheme’s independent actuary, employer employer actuary, independent scheme’s the by recommended As contributions were paid at the rate of 24.9% of pensionable salaries for the period 30 to June 2012 and at the rate of 27.3% for the period 1 July 2012 31 to December 2012. In addition these to employer contributions a payment equivalent the to employee contribution of of 7.0% sacrifice salary Group’s the of part as paid is salaries pensionable arrangement (known as PeopleChoice Pensions). There is a corresponding reduction in members’ wages and salaries as a result. The expected contributions payable in 2013, with regards the to accumulation of future benefits, are £8.9m in respect of The Bupa Pension Scheme and £2.0m in respect of PeopleChoice Pensions. Following the disposal of the Group’s (iii) Assets and liabilities of schemes The assets and liabilities in respect of defined funded pension scheme are as follows: scheme, unfunded pension and post retirement medical benefit benefit medical retirement post and pension unfunded scheme, Bupa annual report 2012 n Present value of unfunded obligations obligations unfunded of value Present 90 Bupa annual report 2012 notes to the financial statements

Notes to the financial statements continued for the year ended 31 December 2012

(iv) Present value of the scheme obligations The movement in the present value of schemes’ obligations are:

Post retirement medical Pension schemes benefit scheme Total

2012 2011 2012 2011 2012 2011 £m £m £m £m £m £m At beginning of year 1,128.0 953.9 18.0 20.8 1,146.0 974.7 Current service cost 19.3 20.0 – – 19.3 20.0 Interest on obligations 51.8 50.3 0.8 1.1 52.6 51.4 Contributions by employees 0.8 0.9 – – 0.8 0.9 Actuarial losses / (gains) 33.0 131.3 (3.4) (3.3) 29.6 128.0 Benefits paid (29.2) (25.8) (0.5) (0.6) (29.7) (26.4) Gains on curtailment – (2.8) – – – (2.8) Past service cost 0.2 – – – 0.2 – Foreign exchange (0.8) 0.2 – – (0.8) 0.2 At end of year 1,203.1 1,128.0 14.9 18.0 1,218.0 1,146.0

(v) Fair value of funded schemes’ assets The movement in the fair value of the funded schemes’ assets are:

2012 2011 £m £m At beginning of year 1,149.0 1,039.3 Expected return on scheme assets 52.8 60.7 Actuarial gains 45.7 31.3 Contributions by employer 39.0 41.3 Contributions by employees 0.8 0.9 Benefits paid (26.3) (24.6) Foreign exchange (0.6) 0.1 At end of year 1,260.4 1,149.0

The market value of the assets of the funded schemes is as follows:

Equities 494.3 405.2 Bonds 724.4 703.8 Other assets 41.7 40.0 Total market value of the assets of the funded schemes 1,260.4 1,149.0

The funded schemes’ assets do not include any of the Group’s own financial instruments, or any property occupied by the Group.

3.6.2 Actuarial assumptions The responsibility for setting the assumptions underlying the IAS 19 valuations rests with the Directors, having first taken advice from the Group’s independent actuary. The key weighted average financial assumptions used when valuing the obligations of the post employment benefit schemes under IAS 19 are as follows:

Funded Unfunded schemes schemes

2012 2011 2012 2011 Note % % % % Inflation rate (a) 3.0 3.1 3.0 3.1 Rate of increase in salaries (a) 4.5 4.6 4.5 4.6 Rate of increase to pensions in payment (a) 2.9 3.0 3.0 3.1 Rate of increase to pensions in deferment (a) 2.3 2.4 2.3 2.4 Discount rate for scheme obligations (a) 4.5 4.7 4.5 4.6 Overall expected return on scheme assets (b) 4.9 4.6 – – Medical cost trend rate (c) – – 4.0 3.9

Asset performance for the disclosures for the year ended 31 December 2012 have been measured against the expected return on assets disclosed as at 31 December 2011. FINANCIAL STATEMENTs

91 – £m (2.1) (0.1) 2011 point (17.0) 115.5 2008

(25.7) One % 799.7 (718.6) decrease

0.1 2.5 2011 £m point (9.6) (14.1) 81.1 One % 2009 916.2 increase (930.3)

(1.7) (0.1) 2012 point £m One % 2010 85.4 (41.2) (45.1) (33.2) (20.8) (21.7) decrease (953.9) 1,039.3 0.1 2.0

2012 point One % £m increase 2011 21.0 (0.3) (0.3) (0.2) 62.7 (31.3) (18.0) 1,149.0 (1,128.0)

£m 2.9 2012 57.3 (0.4) (14.9) (45.7) 1,260.4 (1,203.1) medical benefit obligation benefit medical current service cost and cost interest (d) Mortality assumptions Mortality (d) The Trustees of The Bupa Pension Scheme have undertaken a scheme specific mortality investigation as part of the 1 July 2011 triennial valuation. The Trustees shared the conclusion drawn from this analysis with the Directors, who have adopted assumptions in line with this analysis for the purposes of the IAS 19 valuation as at 31 December 2012. The mortality tables adopted at 31 December 2012 are the S1 SAPS year of birth mortality tables using the CMI projection model, with a long-term rate of improvement of 1.25% pa and an age rating of minus one year. The average life expectancies at age 60 based on these tables for a male currently aged 60 is 27.8 years (45) (29.3 years) and for a female currently aged 60 is 30.3 (45) years (31.9 years). Effect on post retirement Effect on the aggregate of (c) Medical(c) cost trend rate The medical costtrend rate is the assumed additional escalation of medical costs over and above the assumed inflation rate. It is assumed that such an effect will continue during the remaining run-off of the liability. Assumed medical cost trend rates have a significant effect on the amounts recognised in the consolidated income statement. A one percentage point change in assumed medical cost trend rates would result in the following increase and decrease in the post retirement obligation. benefit medical

s t n stateme

ial c n a n fi

e h t

to

st retirement medical benefit schemes benefit medical retirement st tes e o o Experience credit arising on: obligations Scheme (vi) History of experience gains and losses Net surplus / (deficit) Experience charge / (credit) arising on: obligations Scheme assets Scheme P Present value of defined benefit obligations P schemes nsion Present value of scheme obligations (a) Actuarial assumptions underlying the valuation of obligations of valuation the underlying assumptions Actuarial (a) The inflation assumption is setby referenceto the difference between the yield on long-term fixed interest gilts and the real yield on index-linked gilts, with a deduction of 0.2% reflect to an inflation risk premium.risk The rateof increase of pensions in payment is the same as the inflation rate, with the exception of benefits which receive fixed increases of the major asset classes, equities, bonds and ‘other’. The expected return on equities and other return seeking assets has been taken as the yield on fixed interest gilts at the balance sheet date plus a margin of 3.5%, representing the additional return on top of the risk free return available onthe asset class. The expected return on bonds has been taken as an average of the yield available on fixed interest gilts and high quality corporate bonds at the balance sheet date. The expected return on ‘other’ has been taken as 3.0% pa, representing the long-term expected return on cash and short dated securities. in payment as defined under the respective scheme rules. The rateof increase in salaries is equal the to long-term expected annual average salary pay increase for the employees who are members of the scheme. This assumption is set relative the to inflation assumption. rate The discount rate used value to scheme liabilities is the yield at the balance sheet date on high quality corporate bonds of appropriate term. Expected(b) rate of return on assets The overall expected return on scheme assets has been derived by calculating the weighted average expected return applied each to Bupa annual report 2012 n Fair value of scheme assets 92 Bupa annual report 2012 notes to the financial statements

Notes to the financial statements continued for the year ended 31 December 2012

Deferred taxation assets and liabilities in brief Deferred tax is an amount which recognises the differences between the carrying amounts 3.7 of assets and liabilities for financial reporting and the amounts used for taxation purposes. D efERRED An example is the variance between the carrying value of equipment due to depreciation being taxation assets charged for financial reporting purposes and written down allowances being applied for the and liabilities relevant tax authorities.

Deferred taxation is recognised in full using the balance sheet liability Deferred taxation is recognised on temporary differences arising on method, providing for temporary differences between the carrying investments in subsidiary companies, except where the timing of the amounts of assets and liabilities for financial reporting purposes and reversal of the temporary difference is controlled by the Group and the amounts used for taxation purposes. it is probable that the temporary difference will not reverse in the foreseeable future. The following temporary differences are not recognised: goodwill not deductible for taxation purposes and the initial recognition of an asset A deferred taxation asset is recognised only to the extent that it is or liability in a transaction that is not a business combination and probable that future taxable profits will be available against which which, at the time of the transaction, affects neither the accounting the asset can be utilised. profit nor taxable profit or loss. Deferred taxation assets and liabilities are offset when they relate The amount of deferred taxation recognised is based on the expected to income taxes levied by the same taxation authority and when the manner of realisation or settlement of the carrying amount of assets Group can settle its current taxation assets and liabilities on a net basis. and liabilities, using taxation rates enacted or substantively enacted at the balance sheet date.

Recognised deferred taxation assets and liabilities Deferred taxation assets and liabilities are attributable to the following: Assets Liabilities Net

2012 2011 2012 2011 2012 2011 £m £m £m £m £m £m Accelerated capital allowances – – (65.2) (36.5) (65.2) (36.5) Post employment benefit asset / liability – – (8.9) (4.5) (8.9) (4.5) Revaluation of properties to fair value – – (76.9) (117.5) (76.9) (117.5) Employee benefits (other than post employment) 22.3 24.6 – – 22.3 24.6 Provisions 11.2 3.8 – – 11.2 3.8 Taxation value of losses carried forward 19.1 13.3 – – 19.1 13.3 Goodwill and intangible assets – – (65.1) (77.3) (65.1) (77.3) Other 11.9 23.7 (4.1) (4.3) 7.8 19.4 Deferred taxation assets / (liabilities) 64.5 65.4 (220.2) (240.1) (155.7) (174.7) Allowable netting of deferred taxation assets and liabilities (61.9) (65.4) 61.9 65.4 – – Net deferred taxation asset / (liability) 2.6 – (158.3) (174.7) (155.7) (174.7)

Recognised deferred taxation assets Unrecognised deferred taxation assets Deferred taxation assets relating to the carry forward of employee As at 31 December 2012, the Group had deductible temporary benefits, other provisions, unused taxation losses and other deferred differences relating to intangible assets of £28.4m (2011: £8.4m), taxation assets are recognised to the extent that it is probable that trading losses of £69.3m (2011: £8.5m) and capital losses of £36.0m future taxable profits will be available against which the deferred (2011: £31.7m) for which no deferred taxation asset was recognised taxation assets can be utilised. due to uncertainty of utilisation of those temporary differences. FINANCIAL STATEMENTs

93 £m 7.8 3.8 19.1 11.2

13.3 (4.5) (8.9)

22.3 24.6 (65.1) (77.3) (65.2) (76.9) (117.5) (36.5)

At end (174.7) of year 18.6m), (155.7)

$ U

mebusinesses – – – o 2.1 1.2 1.5 1.9 0.1 1.0 £m H 0.5 0.3 0.4 (0.1) (1.3) (0.4) (0.3) (0.6) Foreign exchange

– – – – – – – – – – – – – – – – £m 0.30.3 0.3 19.4 subsidiary companies Disposal of

– – – – – – – – – – – – – – £m 6.7 6.7 0.5 ief r through through b business business Acquisitions combinations

– – – – – – – – – – ucluse Gardens. A valuation carried out Knight by Frank 9.1 a £m 8.3 0.2 0.5 0.2 (1.0) 12.2 26.1 V income hensive in other sposals in compre- i d

Recognised d

d Torrejón been consolidated from 1 January 2012, total revenue a 1.7 13.7 8.1 6.1 £m 7.4 to theto Torrejón acquisition balance sheet are provisional and will be finalised in 2013, no later than 12 months following the date of acquisition. The acquisition related costs included in operating expenses for the yearended 31 December 2012 were £0.2m (€0.3m). (i) Torrejón (i) On 5 December 2012, the Group acquired 50% of the share capital of Torrejón for cash consideration of £6.0m The investment (€7.4m). the with arrangement Partnership Public-Private year 30 a represents local government operate to the 250 bed hospital in Madrid. As a result, £0.1m of goodwill has been recognised. The fair value adjustments H would have increased £56.8m by and profit after tax would have been reduced £1.9m. by Bupa has control over the financial and operating policies of Torrejón, so as obtain to benefits from the activities of the enterprise, therefore the results have been consolidated within the accounts. Group Other(ii) Includedwithin other are the acquisitions of two Care resulted in a fair value adjustment the to value of freehold properties acquired of £2.6m. As this valuation was not reflected in the negotiated purchase price, this resulted in a £2.6m gain on bargain purchase that has been recognised in the income statement in 2012. in Australia, acquired for total cash consideration of £12.2m (A Shalom and 3.2 0.7 (1.7) (7.7) 19.5 (5.2) (3.4) 31.0 10.3 10.8 18.0 (11.9) (19.4) (29.7) in income in statement Recognised nations an i

b 9.1 £m 3.8 6.2 13.3 (4.5) 19.4 14.0 24.6 38.2

(17.4) (77.3) (117.5) 0% (36.5) (38.4) (98.3) 00% 00% 00% 00% 00% 00% (174.7) of year (219.8) (133.2) 1 1 5 1 1 1 1 At beginning At

