Annual Report 2016 With no shareholders, Bupa exists to serve our customers

Helping people live lon ger , he alth ier , happier lives Our purpose ...is an inspiring and motivating driver of performance

Bupa’s status, as a company limited by guarantee with no shareholders, enables us to make customers our absolute focus. This means we can reinvest our profi ts to provide more and better healthcare for current and future customers. As a service organisation, everything we do for our customers relies on our people and partners, so being a place where people love to work is critical to our success. We employ 86,000 people, principally in the UK, Australia, Spain, Hong Kong, Poland, New Zealand, Chile, Brazil, Thailand, China, Saudi Arabia, India and the US. Around 70% of our revenue is from health insurance, with the rest from health and care provision. We fund healthcare around the world and run clinics, dental centres, hospitals, care homes and retirement villages in a number of countries.

Our organisation structure Our business is managed through four Market Units:

Australia and UK Europe and International New Zealand Latin America Markets2 See page 8 See page 9 See page 10 See page 11

Revenue Revenue Revenue Revenue £4,360.6m £2,785.9m £2,474.7m £1,427.8m Underlying Profi t Underlying Profi t Underlying Profi t Underlying Profi t £344.4m £194.9m £165.6m £65.9m

– Bupa Health Insurance – Bupa UK Insurance – Sanitas Seguros – Bupa Global – Bupa Health Services – Bupa Care Services – Sanitas Hospitales and – Bupa Arabia – Bupa Aged Care Australia – Bupa Health Clinics New Services – Bupa Hong Kong – New Zealand Care Services – Bupa Cromwell Hospital – Sanitas Dental (Spain) – Quality HealthCare – Oasis Dental Care1 – Sanitas Mayores (Spain) (Hong Kong) – LUX MED (Poland) – Max Bupa (India) – Bupa Chile – Bupa Thailand

Our nine global functions connect across Bupa:

Information Corporate Finance & Risk & Medical People Marketing Strategy Legal Services Aff airs Governance Compliance

Our Group Corporate Centre leads reporting, capital management, coordination and governance.

1 Bupa completed the purchase of Oasis Dental Care on 9 February 2017 with an enterprise value of £835m. 2 While revenues from our associates and joint ventures are excluded from our reported fi gures, customer numbers and the appropriate share of profi t from these businesses are included in our reported numbers. Bupa Annual Report 2016 01

Contents Strategic report Strategic report Financial performance summary 1 ifc Our purpose and structure 01 F inancial performance Revenue +4% CER summary 2015: £10.6bn 02 Chairman’s statement 03 Gr oup Chief Executive’s £11.0bn +12% AER review 2015: £9.8bn 04 Our business model 05 Our strategic framework 06-07 Our performance 2 Underlying profit +10% CER 08-11 Our Market Unit 2015: £638.1m strategy in action 12-15 Financial Review +2% CER 3 £700.7m 16 Lo nger term viability +20% AER statement Risks 2015: £582.5m 17-21 Governance Statutory profit before taxation +40% AER Governance 2015: £374.3m 22-23 Chairman’s introduction 24-25 Board of Directors £522.9m 26-27 Bupa Executive Team 28-30 Leadership 31-32 Effectiveness 33 Engagement Net cash generated from +13% AER 34-37 Audit Committee Report operating activities 2015: £788.1m 38-39 Risk Committee Report 40-41 Nomination and Governance £891.0m Committee Report 42-52 Remuneration Report 53 Re port of the Board of Directors 4 Solvency II capital coverage ratio 2015: 178% 54 Statement of Directors’ Responsibilities

204% Financial statements Financial statements See Our performance on pages 6-7 55-140 Financial statements 56-58 Independent Auditor’s report

1 We use Constant Exchange Rates (CER) to compare trading performance in a consistent manner to the prior year. We have therefore retranslated our 2015 results using 2016 average foreign exchange rates. Please refer to the Financial Review for the foreign exchange rates in our principal currencies. Due to our geographically diverse portfolio, the impacts of foreign exchange rates fluctuate year on year. 2 To derive underlying profit, profit before taxation is adjusted for amortisation and impairment of intangible assets and goodwill arising on business combinations, net property revaluation gains or losses, realised and unrealised foreign exchange gains and losses, gains or losses on return seeking assets, profits or losses on the sale of businesses and fixed assets, transaction costs on acquisitions and disposals, and restructuring costs. 3 Underlying profit is up 2% at CER and up 12% at AER when excluding the impact of the IFRIC 12 adjustment relating to our Spanish Public-Private Partnerships (PPPs) in 2015. 4 Th e 2016 Solvency II capital coverage ratio is an estimated value. The 2015 Solvency II capital coverage ratio has been updated to 178% from the 180% estimate disclosed in the 2015 Annual Report and Accounts. 02 Bupa Annual Report 2016

Lord Leitch Chairman’s statement

“I’m incredibly proud of the way Bupa has navigated the challenging market conditions in 2016. We anticipate these will continue for some time to come, and are committed to delivering the very best for our customers.”

Focused on customers Global due to our exit of non-strategic Well-positioned for the future 2016 has been a year of change at Bupa. markets, investment in capability and I’m incredibly proud of the way Bupa has Evelyn Bourke became Group Chief Executive infrastructure, and a lower rate of growth. navigated the challenging market conditions Offi cer, after Stuart Fletcher stepped down in In December, we acquired Care Plus, a in 2016. We anticipate these will continue for April. Stuart left Bupa in a strong position, and market-leading health insurer in Brazil. some time to come, and are committed to with our thanks. As our former Chief Financial delivering the very best for our customers. Offi cer, Evelyn knows Bupa well. She refreshed Culture, diversity and corporate I would like to thank all our 86,000 people Bupa’s strategy with a renewed emphasis on responsibility around the world. Their commitment to high quality service for our customers in this serving our customers is vital to our success digital age. The focus is on strengthening Culture is core to Bupa’s success, with the and something we never take for granted. Bupa’s positions in existing geographic company’s purpose and values at the heart Our 2016 Strategic Report, from pages 1-21, markets, including extending into adjacent of the customer and employee experience. was reviewed and approved by the Board business lines such as dental. Selective It is vital that Bupa’s people are engaged and of Directors on 1 March 2017. geographic expansion will continue to be empowered to deliver for our customers, and we place great emphasis on being a place part of Bupa’s strategy, with Asia and Latin By order of the Board. America of interest. Bupa operates in highly where people love to work. The Bupa Code – sensitive and regulated sectors and must our code of conduct – sets out the behaviours uphold the high standards our customers and we expect, and is complemented by our regulators expect. During 2016, we increased confi dential Speak Up hotline. We are an our focus on risk and compliance and this inclusive organisation and celebrate diversity. remains a priority going forward as part of our 40% of our Board members are female, as refreshed strategy. This is key to delivering are 45% of the Bupa Executive Team, 41% Lord Leitch strong and sustainable performance, now of our senior management team and 69% of Chairman and in the future. our total workforce. Gender is, of course, only one measure of diversity and is considered alongside a wide range of relevant skills Growth in challenging markets and experience. We are proud of the Over the year, Bupa made solid progress diverse culture Bupa has fostered and our in challenging market conditions amidst commitment to corporate responsibility and global political uncertainty. Revenue grew sustainability. We actively engage with the 4% and underlying profi t 10%, albeit up 2% community to make a positive contribution when excluding the impact of the IFRIC 12 on public health matters and promote positive adjustment, related to our Spanish Public- environmental practices. Private Partnerships, made in 2015. Bupa became Australia’s largest health insurer for Corporate governance the fi rst time, and progress has been made in reshaping the UK business. Bupa UK exited There were a number of changes to the the home healthcare sector and announced a Bupa Board. With Evelyn’s appointment as purchase in the dental market. In Spain, further Group CEO, we appointed Joy Linton as Chief progress was made in digitising the customer Financial Offi cer. In January 2016, Simon Blair journey with the launch of Blua, Sanitas’ digital and Janet Voûte joined us as Non-Executive health insurance off ering. Our ownership of Directors, while Rita Clifton stepped down Bupa Chile was increased to 100%, while our from the Board at the AGM in May 2016. stake in Max Bupa in India was also increased More information about Bupa’s governance is to 49%. Performance in International Markets contained in my introduction to governance was impacted by a large profi t decline in Bupa on pages 22-23 of this report. Bupa Annual Report 2016 03

Evelyn Bourke Group Chief Executive’s review

“We are focused on improving and extending our services Strategic report for customers. To equip Bupa for the next phase of growth, we have refreshed our strategy, putting customers front and centre in the context of today’s digital age.”

It is a huge honour to be the Group Chief health insurance business became the Structure and executive team changes Executive of Bupa, a special organisation which country’s biggest health insurer for the In July, we reshaped our operating structure, exists to help our customers live longer, healthier, fi rst time. The Australian Government is reducing from fi ve to four Market Units. happier lives. Financially strong, we have a considering reforms of the health insurance We also made a number of changes to the trusted brand, committed people, and market- sector, and aff ordability remains a challenge Bupa Executive Team. With my appointment as leading positions which we continue to grow. for the whole healthcare industry. Group CEO, Joy Linton became Chief Financial Governance In the UK, we achieved good underlying profi t Officer and joined the Bupa Board. Richard Delivering for customers in the digital age growth despite continued market pressures. Bowden is now CEO of Australia and New We are focused on improving and extending Revenue was down due to the disposal of Zealand, with David Hynam succeeding him our services for customers. To equip Bupa for Bupa Home Healthcare (BHH) in July. If BHH as CEO of the UK. Wayne Close was appointed the next phase of growth, in 2016 we refreshed revenue is removed from 2015 and 2016 Acting CEO of International Markets. The role of our strategy, putting customers front and centre performance, UK revenue was up 5%. Over Chief Risk Officer became part of the Executive in the context of today’s digital age. As a service the year we made progress in reshaping our Team, refl ecting our increased focus on organisation, it is critical our people love working portfolio. In July, we exited the home healthcare risk and compliance, with David Fletcher at Bupa and delivering for customers. Insurance, market. In November, we announced our appointed to the role. Gabriela Pueyo became healthcare and care services are highly sensitive agreement to purchase Oasis Dental Care. Chief Strategy Offi cer. and regulated sectors and we are increasing our We also undertook a review of our UK care focus on management of risk and compliance services business. Outlook to ensure we continue to uphold the high In Europe and Latin America, we delivered Looking ahead, we expect conditions to remain standards our customers and regulators expect. strong growth in revenue and underlying profit. challenging in our key markets with changing Through rigorous capital management, and In Spain, we grew our dental and health political environments, including the UK preparing investing in strength and depth in our existing insurance businesses, while our Public-Private to exit the European Union. Demand for quality, markets with selective expansion into new growth Partnerships are meeting their profit targets value-for-money healthcare will remain strong markets, we will deliver strong and sustainable and providing high quality medical services in for years to come, however governments and Financial statements performance for our customers and for Bupa. a difficult political environment. LUX MED, our consumers face funding pressures and medical In 2016, our businesses performed solidly in business in Poland, performed well primarily costs are outpacing inflation. In addition, there challenging market conditions. We achieved due to good performance in our ambulatory are new customer standards of personalisation, good profi t growth in our three largest Market and inpatient businesses. Bupa Chile achieved ease and choice as well as high expectations of Units – Australia and New Zealand, the UK, strong revenue growth. quality, safety, privacy and transparency. and Europe and Latin America – and, while In International Markets, performance was The Bupa Executive Team and I would like to performance within International Markets was impacted by a large profit decline in Bupa thank our 86,000 people. Their dedication and impacted by a signifi cant decline in profi t in Global. This was driven by the ongoing impact commitment is key to delivering our purpose Bupa Global, the overall Group grew revenue of our decision to exit non-strategic markets, of helping people live longer, healthier, happier 4% and underlying profi t 10%, albeit up 2% as well as our investment in capability and lives. By ensuring an excellent experience for when excluding the impact of the IFRIC 12 infrastructure to improve the customer customers, patients and residents, we also adjustment made in 2015. Our performance was experience and grow our corporate book, and ensure Bupa can deliver strong and sustainable bolstered by strong and consistent cash fl ow, a lower than anticipated rate of growth in our performance, both now and in years to come. a strong balance sheet, robust management individual and small medium enterprise books. and an upgrade in one of our credit ratings. While progress is being made, there will continue In Australia and New Zealand, we delivered to be some impact on performance in 2017. good revenue and underlying profi t growth in In December, we acquired Care Plus. diffi cult market conditions, and our Australian Evelyn Bourke Group Chief Executive Officer 04 Bupa Annual Report 2016

Our value creation model How our business works

Our business model

Customers are at the heart of everything we do. We fund and provide health and care services to fulfi l our purpose of helping people live lon ger , he alth ier , happier lives . As a company without shareholders, our profi ts are reinvested back into our business for the benefi t of current and future customers.