Business com A business combinationrefers the to acquisition of all or part of a company’s shareholding and disposals refers the to sale of a subsidiary. This section describes how these transactions are presented within the consolidated financial statements.

althcare e H

me

o

H

spital s

o t

n H s althcare – n e H stateme

ucluse Gardens – Care Services

timate Spa Smile – Wellness EM bano – Care Services l apital Dent – Dental a tio halom – Care Services orrejón – ial V T S A U C G c a n a n

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disposals e n

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w Zealand Buis 4.0 c a tes e K o Post employment benefit asset / liability Revaluation of properties fair to value 2012 Accelerated capital allowances 2011 Accelerated capital allowances Movement in net deferred taxation (liabilities) / assets N Australia (a) Acquisitions (a) method. acquisition the using for accounted are combinations Business liabilities contingent and liabilities and acquired assets Identifiable assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any interest. non-controlling The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable assets acquired is recorded as goodwill. Costs related the to acquisition are expensed as incurred. acquisitions 2012 A number of acquisitions were made during the year ended 31 December 2012, the details are as follows: Spain Bupa annual report 2012 n Employee benefits (other than post employment) employment) post than (other benefits Employee Provisions Total U Taxation value of losses carried forward assets intangible and Goodwill Other Other Post employment benefit asset / liability

Revaluation of properties fair to value Employee benefits (other than post employment) employment) post than (other benefits Employee Provisions Taxation value of losses carried forward Goodwill and intangible assets intangible and Goodwill Other Other Total 94 Bupa annual report 2012 notes to the financial statements

Notes to the financial statements continued for the year ended 31 December 2012

Torrejón Other Carrying Carrying value at Fair value value at Fair value acquisition adjustments Fair value acquisition adjustments Fair value £m £m £m £m £m £m Intangibles – – – 4.1 – 4.1 Property, plant and equipment – – – 30.1 2.6 32.7 Trade and other receivables 101.3 – 101.3 0.5 – 0.5 Inventories 1.3 – 1.3 – – – Cash and cash equivalents 4.9 – 4.9 0.2 – 0.2 Deferred tax 0.5 – 0.5 – – – Other interest bearing liabilities (0.2) – (0.2) – – – Trade and other payables (63.2) – (63.2) (21.6) – (21.6) Subordinated liabilities (32.9) – (32.9) – – – Provisions for liabilities and charges – – – (0.8) – (0.8) 11.7 – 11.7 12.5 2.6 15.1

Net assets acquired 11.7 15.1 Attributable to non–controlling interests (5.8) – Gain on bargain purchase (2.6) Goodwill 0.1 6.2 Consideration 6.0 18.7

Consideration satisfied by: Cash 6.0 18.2 Deferred – 0.5 Total consideration paid 6.0 18.7

Purchase consideration settled in cash 6.0 18.2 Cash acquired on acquisition (4.9) (0.2) Net cash outflow on acquisition 1.1 18.0

In 2012, the Group acquired the remaining 40% non-controlling interest Net assets divested were £166.9m, which included £179.1m in relation in Especializada y Primaria L’Horta-Manises SA for cash consideration to financial investments, £177.0m of assets arising from insurance of £5.3m (EUR 6.5m). This resulted in a net gain of £5.3m recognised business and £157.1m of provisions under insurance contracts issued. in other comprehensive income. A net gain on sale of business of £0.3m was included within other income and charges. 2011 acquisitions On 1 June 2011, the Group acquired 100% of the share capital of Centro The 2011 sale proceeds from the disposal of subsidiary company Internacional de Medicina Avazada (CIMA) for cash consideration of was satisfied by cash of £168.2m. The cash proceeds received, £11.8m (€13.7m). net of disposal costs paid to 31 December 2011 and bank overdraft disposed of, resulted in a cash inflow of £171.7m. (b) Disposals At the date when the Group ceases to have control in an entity it (c) Subsequent events is remeasured to its fair value, and the change in carrying value On 8 February 2013 Bupa acquired Innovative Care’s care services recognised in the income statement. Any amounts relating to the operations in Australia. This acquisition will add an additional entity that have previously been recognised in the statement of other 10 residential care services facilities to our existing portfolio. comprehensive income are reclassified to the income statement. A deposit of £2.5m (AU$4.0m) was paid in regards of the Innovative There were no disposals of businesses during the year ended Care acquisition in December 2012. 31 December 2012. An exercise to determine the fair value of the net assets, consideration On 31 January 2011, the Group sold its 100% shareholding in Bupa and contingent liabilities is ongoing. Health Assurance Limited, for cash proceeds of £168.2m. This business had been held for sale at 31 December 2010. FINANCIAL STATEMENTs

95 –

1.2 £m £m 0.7 6.2 3.4 0.6 2011 2011 31.9 (5.9) (3.4) 115.4 India (76.6) 108.5

Country of

incorporation – £m £m 7.6 3.3 3.3 6.3 0.9 (5.2) (4.9) 2012 2012 Cayman Islands Cayman 93.5 36.0 (57.5) 107.6 S U India Denmark Denmark Principally Principally operates in operates Saudi Arabia Saudi Arabia 33.33% 26.25% 26.04% 26.00% share capital share Share of issued issued of Share alth Insurance Company Limited maintain to the e activity H lthcare Business Business ea Insurance Insurance Insurance H assets assets n-current liabilities o o et et Current assets Current N assets n-current N Current liabilities Assets Liabilities N (i) Associates(i) The Group’sshare of the assets, liabilities, revenue and profit as reported in the most recent accounts of the individual equity follows: as is associates, accounted Profit before taxation expense N Revenues (ii) Joint ventures Joint (ii) The Group’s share of the assets, liabilities, revenue and expenses as reported in themost recent accounts of the individual joint ventures, is as follows: Revenues in Max Bupa Expenses During 2012, a capital injection of £3.7m (2011: £5.1m) was made shareholding of 26.0%. This investment has been classified as a joint venture as the Group is party a shareholder to agreement for the sharing of joint control. nture e nvestments V i

Associate Associate Associate d

Joint

counte c althcare Asia A e H q E uity Equity accounted investments comprise associated companies and joint ventures. ventures. joint and companies associated comprise investments accounted Equity

ted s t n n u s Data Centre A / S nvestments e i ts N d stateme

n ial c acco n a alth Insurance Company Limited n e y althcare Limited fi H

e e stme i h H t e

to v

uity accounte n tes 4.1 Equt i q o in the year (2011: £0.1m) and cumulatively £0.5m (2011: £0.5m) and Joint Research in the year of £0.1m (2011: £nil) and cumulatively £0.1m (2011: £nil), as these investments have been fully impaired and the share of losses exceeds the interest in the associate in each case. accounted investment. The consolidated financial statements include the Group’s share after of income, comprehensive other and expenses, and income the adjustments align to the accounting policies with those of the Group where materially different, from the date that significant influence Associated companies and joint ventures are accounted for using the equity method and are initially recognised at cost. The cost of has an obligation or made payments on behalf of the equity or control commences until the date that significant influence or ceases. control The carrying amount of equity accounted investments is £34.2m £43.3m). (2011: All equity accounted investments are included on a coterminous basis. The Group has recognised £nil losses relating Bupa to E the investment includes transaction costs. costs. transaction includes investment the Associated companies include those entities in which the Group has significant influence, but no control,over the financial and operating policies of the entity. Joint ventures include those entities over contractualby agreement and requiring unanimous consent for strategic financial and operating decisions. When the Group’s share of losses exceeds its interest in an equity accounted investment, the carrying amount of that interest (including any long-term interests that, in substance, form part of the Group’s net investment), is reduced nil. to In addition, the recognition of further losses is discontinued except the to extent that the Group the activities of which the Group has joint control, established Forsikringsselskaber Bupa Arabia For Cooperative Insurance Company Insurance Cooperative For Arabia Bupa Bupa annual report 2012 n IBC Asia MAX Bupa The Group’s principal equity accounted investments are: 96 Bupa annual report 2012 notes to the financial statements

Notes to the financial statements continued for the year ended 31 December 2012

F inancial investments in brief The Group generates cash from its underwriting, trading and financing activities and invests the 5.0 surplus cash in financial investments. These include government bonds, corporate bonds, shares F inancIAL and variable yield securities. investments

All financial investments are initially recognised at fair value, which The Group has classified its financial investments into the following includes transaction costs for financial investments not classified at categories: at fair value through profit or loss, held to maturity, and fair value through profit or loss. loans and receivables. Management determines the classification at initial recognition. Financial investments are derecognised when the rights to receive cash flows from the financial investments have expired or where the Group The accounting policy for the impairment of financial investments has transferred substantially all risks and rewards of ownership. is detailed in Section 3.0.1.

Financial investments Financial investments are analysed as follows: Carrying Carrying value Cost value Cost 2012 2012 2011 2011 £m £m £m £m N on-current Designated at fair value through profit or loss Debt securities – government bonds 11.8 11.8 7.1 7.9 Debt securities – corporate bonds 109.9 98.2 56.5 75.0 Shares and other variable yield securities 136.9 111.0 139.3 124.2

Held to maturity Medium-term notes 200.8 200.0 200.9 200.0 Debt securities – corporate bonds 1.7 1.7 – –

Loans and receivables Debt securities – corporate bonds 75.9 39.9 72.2 39.9 Deposits with credit institutions 549.1 541.8 185.5 184.9 Total non-current financial investments 1,086.1 1,004.4 661.5 631.9

Current Designated at fair value through profit or loss Debt securities – government bonds 10.9 10.9 8.4 8.3 Debt securities – corporate bonds 1.5 1.5 26.5 26.4 Shares and other variable yield securities 20.0 16.8 – –

Held to maturity Medium-term notes – – 180.5 179.2 Discounted notes 2.3 2.3 – – Debt securities – government bonds – – 0.5 0.5 Debt securities – corporate bonds 53.7 53.2 – –

Loans and receivables Other loans 9.3 9.3 – – Deposits with credit institutions 1,067.7 1,041.0 1,005.7 979.4 Total current financial investments 1,165.4 1,135.0 1,221.6 1,193.8

Total financial investments 2,251.5 2,139.4 1,883.1 1,825.7 FINANCIAL STATEMENTs

97

£m £m 2011 (8.2) Cost 111.4 22.7 Total 85.6 187.3 474.1 156.9

1,164.3 1,825.7

ld to – – – – – e £m £m Fair 2011 H value 201.5 1,191.2 Level 3 490.4 1,883.1

£m £m 0.2 0.2 (8.2) Cost 2012 92.5 85.6 225.7 330.8 Level 2 2,139.4 1,582.9

– – £m £m Fair 18.9 2012 22.5 156.7 value Level 1 255.8 378.9 1,616.8 2,251.5 Level 1: quoted prices (unadjusted) in active markets for identical assets liabilities; or Level 2: inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (ie as prices) or indirectly (ie derived from prices); and Level 3: inputs for the asset or liability that are not based on inputs). (unobservable data market observable ° ° ° These may include reference the to current fair value of other cash discounted and same the substantially are that instruments flow analysis. Financial instruments carried at fair value are measured using different valuation methods categorised into a three level hierarchy. The different levels have been defined by reference to the lowest level input that is significantto the fair value measurement, as follows: ° ° ° ld maturity to investments are similar loans to and receivables but where the Group has a positive e Criteria and treatment where management make decisions based upon their fair value. The investments are carried at fairwith value, gains and losses arising from changes in this value recognised in the incomestatement in the periodwhich in they arise. H intention and ability hold to investments maturity. to This is assessed at each reporting date. maturity investments are measured at amortised cost using the effective interest method, less any impairment losses. Any discount or premium on purchase is amortised overthe life of the investment through the income statement. Loans and receivables are carried at amortised cost calculated using the effective interest method,impairment losses. less

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isted investments investments isted ld maturity to ir value of financial instruments financial of value ir listed securities – quoted price. debt securities, shares and other variable yield securities – quoted quoted – securities yield variable other and shares securities, debt price if available or discounted expected future principal and interest cash flows; tes Debt securities – government bonds Shares and other variable yield securities yield variable other and Shares Derivative assetsDerivative Debt securities – corporate bonds Derivative liabilities Derivative e nl a o ° ° An analysis of financial instrumentsby valuation method is as follows: 2012 Financial investments ° ° Listed investments U Fair value through profit or loss Financial investments designated at fair value through profit or loss consist ofinvestments or instruments H Classification Derivatives* The fair values of quoted investments in active markets are based on current bid prices. The fair values of unlisted securities, and quoted investments for which there is no active market, are established using parties. third independent by corroborated techniques valuation Bupa annual report 2012 n Loans and receivables and Loans Financial comprise: investments F The fair value of a financial instrument is defined as the amount at which a financial instrument could be exchanged in an arm’s length transaction between informed and willing parties. Fair values disclosed in the table above have been calculated as follows: Deposits credit with institutions Total financial investments 98 Bupa annual report 2012 notes to the financial statements

Notes to the financial statements continued for the year ended 31 December 2012

Level 1 Level 2 Level 3 Total £m £m £m £m 2011 Financial investments Debt securities – government bonds 15.4 0.1 – 15.5 Debt securities – corporate bonds 46.4 36.6 – 83.0 Shares and other variable yield securities 139.1 0.2 – 139.3 Derivatives* Derivative assets – 81.7 – 81.7 Derivative liabilities – (8.8) – (8.8)

Note * The accounting policies for derivatives is described in Section 5.2.

The Group uses the zero coupon curve as at the balance sheet date to discount financial instruments where the fair value cannot otherwise be found from quoted market values. The range of interest rates used is as follows:

2012 2011 % % Sterling assets and liabilities 0.7–3.2 1.3–3.1 Australian Dollar assets and liabilities 2.6–3.8 3.2–4.2 Euro assets and liabilities 0.1–2.3 0.2–2.6 US Dollar assets and liabilities 0.2–3.4 0.1–3.3

Borrowings in brief The Group has various sources of funding including subordinated bonds, senior unsecured 5.1 bonds, debenture stock and loans. B orrOWIngs

Subordinated liabilities Subordinated liabilities are stated at amortised cost using the effective The coupon payable on the bonds is recognised as a financial expense. interest method. The carrying value is adjusted for the gain or loss on The Group holds callable subordinated perpetual guarantee bonds hedged risk; changes in the fair value of derivatives that mitigate with a corresponding fair value hedge. The amortised cost of these interest rate risk resulting from the fixed interest rate of the bonds are borrowings is adjusted for the fair value of the risk being hedged. recognised in the income statement as an effective fair value hedge of this exposure.

2012 2011 Non- Non- Section/ current Current Total current Current Total Note £m £m £m £m £m £m Callable subordinated perpetual guaranteed bonds 330.0 6.0 336.0 330.0 5.9 335.9 Fair value adjustment in respect of hedged interest rate risk 5.4.2.2 84.0 – 84.0 76.7 – 76.7 Callable subordinated perpetual guaranteed bonds at carrying value (a) 414.0 6.0 420.0 406.7 5.9 412.6 Other subordinated debt due 2022 (b) 33.3 – 33.3 – – – Other subordinated debt due 2024 (c) – – – 18.3 – 18.3 10.5% subordinated guaranteed bonds due 2018 3.9 – 3.9 3.9 – 3.9 Total subordinated liabilities 451.2 6.0 457.2 428.9 5.9 434.8

The fair value of total subordinated liabilities is £385.5m (2011: £276.3m). FINANCIAL STATEMENTs

99 1.1 £m £m 2.0 3.4 2011

55.1

Total lease 36.6

693.7 238.0 360.5 Present Present value of minimum payments

1.5 4.1 1.9 0.1 0.1 £m £m 4.7 2.8 5.5 3.4 3.4 0.4 0.3 0.4 (1.3) 2011 12.3 lease 24.3 Future Current 2011 minimum payments

– rta-Manises SA, with 1.7 £m £m on- o 31.1 3.0 0.9 2012 53.2 N lease H 233.9 348.2 669.4 current Present Present value of minimum payments

1.3 £m 2.8 2.8 2.4 0.3 0.2 4.0 (1.2) 2012 £m lease 2.8 31.4 Future Total 53.2 361.0 237.9 688.7 minimum payments

4.1 £m 2.4 2.4 0.3 0.2 12.3 21.4 Current 2012

– IBOR, or at a commercial fixed rate. IBOR +2.5%. £m 2.6 51.1 2.1 31.1 R R Non- IBOR +6%. In the event of a winding up of Torrejón Salud SA, U 667.3 233.8 U 348.7 current R finance charges finance included above included but within fiveyears U (d) Bank loans and bank overdrafts bank and loans Bank (d) Bank loans of £31.4m (2011: £36.6m) do not include any amounts overdraft which The companies. subsidiary Group other by guaranteed are bank The Group. the within guarantees cross to subject are facilities loans and overdrafts bear interest at commercial rates linked LIBOR, to or E (e) Finance(e) lease liabilities Future minimum payments under finance leases are as follows: Total payments net of Less: finance charges finance Less: Total gross payments gross Total Payable after fiveyears Payable within one year year one after Payable (b) Other subordinated debt due 2022 due debt subordinated Other (b) Subordinated debt of £33.3m (€41.0m) issued Torrejón by Salud SA matures on 31 December 2022. Interest accrues on the debt at E the claims of the holder ofthe debt are subordinated the to claims of the senior creditors of that company. 2024 due debt subordinated Other (c) Debt issued Especializada by y Primaria L’ a maturity date of 7 May 2024, was repaid during 2012 as part of the acquisition of the remaining 40% of the Company. The interest accrued at E Subsequent initial to recognition, they are stated at amortised cost, net of accrued interest, with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis. te

(c) (e) (a) o (d) (d) (b)

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her interest interest her tes t o and the rental income receivable thereunder, held in a number of the the of number a in held thereunder, receivable income rental the and Group’s care homes which eliminates on consolidation. The carrying value of the property, plant and equipment of these homes is £529.4m (2011: £543.8m). stock Debenture (c) The 11.8% debenture stock of £53.2m (2011: £55.1m) is repayable at par in 2014. The stock is secured a fixed by chargeover certain of the Group’s assets and a first floating chargeover the businesses attached thereto and a general floating chargeover certain assets. of £72.2m £80.3m) include (2011: security as pledged assets The property, plant and equipment and £0.8m (2011: £0.4m) of inventories. The security includes is due mature to in 2029 and a £60.0m Class A2 note is due mature to in 2031. The and A1 A2 loan notes bear a fixed interest rate of 6.3% and 7.5% respectively. The loan notes are secured fixed by and floating charges over the assets and undertakings of Limited issued two classes of secured notes. A £175.0m Class note A1 Finance lease liabilities Bank overdrafts Total other interest bearing liabilities The fair value of total other interest bearing liabilities is £803.3m (2011: £789.8m). bonds unsecured Senior (a) On 2 July 2009, Bupa Finance plc issued £350.0m of 7.5% senior unsecured bonds. The bonds are repayable in July 2016. They are companies. subsidiary Group other and Company the by guaranteed loans Secured (b) The secured loans balance of £237.9m (2011: £238.0m) relates a to loan issue by Bank loans Bank Debenture stock Secured loans Secured Senior unsecured bonds unsecured Senior (a) Callable subordinated perpetual guaranteed bonds guaranteed perpetual subordinated Callable (a) In December 2004, Bupa Finance plc issued £330.0m of callable by guaranteed are which bonds, guaranteed perpetual subordinated Bupa Insurance Limited. Interest is payable on the bonds at 6.125% per annum. The bonds have no fixed maturity date but a call option is exercisable Bupa by Finance plc redeem to the bonds on 16 September 2020. In the event of the winding up of Bupa Finance plc or Bupa Insurance Limited, the claims of the bondholders are subordinated Bupa annual report 2012 n to theto claims of other creditors of these companies. The total fair value of the callable subordinated perpetual guaranteed bonds, net of accrued interest, is £420.0m (2011: £412.6m). The valuation adjustment is the change in value arising from interest rate risk which is matched the by fair value of swap contracts in place to hedge this risk. O Other interest bearing liabilities consist of senior unsecured lease bonds, finance and loans other and bank stock, debenture loans, secured liabilities. These borrowings are recognised initially on as proceeds discount any of net costs, transaction attributable less receivable issue. 100 Bupa annual report 2012 notes to the financial statements

Notes to the financial statements continued for the year ended 31 December 2012

Derivatives in brief A derivative is a financial instrument whose value is based on one or more underlying 5.2 assets. The Group uses derivative financial instruments to hedge its exposure to foreign Di er vaTIves exchange and interest rate risk.

Derivatives that have been purchased or issued as part of a hedge that 2012 2011 subsequently does not qualify for hedge accounting are accounted for £m £m at fair value through profit and loss. Derivative assets Derivative financial instruments are initially recognised and Non-current* 84.0 76.7 subsequently measured at fair value. Section 5.0 shows the instrument Current 1.6 5.0 valuations under level 2 of the three level hierarchy. Total derivative assets 85.6 81.7 Fair values are obtained from exchange quoted prices and, where specific exchange prices are not available, from market observable Derivative liabilities pricing information including interest rate yield curves. The fair values Non-current (4.5) (5.0) of futures and options are obtained from the quoted prices on the Current (3.7) (3.8) relevant exchange, including LIFFE. The value of foreign exchange Total derivative liabilities (8.2) (8.8) forward contracts is established using listed market prices. Note Fair values have been calculated for each type of derivative as follows: * See fair value hedges in Section 5.4.2.2. °° Currency forward contracts and swaps – quoted prices in an inactive market at balance sheet date; and °° Interest rate swaps bank or broker quotes.

C apital management in brief Bupa is a company limited by guarantee, has no shareholders and is funded through retained 5.3 earnings and borrowings. The Group’s capital management objective is to maintain sufficient C apITAL capital to protect its stakeholders while efficiently deploying capital to sustain ongoing management business development.

The Group manages as capital the cumulative individual amount of criteria on admissibility, concentration limits and counterparty the equity of all Group subsidiaries, exclusive of any non-controlling exposure limits. Group companies that are regulated are subject to interests, and other inadmissible assets as discussed below. The Group similar regulatory restrictions within the jurisdictions in which they has a £330.0m perpetual bond accounted for as debt in these financial operate. The Group and its regulated subsidiaries complied with all statements. However, this is managed as though it were capital for externally imposed capital requirements during the current and prior regulatory purposes, as discussed below. year. Although they are not insurance businesses, the Group can and does recognise the book value of its care provision businesses as As a company limited by guarantee, Bupa has no shareholders or capital resources. owners. All profits are therefore used to develop the Group’s businesses for the benefit of customers. Except for equity attributable It is the Board’s policy that the Group maintains capital resources to non-controlling interests, any equity in the Group is considered significantly in excess of its capital requirements and furthermore, that ‘equity attributable to Bupa’. all regulated entities within the Group’s corporate structure meet any local minimum capital requirement imposed by local regulators at all The Group’s capital management objective is to maintain sufficient times. The Group has a number of internal processes to ensure capital to protect the interests of all of its customers, investors, compliance with the Group’s capital requirements. These include regulators and trading partners while also efficiently deploying capital requiring that significant future capital expenditure and growth and managing risk to sustain ongoing business development. initiatives be approved by the Board, either as stand alone projects The Group aims to operate within a targeted range for solvency, or as part of the budgeting and forecasting exercises. The Group’s leverage and interest cover ratios designed to support an investment Treasury and Investment Committee must approve any change to grade rating. The Bupa Group as a whole is not rated by any rating financial investment strategy. Strategic developments and acquisitions agency, although individual debt issues and various subsidiaries within affecting the Group’s capital require Board authorisation. the Group do have public ratings. The Group Finance Department routinely reports to the Board the The UK’s Financial Services Authority (FSA) classifies the whole of Group’s capital position, leverage and interest cover ratios as well as the Group as an insurance group. As such, the Group must maintain any constraints, risks or uncertainties about this position. The Group regulatory capital resources in excess of a collective capital reports on any regulatory capital resources to local regulators and requirement, imposed by the FSA through its Prudential Sourcebook the FSA each year end. (PSB), for Bupa to comply with the EU Insurance Groups Directive In addition, the calculation of the return on capital employed is (IGD). When assessing the Group’s compliance with its capital regularly reported to the Board. requirement, the PSB requires that the Group values and credits towards its net asset position only those assets that meet certain FINANCIAL STATEMENTs 101

arket riskarket redit risk redit iquidity risk iquidity nsurance risk I M C L

f

f (ii) (iv) The Group has adopted a risk management strategy that endeavours mitigateto these risks, which is approved the by Board. In managing these exposures, the Treasury and Investment Committee reviews risks. market and investment significant any monitors and The Group has exposure a number to of risks from its use of financial These business. insurance its with associated risks and instruments have been categorised into the following types of risk, and details (iii) The ability review to benefit levels and premium rates is a significant mitigant pricing to risk. The Group underwrites no material general insurance business that commits it cover to risks at premiums fixed beyondtwelve a month period from inception or renewal. Claims risk Claims risk is controlled means by of pre-authorisation of claims, outpatient benefit limits, the use of consultant networks and agreed management claims Specific charges. and hospitals of networks processes vary across the Group depending on local conditions practice. and Future adverse claims experience, for example, caused external by factors such as medical inflation, will affect cash flowsafter thedate of the financial statements. Recent adverse claims risks are reflected provisions.in Generally, the Group’s health insurance contracts contain terms and conditions that provide for the reimbursement of incurred medical expenses for treatment related acute to medical conditions. The contracts do not provide for capital sums or indemnified amounts. prevailing by underpinned necessarily is experience claims Therefore rates of illness. Additionally, claims risk is generally mitigated the by treatments the both that ensure to processes control running insurers appropriate. are reimbursements consequent the and of the nature, extentand how the Group has managed these risks is below: described (i) in these financial statements in claims paid and in the movement There have been no changes the to Group’scapital management year. the during procedures or policies objectives, rie b rie b

derwriting derwriting n U isk management in in management isk nsurance risk in in risk nsurance I Insurance risk only affects the general insurance entities in the Group. It consists of underwriting andpricing risks which relate inadequate to tariffs of insurance products R The Board is responsible for identifying, evaluating and managingrisks faced theby Group and considers the acceptable level of risk, the likelihood of these risks materialising, how reduce to the risk and the cost of operating particular controls relative the to benefit from managing the risks. related as well as reserving risk which relates the to potential inadequacy of claims provisions. t