We fund We provide Helping customers fund health Providing health and care and care through domestic and services through primary care international health insurance, clinics, hospitals, dental centres, as well as other funding models and aged care services

International health insurance Our services Domestic health Access to premium insurance insurance products and healthcare Funding quality healthcare services worldwide for customers where they live Primary Hospitals care clinics

Other funding Pay-as-you-go, subscriptions, and dental Advice Dental Aged care and travel insurance

Customers

Purpose and status Brand health Our status, as a company Our focus on customers limited by guarantee with drives us to deliver no shareholders, means we high-quality customer are focused on delivering experiences and health our purpose for customers outcomes, earning brand trust

Financial Regulation strength and governance Our robust capital base, We operate in regulated Underpinned by profi tability and cash markets and aim to ensure generation refl ect our strong best practice in governance fi nancial management where appropriate with strong disciplines. A variety of internal controls and risk funding sources ensures management. Our executive our long-term sustainability team is overseen by the Board, and appropriate rates which is held to account by our of return to lenders Association Members

Customers As a company without shareholders, our customers are our primary stakeholder with profi ts reinvested for their benefi t, now and in the future

Delivering for Employees Partners Society We employ 86,000 people principally We work with a range of partners, We deliver quality health and care services in the UK, Australia, Spain, Hong Kong, including other health providers, and contribute to local economies, Poland, New Zealand, Chile, Brazil, associates and distributors including through employment. We play Thailand, China, Saudi Arabia, India, our part in the community and manage our and the US social and environmental responsibilities Bupa Annual Report 2016 05

Our strategic framework Strategic report

Our refreshed strategic framework is driving the next phase of our growth in today’s digital age. It has three core elements – Customers, People and Performance – underpinned by three operating principles, with Bupa’s purpose and values guiding everything we do.

live ople pe ng pi el h is se o rp u p r u Customers O We want to be loved as a true customer champion in Governance health and care

O

People Performance y u r

r a We want our people to We need to generate strong v n i a love working at Bupa, and and sustainable performance d l u be empowered to serve to invest in meeting the needs r e o s our customers of current and future a r a customers t r x e E

s P u a s o s e io g n ra a u te o C C e a bl rin ta g un Ope cco n Authentic A

Invest in strength Win locally, Ever-focused on quality, Financial statements and depth enabled globally effi ciency, safety and compliance Strengthening our existing businesses, Responsive to local conditions and customer Upholding the highest standards, selective expansion into new markets needs, while sharing knowledge globally continuou s focus on effi ciency

Market context The digital age is bringing new standards of customer choice, personalisation, ease and availability, with the emphasis on customer centricity, transparency and accountability higher than ever. Demand for quality, value-for-money healthcare continues to rise. Ageing populations, growth in chronic disease, continual advances in medical science, and rising consumer expectations mean demand is very strong and will remain so for years to come. Broader economic trends, exacerbated by medical costs rising ahead of spending, mean funding healthcare and associated services is increasingly challenging for both governments and consumers. Healthcare is signifi cant within the wider political and regulatory agenda. 06 Bupa Annual Report 2016

Our performance How we are performing

Measuring our progress

We track our performance using both fi nancial and non-fi nancial metrics aligned to our refreshed strategic framework. As well as revenue and underlying profi t, we measure net cash fl ow and our solvency coverage ratio. We also measure customer numbers for insurance, provision and aged care, and regularly check how our people feel about working at Bupa. We remain committed to managing our environmental responsibilities and playing our part in communities. Customers 16.5m 10.6m 33,100 Insurance customers Provision customers Aged care residents +6% +14% +2%

Employee Net Extremely Would you recommend Bupa as a place to work? Not at all +30 +21 likely likely Promoter Score 10 9 8 7 6 5 4 3 2 1 0 (eNPS) (October 2016) (July 2016)

% % = Net Promoter Score Revenue £11.0bn +4% CER Trend (AER) +12% AER 2016 £11.0bn

2015 £9.8bn

Underlying profi t +10% CER Trend (AER) £700.7m 1 +2% CER 2016 £700.7m +20% AER 2015 £582.5m

1 Under IFRIC 12, which applies to service concession contracts such as Spanish PPPs, we use the average operating margin for the life of the contract (based on historic performance plus projections) as a means for recognising results. Once there is a change in performance compared to expectations, the operating margin is reassessed and an adjustment made to the current year results to bring the contract performance to date in line with the revised margin. In 2015, this negative non-cash adjustment of £52m included an amount relating to the current year of £8.8m together with a retrospective adjustment for the years preceding 2015 of £43.2m. To compare the result on a ‘like for like’ basis with 2016, we have excluded £48.6m (being £43.2m retranslated at 2016 exchange rates) from underlying profi t in 2015. Net cash generated £891.0m +13% AER Trend (AER) from operating 2016 £891.0m activities 2015 £788.1m

Solvency II capital 204% Trend (AER) coverage ratio 2016 204%

2015 178%2

2 The Solvency Coverage Ratio was updated to 178% from the 180% estimate disclosed in the 2015 Annual Report and Accounts. Bupa Annual Report 2016 07

Corporate responsibility and sustainability Strategic report Our purpose – helping people live longer, healthier, happier lives – is at the core of our approach to corporate responsibility and sustainability. We aim to make a positive impact by:

Performance commentary 1. Funding and providing quality health and care services: As a health and care business without shareholders, we are focused on serving our From 2016, we are categorising our customers in line with our customers. We champion quality, medically-evidenced treatment and care. We seek to business model, grouping the numbers by insurance, provision deliver value for money, provide exceptional care, and help customers navigate the complex and aged care. Insurance customers reflect closing members world of healthcare. at the end of the year and do not include Rashtriya Swasthya Bima Yojana (RSBY) customers. Provision customers comprise 2. Conducting our business ethically: people we have cared for in our health and dental clinics and With a strong purpose across the organisation, we also have seven clear Bupa values and the hospitals during the year. This figure also includes the Bupa Bupa Code which are designed to help our people make the right choices. More broadly, we Home Healthcare customers we cared for until the sale of the aim to ensure a culture which emphasises serving the interests of customers while operating business in July. Aged care residents reflect the number of robust internal controls, including complying with our enterprise policies and all regulations. residents in our care homes and retirement villages at the We have performance management, risk management, audit, governance, and ‘Speak Up’ end of the year. All numbers are inclusive of customers in processes in place. our associate and joint venture businesses. 3. Being a place where people love to work: In 2016, we replaced our annual employee survey with a Our people are vital to our success. We promote a positive working environment and a Governance contemporary global People Listening System called ‘People diverse and inclusive culture that engages and empowers people with the right tools, training, Pulse’. This includes measurement of an employee Net information, recognition and reward. We want everyone to be happier and healthier because Promoter Score (eNPS) – a widely recognised system to they work at Bupa and invest in this through our ‘Smile’ programme. Our Bupa values and the measure employee recommendation of Bupa as a place to Bupa Code set clear expectations to protect our customers, our colleagues, our partners and work. Our October Pulse recorded an eNPS of +30, up nine Bupa, now and in the future. points from the first wave of results in July. 4. Engaging with our communities: Beyond our health and care services for customers, we engage people more widely in their Revenue increased by 4%, with solid growth across our three health and wellbeing. We also connect with stakeholders to make a positive contribution on largest Market Units – Australia and New Zealand, the UK public health matters. We work with numerous community groups and sporting organisations (when adjusted for the disposal of Bupa Home Healthcare in and have dedicated Health Foundations in Australia, the UK and Spain to channel our July 2016) and Europe and Latin America despite challenging investment in research and initiatives to improve public health (as noted below). operating environments and political uncertainty. 5. Making a positive impact on the environment: Climate change is a health concern, and we play an active part in promoting positive environmental practices. In 2016, we reduced our absolute global carbon emissions by a further We achieved good profit growth in our three largest Market 1 1% to 149.7 ktCO2e (representing an almost 25% reduction against our 2009 baseline) through Units – Australia and New Zealand, the UK, and Europe and energy efficiency and renewables projects across our business, and the purchase of electricity Latin America – and while performance within International from certified renewable sources. During the year, we broadened our global environmental Markets was impacted by a significant decline in profit in Bupa investment programme and continued our focus on promoting the use of renewable energy. Global, the overall Group delivered growth, with underlying Financial statements 1 Figure represents Bupa’s Total Carbon footprint, including Scope 1 emissions 65.4 kt CO e, Scope2 emissions profit up 10%, albeit up 2% when excluding the impact of the 2 65.9kt CO2e and Scope3 18.4kt CO2e. IFRIC 12 adjustment, made in 2015. In 2016, we achieved many of our goals in corporate responsibility and sustainability. Our highlights include: –– Our Health Foundation in Australia invested AUD$3.1 million including projects to harness data to improve patient journeys and clinical outcomes, and raising awareness of the critical ‘First 1,000 Days’ period of child development from conception to age two. Through the Net cash generated from operating activities remains strong, Australia Reconciliation Action Plan we are also advocating for better delivery and health increasing to £891.0m (2015: £788.1m). This reflects the outcomes for Aboriginal and Torres Strait Islander people. impact of the foreign exchange fluctuations affecting profit –– Our UK Foundation awarded nearly £1 million to initiatives focused on mid-life mental health before tax and growth in earnings following the robust trading and caring for carers. Through our strategic partnership with Age UK, we supported the performance from our three largest Market Units – Australia health and wellbeing of older people. We also supported employee fundraising for a range and New Zealand, the UK and Europe and Latin America. of health and social care charities in the UK thanks to our match-funding programme. –– Our Sanitas Foundation invested €750,000 to support social initiatives in Spain. Its flagship project promoted the inclusion of children with disabilities through sport and set a new Solvency II capital coverage was 204% at year end following Guinness World Record for inclusive spinning in one of Madrid’s most famous public squares. a £400m subordinated bond issue in December 2016, Sanitas also ran the ‘Madrid Healthy Cities’ initiative with a group of companies and the which occurred prior to completion of the Oasis Dental Care Spanish Heart Foundation, highlighting the power of workplaces to improve the health of purchase. The 2016 Solvency II capital coverage ratio is employees and the wider environment. Employees from participant companies took part in an estimated value. walking activities, clocking more than 600,000km and raising funds to build healthy walking routes in the city.

For more information, please visit bupa.com 08 Bupa Annual Report 2016

Our Market Unit strategy in action

Australia & New Zealand

Australia & New Zealand performed well in 2016, achieving strong growth in challenging local conditions.

Operating environment insurer for the fi rst time. We achieved a 3% – In the third quarter of 2016, Australia’s growth in customer numbers at year end, economic growth declined for the fi rst time which is the result of our focus on providing in fi ve years, by 0.5%. enhanced customer service and better value. We believe customer aff ordability will continue – The Australian Government is considering to be an issue for the sector in 2017. As a result, reforms of the health insurance sector, and we are focused on having a strong say in the aff ordability remains a challenge not only for national health debate, advocating government Richard Bowden Bupa and our customers, but for the broader policy reform that will deliver a more aff ordable CEO, Australia & New Zealand healthcare industry. There was very low and effi cient health system for all Australians. growth across the sector during the year. We grew our health services business, with – We are working with a variety of our 237 Bupa dental practices making Bupa stakeholders, including governments, Australia’s largest dental provider. We also hospitals, doctors and our networks to opened three new Bupa Optical stores in tackle rising overall healthcare costs. Australia, taking the total to 37, with some – Changes to the Australian Aged Care off ering audiology services for the fi rst time. Funding Instrument will reduce aged care Bupa Aged Care Australia remains the sector funding, particularly for residents country’s leading private aged care provider, with complex care needs. These changes caring for nearly 7,000 residents across are expected to adversely impact revenue an expanding network of 71 homes. and the sustainability of the whole aged Our Australian aged care business is care sector and we continue to urge the driven by a person-fi rst model of care government to consider alternative and a consistent management system. funding arrangements. CER During the year, our aged care business in Revenue – In New Zealand, our care services business New Zealand grew, with four new care +7% has benefi ted from higher property values 2015: homes opening at Wattle Downs, Parkstone, £4,078.3m during the year but was challenged by St Andrews and Hugh Green. We also opened £4,360.6m care home occupancy rates and reduced a retirement village off ering at St. Andrews. government funding. A pending fair wage We are the leading provider of dementia care case for care homes could increase costs in New Zealand and our focus is on ensuring Underlying profi t +9% in the sector. people with dementia are valued, can 2015: contribute to and participate in society, and £314.7m Performance importantly that they can feel safe doing so. £344.4m We are taking a leading role in dementia In 2016, we performed well with 7% growth awareness and care, partnering with in revenue and 9% growth in underlying governments and industry. profi t despite low-growth macroeconomic Customers conditions and regulatory uncertainty. We are committed to enhancing the We focused on transforming our business experience of our customers and people Insurance 4m and digitising manual processes to vastly through better and more effi cient use of improve experiences for our customers. technology. We are building new tools and Provision 1.9m capabilities so our customers have meaningful Against the backdrop of slower overall growth and personalised interactions with us, Aged care in the market, our health insurance business 10,800 whether in store, on the phone or online. grew to become Australia’s largest health Bupa Annual Report 2016 09

United Kingdom Strategic report In the UK, all our businesses delivered good performances, despite ongoing challenges in the market.