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is usiness management is responsible for the identification and identification the for responsible is management usiness isk functions together with risk policy owners provide support nternal audit provides independent and objective assurance assurance objective and independent provides audit nternal derwriting risk refers the to potential deviation from the actuarial assessment of risks and controls. controls. and risks of assessment R I B the and framework, management risk the of robustness the on controls. internal of effectiveness and appropriateness and challenge the completeness and accuracy of risk assessments risk of accuracy and completeness the challenge and plans. mitigation of adequacy the and tes 5.4.1 Ina 5.4 Rk

n

o assumptions used for setting insurance premium rates which in which rates premium insurance setting for used assumptions inadequacy. premium to lead could scenarios extreme U risk is therefore concerned with both the setting of adequate premium rates (pricing risk) as well as the management of claims (claims risk) for Group. the by underwritten policies insurance Pricing risk Pricing risk relates the to setting of adequate premium rates taking into consideration the volume and insurance characteristics of the policies issued. External influencesto pricing risk include (but not limited to) competitor pricing initiatives and regulatory environments. The level of influence from these external factors can vary significantly between regions and largely depend on the maturity of health insurance analysis actuarial Thorough regulator. the of role the and markets performed on a regular basis combined with an understanding of local market dynamics and the ability change to insurance premium rates mitigations. risk effective as act can necessary when In every general insurer in the Group, the dominant product style reasonably respond to revisions rate premium insurance tariff quickly changes to in customer risk profiles and claims experience. 2. The principal significant risks of the Group and how they are mitigated are described on pages 101 109. to is of an annually renewable health insurance contract. This permits 3. Bupa operates the three lines of defence model. 1. Underwriting,(i) pricing and claims risk Underwriting risk The Group has in place internal debt and investment management arrangements that allow the assets supporting technical liabilitiesor any solvency capital be to efficiently managed in a centralised manner. The Group’sTreasury Department also maintains large external credit lines with several leading banks ensure to the liquidity of the Group needed. as Bupa annual report 2012 n 102 Bupa annual report 2012 notes to the financial statements

Notes to the financial statements continued for the year ended 31 December 2012

(ii) Reserving risk Reserving risk is the risk that provisions made for claims prove to be None of the Group’s general insurance contracts contain embedded insufficient in light of later events or information. Reserving risk is not derivatives so the contracts do not in that respect give rise to interest significant to the Group as a result of the shortness of claims development rate risk. patterns, coupled with the efficacy of the processes used to derive The Group is exposed to foreign currency risk through some of the the assumptions used in setting provisions. The short-tail nature of insurance liabilities which are settled in a local currency. Where the Group’s general insurance contracts means that movements possible these liabilities are matched to assets in the relevant currency in claims development assumptions are generally not significant. to hedge this exposure. The development claims settlement patterns are kept under constant review to maintain the validity of the assumptions and hence, the All of the Group’s general insurance activities are single line health validity of the estimation of recognised general insurance liabilities. portfolios. Even though only one line of business is involved, the Group does not have significant concentrations of insurance risk The amount of claims provision at any given time that relates to for the following reasons: potential claims payments that have not been resolved within one year is not material. Also, of the small provisions that do relate °° broad geographical diversity across several markets – UK, Spain, to longer than one year, it is possible to predict with reasonable Australia, Latin America, the Middle East, and Hong Kong; confidence the outstanding amounts. Comparisons of actual °° product diversity between domestic and expatriate, and individual claims against previous estimates are therefore not provided. and corporate health insurance; and (iii) Other risks related to underwriting health insurance business °° a variety of claims type exposures across diverse medical providers Claims provisions are not discounted and their short-term nature – consultants, nursing staff, clinics, individual hospitals and hospital means that changes in interest rates have no impact on reserving risk. groups. In addition, the future premium income and claims outflows of health The Group as a whole and its principal general insurance entities are insurance premium liabilities are largely unaffected by changes in very well diversified. Only in selected circumstances does the Group interest rates. However, changes to inflationary factors such as wage use reinsurance. The reinsurance that is used does not give rise to a inflation and medical provider cost inflation affect the financial material counterparty default credit risk exposure to the Group. soundness of health insurance business.

M arket risk in brief Market risk is the risk of adverse movements in market prices related to the Group’s investments 5.4.2 and borrowings. Such adverse movements include increased interest rates on borrowings, a fall Market risk in the share price of an investment or adverse currency fluctuations.

Market risk is the risk of adverse financial impact due to changes in fair 5.4.2.1 Foreign exchange risk values or future cash flows of financial instruments from fluctuations in The Group is exposed to foreign exchange risks arising from interest rates, foreign exchange rates, commodity prices, credit commercial transactions and from recognising assets, liabilities and spreads and equity prices. The focus of the Group’s long-term financial investments in overseas operations. The Group is exposed to both strategy is to facilitate growth without undue balance sheet risk. Group transaction and translation risk. The former is the risk that a company’s Treasury is responsible for the management of the Group’s liquidity cash flows and realised profits maybe impacted by movements in position and short-term borrowings, together with the risks arising on foreign exchange rates. The latter arises from translating the financial interest rates and foreign currencies and to protect the security of the statements of a foreign operation into the Group’s functional currency. Group’s financial assets. The results and financial position of the Group’s foreign entities that do In order to reduce the risk of assets being insufficient to meet future not have a functional currency of Sterling are translated into Sterling as policyholder obligations, the Group seeks to match investments follows: to liabilities. In addition, the Group actively manages assets using °° assets and liabilities at the exchange rate at the balance sheet date; an approach that balances quality, diversification, liquidity and income and expenses at average rates for the period. All foreign investment return. °° exchange differences arising on translation are recognised initially The Group manages price risk by ensuring that the majority of its in the statement of comprehensive income, and only in the income cash and investments are held with highly rated credit institutions. statement in the period in which the entity is eventually disposed. Where the Group has moved away from straight money market The following significant exchange rates applied during the year: investments and invested in a limited portfolio of absolute return assets (principally corporate bonds), the Group uses a value at risk Average rate Closing rate analysis (VaR95) to quantify risk, taking account of asset volatility 2012 2011 2012 2011 and correlation between asset classes. This portfolio was valued at Australian Dollar 1.5301 1.5545 1.5643 1.5157 £250.6m at 31 December 2012 (2011: £179.2m) and the 1 year VaR95 Euro 1.1526 1.1972 figure attributable to the portfolio is £22.7m at 31 December 2012 1.2335 1.2308 (2011: £19.2m). New Zealand Dollar 1.9563 2.0289 1.9657 1.9912 US Dollar 1.5851 1.604 1.6242 1.5539

In the consolidated financial statements, where a loan between Group entities results in an exchange gain or loss then it is recognised in the statement of comprehensive income to the extent that it relates to the Group’s net investment in overseas operations. FINANCIAL STATEMENTs 103

n- o N n-monetary assets and liabilities, denominated in a foreign currency o arises on financial assets or liabilities and then it is presented in as appropriate. expense financial or income financial at historical cost are translated usingthe exchange rate at the date of the transaction; no exchange differences therefore arise. monetary assets and liabilities denominated in a foreign currency at fair value are translated using the exchange rate ruling at the date that the fair value was determined. Foreign exchange differences that arise on retranslation are recognised in operating expenses. are measured using the functional currency of the subsidiary company, which is based on the primary economic environment in which the subsidiary operates. The transactions are translatedinto the functional currency at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currencyat the exchange rate ruling at the balance sheet date; the resulting foreign exchange gain or loss is recognisedin operating expenses, except where the gain or loss N Foreign currency transactions in the Group’s subsidiary companies companies subsidiary Group’s the in transactions currency Foreign

et 4.1 1.4 £m 9.7 N 11.7 6.8 4.6 12.8 (2.8) (5.8) 19.0 27.8 23.7 (87.1) 22.4 20.6 175.8 (86.8) 239.2 462.7 209.5 59.2% 55.9% hedges w 2,138.8 2,485.1 currency 2,852.6 2,099.3 including exposure e N – – – – – – – – – – – £m (7.6) (2.9) 15.9 15.9 16.3 (8.2) 19.4 14.4 14.4 (12.5) (66.0) (133.1) (157.3) (278.1) (198.7) (186.2) (428.4) forward Currency Currency contracts – – et 4.1 0.1 1.4 £m 9.7 N 2.4 11.7 6.8 4.3 8.4 4.6 12.8 19.0 111.6 23.7 22.4 70.5 595.8 246.8 362.0 209.5 65.6% 2,151.3 65.0% 2,165.3 2,913.5 3,130.7 currency exposure

s t ng Kong Dollar, Bahraini Dinar, Thai Baht, Baht, Thai Dinar, Bahraini Dollar, Kong ng n o H stateme

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ng Kong Dollar Kong ng ng Kong Dollar Kong ng Dollar Dollar w Zealand Dollar Zealand w w Zealand Dollar Zealand w tes denominated net assets net denominated denominated net assets net denominated e e o o S S o N U H 2012 Australian Dollar Bupa has exposure foreign to exchange risk arising from its overseas operations. exposuresKey are the to AustralianDollar, Euro, Dollar: Singapore and Peso Mexican Bupa annual report 2012 n Zealand Dollar, Dollar, Zealand Brazilian Real Other foreign currency Total Mexican PesoMexican Dollar Singapore Swiss Franc assets net Group of Percentage Euro Bahraini Dinar Bahraini Thai Baht 2011 Australian Dollar N U Thai Baht PesoMexican Certain forward currency contracts are entered into hedge to net monetary asset exposure and future cash flows of the Group and do not form part of designated hedging arrangements. Euro H Bahraini Dinar Bahraini Dollar Singapore Swiss Franc Brazilian Real Other Total foreign currency Total assets net Group of Percentage 104 Bupa annual report 2012 notes to the financial statements

Notes to the financial statements continued for the year ended 31 December 2012

The impact of a hypothetical strengthening / (weakening) of Sterling against the currencies below, with all other variables constant, would have increased / (decreased) equity and profit by the amounts shown below:

Strengthening 10% Weakening 10% Gains / (losses) Gains / (losses) Gains / (losses) Gains / (losses) included in income included included in income included statement in equity statement in equity £m £m £m £m 2012 Australian Dollar (29.3) (194.4) 35.8 237.6 Euro (8.7) (42.1) 10.7 51.4 New Zealand Dollar (0.8) (21.7) 1.0 26.6 US Dollar (4.0) 7.9 4.8 (9.6) Other (1.5) (9.0) 1.8 11.0 Total sensitivity (44.3) (259.3) 54.1 317.0

2011 (restated) Australian Dollar (22.1) (190.8) 27.0 233.3 Euro (8.2) (16.0) 10.1 19.5 New Zealand Dollar (1.4) (19.0) 1.7 23.3 US Dollar 20.4 7.9 (24.9) (9.7) Other (0.6) (8.1) 0.7 9.7 Total sensitivity (11.9) (226.0) 14.6 276.1

Foreign exchange hedging activities (b) Cash flow hedges The Group manages its exposure to foreign exchange risk by entering Where a derivative financial instrument hedges the change in cash into hedging transactions using derivative financial instruments. flows related to a recognised asset or liability, a firm commitment The Group applies fair value, cash flow and net investment hedge or a highly probable forecast transaction it is accounted for as a accounting. cash flow hedge. The hedging relationship between a hedging instrument and a hedged The effectiveness of a cash flow hedge is the degree to which the cash item is formally documented. Documentation includes the risk flows attributable to a hedged risk are offset by changes in the cash management objectives and the strategy in undertaking the hedge flows of the hedging instrument. The effective portion of any gain transaction. or loss on the hedging instrument is recognised directly in other comprehensive income until the forecast transaction occurs and (a) Fair value hedges results in the recognition of a financial asset or liability which impacts Where a derivative financial instrument hedges the change in fair value the income statement. The ineffective portion of the gain or loss is of a recognised asset or liability or an unrecognised firm commitment, recognised in the income statement. any gain or loss on remeasurement of the hedging instrument at fair value is recognised in the income statement. The hedged item is fair If the hedged cash flow is no longer expected to take place, all deferred valued for the hedged risk with any adjustment being recognised in the gains and losses are released to the income statement immediately. income statement. If the hedging instrument or hedge relationship is terminated but the hedged transaction is still expected to occur, the cumulative gain The currency forward contracts hedge the Group’s currency exposure, or loss at that point remains in other comprehensive income and which arises from holding US Dollar and Euro denominated financial is recognised in accordance with the above policy when the investments classed as shares and other variable yield securities and transaction occurs. corporate bonds. These hedged items have resulted in an income statement gain of £0.6m (2011: £0.1m). In 2012, foreign currency forward contracts were entered into hedge cash outflows for the anticipated acquisition of UL X MED in 2013 As at 31 December, the following currency forward contracts were in amounting to €274.4m (£222.9m) resulting in a cash flow hedge place to hedge the Group’s currency exposure and held in the following reserve loss of £2.2m. currencies: In 2008, forward foreign exchange contracts were entered into Initial to hedge cash outflows for the acquisition of MBF amounting to value of Notional AU$2,001.1m (£915.2m), which led to a cash flow hedge reserve Maturity, expiry contracts value of Carrying gain of £36.4m. In 2011, a total of £2.2m of the related cash flow or execution sold liabilities value date £m £m £m hedge gain was recognised in the income statement. 2012 At 31 December 2012, the cash flow hedge reserve amounts to £25.1m. Euro (€34.5m) 10 January 2013 (28.1) (28.0) 0.1 US Dollar (US$93.3m) 10 January 2013 (57.3) (57.4) (0.1)

2011 Euro (€36.2m) 16 January 2012 (30.4) (30.2) 0.2 US Dollar (US$79.0m) 17 January 2012 (51.1) (50.8) 0.3 Bupa annual report 2012 105 notes to the financial statements

E ffect of foreign exchange hedging transactions A collar option is an instrument that combines the purchase of a cap The impact of all external foreign currency hedging activity is set out and the sale of a floor to specify a range in which a foreign currency below. The ineffective portion of all hedges recognised in the income rate will fluctuate. The instrument insulates the buyer against the risk statement was £nil (2011: £nil). of a significant weakening of a foreign currency rate, but limits the benefit of a strengthening of that foreign currency rate. Collar options Gains / (losses) included in the income statement are: are only exercised, at specified intervals, if the benchmark rate is Currency exceeded. Settlement amounts are calculated by reference to the forward External agreed notional amounts. contracts borrowing Total £m £m £m If an external foreign currency denominated loan is used as a hedge, the portion of the exchange gains or losses arising from the 2012 retranslation, that is found to be an effective hedge, is recognised in Euro 0.8 – 0.8 other comprehensive income. The same treatment is applied to both US Dollar 2.4 – 2.4 the realised and unrealised exchange gains and losses arising from Total 3.2 – 3.2 foreign currency forward contracts and foreign currency collar options. These hedging relationships are documented and tested as required 2011 by IAS 39. Euro 0.9 – 0.9 All foreign currency forward contracts and collar options are US Dollar (0.3) – (0.3) accounted for on a fair value basis. Total 0.6 – 0.6 Australian Dollar translation exposure Gains / (losses) included in other comprehensive income are: The Group’s Australian Dollar translation exposure of £2,151.3m (AU$3,365.2m) (2011: £2,165.3m (AU$3,281.9m)) arises from the net Currency assets of Bupa Australia Pty Limited, Bupa Care Services Australia and forward External their subsidiary companies. Foreign exchange gains and losses on the contracts borrowing Total £m £m £m Australian Dollar intercompany loans that are permitted to be taken to other comprehensive income on consolidation, under IAS 21, total a 2012 gain of £1.8m (2011: £15.8m). At 31 December 2012, the Group held Australian Dollar 2.0 – 2.0 foreign currency forward contracts totalling £12.5m (AU$19.6m) Euro 1.1 – 1.1 (2011: £66.0m (AU$100.0m)) and collar options totalling £127.9m US Dollar – – – (AU$200.0m) (2011: £132.0m (AU$200.0m)) to hedge a portion of Total 3.1 – 3.1 net assets, which have been designated as hedges under IAS 39. The collar options mature within one year (AU$100.0m) and two years (AU$100.0m) from balance sheet date. The forward contracts 2011 mature within one month from balance sheet date and are rolled Australian Dollar 4.0 – 4.0 forward on an ongoing basis. Euro 2.0 2.0 4.0 Euro translation exposure US Dollar (0.2) – (0.2) Euro translation exposure of £595.8m (€733.3m) (2011: £362.0m Total 5.8 2.0 7.8 (€433.4m)) arises from the net assets of Grupo Bupa Sanitas SL and its subsidiary companies. Foreign exchange gains and losses on (c) Foreign currency hedging of net investment the Euro intercompany loans that are permitted to be taken to other The Group applies hedge accounting to its foreign currency exposure comprehensive income on consolidation, under IAS 21, total a gain on a net investment basis. By designating opposing instruments in the of £7.9m (2011: gain of £10.2m). At 31 December, the Group held same currency the net exposure to currency fluctuations is reported. foreign currency forward contracts totalling £254.9m (€313.7m) The Group uses foreign currency forward contracts, foreign currency (2011: £140.8m (€168.6m)) to hedge a portion of these net zero cost collar options and foreign currency borrowings to hedge its assets, all of which have been designated as hedges under IAS 39. net investment foreign exchange risk. The forward contracts mature within one month from balance sheet date and are rolled forward on an ongoing basis. FINANCIAL STATEMENT s 106 Bupa annual report 2012 notes to the financial statements

Notes to the financial statements continued for the year ended 31 December 2012

5.4.2.2 Interest rate risk Variable loans are re-priced at intervals of between one and six Interest rate risk is the risk that the fair value or future cash flows months. Interest is settled on all loans in line with agreements of a financial instrument will fluctuate because of changes in and is settled at least annually. market interest rates. The impact of a hypothetical rise of 100 bps (2011: 100 bps) in interest The Group is exposed to interest rate risk arising from fluctuations in rates at the reporting date, on an annualised basis, would have market rates. This affects both the return on floating rate assets, the increased / (decreased) equity and profit by £27.3m (2011: £26.0m). cost of floating rate liabilities and the balance sheet value of its The impact of a fall of 100 bps (2011: 100 bps) in interest rates, on an investment in fixed rate bonds. Floating rate assets represent a natural annualised basis, would have the inverse effect. This calculation is hedge for floating rate liabilities. based on the assumption that all other variables, in particular foreign exchange rates, remain constant. The net balance on which the Group is exposed as at 31 December 2012 was £1,873.2m (2011: £1,584.6m). The rate at which maturing deposits Interest rate hedging activities are reinvested represents a significant potential risk to the Group, The Group applies fair value hedges and cash flow hedges in order in currencies such as Sterling and Australian Dollar where the Group to hedge its exposure to interest rate risk. has a significant net floating cash position. (i) Fair value hedges The Group has also used interest rate swaps to manage interest rate Interest rate swaps totalling £330.0m have been entered into to swap exposure whereby the requirement to settle interest at fixed rates the fixed rate coupon on the £330.0m callable subordinated perpetual has been swapped for floating rates. This increases the ability to guaranteed bond to a floating rate. These interest rate swaps are match floating rate assets with floating rate liabilities. designated as fair value hedges of the underlying interest rate risk on the debt. The fixed receipt occurs annually on the payment of the bond The contractual and anticipated repayment profile of interest bearing coupon in September. The variable payment is settled quarterly and financial liabilities is as follows: the rate is reset on the floating element at this time. As at 31 December Undrawn 2012 the fair value movement in the bond attributable to the hedged V ariable Fixed Total facility risk amounted to £7.3m (2011: £35.9m). £m £m £m £m The following derivative contracts were in place as at 31 December 2012 to hedge the Group’s interest rate exposure: 2013 (8.5) (18.6) (27.1) (793.6) 2014 (0.5) (52.6) (53.1) – Initial value Notional Maturity, of contracts value of Carrying 2015 (0.8) (0.8) (1.6) – expiry or sold assets value 2016 (0.8) (351.1) (351.9) – execution date £m £m £m 2017 (1.5) (1.4) (2.9) – 2012 2018–2022 (468.7) (6.3) (475.0) – Interest rate swaps – After 2022 (1.7) (232.6) (234.3) – fair value September 2020 330.0 330.0 84.0 Total (482.5) (663.4) (1,145.9) (793.6) 2011 Interest rate swaps – 2011 fair value September 2020 330.0 330.0 76.7 2012 (5.5) (24.7) (30.2) (893.6) 2013 0.5 (2.4) (1.9) – (ii) Cash flow hedges 2014 (1.6) (51.6) (53.2) – During 2009, interest rates swaps were designated to hedge the 2015 (1.9) (0.5) (2.4) – €40.3m (£35.7m) floating rate debt in Especializada Y Primaria L’Horta Manises. The swaps currently cover 70.4% of the floating 2016 (2.0) (348.7) (350.7) – rate loan principal balance outstanding at the balance sheet date. 2017–2021 (332.5) (83.0) (415.5) – At 31 December 2012, the fair value of the interest rate swap liability After 2021 (41.9) (232.7) (274.6) – was £4.6m (€5.7m) (2011: £3.9m (€4.7m)). Total (384.9) (743.6) (1,128.5) (893.6) FINANCIAL STATEMENTs

107 £m 2.3 2.8 9.3 3.0 £m the the 2011 79.1 13.6

19.4 16.0

171.2 788.1 139.3 Total Total 156.9 381.4 sheet 382.4 750.5 265.4 3,111.5

1,191.2 200.8 460.9 3,517.1 1,616.8 3,016.4

3,038.2 value in value balance carrying

– – – – – – – – – – – – £m £m (8.1) (1.6) 2012 (17.9) 22.6 (17.4) 92.2 (10.3) (27.7) ment ment (29.3) Impair- 3,445.1 3,559.9 – – – – – – – – – – – – 3.1 2.7 (1.7) 2.8 2.4 £m 47.1 41.9 year year 115.5 109.7 than 1 than Greater

– – – – – – – – – – – – – 0.1 7.7 3.6 £m 14.8 18.5 16.9 1 year year 1 n-investment grade counterparties are are counterparties grade n-investment o 6 months- N

– – – – – – – – – – – – – – 6.3 9.4 £m 3-6 3-6 19.4 10.0 9.2 28.7 months

– – – – – – – – – – – – – 0.1 £m 0-3 73.3 161.1 59.4 54.6 101.7 128.0 35.0 months n-investment grade counterparties grade n-investment o Overseas government bonds bonds government Overseas N Investment grade counterparties counterparties grade Investment The investment profile at 31 December is as follows: Investment grade counterparties include restricted assets of of assets restricted include counterparties grade Investment those rated below BBB-, and mainly comprise corporate bonds, loans of £9.3m (2011:£nil). Total £45.3m). (2011: £52.7m shares and other variable rate securities of £67.5m (2011: £58.7m), cash and cash equivalents of £15.4m (2011: £20.4m) and other

or 1.8 2.3 9.3 2.0 £m 13.6 19.4 f 171.2 139.3 156.9 381.4 716.0 272.2 265.4 e 264.9 1,191.2 646.3 200.8 1,616.8 3,247.8 N ither 2,823.0 rie past due past impaired b

i d r Ce in risk t Credit risk is the risk that those that are in debt the to Group default ontheir obligation. Examples of credit risk would be non-payment of a trade receivable or a corporate bond failing repayto the capital sum and related interest.

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r omprises insurance debtors, Medicare rebate and Risk Equalisation and Risk Equalisation rebate Medicare debtors, omprises insurance concession and service other receivables receivables, omprises trade C detailed in Section 3.0.2. Fund recoveries Trust C 3.0.1. detailed in Section receivables tes 5.4.3 Cedit

o Total financial and insurance assets Credit risk is the risk of loss in the value of financial assets due counterpartiesto failing meet to all or part of their contractual obligations. The Group manages its credit risk exposures under theby Treasury and Investment Committee). The Group has no direct exposure peripheral to Eurozone sovereign debt, however, there may be small holdings within the Group’s portfolio of return seeking assets. The Group’s exposure Eurozone to bank deposits has been reduced over the course of 2012 as part of ongoing management. risk 2011 Debt securities the guidance of the Treasury and Investment Committee. Investment and Treasury the of guidance the Investment exposure with external counterparties is managed approved specifically (unless Group the by used agencies rating by ensuringby there is a sufficient spread ofinvestments and that all counterparties are rated at least AA– two by of the three key b. Notes a. Bupa annual report 2012 n Trade and other receivables other and Trade Investment receivables and accrued investment income investment accrued and receivables Investment Information regarding the ageing and impairment of financial financial of impairment and ageing the regarding Information and insurance assets is shown below. Total financial and insurance assets Investment receivables and accrued investment income investment accrued and receivables Investment Shares and other variable yield securities yield variable other and Shares 2012 Debt securities Medium-term notes Trade and other receivables other and Trade Shares and other variable yield securities yield variable other and Shares Deposits credit with institutions Medium-term notes Reinsurers’ share of insurance provisions insurance of share Reinsurers’ Discounted notes Insurance debtors Insurance Deposits credit with institutions Other loans Other Reinsurers’ share of insurance provisions insurance of share Reinsurers’ Insurance debtors Insurance 108 Bupa annual report 2012 notes to the financial statements