Operating environment Over the year we put considerable focus on – The UK Government has further increased managing risk and compliance across all areas the Insurance Premium Tax, which challenges of our business. We also made progress in reshaping our portfolio. In July, we exited the the aff ordability of health insurance for our Governance customers. Together with industry partners, home healthcare market with the disposal we are championing the role of independent of BHH. In November, we announced our 1 healthcare and campaigning to make it agreement to purchase Oasis Dental Care , more aff ordable for customers. the UK’s leading private dental provider, from David Hynam European private equity group Bridgepoint. CEO, UK – The UK aged care sector remains under This purchase forms part of our growth pressure with increased costs including strategy, making Bupa a major dental provider the impact of the National Living Wage. in the UK’s £7.1bn dental market, with over two We are maintaining a disciplined approach million customers and around 420 clinics. to fee negotiations with Local Authorities in order to recover the true cost of caring Following a review of our care services for publicly-funded residents. business, we have identifi ed a number of homes which are now held for sale to enable – In 2016, we saw an uplift in contribution us to focus our eff orts and investment. from funded nursing care payments We remain committed to the growing aged towards the cost of providing registered care sector. We refurbished 20 homes, nursing care. began building four new homes and acquired two homes from Primetower Care. We are expanding our portfolio of six Richmond

Performance Financial statements Care Villages with two new villages under In the UK, good performances were delivered construction in Worcestershire and South across our businesses despite ongoing challenges Derbyshire. Our care services occupancy in the market. Revenue was down 3% due to is 86%. Revenue -3% the disposal of Bupa Home Healthcare (BHH). 2015: If BHH revenue is removed from 2015 and In our health clinics business, revenue growth £2,857.8m 2016 performance UK revenue was up 5%. has been driven by health assessments, £2,785.9m dental, primary care and greater capacity Our health insurance business has performed in our musculoskeletal services. well, with profi t driven by improved corporate Underlying profi t +7% and consumer loss ratios. We are committed We are upgrading and improving our facilities 2015: to our digital transformation and innovating at Bupa Cromwell Hospital, where our £2.1m £182.6m to give our customers access to the best investment in redeveloping our wards has taken £194.9m care, with initiatives such as our pioneering customer satisfaction scores for accommodation breast and bowel cancer self-referral service from 71% to 91% post-completion. providing our customers faster access to Customers diagnosis without the need for a GP referral. In 2016, we also launched an expanded cataract 2.4m Insurance network tackling shortfalls in ophthalmology, improving our customers’ experience. Our 1.2m Provision intermediary partners are also seeing the benefi ts of Bupa Connect, our user-friendly 1 Bupa completed the purchase of Oasis Dental Care on Aged care 9 February 2017, subject to UK Competition and Markets 17,400 online portal, which allows them to manage Authority (CMA) approval, with an enterprise value their clients more eff ectively. of £835m. 10 Bupa Annual Report 2016

Our Market Unit strategy in action continued

Europe & Latin America

Europe and Latin America delivered good growth in revenue and underlying profi t and made digital advances across the business.

Operating environment our health insurance off ering, are enhancing – In Spain, after a year of uncertainty the customer experience through direct following the fi rst general election in video consultations. December 2015, the new government In Sanitas Mayores, our aged care business, was formed in November 2016. occupancy is 96%. We opened our 14th home – The Polish market continues to show in Madrid and acquired a home in Valencia, positive signs of growth, in spite of and are now operating 40 homes and three uncertainty around the impact of the day-care centres with a total capacity of nearly Iñaki Ereño 5,000 residents. CEO, Europe and Latin America current government’s agenda. – Despite a challenging political scenario, our In Sanitas Dental, we launched emergency Public-Private Partnerships are meeting their video consultations, off ering services outside profi t targets while providing high quality standard business hours, available nationwide. medical service in their respective areas. We opened fi ve new dental centres and acquired nine dental franchises. – Legal uncertainties in Chile, which are linked to the premium increase process, In Sanitas Hospitales and New Services, are aff ecting the performance of the we have successfully created an integrated whole Isapre industry. care network in Barcelona connecting our Sanitas CIMA Hospital with a network of multi-specialty medical centres. Performance In Poland, LUX MED has achieved very In Europe and Latin America, we delivered strong growth in revenue, primarily due to strong growth in revenue of 10% with good performance in our ambulatory and underlying profi t up 63%. When excluding inpatient businesses. Ambulatory revenues CER the impact of the adjustment relating to our were driven by demand for our core Spanish Public-Private Partnerships in 2015, Revenue +10% subscription product, supported by a underlying profi t was up 10%. Our business 2015: strong fee-for-service revenue stream. £2,251.8m units delivered good performance, with £2,474.7m growth in our dental and health funding During the year, we increased our ownership businesses and a year-on-year increase in of Bupa Chile from 73% to 100%. Bupa Chile new customers numbers. has achieved year-on-year revenue growth, with good performance in our hospital and Underlying profi t +63% In Spain, we achieved revenue growth across outpatient services and a performance 2015: a number of business units, with a good £101.8m improvement in Isapre despite diffi cult increase in our Sanitas Seguros private market conditions. Our claims programmes £165.6m medical insurance business as a result of and operating cost controls have driven successful partnerships with SantaLucia profi tability. In September, we strengthened and Banco Bilbao Vizcaya Argentaria. Customers our dental business opening four centres We are committed to digitising the entire and off ering additional services at outpatient 2.9m Insurance customer journey through a new version of care facilities, as well as dental insurance. our Sanitas app, so customers can purchase Construction of Clínica Bupa Santiago 6.7m Provision products on our website, fi nd a doctor and hospital is well advanced and expected make an appointment, undertake video to be operational from late 2017. We 4,900 Aged care consultations with our doctors and access are also expanding our Clínica Bupa their medical histories. Products such as Blua, Antofagasta hospital. Bupa Annual Report 2016 11

International Markets Strategic report In International Markets, while revenue grew, underlying profi t declined driven by a profi t decline in Bupa Global.

Operating environment regional and multinational companies. – We operate in diverse markets across We announced our plans to open two the world where healthcare regulation medical centres in Guangzhou, China in 2017. In Thailand, high claims in the fi rst half and the economic environment are Governance constantly evolving. of 2016 due to infl uenza led to a diffi cult year, but customer numbers have remained – Challenging market conditions in Saudi steady with revenue growth in the individual Arabia, including a slowing economy, and SME markets. have aff ected profi t margins. Wayne Close Our Bupa Arabia associate business continued Acting CEO, International Markets – The Indian health insurance sector is to deliver strong customer and revenue growth attracting new entrants leading to a despite less favourable economic conditions, competitive market. relaunching its health and wellness support – High claims in the fi rst half of 2016 due to service, Tebtom, and introducing a point-of- infl uenza led to a commercially challenging care service inside hospitals. year for Bupa Thailand. In India, we increased our shareholding of Max Bupa from 26% to 49% in June 2016 Performance following a change in the law allowing greater foreign ownership. This business In International Markets, while revenue has delivered strong year-on-year growth grew 1%, underlying profi t declined 52%, in both customers and revenue. predominantly due to a large profi t decline in Bupa Global. As noted in our Half Year In December, we announced the expansion Financial statements statement in August, this was driven by the of our Bupa Global Latin American business ongoing impact of our 2013 decision to exit through the acquisition of Care Plus, a CER non-strategic markets, which has led to market-leading health insurer in Brazil, Revenue +1% high lapses in the period, our investment in which serves more than 400 companies 2015: capability and infrastructure to improve the with around 100,000 customers. 1 £1,418.9m customer experience and grow our corporate £1,427.8m book, and a lower than anticipated rate of growth in our individual and small medium enterprise (SME) books. While progress is Underlying profi t -52% being made, there will continue to be some 2015: impact on performance in 2017. £138.1m In Hong Kong, we grew our market share £65.9m in private medical insurance through good growth in revenue and customers, supported by our bancassurance partnership with Hang Customers Seng Bank. Our Quality HealthCare clinics delivered steady growth in patient visits, with 7.2m Insurance fi ve new facilities, including health centres and 1 While revenues from our associates and joint ventures are excluded from our reported fi gures, customer numbers clinics, opening in residential districts in Hong Provision and the appropriate share of profi t from these businesses 700,000 Kong and new business secured with large are included in our reported numbers. 12 Bupa Annual Report 2016

Financial Review

“We have delivered strong cash generation, improved our credit rating and restructured our debt. These actions refl ect the strong fi nancial management disciplines we have embedded across Bupa.”

Joy Linton Chief Financial Offi cer

In 2016 we have maintained our strong fi nancial Brazil. Over the year we have made progress Revenue position in challenging market conditions in reshaping our portfolio in the UK. We sold +4% CER through our focus on sustainable profi tability, Bupa Home Healthcare in July and completed 2015: £10.6bn supported by our robust capital base. the purchase of Oasis Dental Care in February £11.0bn +12% AER 2017, subject to UK CMA clearance, having Following the result of the referendum on the 2015: £9.8bn announced our intention to do so in November UK’s membership in the European Union (EU), 2016. We also undertook a review of our UK sterling weakened considerably against our Underlying profi t +10% CER care services business and as a result have major operational currencies (refer to currency 2015: £638.1m identifi ed a number of homes for sale as at table) which has a positive impact across all 31 December 2016. £700.7m 4 reported measures. Net cash generated from +2% CER operating activities refl ects these favourable Our capital base remains strong with an +20% AER 2 foreign exchange movements which, together estimated Solvency II surplus of £2.1bn (2015: 2015: £582.5m with our strong fi nancial discipline, result in an £1.3bn), representing a coverage ratio of 204%3. increase in cash fl ows from operating activities Our coverage ratio decreased to an estimated Statutory profi t before tax +40% AER 3 of 13% to £891m (2015: £788.1m). 165% following the completion of the Oasis 2015: £374.3m Dental Care purchase in February 2017, The continued revenue and profi t growth comfortably within our capital risk appetite. £522.9m across our businesses underpins our cash This capital strength helped to support the generation. In 2016 we delivered revenue Moody’s upgrade of our Bupa Finance plc growth of 4% to £11bn (2015: £10.6bn) at senior debt rating from Baa2 to Baa1 in Net cash generated from +13% AER constant exchange rates (CER), with our September. The upgrade by Moody’s has operating activities 2015: £788.1m underlying profi t before tax increasing by 10% reduced our cost of borrowing under the to £700.7m (2015: £638.1m). The result is up £800m committed bank facility and is 2% at CER in 2016 when excluding the £48.6m £891.0m expected to underpin lower costs in future impact of the IFRIC 12 adjustment1 relating to debt issuances. our Spanish PPPs in 2015. Underlying profi t Solvency II coverage ratio3 +26p.p. increased in all our Market Units in 2016, with Our leverage ratio is down to 22.6% (2015: 2015: 178% the exception of International Markets. 27.7%) driven by strong repatriations and foreign exchange movements. Following 204% Our statutory profi t before taxation of £522.9m the purchase of Oasis Dental Care in (2015: £374.3m) is up 40% at actual exchange Solvency II capital surplus2 February 2017, our leverage is approximately +62% AER rates (AER). This refl ects the good trading 7 percentage points higher than at the year end. 2015: £1.3bn performance in our Market Units in 2016, while our 2015 result was negatively impacted by the £2.1bn impairment of goodwill and a write down in the 1 Refer to page 6 for further detail. value of property and equipment in UK Care 2 The 2016 Solvency II capital surplus is an estimate. The Currency Services. The increase in 2016 is after a loss of 2015 Solvency II capital surplus was updated to £1.3bn from the £1.4bn estimate disclosed in the 2015 Annual % £112.3m on the redemption of the secured loan Report and Accounts. 2016 2015 Change notes as previously reported. 3 The 2016 Solvency II coverage ratio is an estimate. The 2015 Solvency II coverage ratio was updated to 178% from AUD average rate 1.8234 2.0370 -10% We continued to invest in our core markets. the 180% estimate disclosed in the 2015 Annual Report AUD closing rate 1.7106 2.0210 -15% In 2016 we acquired the remaining minority and Accounts. The Solvency II number disclosed post Oasis Dental Care completion is a pro-forma fi gure as if EUR average rate 1.2234 1.3782 -11% interest shareholding in Bupa Chile, increased the acquisition occurred at the balance sheet date. EUR closing rate 1.1703 1.3560 -14% our holding in Max Bupa to 49% and, in 4 Underlying profi t is up 2% at CER and up 12% at AER December, we increased our footprint in Latin when excluding the impact of the IFRIC 12 adjustment USD average rate 1.3547 1.5288 -11% relating to our Spanish Public-Private Partnerships (PPPs) USD closing rate 1.2345 1.4734 -16% America through the acquisition of Care Plus in in 2015. Refer to page 6 for further detail. Bupa Annual Report 2016 13

Underlying profi t Non-underlying profi t items (AER) In order to compare trading performance in 2016 2015 a consistent manner year-on-year, a number £m £m of non-trading items are removed from our Amortisation and impairments of intangible assets and impairments of goodwill arising statutory profi t before taxation to arrive at on business combinations (70.7) (160.6) underlying profi t. Underlying profi t excludes Net gains/(losses) on disposal of businesses and transaction costs relating to a number of components of the statutory business combinations 6.5 (3.8) profi t before taxation, including items relating Net property revaluation losses (23.8) (61.7) Strategic report to business combinations and disposals, Realised and unrealised foreign exchange gains/(losses) 19.4 (11.7) fl uctuations in foreign exchange rates, property revaluations and gains or losses on Other Market Unit and central non-underlying items (19.8) 22.6 return seeking assets, along with other one-off Early termination of secured notes (112.3) – items as shown in the table. Refer to Note 2.0 Gains on return seeking assets, net of hedging 22.9 7.0 for a detailed explanation of underlying profi t Total non-underlying profi t items (177.8) (208.2) and non-underlying items. We achieved good underlying profi t growth in our three largest Market Units – Australia Insurance Premium Tax. Care Services also Most notably and as reported within our Half and New Zealand, the UK, and Europe and benefi tted from a number of factors including Year results, in 2016 there was a net loss of Latin America. While performance within an uplift in contribution from government £112.3m on the redemption of the secured loan our International Markets Market Unit was funded nursing care payments to support notes (2015: £nil). The redemption reduced impacted by a signifi cant decline in profi t in the cost of providing registered nursing care. the complexity and cost of maintaining this Bupa Global, the overall Group delivered These were partially off set by increased expensive and complex piece of legacy debt growth with underlying profi t up 10%. staff costs following the introduction of funding. It also reduced the ongoing interest The 2015 result included a £48.6m IFRIC 12 the National Living Wage in April. cost of our debt. adjustment in relation to our PPPs, excluding The strong growth in Europe and Latin The gains on return seeking assets were this impact the 2016 result is up 2%. Governance America is primarily driven by growth in £22.9m (2015: £7m), driven by our corporate Underlying profit by Market Unit (AER) Bupa Chile, including the Isapre, hospitals and bond and emerging market debt exposure. In outpatient businesses, as well as increasing 2017, we will continue to actively manage the 4 our shareholding to 100% (2015: 73.7%). In portfolio, consistent with our investment risk Spain we saw growth across most businesses. appetite and in line with our views of prospective asset class returns. In International Markets, our underlying profi t 3 declined 52%, primarily driven by Bupa Global. Following the reclassifi cation of a number of 1 This refl ects the continued impact of our UK care homes as assets held for sale, £10.7m 2013 decision to exit non-strategic markets was recognised as the expected costs of sale which has led to high lapses in the year, our within net property revaluation losses. investment in capability and infrastructure To provide further year-on-year context, in to improve the customer experience and 2015 there was a write down in the carrying 2 grow our corporate book, and a lower than amount of goodwill and property and anticipated rate of growth in our individual equipment within our UK care services and small medium enterprise books. 2016 2015 business, resulting in a charge of £181.9m 1. Australia and New Zealand 45% 41% Our underlying profi t result has also benefi tted to the income statement. 2. United Kingdom 25% 27% from lower fi nancial expense resulting from 3. Europe and Latin America 21% (restated) 13%

the early redemption of the secured notes “Having no shareholders means Financial statements 9% 4. International Markets (restated) 19% (refer to the Funding section for further detail), that our profi ts are continuously as well as lower debt costs following the In our Australia and New Zealand Market repayment of the £350m senior bond reinvested into the business to Unit, despite challenging trading conditions, which matured in July 2016. fund and provide more and better we achieved 9% underlying profi t growth. The increase is due to a strong performance healthcare, fulfi lling our purpose.” in our health insurance business, and is Statutory profi t supported by increased occupancy in our In 2016 we generated 70% of our revenues Taxation care homes and retirement villages. outside of the UK (2015: 66%). This geographically diverse portfolio has driven Our taxation expense of £136.1m (2015: In the UK, revenue was down 3% due to the the 40% (AER) increase year-on-year in £96.0m) represents an eff ective tax rate of disposal of Bupa Home Healthcare in July. statutory profi t before taxation due to the 26.0%. The eff ective rate is higher than the Despite the revenue shortfall, the UK achieved signifi cant weakening of sterling against our UK statutory rate of 20% mainly due to good underlying profi t growth due to our major operational currencies, together with profi ts arising in higher tax territories. health insurance business performing well a lower number of negative non-underlying notwithstanding the further increase in We operate in a number of markets with items in 2016 compared to 2015, as presented diff erent tax rates ranging from 16.5% to in the table above. 35.0% and the weighted average tax rate is 26.0%. 14 Bupa Annual Report 2016

Financial review Continued

Cash fl ows Funding “Our credit rating upgrade Net cash generated from operating activities Bupa Finance plc senior debt rating in 2016 further supports our remains strong, increasing to £891.0m Fitch (2015: £788.1m). This refl ects the growth in fi nancial strength in pursuit earnings, strong infl ows from refundable of long-term sustainability.” accommodation deposits and occupational A- rights agreements following the opening (Stable outlook) On 1 April 2016, we took the opportunity to of new care home and retirement village redeem early both tranches of the £235m Moody’s facilities in Australia and New Zealand, and secured loan notes, which were due to mature the favourable impact of foreign exchange. in 2029 and 2031 with coupons of 6.3% and Baa1 7.5% respectively. The redemption reduced Cash used in investing activities decreased by (Stable outlook) the complexity and cost of maintaining the £385.3m compared to 2015 primarily due to a debt. It also reduced the ongoing interest cost change in mix in our investment portfolio from We manage our funding prudently to secure a of our debt. A zero coupon bond which was bonds into cash to support the repayment sustainable platform for our continued growth. in place to support the ultimate repayment of debt and the funding of business growth A key element of our funding policy is to of one of the tranches of debt was and acquisitions. Capital expenditure of target an A-/A3 senior debt rating for Bupa simultaneously unwound and helped to £502.7m (2015: £386.4m) was invested in our Finance plc, the main issuer of Bupa debt. fund the redemption. This resulted in a net businesses, including the continued expansion loss of £112.3m, which comprises the early and refurbishment of our care homes. We Our Bupa Finance plc senior debt rating was redemption of the notes (£151.6m) and profi t acquired a further 26.3% share holding in upgraded by Moody’s from Baa2 to Baa1 in on early termination of the zero coupon bond Bupa Chile for £93.1m thereby achieving 100% September 2016. This follows the change to (£39.3m). In July 2016, we repaid £350m of ownership. We increased our share holding positive outlook by Moody’s in September 7.5% senior unsecured bonds issued by Bupa in Max Bupa in India from 26% to 49%, for 2015, where they noted our low product risk, Finance plc in July 2009. £21.9m, following the change in law allowing improved fi nancial results and strong track greater foreign ownership. In December 2016 record in generating capital. The Fitch rating An additional committed bank facility of we also acquired 100% of Care Plus. was unchanged during the year at A- (stable). £250m was agreed in June 2016 which was The upgrade by Moody’s has reduced our due to mature in December 2017. This was partly off set by £128.5m cash cost of borrowing under the £800m received on sale of the zero coupon bond On 8 December 2016, Bupa Finance plc committed bank facility and is expected to that provided security for repayment of issued a £400m 10 year tier 2 subordinated underpin lower costs in future debt issuances. the £235m secured loan notes and the net bond with a coupon of 5%. Following the Our continued focus on cash generation and cash proceeds from the sale of Bupa Home bond issuance, a prepayment notice was appropriate repatriation from Market Units Healthcare of £20.4m. issued cancelling the commitment under enabled us to fund growth in the business the £250m facility. Cash outfl ows from fi nancing activities and end the year undrawn on the £800m increased by £458.0m compared to 2015. committed bank facility. On 17 January 2017, Bupa Finance plc entered The variance to the prior year is due to the into a £650m acquisition fi nancing facility to We focus on managing our leverage in line repayment of the aforementioned secured part fund the purchase of Oasis Dental Care. with our rating target. Leverage reduced loan notes (£381.6m) as well as the repayment The facility has a 12 month term, with an option during the year, driven by lower borrowings of senior unsecured bonds (£350m). to extend for a further six months. alongside the increase in equity from profi ts Partially off setting this were proceeds from and foreign exchange movements. At year Cash and Investments by Credit Rating (%) the £400m subordinated bond issued in end, leverage stood at 22.6% (2015: 27.7%). December 2016. As part of our eff ective Following the completion of Oasis Dental Care 5 1 capital management we settled hedging in February 2017, leverage is approximately 4 instruments at a cost of £77.7m to off set 7 percentage points higher than at the year the impact of the weakening sterling. end. Coverage of fi nancial covenants remains

Overall cash and cash equivalents increased considerably within levels required in Bupa’s 2 18% to £1,412.7m. These funds, in addition bank facilities. to our fi nancial investments and longer term deposits, continue to be managed conservatively and in line with a clearly articulated risk appetite. We actively manage 3 our counterparty exposures as part of our ongoing risk management, and cash is only 2016 2015 invested with counterparties rated A/A2 1. AAA 3% 9% or higher, unless approved by the relevant 2. AA 39% 41% Investment Committee. 3. A 44% 41% 4. BBB 6% 4% 5.