Notes to the financial statements continued for the year ended 31 December 2012

The carrying amount of financial and insurance assets of £3,517.1m The Group believes no impairment allowance is necessary in respect (2011: £3,038.2m) included on the Group balance sheet represents the of financial assets not past due date. maximum credit exposure. In aggregate across the Group, reinsurance The Group considers notified disputes, significant changes in the credit risk is not material. counterparty’s financial position and collection experience in The movement in the allowance for impairment in respect of financial determining which assets should be impaired. The credit quality of and insurance assets during the year was as follows: receivables is managed at a local business unit level with uncollectable amounts being impaired when necessary. 2012 2011 £m £m Assets pledged as security include £52.7m (2011: £45.3m) of cash At beginning of year 29.1 33.7 held in restricted access deposits, £72.2m (2011: £80.3m) of property, Impairment loss recognised 11.5 15.1 plant and equipment (see section 3.2) and £0.8m (2011: £0.4m) of Additions through business combinations – 0.1 inventories (see section 3.0.5). The property, plant and equipment is subject to a first legal mortgage and inventories are subject to a first Bad debt provision released in year (12.6) (19.5) floating charge as security for debenture stock issued by the Group, Foreign exchange (0.3) (0.3) repayment in 2014. At end of year 27.7 29.1

L iquidity risk in brief Liquidity risk is the risk that the Group will not have available funds to meet its liabilities when 5.4.4 they fall due. Luditiq i y risk

The Group’s main source of funding is via an £800m committed bank The Group enjoys a strong liquidity position and adheres to strict facility which was put in place in October 2012 and matures in October liquidity management policies as set by the Treasury and Investment 2017. The facility was undrawn at 31 December 2012 with the exception Committee as well as adhering to certain liquidity parameters, as of £6.4m of outstanding letters of credit for general business purposes. defined by the FSA for the Group’s regulated entities in the UK and local equivalent authorities for the Group’s foreign operations. The Group monitors funding risk as well as compliance with existing financial covenants within the banking arrangements. There were no Liquidity is managed by currency, and by considering the segregation concerns regarding bank covenant coverage in 2012 and that position of accounts required for regulatory purposes, short-term operational is not expected to change in the foreseeable future. working capital requirements are met by cash in hand and committed bank facilities. FINANCIAL STATEMENTs 109 1.7 £m £m 2.2 2.0 16.8 Total Total 22.5 76.2 72.4 92.6 50.5 (81.9) (67.5) (65.7) 189.2 (39.5) 365.7 (131.0) 890.6 (122.8) (402.1) 2,421.1 (458.8) (494.9) (369.6) (554.0) (400.5) 3,507.2 2,369.9 (4,125.3) (3,351.2) 3,066.2 (4,451.0)

(4,914.9) (4,672.6) (3,048.0)

– – – – – – – – – £m 0.2 0.3 a yield 20.0 – 139.0 139.3 156.9 Shares variable £m (1.1) (2.1) (4.1) (1.5) (0.7) (9.4) (0.7) (3.4) securities (0.5) (0.4) and other and Trade (10.5) (805.1) (889.7) (820.9) (820.9) (908.3) (908.3) payables and other and – – – – – – – – – £m 50.1 term 50.2 notes 150.7 136.7 150.7 180.5 381.4 Medium – – – – – – – – – – – – £m

– – – – – – – – – – – – – – (13.7) (13.7) (13.7) (16.8) (16.8) (16.8) £m 9.3 9.3 200.8 loans Other Other Other liabilities under insurance insurance under contracts issued issued contracts

– – – – – – – – – – – £m 2.2 2.0 11.3 £m (0.1) 55.3 53.5 29.2 (1.9) 42.5 36.6 (2.7) (2.2) 66.0 166.8 bonds (20.1) (23.5) Overseas (2,162.2) corporate (2,136.5) (2,355.2) insurance (2,380.0) – – – – – – – K U 1.6 1.9 £m 9.8 3.4 0.3 contracts issued contracts Provisions underProvisions 72.2 0.2 75.9 75.9 89.2

bonds £m corporate (72.1) (98.1) (18.5) (49.7) (43.5) (83.3) (68.9) (44.4) (98.0) (101.9) bearing liabilities. The maturity profile of financial assets as at 31 December 2012 and 2011, which are available fund to the repayment of liabilities as they crystallise, is as follows: (693.7) (688.7) (2,380.0) (403.8) (348.0) – – – – – (1,130.8) (2,162.2) – (1,059.5) 0.1 0.1

£m 8.7 6.7 0.5 0.5 11.2 10.9 16.0 22.7 ment Other interest interest Other bonds govern-

bearing liabilities Overseas

– £m – – – – – – – – – – – – – – Sub- (31.5) £m (20.6) (379.4) (20.6) (20.6) (20.6) (20.6) (20.6) (20.6) (20.6) (20.6) (380.7) (20.6) 2.3 2.3 (410.5) (457.2) (447.3) (434.8) (550.3) (545.0) notes liabilities ordinated ordinated Discount Discount – – – – – – – – – – £m 185.4 549.2 1,191.2 1,616.8 1,067.6 1,005.8 Deposits with creditwith institutions – – – – – – – – – – – – £m cash 1,183.1 1,183.1 1,255.7 1,255.7 Cash and Cash

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omprises trade payables, other payables, accommodation bond liabilities accommodation other payables, payables, omprises trade and accruals detailed in Section 3.0.6. detailed in Section 3.0.6. and accruals C tes

o 2016 2015 2014 2017–2021 2013 After 2021 2011 (restated) 2011 2012 Carrying value in the balance sheet 2015 Total Carrying value in the balance sheet 2015 2012 2013 2014 2016 2018–2022 Total After 2022 2012 2013 2014 The total liability is split remainingby duration in proportion the to Notes a. cash flows expectedto arise during that period. Interest payments are included in the cash flows for subordinated liabilities and other interest The contractual maturities of financial liabilities and the expected payments interest estimated including liabilities insurance of maturities of the Group as at 31 December are as follows: Bupa annual report 2012 n 2017 2016 2017 2018–2022 After 2022 Total 2011 2012 2013 2015 2014 2016 2017–2021 After 2021 Total 110 Bupa annual report 2012 notes to the financial statements

Notes to the financial statements continued for the year ended 31 December 2012

R elated party transactions in brief These are transactions between the Group and related individuals or entities by nature of 6.0 influence or control. The Group has such relationships with its subsidiaries, key management R elATED party personnel, equity accounted investments and associated pension arrangements. The disclosure transactions of transactions with these parties in this section enables readers to form a view about the impact of related party relationships on the Group.

All transactions with related parties are conducted on an arm’s length The total remuneration of key management personnel not disclosed in basis. the remuneration report is as follows: Where the Company enters into financial guarantee contracts to 2012 2011 guarantee the indebtedness of other companies within the Group, the £m £m Company considers these to be insurance arrangements, and accounts Short-term employee benefits 5.9 3.6 for them as such. In this respect, provision for expected claims is made Long-term incentive plan 1.1 1.3 on an incurred basis. Post employment benefits 3.1 1.7 There were no material transactions during the year with any related Total 10.1 6.6 parties, as defined by IAS 24, other than those disclosed in this Section. The total remuneration of key management personnel is included in (i) Transactions with key management personnel staff costs (see Section 2.3). The key management personnel are the Group’s Executive and (ii) Transactions in relation to the non-registered pension Non-Executive Directors and includes the Managing Directors of arrangements the Group’s business segments at the beginning of the period to The Company has made pension commitments to certain current and 30 September 2012, the Managing Directors of the Group’s market former Executive Directors and key management personnel through units from 1 October 2012 to year end, the Group Finance Director, a non-registered pension arrangement which mirrors the terms of The and the Managing Director of Group Development. No Director Bupa Pension Scheme (see Section 3.6). These unfunded benefits are had any material interest in any contracts with Group companies governed by The Law Debenture Pension Trust Corporation Plc who at 31 December 2012 (2011: £nil) or at any time during the year. are the Trustee of the non-registered pension arrangement, and are The remuneration of the Group’s Executive and Non-Executive secured by a charge over £44.0m (2011: £39.4m) of cash deposits (see Directors is disclosed in pages 54 to 58. Section 3.0.4). The increase in the charge of £4.6m during 2012 mainly reflects the changes in market conditions (low gilt yields) as well as the increase in the value of the liabilities resulting from additional accrual of benefits during the year and market related changes in the underlying actuarial assumptions.

C ommitments and contingencies in brief A commitment is future expenditure that is committed to as at 31 December 2012. These 6.1 commitments fall under non-cancellable operating lease payments and contracted capital C oMMITMEnts and expenditure. Contingent assets and liabilities are those that are considered possible at year-end, contingencies whose existence will be determined by a future event.

(i) Operating leases Some of the leased properties have been sub-let by the Group. Both The total value of future non-cancellable operating lease rentals is the leased properties and the sub-leases expire between 2013 and payable as follows: 2024. Sub-lease receipts of £1.0m (2011: £1.3m) are expected to be received during the next financial year. The Group has an unoccupied 2012 2011 property provision of £6.8m (2011: £8.4m) in respect of these leases £m £m (see Section 3.5). See Section 3.3 where the Group leases out its Less than one year 55.2 45.1 investment properties as a lessor. Between one and five years 184.8 173.1 (ii) Capital commitments More than five years 528.8 516.5 Capital expenditure for the Group contracted as at 31 December 2012 Total operating leases 768.8 734.7 amounted to £31.8m (2011: £28.1m), of which £14.9m (2011: £17.6m) related to property, plant and equipment and £16.9m (2011: £10.5m) The Group leases a number of properties under operating leases. related to investment property. The leases typically run for a period of 25 years, with an option to renew the lease after that date. Lease payments are reviewed regularly (iii) Contingent assets and contingent liabilities in accordance with the terms and conditions of the individual lease The Group currently has no contingent assets. agreements. None of these leases include contingent rentals. The Group has contingent liabilities arising in the ordinary course of business, including losses which might arise from litigation, from which it is anticipated that the likelihood of any material unprovided liabilities arising is remote. FINANCIAL STATEMENTs

– – 1.8 0.1 1.0 £m 111 0.2 0.4 2011 (1.0) 21.9 (4.2) 16.9 16.9 16.4 67.8 29.2 (54.1) (13.3) 321.0 102.8 103.8 200.1 (115.7) 424.8 (219.6) (120.9)

(287.0) (407.9)

– – –

£m 4.5 0.2 0.2 0.4 (4.5) (3.2) 2012 (9.0) 29.7 26.8 123.1 (12.3) 118.4 (52.3) (76.8) 361.3 200.1 104.5 283.5 (119.2) 283.9 283.9 (123.7) 484.4 (200.5) 7.1 7.2 7.5 7.3 7.5 7.8 7.6 7.8 7.6 7.6 7.6 7.4 7.4 ief r b Section ief Financial Officer Financial ief velyn Bourke velyn E Ch notes in d

associate d

Chairman 11 March 2013 by Leitch Lord Approved the by Board of Directors and signed on its behalf on o C mpany primary statements an This section consists of the Company’s primary statements including balance sheet, statement of cash flows and statement of changes in equity. Sections7.10 form7.1to the associated notes the to Company financial statements. The Company accounting policies are aligned with those at the Group, described at Sections 6. 2 to

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ssociated o tateme tes 7.0 C s MPA a o BALANCE SHEET 2012 31 December as at Non-current assets assets Intangible Bupa annual report 2012 n Property, plant and equipment equipment and plant Property, Investment in subsidiary companies companies subsidiary in Investment assets net benefit employment Post Other receivables receivables Other Trade and other payables payables other and Trade Deferred taxation liabilitiesDeferred taxation liabilitiesCurrent Provisions for liabilities and charges liabilities Current taxation Deferred taxation assets assets taxation Deferred equivalents cash and Cash Current assets Current receivables other and Trade charges and liabilities for Provisions Current taxation asset taxation Current Trade and other payables payables other and Trade Non-current liabilities liabilities net benefit employment Post Total assets assets Total assetsNet Total liabilities Total Equity Property revaluation reserve Income and expenditure reserve reserve expenditure and Income equity Total Foreign exchange translation reserve translation exchange Foreign Sections form 7.10 to part 7.1 of these financial statements. 112 Bupa annual report 2012 company primary statements and associated notes

Notes to the financial statements continued for the year ended 31 December 2012

INCOME STATEMENT for the year ended 31 December 2012 The profit for the financial year dealt with in the accounts of the The average number of full time equivalent employees, including Company, The British United Provident Association Limited (Bupa), Executive Directors, employed by the Company during the year is £249.2m (2011: £142.2m). In accordance with the exemption granted was 754 (2011: 724). under Section 408 of the Companies Act 2006, a separate income statement and statement of comprehensive income for the Company have not been presented.