Capital structure Reconciliation of IFRS equity to Solvency II Own Funds 2016 2015 £bn1 £bn Unrestricted Tier 1 2.9 2.2 £6.6bn Restricted Tier 1 0.4 0.4 Tier 2 0.9 0.5 Own Funds 4.2 3.1 £1.3bn £4.2bn £3.4bn £0.1bn £0.4bn Strategic report Our capital comprises equity, exclusive of any non-controlling interests, together with eligible subordinated debt. We have £330m of callable subordinated perpetual guaranteed bonds, a £500m dated hybrid bond which matures on 25 April 2023 IFRS equity Goodwill Valuation Pension Subordinated Solvency II and a £400m dated hybrid bond which matures attributable and intangibles differences surplus debt Own Funds on 8 December 2026. These bond issues are to Bupa adjustment accounted for as liabilities in the IFRS fi nancial statements, but are treated as solvency capital for regulatory and management purposes. “We continue to maintain Risk sensitivities 3 a strong solvency position, The following analysis shows the relative sensitivity Solvency position of our estimated solvency coverage ratio as which is comfortably within at 31 December 2016 to changes in market We maintain regulatory capital coverage in our risk appetite.” conditions and underwriting performance. line with our capital management objective Each sensitivity is an independent stress of as set out in Note 5.3. Solvency capital requirement a single risk and does not take into account At 31 December 2016, our eligible Own Funds, management actions. The selected scenarios Governance 2016 % of 2015 % of do not represent our expectations for future determined in accordance with the Solvency II Analysis of the Solvency diversifi ed diversifi ed valuation rules, were £4.2bn1 (2015: £3.1bn), Capital Requirement SCR1 SCR1 market and business conditions. which was in excess of our estimated SCR Insurance risk 19% 19% 1 Risk sensitivities of £2.1bn (2015: £1.8bn). This represented a Market risk 60% 61% solvency coverage ratio of 204%2 (2015: 178%). Spread 2% 3% The completion of the purchase of Oasis Solvency Coverage Ratio 204% Equity 2% 1% Dental Care in February 2017 reduced our Interest rate +/- 100bps 204% Property 34% 31% coverage ratio to an estimated 165%2, Credit spreads + 100bps assuming no credit transaction 204% comfortably within our capital risk appetite. Currency 16% 13% Pension Scheme 6% 13% Equity markets – 20% 204% The key items of the reconciliation above: Counterparty risk 4% 3% Property values – 10% 193% Operational risk 11% – Goodwill and intangibles on the IFRS 11% GBP appreciates by 10% 201% balance sheet are not recognised as Participations (Associates) 6% 6% Pension risk + 10% 203% Own Funds under Solvency ll. 100% 100% USP + 0.2% 201% – Subordinated debt is treated as Own SCR is calculated in accordance with the Funds under Solvency ll but as a liability Loss ratio worsening by 2% 196% Standard Formula specifi ed in the Solvency II under IFRS. 100 125150 175 200 225 legislation. We have obtained approval from Financial statements – Pension surplus in excess of the pension the Prudential Regulation Authority (PRA) Outlook risk contribution to the SCR of £361m is to amend the formula with an Undertaking not included in Own Funds. Specifi c Parameter (USP) which refl ects our In 2016 we have successfully navigated own loss experience. challenging market conditions to achieve solid Solvency II capital position trading performance, improved cash flows and Replacing the standard parameter for reduced leverage. As we look to the future, we will insurance premium risk with our own refl ects continue to focus on growing and developing £4.2bn the lower risk that our size, experience and our businesses, as well as driving operational Capital geographic diversifi cation brings. surplus effi ciencies while sustaining a strong capital £2.1bn The single largest risk component of our SCR position and managing our funding to ensure is property risk which relates to our care home a sustainable platform to support future growth. £2.1bn portfolio in the UK, Australia, New Zealand In 2017 we look forward to welcoming the Oasis and Spain. The majority of these care homes Dental Care team into the Bupa family, which are not in regulated entities and therefore our will make us a major provider of dental care policyholders are largely immunised for the services in the UK and signifi cantly increase Own Funds SCR volatility of the property value. our high street presence for customers.

1 The 2016 Solvency II capital position and SCR are an 2 The 2016 Solvency II coverage ratio is an estimate. The 3 The pension scheme surplus in excess of the pension estimate. The 2015 Solvency II capital surplus was 2015 Solvency II coverage ratio was updated to 178% from risk contribution to the SCR is suffi cient to cover the updated to £1.3bn from the £1.4bn estimate disclosed in the 180% estimate disclosed in the 2015 Annual Report sensitivity analysis stress such that the Group solvency the 2015 Annual Report and Accounts. and Accounts. The Solvency II number disclosed post capital surplus is unchanged. Oasis Dental Care completion is a pro-forma fi gure as if the acquisition occurred at the balance sheet date. 16 Bupa Annual Report 2016

Longer term viability statement

In accordance with provision C2.2 of the 2014 The directors considered each of the principal UK Corporate Governance code the directors risks and uncertainties set out in the Risks have assessed the prospects of the Company section from page 17 which include those and the Group. They have evaluated Bupa’s that would threaten its business model, ability to continue in operation and meet its future performance, solvency or liquidity. liabilities as they fall due over a period of They are satisfied that Bupa has appropriate three years. risk management and governance procedures in place to manage and mitigate these over The three-year assessment period was chosen the plan period. Bupa’s governance structure to align with the internal strategic planning and the robust, regular reviews through process. This planning period is consistent the Internal Control Risk Management with the nature of our business and is Assessment (ICRMA) process give comfort considered an appropriate period for strategic in this regard. planning. The planning process considers all key financial and capital metrics over the Based on the results of this analysis and the period. The plan is also stressed for risks facing regular risk and capital reporting processes, individual business units, as well as for global the directors have a reasonable expectation macro risks impacting Bupa as a whole. that Bupa will be able to continue in operation and meet its liabilities as they fall due Since 1 January 2016 the Group has been throughout the three year planning period subject to regulation and supervision under up to 31 December 2019. Solvency II, which has promoted an increased focus on risk management. The Bupa own risk The going concern assessment within the solvency assessment (ORSA) considers the Basis of Preparation in the financial statements appropriate level of capital that is required to section includes information regarding the meet overall solvency needs over the planning directors’ detailed assessment of the Group’s period, given the current risk profile and the going concern status based on its current strategy as articulated in the Bupa business position and forecast results. As part of this plan and risk appetite statement. It considers assessment details are provided on Bupa’s all risks to Bupa as a whole. This assessment revolving credit facility and the Group’s concluded that Bupa’s strategy and business short-term liquidity position. plan provide reassurance that Bupa has sufficient capital and liquidity to continue to meet regulatory capital requirements and Bupa’s capital risk appetite over this period. As part of the assessment of the viability of Bupa, the directors have considered the financial performance, capital management, cash flow, solvency and future outlook. Bupa is well capitalised and is expected to remain so over the plan period. The insurance businesses are cash generating and therefore expected to be able to settle liabilities as they fall due. Bupa has no shareholders and therefore has no requirement to pay dividends. Instead Bupa can invest in growing organically and through acquisition. Bupa Annual Report 2016 17

Risks Delivering our purpose sustainably

“Understanding our risks is the responsibility of everyone at Strategic report Bupa and allows us to make the best decisions for our customers, our people and Bupa. Through an appropriately embedded framework for taking and accepting suitable risks, Bupa is able to deliver its purpose sustainably into the future."

David Fletcher Chief Risk Officer

Overview Each of the large insurance entities also has Risk framework The risk profile of Bupa differs between a Board Risk Committee composed primarily We manage risks according to a Board funding and provision activities. Bupa’s of independent Non-Executive Directors approved Risk Management Framework geographic reach also exposes our Market (NEDs) to oversee the operation of the risk covering funding and provision businesses. Units (MUs) to a wide range of political, legal management framework. Subsidiary boards This sets out the principles underpinning a and economic contexts. We manage the risks receive reports from local management and robust and continuous risk management Governance to Bupa as a whole by understanding the risk local risk directors. system for the first line. This ensures: drivers for our individual businesses and our The second line of defence is comprised of –– Current and emerging risks to the business balance sheet and by assessing how they risk and compliance and clinical governance are identified and the potential interact. By understanding the risks we face, functions both at the Centre and within MUs. consequences of them are understood; we seek opportunities to benefit from risk Bupa has a global Risk Function led by diversification, to identify emerging risks the Chief Risk Officer. Its role is to advise, –– We have clear and established risk appetites and to understand and manage any risk challenge and oversee the first line risk within which we operate. These are concentrations. management activities and to collate reports discussed further below; for management and the Board on their –– Appropriate and effective steps are taken Risk Governance independent views on risk issues. to mitigate and manage identified risks; We adopt a “three lines of defence” approach The Bupa Board Risk Committee (BRC) –– Risk management information is utilised to the governance of risk management which receives the minutes from the subsidiary to make risk based decisions across is set out in our Risk Management Framework board committees and the BERC, and reports the business; as described below. from the Chief Risk Officer and other Bupa executives as appropriate, covering both the –– There is clear ownership of, and The first line of defence encompasses funding and provision businesses. The BRC is accountability for, risk; management and staff in our MUs, accountable for the oversight of risk by the Business Units and the Centre. MU CEOs –– There is a culture in which:

Board and recommends risk appetite to the Financial statements are responsible for the identification and –– Appropriate risk behaviours are Board for approval. management of their risks. In each MU, encouraged and rewarded; executive risk committees, chaired by the MU The third line of defence is Internal Audit. –– Inappropriate behaviours are CEO, scrutinise their risk profiles and generate Bupa has a global Internal Audit Function led challenged and sanctioned; mitigating actions where necessary covering by the Chief Internal Auditor at the Centre. both the funding and provision businesses. Internal Audit is responsible for providing –– Risk events are communicated This process culminates in the Bupa Group assurance over the effectiveness and as quickly as good news without CEO chairing an enterprise-wide committee, adequacy of governance and risk and fear of blame. the Bupa Enterprise Risk Committee (BERC), controls, including the activities undertaken We have well-established, regular reporting which brings the whole picture together. by the first and second lines in accordance mechanisms in place which ensure that For some key categories of risk there are with the Global Internal Audit Plan, which is relevant top risks for our businesses are specific risk forums, such as the Clinical approved by the Board Audit Committee. appropriately identified and escalated. Governance and Quality Steering Committee. These processes also ensure that strategies to manage and mitigate the risks to acceptable levels are identified and executed. 18 Bupa Annual Report 2016

Risks Continued

Our Enterprise policies define the way we do appetite statement limits at an MU and Group We are focused on ensuring that our risk business and cover funding and provision. level to the Enterprise Risk Committees and to management framework is fully embedded The policies cover all key areas of risk and the Board Risk Committees. across the Group. This includes ensuring that are implemented in our MUs which monitor processes and controls are designed and The risk appetite statements are reviewed compliance against the requirements. These operating effectively and well documented on an annual basis, with the Board Risk policies all have designated ownership at both in all MUs in line with our Enterprise Policies. Committee recommending any changes to the enterprise and MU levels with defined We continue to look to ensure the training the statements to the Board for approval. roles and responsibilities. These policies are of our people is appropriate and adequate. reviewed on an annual basis. We are also deepening our understanding of What we did in 2016 The processes we use to identify, measure, particular areas of risk most notably in regards manage, monitor and report risks, include a During 2016, we continued to strengthen to the governance of all aspects of information programme of stress and scenario testing. We our risk management approach and capability risk and cyber security risk (see case study also undertake specific detailed reviews on in response to Bupa’s growth and the increasing below); financial crime risk, pension risk and particular risks where considered necessary. expectations of our regulators around the aspects of conduct risk. world. The Solvency II Directive came into We test the effectiveness of our force from 1 January 2016 and is now business Managing cybersecurity risk implementation of the Risk Management as usual, with the ORSA process and report Framework through our Internal Control and considered to be a key part of our Risk Our cybersecurity programme, which Risk Management Assessment (ICRMA). Management Framework. Insurance, commenced in 2015, has continued This aims to assess how well internal control healthcare and care services are highly throughout 2016. The programme has and risk management practices and policy sensitive and regulated sectors and we are increased a range of capabilities, including compliance are embedded across Bupa. increasing our focus on management of risk cybersecurity controls, incident response This is a self-assessment conducted by the and compliance to ensure we continue to and crisis management, people capabilities first line of defence, which is subject to review uphold the high standards our customers and post-incident customer care. This is a and challenge by the second and third lines. and regulators expect. Group wide programme and is enhancing This assessment has been conducted on a half our capabilities across all our MUs. This yearly basis and the results are presented to We have continued to embed all aspects of our includes ensuring our IT systems that the Audit Committee and the Risk Committee. risk management framework, including: monitor and detect external threats are –– refreshing our Enterprise policies to ensure appropriate and implementing a robust Risk appetite the scope of the policies and the requirements and consistent internal control framework. within the policies remain adequate; Our Board risk appetite expresses the degree This has been supported by the formation of risk we are prepared to accept as we work –– strengthening our crisis management of a new Directorate of Information to deliver on our strategy. Our core risk and business continuity capability; Strategy and Governance in the first line appetite statements focus on: –– reviewing how risk management factors to lead this programme. Working with the –– management of our financial strength; into our reward system; Risk function, the Directorate has realigned our risk categorisation to give our executive –– the treatment of customers and employees; –– conducting a detailed review of how and board risk committees clearer visibility effectively we are mitigating operational –– the sustainability of our business; and of cybersecurity risk on a quarterly basis. risks through insurance; Fundamental cybersecurity controls have –– operational risk. –– enhancing our ongoing regular risk also formed a key focus of our Internal Our risk appetite statements are a key reporting particularly in relation to Audit plans. consideration in our business planning process risk appetite; and a central reference point for key decisions. –– introducing the Bupa Code, which aims These statements are not intended to to support all staff at Bupa to make the Risk profile automatically prevent activity outside of correct choices to protect our customers, Bupa accepts risks as part of its business Bupa’s risk appetite, but rather to help identify our colleagues, our partners and Bupa; operation. Some risks are avoidable (e.g. certain any such instances in a timely manner so financial risks) and others are part and parcel that the Board can consider an appropriate –– assessing the resilience of Bupa’s business of Bupa’s business model (e.g. operational response. model, including contagion risk of unrelated risks). We consider that we have an effective events in different parts of the group; and The statements apply to all MUs. MU risk management system and appropriate Enterprise Risk Committees ensure risk limits, –– undertaking a stress and scenario testing internal controls in place to mitigate our risks. consistent with Bupa’s Risk Appetite statements, programme to strengthen our understanding Bupa maintains significant economic capital are in place to manage the amount of risk of severe scenario risks and how they may as a mitigant against certain inherent risks. taken within businesses and at the MU level. interact with business plan. These reflect the nature of our operations There is regular reporting against our risk and the level of risk associated with them. Bupa Annual Report 2016 19

These risks are set out in the table below in order of magnitude of SCR. Strategic report

Risk Comment and outlook Mitigating actions

Property risk –– Bupa generally owns rather than rents –– By maintaining a geographic spread of property, which keeps lease commitments Risk of devaluations in property markets businesses across the globe, Bupa is down but leaves Bupa exposed to falls leading to a material devaluation of Bupa’s able to diversify exposure to individual in property values. property portfolio such as head offices, property markets. hospitals and care homes. –– If Bupa expands its care provision businesses –– Care home valuations are based and, if properties are owned rather than leased, on underlying profitability of the its property risk exposure would increase. individual homes.

Insurance risk –– Bupa’s health insurance is short-tailed with –– The relatively short-tailed nature of Risks relating to Bupa’s insurance lower outstanding claims as a percentage Bupa’s products allows Bupa to respond businesses. Risk of inadequate pricing of revenue than most general insurers. to market changes quickly. and/or underwriting of insurance policies, –– Insurance risk exposure will grow with –– Bupa has extensive control mechanisms in and of claims experience being materially planned growth in premium income of place to mitigate against the risk of higher adversely different to expectations. the funding businesses. than expected claims costs. Governance –– Health insurance is a well diversified business and the geographical diversity of Bupa provides further mitigation against insurance risk.

Currency risk –– As the net assets of businesses outside –– Currency translation risk is partially the UK grow there will be a corresponding mitigated through a hedging programme. Risk arising from changes in the level, increase in currency risk in relation to or volatility, of currency exchange rates –– Asset liability matching in local currencies translation into sterling. impacting on cash flows and assets helps ensure that sufficient funds are held held in currencies other than sterling, –– There is transactional risk relating to in the local currency therefore limiting and on the financial statements. policies where premiums and claims currency risk exposure. are in different currencies

Credit Spread and –– Bupa’s funding businesses have modest –– Bupa’s bond portfolio is small in relation Counterparty Default Risks holdings of corporate and other bonds. to its other financial assets and of These are exposed to the risk of widening investment grade. Risk of a loss in value of bond assets

spreads and defaults. Financial statements and/or that a counterparty fails to meet –– Counterparty exposure is managed by its obligations in the face of difficult –– There is banking counterparty default dealing with highly rated counterparties economic conditions. This also includes risk in respect of deposits. with exposure limits as per Group Treasury the risk of a loss in value of the bond Policy. In addition, Bupa does not permit assets held within the Pension Schemes. securitised lending of its assets.

Operational Risk (including –– We are committed to managing operational –– Maintenance of robust internal control Conduct Risk and Clinical Risk) risk effectively. This includes continued close processes and governance frameworks, the attention to management of regulatory risk approval of risk policies, and the assessment Risk of loss arising from inadequate or failed and proactive engagement with regulators. of compliance helps mitigate this risk. internal processes, or from personnel, systems or external events. This includes –– As Bupa expands its care provision businesses, –– All MUs have a Medical Director responsible Conduct and Clinical Risk. there will be an increase in inherent exposure for ensuring clinical quality and governance to clinical risk. This is being actively managed within the business. They are accountable through continued refinement of our approach to the Chief Medical Officer (CMO) for to clinical risk governance. clinical governance. 20 Bupa Annual Report 2016

Risks Continued

There are other risks that cannot be effectively mitigated through capital. These are significant risks to Bupa. The MU Risk Committees regularly review the residual risks arising and the mitigating actions in place to reduce the levels of residual risk and the key themes and any areas of specific concern are provided to the Board and Enterprise Risk Committees. This provides management with a view of the areas of priorities to focus resources. The table below reflects the themes of the most significant risks currently facing Bupa from the latest review.

Risk Comment and outlook Mitigating actions

Change risks – transformations –– This risk could lead to excessive management –– MU ownership is an important component and transactions stretch, inadequate capability within the of how change is managed and each MU has organisation, failure to identify and manage defined plans in place covering the change The risk that change programmes and portfolios key risks. programmes underway. of transformation are not adequately planned or managed, fail to deliver expected benefits, or do –– Failure to deliver on aspects of the existing not deliver in appropriate timescales resulting in transformation programmes which are of adverse impacts. strategic importance to Bupa could have significant impacts.

People –– As a complex business with a multinational –– We are focusing on ensuring we have the footprint it is critical to the delivery of our right levels and amount of experience and The risk that we do not have the appropriate strategy that our people have the appropriate succession plans to manage our businesses levels of capacity and capability of people to knowledge, skills and experience to identify and deliver on change management, deliver our strategic objectives. and manage risk and to deliver on objectives. supported by a simple more automated operating model and enhanced ways of delivering training.

Cyber resilience –– Healthcare providers are increasingly being –– This risk has been identified and reported The risk that our inability to identify and respond targeted by APTs. as significant by all MUs and the Centre. to a successful information breach through an A detailed programme of activities is Advanced Persistent Threat (APTs) results in underway across Bupa to ensure this risk adverse impacts. is appropriately mitigated.

Information governance –– We continue to review and enhance our –– MU specific programmes of work are controls over the management and security in place to continue to address this risk. The risk that a failure in our policies or controls of information. over the management and security of –– This is being supported by the personal data and other information results –– For EU-based MUs there is also an additional implementation of the Information Risk in adverse impacts. risk arising from the implementation of a new Operating Model. European regulation on data in 2018. –– Affected MUs have projects to implement the new European regulations, with a central oversight and assurance programme in place.

Changes in government and –– Our funding and provision businesses operate –– All MUs have defined key activities to ensure regulatory policy in the context of government and regulatory we can continue to appropriately monitor, policy ranging from minimum wage lobby and consider strategic implications The risk that political, government, regulatory, requirements to prudential requirements on our businesses of any future changes in economic or market changes adversely and include clinical care requirements for policy or regulation. impact on the delivery of Bupa’s strategy. our provision businesses. Also includes the risk that changes are either not reacted to quickly enough or are responded to inappropriately. Bupa Annual Report 2016 21 Strategic report

Risk Comment and outlook Mitigating actions

External conditions –– These include structural market changes (e.g. –– We continue to review our strategy and political change, medical inflation, minimum processes to ensure that they are flexible There are a number of evolving economic and wage increases) and economic volatility. enough to take into account changing geo-political conditions in the markets Bupa external conditions. operates in that could impact our business model.

UK exit of the EU –– The immediate impact on Bupa’s financial –– While there will be commercial, operational position following the EU referendum in June and legal impacts from the UK’s eventual exit The result of the UK Referendum to leave the EU has been limited. from the EU, it is too early to conclude how has introduced uncertainty to our business. the UK exit will affect the Group’s businesses, –– Liquidity remains strong, our investment customers and employees. portfolio is largely cash-based and low risk and our statutory profits and cashflows would –– While the UK Government has set out be higher if sterling continues to stay weak. its intention to leave the ‘Single Market’, uncertainties remain relating to limitations –– The UK Government intends to notify the about the movement of people and workers, intention to leave the EU by the end of March

regulation of financial services (passporting) Governance 2017 which will start the formal process. and the wider impact on the UK economy.

There are also other risks where capital is not an appropriate mitigant and even though they are not highlighted in the table above they are always a priority issue for management. These are set out in more detail in the table below.

Risk Comment and outlook Mitigating actions

Liquidity risk –– Liquidity risk is addressed not by capital –– This is mitigated by the Treasury Function but by holding liquid assets and through actively managing borrowings, where the The risk of insufficient financial resources to appropriate controls. amount and timing of outflows are known, enable Bupa to meet its obligations as they and maintaining a portion of the Bank fall due or to take advantage of potential –– With policyholder liabilities predominantly Facility undrawn. opportunities, or being able to secure such backed by liquid assets, Bupa’s liquidity risk resources only at excessive cost, resulting in exposure primarily relates to the funding risk adverse impacts. associated with borrowings. Financial statements

Strategic risks –– The world is changing rapidly. The political –– We have refreshed our strategy, and and economic backdrop is uncertain, remain focused on delivering value for The risk of the inability to design or implement with powerful global social trends. Populations money and great service and care to appropriate business plans and strategies, are ageing, public health solutions are our customers. make decisions, allocate resources, or adapt ever-evolving, governments are facing to changes in the business environment. –– Our purpose – helping people live longer, funding issues in healthcare and aged care, healthier, happier lives – and our values and competition is intense – both from shape how we act and deliver for our traditional and non-traditional players. customers and our people. –– Through the identification and assessment of emerging risks we are able to react to issues in a timely and appropriate manner. 22 Bupa Annual Report 2016

Governance report Chairman’s introduction to governance

Good corporate governance must be Simon Blair and Janet Voûte joined the at the centre of any well-run company. Board as Non-Executive Directors (NEDs) Our status as a company limited by on 12 January 2016 further strengthening guarantee, without shareholders, enables the skills and international experience of our Bupa to make our customers our focus. Board. Rita Clifton retired from the Board at Our profi ts are reinvested to provide more the conclusion of the AGM on 11 May 2016. and better healthcare for current and future The Board would like to thank Rita for her customers, taking a longer term view. six years of service as a NED, including her contribution as a member of the In this governance report we explain the Remuneration and Nomination & Board’s role in promoting a fair, accountable, Governance Committees. Lord Leitch responsible and transparent approach to Chairman corporate governance. The Board will continue to regularly review and assess our succession plans to ensure Board composition and an orderly refreshment of the Board as NEDs come to the end of their tenure. It will also succession planning continue to focus on strengthening the Stuart Fletcher stepped down as CEO on executive pipeline within the business. 4 April 2016 after four years, having brought the customer and our people to the fore, as well as extending Bupa’s global footprint. Diversity statement The Board extends their thanks to Stuart We are pleased to report, that at the for his service. The Board appointed Evelyn year end, 40% of our Board was female. Bourke as Acting Group CEO, confi rming her We have already surpassed Lord Davies’ appointment as Group CEO on 25 July 2016. recommendation that by 2020, boards of Evelyn was previously Bupa’s CFO for nearly FTSE 350 companies should aim for 33% four years. The Nomination & Governance female representation. Gender is, however, “We aim to operate to the same Committee’s Report on pages 40-41 outlines only one measure of diversity and Bupa governance standards as required the recruitment process undertaken. believes diversity should be considered more broadly including a wide range of relevant of UK FTSE 100 companies, Joy Linton, was appointed as Acting CFO skills and experience. Our Board diversity where appropriate. The Board on 1 May 2016, becoming CFO on 25 July. policy can be found on bupa.com and She brings 30 years’ experience in fi nancial closely monitors developments is covered in more detail on page 29 of and strategic roles in Australia and the UK. this report. in corporate governance and Full biographical details for Evelyn and assesses how these can be Joy are included on page 25. These internal applied to Bupa.” appointments were identifi ed in Bupa’s succession plans, which are considered by the Board on a regular basis.

Board and Committee structure The Board delegates certain matters to the Audit, Risk, Nomination & Governance and Remuneration Committees. The activities of the Board and its Committees are detailed later in this governance report.