S tATEMENT of cash flows as at 31 December 2012 2012 2011 Section £m £m Operating activities Profit before taxation expense 233.6 130.1

Adjustments for: Net financial income and expenses 4.5 5.2 Depreciation, amortisation and impairment 14.8 11.8 Revaluations 0.5 – Other non-cash items 3.8 (5.8)

Changes in working capital and provisions: Changes in net pension asset / liability (19.9) (29.8) Decrease in provisions for liabilities and charges (0.7) (2.4) (Increase) / decrease in trade and other receivables, and other assets (15.7) 381.6 Decrease in trade and other payables, and other liabilities (191.2) (459.4) Cash generated from operations 29.7 31.3

Cash flow from investing activities Purchase of intangible assets (33.7) (37.9) Proceeds from sale of intangible assets 20.8 26.3 Purchase of property, plant and equipment (9.4) (18.5) Proceeds from sale of property, plant and equipment 1.6 1.9 Interest received 1.3 1.5 Net cash used in investing activities (19.4) (26.7)

Cash flow from financing activities Interest paid (6.8) (6.8) Net cash used in financing activities (6.8) (6.8)

Net increase / (decrease) in cash and cash equivalents 3.5 (2.2) Cash and cash equivalents at beginning of year 1.0 3.2 Cash and cash equivalents at end of year 4.5 1.0

Sections 7.1 to 7.10 form part of these financial statements. FINANCIAL STATEMENTs

113 £m (0.1) 17.8 16.5 18.6 (0.7) 16.9 16.9 Total 74.8 (57.9) (67.4) 142.2 (83.9) equity 267.0 249.2 283.9

– – – – – – – – – – – £m 0.4 0.4 0.4 0.4 reserve Foreign exchange translation translation

– £m 17.9 16.5 18.6 (0.7) 16.4 16.4 74.8 267.1 (67.4) 142.2 (83.9) (58.4) 249.2 283.5 reserve Income and and Income expenditure expenditure

– – – – – – – – – 0.1 0.1 0.1 £m (0.1) (0.1) (0.1) reserve Property revaluation revaluation 7.8 7.8 7.4 7.4 Section

tes o n associated

d n a

s t n stateme

y primar y y n realised gains or losses on property revaluation reserve recognised directly in other comprehensive income comprehensive other in directly recognised recognised directly in other comprehensive income comprehensive other in directly recognised n ompa Other comprehensive (expense) / income for the year, net of taxation Sections form 7.10 to part 7.1 of these financial statements. At end of year U Other comprehensive (expense) / income income / (expense) comprehensive Other Actuarial loss on pension schemes Taxation expense and credit on income and expenses Total comprehensive income for the year Other comprehensive income / (expense) (expense) / income comprehensive Other Actuarial gain on pension schemes Total comprehensive income for the year At end of year 2011 beginningAt of year Profit for the financial year Other comprehensive (expense) / income for the year, net of taxation Taxation expense and credit on income and expenses 2012 beginningAt of year STATEMENT OF CHANGES IN EQUITY STATEMENT 2012 ended 31 December the year for Profit for the financial year Bupa annual report 2012 c 114 Bupa annual report 2012 company primary statements and associated notes

Notes to the financial statements continued for the year ended 31 December 2012

Intangible assets in brief Intangible assets are the non-physical assets held by the Company and consists of computer 7.1 software only. iaiblent ng assets

Intangible assets – Computer software 2012 2011 £m £m Cost At beginning of year 71.8 61.9 Additions 33.7 37.9 Disposals (47.1) (27.5) Other – (0.5) At end of year 58.4 71.8

Amortisation and impairment loss At beginning of year 49.9 45.0 Amortisation for year 8.0 6.3 Impairment loss – 0.2 Disposals (26.3) (1.2) Other – (0.4) At end of year 31.6 49.9

Net book value at end of year 26.8 21.9 Net book value at beginning of year 21.9 16.9 FINANCIAL STATEMENTs

115 – £m 5.2 4.6 18.5 27.9 (15.1) Total 29.2 53.8 24.6 22.0 49.9 (13.2)

– 0.1 0.1 £m 7.5 0.5 0.5 0.4 19.2 14.6 41.0 (11.8) 35.3 26.4 (13.7) 2011 Equipment

– – – 1.1 4.1 1.5 £m 7.4 8.9 5.4 4.2 13.1 16.1 11.0 (1.4) (1.4) 18.5 property Leasehold

– – £m 6.8 9.4 (5.0) (0.6) 57.6 27.9 29.7 Total 53.8 29.2 24.6

– – 8.1 0.1 £m ief 5.3 (4.1) (0.1) (0.1) 19.2 (3.4) (3.4) 21.0 18.4 r 35.3 39.4 b 2012 Equipment

– – – 1.3 1.5 £m 5.4 6.9 13.1 16.1 11.3 (0.1) 18.5 18.2 (0.9) (0.6) property Leasehold equipment in d

Property, plant and equipment are the physical assets utilised theby Company profits. and carry to revenues out generate and activities business property, plant an tes o n

t associated

d t n n quipment a

n e s t d n pla , , pme y i stateme

u y q e

primar d y y n n ropert t book value at beginning of year a 7. 2 P e o roperty, plant an plant roperty, ompa P C valuation or st beginningAt of year Bupa annual report 2012 c Disposals Additions At end of year Other Revaluations Depreciation and impairment loss impairment and Depreciation beginningAt of year Disposals Depreciation charge for year for charge Depreciation Impairments Impairments Other Net book value at end of year At end of year for the year ended 31 December 2012 is £nil (2011: £nil). The net book value of finance leased property heldby the Company at 31 December 2012 is £1.0m (2011: £1.0m). The depreciation charge N 116 Bupa annual report 2012 company primary statements and associated notes

Notes to the financial statements continued for the year ended 31 December 2012

investment in subsidiaries in brief 7.3 Below is a summary of the principal investments in subsidiaries held by the Company. Invstmee nt in subsidiaries

Carrying value of investment in subsidiaries The principal subsidiary companies of the Company as at 31 December Subsidiaries are entities controlled by the Group. Investments in 2012 are listed below and, except where stated, are incorporated in subsidiary companies are carried at cost less impairment in the England and Wales. Subsidiary companies are 100% owned unless Company’s accounts. Dividends received from subsidiaries are otherwise stated. Full details of all Group undertakings will be annexed recognised in the income statement when the right to receive to the Company’s next annual return in compliance with the Companies the dividend is established. Act 2006. As at 31 December 2012, the Company held investments in subsidiaries of £200.1m (2011: £200.1m).

Health insurance – general business Care and health provision Bupa Insurance Limited Bupa Care Homes (CFG) Plc Sanitas, SA de Seguros (99% holding) Spain Bupa Care Homes Group Limited Bupa Australia Pty Limited Australia Bupa Care Homes (BNH) Limited Bupa Asia Pacific Pty Limited Australia Bupa Care Services Limited Bupa (Asia) Limited Hong Kong Bupa Care Homes (CFCHomes) Limited Bupa Insurance Company US Bupa Care Homes (CFHCare) Limited Bupa Care Homes (GL) Limited Investment and financing activities Bupa Care Homes (Partnerships) Limited Bupa Finance plc* Bupa Home Healthcare Limited Bupa Investments Limited Bupa Occupational Health Limited Bupa Investments Overseas Limited Bupa Care Services Australasia Pty Limited Australia Bupa Treasury Limited Bupa Healthcare New Zealand Limited New Zealand Grupo Bupa Sanitas SL Spain Euroresidencias Sotogrande SL Spain UK Care No 1 Limited Guernsey Sanitas Residencial SL Spain Sanitas, SA de Hospitales Spain Especializada y Primaria L’Horta-Manises SA Spain * Directly owned by the Company Torrejón Salud SA Spain Health Dialog Services Corporation US Medical Services International Limited

Although the Company holds none of the voting power of UK Care No 1 Limited, it has the right to obtain benefits or is exposed to risks relating to the activities of this company. Consequently, the Group financial statements in Sections 2 to 6 include the results of the entity in it. FINANCIAL STATEMENTs

117

0.1 £m £m 2011 2011 17.6 13.7 13.7 (2.8) 67.8 67.8 121.9 (21.8) 48.0

(54.1) (54.1) 900.1 1,063.1 1,076.8

(1,009.0)

– Total Total 0.1 £m £m 17.1 2012 2012 52.2 52.2 24.8 49.4 (52.3) (52.3) (26.0) 104.5 104.5 1,128.5 1,180.7 1,063.1 (1,076.2)

– – – – – – 1.1 £m £m 2011 2011 (3.3) 18.0 (0.6) 20.8 (18.0) (18.0)

– – – – – – £m £m 0.8 (3.4) 2012 2012 14.9 (0.5) 18.0 (14.9) (14.9) benefit scheme benefit benefit scheme benefit Post retirement medical medical retirement Post Post retirement medical medical retirement Post

0.1 £m £m 2011 2011 17.6 31.7 (2.8) 67.8 46.9 (21.2) (36.1) 125.2 879.3 1,045.1 1,076.8 ief (1,009.0) r b

– 0.1 £m £m 17.1 67.1 2012 2012 28.2 48.6 (37.4) (25.5) 104.5 1,113.6 1,180.7 Pension schemesPension Pension schemesPension 1,045.1 As noted in Section 1.6, IAS 19 EmployeeBenefits (Amendment) 1 January after or on beginning periods annual for effective becomes ended year the for adopted been had amendment the If 2013. 31 December 2012, the surplusfor the Company would be increased by £1.5m.

efits in in efits (1,076.2) en b te (ii) (ii) o (iii) N o P employment st from 1 October 2002. The principal defined contribution pension scheme is The Plan. Bupa Savings Retirement The Company operates a defined benefit and a defined contribution pension scheme for the for scheme pension contribution defined a and benefit defined a operates Company The medical retirement post and unfunded an to addition in Directors, and employees of benefit scheme. benefit The defined benefit scheme is The Bupa Pension Scheme which was closed to new entrants tes o n

t n associated

d e n a

m s t y n stateme

y emplo fits

e primar y y n n sets and liabilities of schemes s e o assets A t assets of funded schemes t liabilities t 7.4 Pst b e et e ompa Current service cost At beginningAt of year Present value of funded obligations funded of value Present c Bupa annual report 2012 (i) The Company is the sponsoring employer for The Bupa Pension medical retirement post and scheme pension unfunded the Scheme, assumptions actuarial The 3.6. Section in described scheme benefit underlying the valuation of obligations are detailed in Section 3.6.2. scheme, pension funded defined the of respect in liabilities and assets The scheme benefit medical retirement post and pension unfunded are as follows: Interest on obligations obligations on Interest Fair value of scheme assets Contributions by employees employees by Contributions N Net recognised assets / (liabilities) N Represented on the balance sheet as: sheet balance the Represented on Actuarial losses / (gains) / losses Actuarial Benefits paid paid Benefits At end of year Present value of unfunded obligations obligations unfunded of value Present N Net recognisedNet assets (ii) Present value of the scheme obligations The movement in the present value of schemes’ obligations is: Gains on curtailment on Gains 118 Bupa annual report 2012 company primary statements and associated notes

Notes to the financial statements continued for the year ended 31 December 2012

(iii) Fair value of funded scheme’s assets The movement in the fair value of the funded scheme’s assets is: 2012 2011 £m £m At beginning of year 1,076.8 967.9 Expected return on scheme assets 48.8 55.9 Actuarial gains 42.0 36.6 Contributions by employer 35.8 36.6 Contributions by employees 0.1 0.1 Benefits paid (22.8) (20.3) At end of year 1,180.7 1,076.8

The market value of the assets of the funded scheme is as follows: Equities 449.3 363.9 Bonds 703.4 686.0 Other assets 28.0 26.9 Total market value of the assets of the funded scheme 1,180.7 1,076.8

(iv) Amounts recognised in the income statement The amounts charged / (credited) to other operating expenses for the year are:

2012 2011 £m £m Current service cost 17.1 17.6 Interest on obligations 49.4 48.0 Expected return on scheme assets (48.8) (55.9) Gains on curtailments – (2.8) Total amount charged to income statement 17.7 6.9

Actual return on scheme assets (90.8) (92.5)

(v) Amounts recognised directly in other comprehensive income The amounts (credited) / charged directly to other comprehensive income are:

2012 2011 £m £m Actual return less expected return on assets (42.0) (36.6) Experience losses arising on obligations 1.0 58.9 Changes in assumptions 22.4 61.6 Total actuarial (gains) / losses (18.6) 83.9

The cumulative amount of actuarial losses recognised directly in other comprehensive income is £169.7m (2011: £188.3m). (vi) History of experience gains and losses 2012 2011 2010 2009 2008 £m £m £m £m £m P ension schemes Present value of scheme obligations (1,113.6) (1,045.1) (879.3) (859.0) (663.0) Fair value of scheme assets 1,180.7 1,076.8 967.9 855.7 753.2 Net surplus / (deficit) 67.1 31.7 88.6 (3.3) 90.2

Experience charge / (credit) arising on: Scheme obligations 2.8 60.6 (31.8) (9.8) (27.3) Scheme assets (42.0) (36.5) (40.1) (39.6) 102.9

Post retirement medical benefit schemes Present value of defined benefit obligations (14.9) (18.0) (20.8) (21.7) (17.0)

Experience credit arising on: Scheme obligations (0.4) (0.3) (0.3) (0.2) – Bupa annual report 2012 119 company primary statements and associated notes

P rovisions for liabilities and charges in brief Provisions for liabilities and charges are those not related to insurance contracts issued that 7.5 require settlement in the future as a result of a past event. Po r viSIOns for liabilities and charges

Provisions for liabilities and charges Unoccupied Insurance property Other Total £m £m £m £m At beginning of year 15.5 1.5 0.5 17.5 Charge for year 7.4 – 0.5 7.9 Released in year – (0.4) (0.3) (0.7) Utilised in year – cash (2.6) – (0.2) (2.8) Utilised in year – non-cash (5.1) – – (5.1) At end of year 15.2 1.1 0.5 16.8

Non–current 11.2 1.0 0.1 12.3 Current 4.0 0.1 0.4 4.5 Total provisions for liabilities and charges 15.2 1.1 0.5 16.8

W orking capital in brief Working capital represents the assets and liabilities the Company generates through its 7.6 trading activities. The Company therefore defines working capital as trade and other working capital receivables and trade and other payables.