Bupa Board

Nomination Audit Risk Remuneration & Governance Committee Committee Committee Committee

See page 34 See page 38 See page 40 See page 42 Bupa Annual Report 2016 23

Read more Remuneration Association Members report Strategic Board evaluation page 31 Bupa aligns its remuneration policy with Board oversight, which in listed companies performance and strategy by incentivising our is normally provided by shareholders, is Engagement page 33 Executive Directors and senior management exercised in Bupa by a body of around 100 to focus on the long term and to fulfi l our distinguished Association Members (AMs). purpose for current and future customers. Serving for an initial term of up to 10 years, The Directors’ Remuneration Report on AMs are drawn mainly from business, public pages 42-52 gives further detail on the life, the medical professions, the charitable design of the Remuneration Policy and sector and academia. AMs are independent how it was implemented during 2016. and do not have any claim on the assets of Bupa. They do not receive a fee for their Board evaluation service or a share of profi ts or dividends. Independent Audit Limited conducted our At the end of 2016, there were 115 AMs. third, externally-facilitated, Board and They are kept informed of Bupa’s strategy Committee evaluation in the autumn of 2016 and performance through regular AM Briefings and the key fi ndings are set out in more and at the AGM. The Group CEO, Chairman detail in the Eff ectiveness Report on page 31 and Senior Independent Director (SID) and within each of the Committee reports. are also available to answer questions on Governance The Board discussed the results at its meeting an individual basis. AMs views are heard in December 2016. There is a plan to address and communicated to the Board and to the key development areas identifi ed in the relevant teams throughout the business. evaluation process which will be monitored More information on how Bupa engages by the Nomination & Governance Committee with our AMs is on page 33. during 2017. This evaluation confi rmed that the Board and its Committees continue to Statement of compliance be eff ective. As part of our commitment to excellence, we aim to operate to the same governance Committee structure change standards as required of UK FTSE 100 As detailed in the 2015 Annual Report, it companies, where appropriate. We have was agreed that the aims and objectives of applied the main principles and complied with the Medical Advisory Panel would be more all of the relevant provisions, for a company eff ectively achieved through a diff erent without shareholders, of the UK Corporate approach. This included the appointment Governance Code (the Code) throughout of Sir John Tooke to the Risk Committee, 2016. Information on our external audit the expansion of the independent oversight tendering plans can be found in the Audit Committee report on pages 34-37.

of the Executive Global Clinical Governance Financial statements and Quality Steering Committee and the The Corporate Governance Report on establishment of a new Medical Advisory pages 22-41, together with the Remuneration Council to advise on health horizon scanning Report on pages 42-52, describe how we and to support Bupa on key medical risks and have applied the main principles of the Code opportunities relevant to delivering Bupa’s during the year. purpose. Details of the Risk Committee’s oversight of Clinical Risk are covered on Our governance arrangements continue pages 38-39. to be reviewed in line with developments in best practice. This includes considering consultations and guidance issued from the FRC in the UK as well as governance bodies globally.

Lord Leitch Chairman 24 Bupa Annual Report 2016

Governance report Board of Directors

1 2 3

456

7 8 9

10 11 Bupa Annual Report 2016 25

1. Lord Leitch, Chairman Institute and Trustee of Age UK. Previously Chairman Bonds plc, a Non-Executive member of the Non-Executive Chairman of the NEST Corporation and the Pension Protection Partnership Board of Miller Insurance Services Fund, a member of the Board for Actuarial LLP and a Trustee and Treasurer of the Disasters N Re Standards, Chief Executive of Zurich Financial Emergency Committee. Clare was a Partner at Joined the Board in May 2005; appointed Services UK, Executive Chairman of UNUM, PricewaterhouseCoopers (PwC) from 1988 until 2011. Chairman in November 2006. Lord Leitch has CEO of NatWest Life and Investments, and a While she was at PwC, she held several senior a deep and broad knowledge of insurance and Director of the Association of British Insurers. and high profi le roles, particularly within the fi nancial services gained over fi ve decades as a insurance sector. Clare is a Fellow of the Institute senior executive in a number of major international 5. Simon Blair of Chartered Accountants in England and Wales. businesses. Lord Leitch is currently Chairman Independent Non-Executive Director of Intrinsic Financial Services, Chairman of FNZ 9. Professor Sir John Tooke report Strategic A Ri (Group), Non-Executive Director of Old Mutual Independent Non-Executive Director Wealth, and member of the House of Lords. Joined the Board in January 2016. Simon brings Previously Deputy Chairman of Lloyds Banking international experience, particularly gained Ri N Group plc, Chairman of Scottish Widows plc, in Australia and New Zealand, and a strong Joined the Board in July 2009. Sir John brings his Senior Independent Director at United Business understanding of the insurance and healthcare medical expertise, gained over 40 years, to advise Media plc, Chairman and Chief Executive Zurich sectors. He is a Non-Executive Director of the the Board on clinical governance and advances in Financial Services UK, Ireland, South Africa and Bank of Hangzhao, Sovereign Assurance, ASB healthcare practices and treatments. A consultant Asia Pacifi c, and Chairman of the Association of Bank and BoCommLife. Simon was Group physician, he is immediate past President of the British Insurers. Executive International Financial Services for Academy of Medical Sciences. Sir John chairs the Commonwealth Bank of Australia. He was the Centre for the Advancement of Sustainable 2. Evelyn Bourke, Group Chief Executive previously Chief Operating Offi cer at Australian Medical Innovation, joint between UCL and Offi cer health insurer, Medibank, Lead Health Specialist Oxford University, and is Executive Chairman Executive Director for the World Bank, and CEO of Inner & Eastern of Academic Health Solutions Ltd. He is also a Healthcare Network, then Australia’s largest Member of the Independent Review Board for Appointed as Group CEO on 25 July 2016. public hospital group. Google DeepMindHealth. Previously served as Acting Group CEO from 4 April 2016 and CFO from September 2012. 6. Roger Davis 10. Janet Voûte Evelyn has a strong track record and extensive Independent Non-Executive Director Independent Non-Executive Director experience in fi nancial services, risk and capital management, and mergers and acquisitions. A Re Ri Re A qualifi ed actuary, she also holds an MBA from Joined the Board in July 2015. Roger has extensive Joined the Board in January 2016. Janet brings Governance London Business School and was previously business experience and an international mindset an international perspective and experience a Non-Executive Director of the IFG Group in acquired during a wide-ranging career in fi nancial gained in corporate strategy, the health and care Ireland. Evelyn joined from Friends Life where she services. He is Chairman of Gem Diamonds, Sainsbury’s sector and consumer facing businesses. She is was Chief Executive Offi cer of its Heritage division. Bank, Global RadioData Communications (GRC) Chairman of the Creating Shared Value Council Previously at Friends Provident, she was the and Future for Heroes. Roger is also a Non-Executive at Nestlé SA and serves as an Ambassador of Executive Director responsible for strategy, capital Director of Experian. He has extensive experience the International Integrated Reporting Initiative. and risk and, before that, Chief Financial Offi cer. in the UK and Asia with previous positions including Previously she served as Global Head of Public Managing Director of India for Jardine Fleming, Aff airs at Nestlé SA and was a member of the 3. Joy Linton, Chief Financial Offi cer Chief Executive Offi cer of BZW Asia Pacifi c, and board of Bamboo Finance SA. She also served Executive Director Chairman and Chief Executive of Barclays Capital as Partnership Advisor at the World Health Appointed CFO on 25 July 2016, and previously Asia Pacifi c. He left Barclays as Executive Director Organization in the area of non-communicable served as Acting CFO from 1 May 2016. Joy brings and Head of the UK Bank in 2005. diseases and mental health and as CEO of the 30 years’ experience in fi nancial and strategic World Heart Federation. Janet was formerly roles in Australia and the UK. She joined Bupa 7. Martin Houston Vice President and Managing Partner at Bain & in March 2011 as Finance Director of Bupa’s Independent Non-Executive Director Company Switzerland.

Australian Health Insurance business, later Re N becoming Finance and Commercial Director of 11. Julian Sanders Bupa Australia and New Zealand. Joy became Joined the Board in January 2014. Martin brings Company Secretary extensive international business experience to Bupa’s Chief People Offi cer on an interim basis Appointed as Company Secretary in July 2014.

the Board. He is Chairman of TPH International Financial statements in 2015, prior to becoming General Manager, Julian was formerly Deputy Company Secretary, and Vice Chairman of Tellurian Investments. Health Services for Bupa UK. Previously, she was having joined Bupa in 1988. Prior to joining Bupa He is also a Non-Executive Director of CC Energy CFO of National Foods, one of Australia’s largest he was a Supervisor in the Business Services Development and Vice Chairman of Hakluyt North food and beverage companies. She was also a Group at Coopers & Lybrand (now PwC). Non-Executive Director of Bega Cheese Ltd, America. Previously Martin was Chief Operating an ASX-200 listed company, serving as Chair Offi cer and Executive Director of BG Group plc of their Audit and Risk Committee. where he spent 32 years. He is a Fellow of the Geological Society of London, is on the advisory 4. Lawrence Churchill, CBE board of the Royal Opera House of London, is a member of the advisory board of the Global Committee key Senior Independent Director Energy Policy unit at Columbia University’s Ri A N Re School of International and Public Aff airs in Committee Chairman Joined the Board in July 2009 and became the New York and is a former Non-Executive A SID on 14 May 2015. Lawrence brings considerable Director of Severn Trent plc. Audit expertise from operating in large, complex Ri Risk organisations and has extensive knowledge of 8. Clare Thompson fi nancial services, risk management, general Independent Non-Executive Director N Nomination & Governance management and public policy. Lawrence is Chairman A Ri N Re of the Board of the Financial Services Compensation Remuneration Scheme, Chairman of the Independent Governance Joined the Board in May 2015. Clare brings a Committee of Prudential Assurance Company wealth of experience, particularly in the areas of and a Trustee of Prudential Corporate Trustee finance and insurance. She is also a Non-Executive Full details of each director are available on Limited. He is also Chairman of the Pensions Policy Director of Direct Line Group and Retail Charity bupa.com/corporate/about-us 26 Bupa Annual Report 2016

Governance report Bupa Executive Team

1 2 3

456

7 8 9

10 11 12

13 Bupa Annual Report 2016 27

The Bupa Executive Team (BET) is comprised 1. Evelyn Bourke 8. Alex Cole of the Group CEO, who chairs the meetings, Group Chief Executive Offi cer Chief Brand & Corporate Aff airs Offi cer the CFO, the CEOs of the four Market Units See page 25 for biographical details. Alex joined Bupa in July 2014 and was appointed and all Global Function Directors. as Chief Brand & Corporate Aff airs Offi cer in May 2016. She has over 20 years’ experience across The BET meets regularly throughout the 2. Joy Linton Chief Financial Offi cer communications and public aff airs and was the year to focus on Bupa’s global strategic Director of Corporate Aff airs at J Sainsbury plc agenda, which supports each BET member See page 25 for biographical details. and Cadbury plc. as they manage performance and risk in their individual roles. In particular, the BET spends 3. Richard Bowden 9. Garry Fingland Strategic report Strategic time together on: CEO, Australia and New Zealand (ANZ) Chief Information Offi cer Richard joined Bupa in 2002 as the Managing – Bupa’s refreshed strategic framework. Garry joined Bupa as its Chief Information Offi cer Director of Bupa Australia and has over 30 years’ in 2014. He has extensive experience in global – Calibrating performance and generating experience in the health sector. He was MD of IT transformation, having held a number of senior improved opportunities. Bupa UK from 2012 to 2016 and was previously IT leadership roles at both Serco and Diageo. the MD of AXA Australia Health, Chairman and He is a Chartered Accountant and holds an – Aligning on priorities, including business President of Private Healthcare Australia and a MBA from Strathclyde Business School. development and M&A. Commissioner on the Australian Commission of Safety and Quality in Healthcare. – High-level resource and capital allocation. 10. Elisa Nardi Chief People Offi cer – Organisation culture and talent 4. David Hynam CEO, United Kingdom (UK) Elisa was appointed as Bupa’s Chief People management. Offi cer in early 2015. Prior to joining Bupa she David was appointed as MD of Bupa UK – Key global strategic initiatives such was the Chief People & Services Offi cer at Virgin in October 2016. He joined Bupa as as driving innovation and leadership Media and the Group Human Resources Director Transformation Director in the UK and as at Marconi Plc. She has also worked in Human development. leader of health and dental clinics before Resources at Lloyds TSB, PepsiCo, HJ Heinz and becoming General Manager of Bupa’s UK Ford Motor Company. Elisa was a Board Trustee Care Services business in 2015. He was of Regent’s University London between 2010 previously Chief Operating Offi cer and to 2016. UK CEO of Friends Life. Governance 11. Penny Dudley 5. Iñaki Ereño Chief Legal Offi cer CEO, Europe and Latin America Penny was appointed as Chief Legal Offi cer in Domestic (ELA) April 2016, having joined Bupa in 2010. Penny has extensive international legal experience in Iñaki was appointed as MD of ELA in November regulated fi nancial services, originally qualifying 2016, with responsibility for Sanitas in Spain, as a solicitor in Australia, and subsequently LUX MED in Poland and Bupa Chile. Iñaki was relocating to the UK where she has held in-house previously the MD of Bupa’s Spain and Latin legal roles at Invesco, and Macquarie. America Market Unit. He has held senior positions at Acerinox, the Telefonica Group David Fletcher and Carrefour as well as founding an online 12. start-up. Iñaki has a degree in Law and holds Chief Risk Offi cer an MBA from IESE Business School. David commenced in the new role of Chief Risk Offi cer in January 2017. He has been with Bupa 6. Wayne Close since 2014 in senior roles including Chief Internal Acting CEO International Markets (IM) Auditor and MD of IDM. He has had extensive international fi nancial services experience, having Wayne was appointed as Acting MD of IM in held various senior positions in Nigeria, China, November 2016. He brings more than 20 years’ Hong Kong, Singapore, Bangladesh, Indonesia, Financial statements experience, having joined Bupa in 1992 with roles and in London with Standard Chartered including leading, Bupa International (the precursor and Citibank. to Bupa Global), MD of Bupa Global North America, setting up and leading Bupa Saudi Arabia, and 13. Gabriela Pueyo holding a number of CFO roles across Bupa including the former International Development Chief Strategy Offi cer Markets (IDM) MU. Gabriela joined Bupa in 2003 and began in her role as Chief Strategy Offi cer in January 2017. 7. Paul Zollinger-Read She has held a number of senior roles in the Chief Medical Offi cer Sanitas business, including Strategy Director, CFO and General Manager of Sanitas Dental. Paul became Chief Medical Offi cer of Bupa in Gabriela started her career as a strategy July 2012. He has led a distinguished medical consultant at McKinsey and Company. She has career within the UK’s National Health Service, an MBA from Harvard University and a degree both as a GP and as CEO of a number of Primary in Economics and International Relations from Care Trusts. He has previously been the Medical Stanford University. and Primary Care Advisor at the King’s Fund. Paul leads the Bupa-powered CMO Network. 28 Bupa Annual Report 2016