7.6.1 Trade and other Receivables 7.6.2 Trade and other payables 2012 2011 2012 2011 £m £m £m £m N on-current N on-current Prepayments 0.2 0.2 Amounts owed to subsidiary companies 0.3 210.6 Total non-current other receivables 0.2 0.2 Accruals 8.7 9.0 Total non-current trade and other payables 9.0 219.6 Current Amounts owed by subsidiary companies 105.3 90.2 Current Other receivables 1.6 2.1 Amounts owed to subsidiary companies 60.3 49.5 Prepayments 11.5 10.5 Other payables 5.5 6.9 Total current trade and other receivables 118.4 102.8 Accruals 53.4 59.3 Total current trade and other payables 119.2 115.7 Total trade and other receivables 118.6 103.0 Total trade and other payables 128.2 335.3 FINANCIAL STATEMENT s 120 Bupa annual report 2012 company primary statements and associated notes

Notes to the financial statements continued for the year ended 31 December 2012

Risk management in brief The Board is responsible for identifying, evaluating and managing risks faced by the Company 7.7 and considers the acceptable level of risk, the likelihood of these risks materialising, how to risk management reduce the risk and the cost of operating particular controls relative to the benefit from managing the related risks.

The Group’s risk management strategy is outlined in detail within The risks faced by the Company have been assessed as part of the Section 5.4. Group’s ongoing risk management processes, a summary of these risks are outlined below:

Risk type Summary of risk assessment Insurance risk The Company is not exposed to insurance risk Market risk The Company is not materially exposed to foreign exchange or interest rate risk Credit risk The maximum credit risk exposure of the Company is £6.1m (2011: £3.1m). The Company believes amounts owed to it by subsidiary companies carry no credit risk Liquidity risk The contractual maturity of financial liabilities, held by the Company, fall due within one year

Deferred taxation assets and liabilities in brief Deferred tax is an adjustment to recognise the differences between the carrying amounts 7.8 of assets and liabilities for financial reporting and the amounts used for taxation purposes. D efERRED taxation assets and liabilities

Recognised deferred taxation assets and liabilities Deferred taxation assets and liabilities are attributable to the following:

Assets Liabilities Net

2012 2011 2012 2011 2012 2011 £m £m £m £m £m £m Accelerated capital allowances 1.0 0.8 – – 1.0 0.8 Post employment benefit asset / liability – – (12.0) (7.9) (12.0) (7.9) Employee benefits (other than post employment) 3.2 3.7 – – 3.2 3.7 Provisions 4.4 4.8 – – 4.4 4.8 Other 0.2 0.4 – – 0.2 0.4 Net deferred taxation (liability) / asset 8.8 9.7 (12.0) (7.9) (3.2) 1.8

Recognised deferred taxation assets Deferred taxation assets relating to the carry forward of employee benefits, other provisions, unused taxation losses and other deferred taxation assets are recognised to the extent that it is probable that future taxable profits will be available against which the deferred taxation assets can be utilised. Bupa annual report 2012 121 company primary statements and associated notes

Movement in net deferred taxation assets / (liabilities) Recognised in other Recognised compre- At beginning in income hensive At end of year statement income of year £m £m £m £m 2012 Accelerated capital allowances 0.8 0.2 – 1.0 Post employment benefit asset / liability (7.9) (3.4) (0.7) (12.0) Employee benefits (other than post employment) 3.7 (0.5) – 3.2 Provisions 4.8 (0.4) – 4.4 Other 0.4 (0.2) – 0.2 Total 1.8 (4.3) (0.7) (3.2)

2011 Accelerated capital allowances 1.2 (0.4) – 0.8 Post employment benefit asset / liability (18.4) (6.0) 16.5 (7.9) Employee benefits (other than post employment) 3.1 0.6 – 3.7 Provisions 5.9 (1.1) – 4.8 Other 0.2 0.2 – 0.4 Total (8.0) (6.7) 16.5 1.8

R elated party transactions in brief These are transactions between the Company and related individuals or entities by nature of 7.9 influence or control. The Company has such relationships with its subsidiaries, key management R elATED party personnel and associated pension arrangements. The disclosure of transactions with these transactions parties in this section enables readers to form a view about the impact of related party relationships on the Company.

The Company has a related party relationship with its key management The total remuneration of key management personnel is included personnel and with its subsidiary companies (see Section 7.3). in staff costs (see Section 2.3). (i) Transactions with key management personnel (ii) Transactions in relation to the non-registered The key management personnel for the Company are the same as for pension arrangements the Group. These transactions are disclosed in Section 6.0. These transactions are disclosed in Section 6.0.

(iii) Transactions and balances with subsidiary companies Transactions Balance at during the year 31 December

2012 2011 2012 2011 £m £m £m £m I ncome statement Management charges received 137.5 137.3 Interest income 1.3 1.5 Interest expense (5.9) (6.8) Income received 2.3 2.7

Expenses paid (including rental expense of £4.9m (2011: £5.8m)) (5.5) (6.6) FINANCIAL STATEMENT Dividends received 311.0 200.0

Balance sheet Amounts owed by subsidiary companies 15.1 (325.6) 105.3 90.2 Amounts owed to subsidiary companies (10.8) 471.2 (60.3) (49.5) Loans to subsidiary companies – (50.4) – – Loans from subsidiary companies 210.3 22.0 (0.3) (210.6) s The above outstanding balances arose during the ordinary course of business and are on substantially the same terms, including interest rates, as for comparable transactions with third parties. 122 Bupa annual report 2012 company primary statements and associated notes

Notes to the financial statements continued for the year ended 31 December 2012

C ommitments and contingencies in brief A commitment is future expenditure that is committed to as at 31 December 2012. 7.10 These commitments primarily consists of contracted capital expenditure. C oMMITMEnts AND Contingent liabilities include bank loan and bond issue guarantees. CONTINGENCIES

(i) Commitments (iv) Contingent liabilities Capital expenditure for the Company contracted as at 31 December Group bank loans do not include any amounts (2011: £nil) that are 2012 but for which no provision has been made in the financial guaranteed by the Company. statements amounted to £nil (2011: £0.3m, all of which related to The Company has given a guarantee in respect of a £350.0m bond property, plant and equipment). issued by Bupa Finance plc. (ii) Operating leases The Company is party to an £800m revolving credit facility, together The Company has £46.2m of operating lease obligations (2011: £nil). with various other companies within the Group. The revolving credit (iii) Pensions contributions facility was fully undrawn at 31 December 2012 with the exception of The Company has an obligation to make a series of special £6.4m of outstanding letters of credit required for general business contributions to The Bupa Pension Scheme between 31 December purposes. The Company has joint and several liability for all obligations 2012 and 31 December 2013, details of which are set out in Section 3.6. under the agreement. In addition, Bupa Finance plc has entered into a legally binding and irrevocable guarantee for the benefit of the Trustees of The Bupa Pension Scheme in respect of these payments. Bupa annual report 2012 123 five year financial summary

F ive Year Financial summary in brief The five year financial summary provides a five year time summary in order to better 8.0 understand trends. Farive ye Financial summary

2012 2011 2010 2009 2008 (restated) (restated) (restated) (restated) £m £m £m £m £m Revenues – segmental analysis Australia and New Zealand MU 3,554.0 3,252.8 2,804.0 2,236.8 1,507.3 UK MU 2,528.8 2,506.2 2,593.7 2,584.2 2,544.3 Spain and Latin America Domestic MU 1,190.8 1,212.6 1,151.4 1,125.8 933.4 International Developing Markets MU 227.3 244.2 262.0 271.5 342.0 International PMI MU 872.0 795.9 765.3 722.6 597.1 Net reclassifications to other expenses or financial income and expenses 0.9 4.4 (0.6) (0.1) (3.1) Unallocated central revenues 0.1 2.0 0.2 0.6 2.9 Consolidated total revenues 8,373.9 8,018.1 7,576.0 6,941.4 5,923.9

Claims and expenses Operating expenses (including claims) (7,841.9) (7,496.2) (7,156.2) (6,564.3) (5,567.5) Impairment of goodwill – (165.8) (249.2) – (116.5) Impairment of other intangible assets arising on business combinations – (133.7) (17.7) (11.7) (4.0) Other income and charges (3.2) (22.9) (54.0) 2.4 (3.4) Total claims and expenses (7,845.1) (7,818.6) (7,477.1) (6,573.6) (5,691.4)

Profit before financial income and expenses 528.8 199.5 98.9 367.8 232.5 Financial income and expenses 54.8 20.5 19.1 48.7 (40.6) Profit before taxation expense 583.6 220.0 118.0 416.5 191.9

Taxation expense (134.9) (84.1) (131.4) (115.7) (79.5)

Profit for the financial year 448.7 135.9 (13.4) 300.8 112.4

Attributable to: Bupa 438.2 131.1 (19.2) 288.9 106.9 Non-controlling interests 10.5 4.8 5.8 11.9 5.5 Profit for the financial year 448.7 135.9 (13.4) 300.8 112.4

Equity Property revaluation reserve 631.9 642.7 660.5 596.7 636.5 Income and expenditure reserve 3,544.9 3,075.9 3,019.1 2,989.1 2,795.2 Cash flow hedge reserve 25.1 29.0 30.7 29.7 30.9 Foreign exchange translation reserve 590.1 662.7 656.1 333.6 124.9 Equity attributable to Bupa 4,792.0 4,410.3 4,366.4 3,949.1 3,587.5

Equity attributable to non-controlling interests 25.9 33.6 29.7 36.8 37.0 FINANCIAL STATEMENT Total equity 4,817.9 4,443.9 4,396.1 3,985.9 3,624.5 s 124 Bupa annual report 2012

IFRSs RELEVANT TO BUPA

Notes to the financial statements continued for the year ended 31 December 2012

International Financial Reporting Standards relevant to Bupa

International Financial Reporting Standards (IFRSs) IAS 31 Interests in joint ventures IFRS 3 Business combinations IAS 32 F inancial instruments: Presentation IFRS 4 I nsurance contracts IAS 36 Impairment of assets IFRS 5 non-current assets held for sale and discontinued IAS 37 P rovisions, contingent liabilities and contingent assets operations IAS 38 Intangible assets IFRS 7 F inancial instruments: Disclosures IAS 39 F inancial instruments: Recognition and measurement IFRS 8 O perating segments IAS 40 I nvestment property International Accounting Standards (IAS) Interpretations IAS 1 P resentation of financial statements IFRIC 4 D etermining whether an arrangement contains a lease IAS 2  Inventories IFRIC 9 R eassessment of embedded derivatives IAS 7 C ash flow statements IFRIC 12 S ervice concession arrangements IAS 8 Accounting policies, changes in accounting estimates IFRIC 13 C ustomer loyalty programmes and errors IFRIC 14 T he limit on a defined benefit asset, minimum funding IAS 10 Events after the balance sheet date requirements and their interaction IAS 12 I ncome taxes IFRIC 16 hedges of a net investment in a foreign operation IAS 16 Property, plant and equipment IFRIC 17 D istributions of non-cash assets to owners IAS 17 Leases IFRIC 18 T ransfer of assets from customers IAS 18 Revenue SIC 12 C onsolidation: Special purpose entities IAS 19 Employee benefits SIC 15 O perating leases – incentives IAS 21 The effects of changes in foreign exchange rates SIC 27 E valuating the substance of transactions involving the legal IAS 23 B orrowing costs form of a lease IAS 24 Related party disclosures SIC 32 I ntangible assets – website costs IAS 27 Consolidated and separate financial statements IAS 28 I nvestments in associates This report has been printed on Vision Superior – an FSC® certified paper containing 100% ECF pulp and manufactured at a mill accredited with the ISO 14001 and EMAS environmental standards. This report is printed by an FSC and ISO 14001 certified printer using vegetable oil-based inks and an alcohol free (0% IPA) process. The carbon footprint of this publication was calculated and carbon credits bought to offset and make this publication completely CarbonNeutral®. These carbon credits are invested in projects around the world that save equivalent amounts of CO2. Designed and produced by Salterbaxter. Printed by Pureprint. Pureprint are ISO 14001:2004, FSC certified and CarbonNeutral®. bupa A Registered office The British United Provident Bupa House Association Limited is a company 15–19 Bloomsbury Way limited by guarantee. London WC1A 2BA Registered in England No. 432511. rep nnual For further copies of this ‘Bupa’ and the Heartbeat logo document are registered service marks. +44 (0)20 7656 2300

Press office +44 (0)20 7656 2454 o 2012rt

RA / 2012 bupa.com