Governance report Leadership

Bupa’s Governance Framework Board can be found on bupa.com. The levels role to ensure eff ective communication with and the Role of the Board of authority delegated to management are the Association Members (AMs) and to chair regularly reviewed and updated when General Meetings. The Board is responsible for the long-term appropriate. The roles of the Board, the success of the Company. Bupa’s governance The Group CEO is responsible for the Chairman, the Group CEO, the Senior structure is designed to enable the Board to day-to-day leadership and management of Independent Director (SID) and the Non- lead Bupa within a framework of prudent and the business, in line with the strategy, risk Executive Directors (NEDs) are clearly eff ective controls which enables risk to be appetite and long-term and annual objectives defi ned and set out in detail on bupa.com. assessed and managed. In 2016, the Board approved by the Board. The Group CEO held 11 full meetings and scheduled four All Board and Committee members are may make decisions in all matters aff ecting additional meetings to discuss specifi c matters provided with suffi cient resources to the operations, performance and strategy such as the appointment of our Group CEO undertake their duties, including access to of Bupa’s businesses, with the exception of and major acquisitions requiring approval. The both internal and external specialist advice at those matters reserved for the Board or Board devotes its time to overseeing Bupa’s Bupa’s expense. The Directors individually and specifi cally delegated by the Board to its strategy, the approval of business plans and collectively act in accordance with their duties Committees, executive committees or signifi cant capital expenditure, acquisitions under the Companies Act 2006. Bupa has a subsidiary company boards. The Group and disposals, as well as monitoring business directors’ and offi cers’ insurance policy in CEO leads the Bupa Executive Team (BET) performance. Minutes of all Board and place as well as a deed of indemnifi cation. in driving the performance of the business Committee meetings are prepared and refl ect and setting the overall strategic agenda. the substance of the discussion as well as the The roles of the Chairman and the For more information about members of decisions made. The Board delegates certain the BET, please see pages 26-27. Group CEO matters to the Audit, Risk, Nomination & The roles of the Chairman and the Group CEO Governance and Remuneration Committees. The role of the Senior Independent The activities of the Board and its Committees are clearly separated. Director are detailed later in this governance report. The Chairman is responsible for the leadership Lawrence Churchill, one of the NEDs, is the of the Board and is pivotal in the creation of Bupa has a schedule of matters reserved for SID. His role is to provide a sounding board for the conditions necessary for overall Board and the Board’s approval, which was updated in the Chairman, to serve as an intermediary for individual director eff ectiveness, both in and 2016, and all other items are delegated to the the other Directors where necessary and to outside the boardroom. It is also the Chairman’s Group CEO. The matters reserved for the provide an additional point of contact for AMs.

Non-Executive Director Inductions 2016

Following any appointment to the Board, for its customers. Both Janet and Simon Simon Blair commented that: a personalised induction programme is drawn participated in the Board visits in Chile and “As part of an excellent induction programme up, which includes Bupa-led knowledge Australia during the year which included I have been able to see fi rst-hand Bupa building, site visits to Bupa’s businesses and visits to customer centres in both countries. dental and health clinics, hospitals, insurance discussions on strategy and development For more information see the Board in Action processing and call centres across four diff erent plans for the business. section on page 30. countries and have been most impressed with the consistently high quality of our employees As new members of the Board appointed Janet also attended one of the AM briefi ng and the facilities, and the primacy accorded during 2016, Simon Blair and Janet Voûte both sessions in October 2016 at which attendees to customer service and care. Employee commenced extensive induction programmes are encouraged to question the Group CEO, motivation and pride stands out across all during the year, including meetings with the CFO and Chairman in relation to strategy and geographies and all lines of business.” heads of various businesses across Bupa. performance. In addition to gaining further Site visits were arranged to the Cromwell knowledge about Bupa, the briefi ng session Janet Voûte commented that: Hospital, health and dental clinics and presented an opportunity for Janet to “A comprehensive induction programme is an call centres, in the UK in the fi rst instance, engage with other AMs to learn more essential part of new Non-Executive Director in order to enable the new Directors to about issues of interest to them at an early onboarding. Bupa is a health insurance and experience fi rst-hand the way Bupa cares stage in her directorship. health and care company which takes time to fully understand. Attendance at the briefi ng session provided another opportunity for me to observe and participate in the challenge provided by Bupa’s Association Members.” Bupa Annual Report 2016 29

The role of the Non-Executive Directors report Strategic Board diversity Lawrence Churchill, Simon Blair, Roger Davis, Martin Houston, Clare Thompson, Sir John The Board Diversity Policy was Length of tenure (years) Tooke and Janet Voûte are collectively launched in 2012 with the intention 1 – 3 6 expected to constructively challenge and help of ensuring that diversity remains develop strategy, to participate actively in the a central feature of the Board. 4 – 6 1 decision-making process of the Board, and to scrutinise the performance of management in Board composition 7+ 3 meeting agreed goals and objectives. 1-3 years Joy Linton, Simon Blair, Roger Davis, Martin Houston, Percentage of Percentage of Clare Thompson, Janet Voûte (2015: 5) A copy of the standard Non-Executive female Directors male Directors 4-6 years Evelyn Bourke, (2015: 3) Director (NED) Terms of Appointment, which 40% 60% 7+ years Lord Leitch, Lawrence Churchill, Prof Sir John Tooke (2015: 1) set out their expected time commitment, is Percentage of Executive Directors available on bupa.com, at Bupa’s registered 20% The Executive Directors are the Group offi ce and is available for inspection before CEO and CFO Sector experience and during the AGM. NEDs have the same Percentage of Non-Executive Directors Financial services 7 general legal responsibilities to the Company 80% The Non-Executive Directors include as any other director. the Chairman and SID Clinical and Healthcare Systems 6

Strategy and Development 8 Governance

Brand and Marketing 6

International Business 6

Board diversity policy as well as maintaining an appropriate balance Should a confl ict arise, the relevant director Bupa’s policy of ensuring that there is of skills and experience on the Board and its would agree to abstain from discussions on broad experience and diversity on the Committees and ensuring we have a strong any matter where they may be confl icted. Board was adopted by the Board in 2012. executive pipeline within the business. Many of Bupa’s NEDs hold appointments at Diversity in Bupa embraces knowledge other organisations, as set out in their profi les on page 25. Each NED confi rmed that they and understanding of relevant diverse Board composition and tenure geographies, peoples and their backgrounds, are able to devote suffi cient time to perform Bupa’s Board consists primarily of NEDs including race, disability, gender, sexual their role eff ectively. (eight including the Chairman), who orientation, religion, belief and age, as well substantially outnumber the Executive as culture, personality and work-style. Directors (two). The independence of NEDs Board training and development In particular, Bupa’s Board is focused from management and any other business or During the year, Board and Committee upon increasing Board diversity without Financial statements relationship which could materially interfere members attended Bupa-led specifi c training compromising on the calibre of Directors. with their independence, is considered and and development sessions. These took the Appointments to the Board are based on confi rmed on an annual basis. All Directors form of presentations on specifi c markets merit as well as complementing and off er themselves for annual re-election by from leading academics and economists expanding the skills, knowledge and the AMs, save for those retiring at the AGM. to more detailed training on forthcoming experience of the Board as a whole. Within regulatory developments. During 2016 the this context the Board aspires to have an training included the implications of the new The Chairman appropriate proportion of Directors who Senior Insurance Managers Regime, an have direct experience of some of Bupa’s key Lord Leitch, Bupa’s Chairman, who was Anti-Bribery and Corruption Update and markets. In 2016 Simon Blair, Joy Linton and independent on appointment, holds a small some familiarisation sessions on the new Janet Voûte were appointed to the Board, number of other appointments, none of which Solvency II regulatory reporting requirements. each with international healthcare experience. are considered to impede his role at Bupa. NEDs also undertook training independently Our Board diversity policy can be found on Details of his other appointments are set out throughout the year to ensure that they bupa.com. in his biography on page 25. maintained their skills and knowledge required for the role. The Committee members also Succession plans Confl icts of interest receive training as necessary on specifi c technical topics. For example, in 2016, the Succession plans are continually reviewed and The Company Secretary performed the Audit Committee received awareness training a phased replacement of NEDs coming to the annual review of all Directors’ actual or on the implications of the new Base Erosion end of their tenure agreed. This approach is potential confl icts of interest and all potential Profi t Shifting taxation framework for Bupa. designed to ensure continuity on the Board, confl icts were recorded and authorised. 30 Bupa Annual Report 2016

Governance report Board in action

The Board undertook two overseas visits Santiago, Chile site visit Melbourne, Australia site visit during the year, the fi rst to Chile in April and In Chile the Board visited the Integramédica In Australia, Board members visited Bupa the second to Australia in October. These Manquehue clinic where they saw the Health Insurance and Bupa Optical stores, visits enable our Directors to deepen their various departments in action. The Board then a Bupa Dental clinic and the Bupa Medical knowledge of Bupa’s global operations and went on to Bupa Santiago Hospital which is Visa Services centre. These site visits enabled meet with local executives, both of which currently under construction. This provided Board members to see the customer help to facilitate better decision making. an opportunity to see the new facilities being experience fi rsthand and to speak to Bupa’s built and hear about the approach to fi rst class people directly, as well as see the Bupa healthcare provision. One to one meetings off ering in that market. The Chairmen of with executives were held, some of which the Audit and Risk Committees of Bupa were tailored to the Directors’ expertise and and Bupa Australia attended one to one Committee positions, for example, Finance meetings on the fi rst day followed by a joint and Audit, Risk and Compliance, Medical, Bupa and Bupa Australia Board discussion. and Brand and Marketing. During the visit Once again some of the meetings with the Board also received presentations on the executives were tailored to the Directors’ local economy and business environment, role and expertise including Corporate facilitated by Banchile Citi. Aff airs and the Political Landscape, Clinical and Remuneration & People.

1 2 “Site visits help the Board appreciate the context-specifi c nature of health and care problems and the challenges faced by management.” Sir John Tooke Non-Executive Director

43

1. Evelyn Bourke visiting a Bupa Optical store in Melbourne during the Board’s visit to Australia in October 2016. 2. L-R: Lawrence Churchill and Sir John Tooke visiting the Transformation Hub in Melbourne (Bupa’s modern, fit-for-purpose, face-to-face collaboration capability). 3. The Board visiting the construction site of the Bupa Santiago Hospital, during their visit to Chile in April 2016. Top row L-R: Andrés Varas – Bupa Chile General Manager, Iñaki Ereño – CEO Europe & Latin America (ELA), Julian Sanders, Lawrence Churchill, Janet Voûte, Rita Clifton, Simon Blair and José Francisco Tomás – ELA Medical Director. Bottom row L-R: Sir John Tooke, Joy Linton, Evelyn Bourke and Clare Thompson. 4. L-R: Martin Houston, Julian Sanders and Clare Thompson visiting a Bupa Health Insurance retail store in Melbourne. Bupa Annual Report 2016 31

Eff ectiveness

Board performance In 2016, the Board and individual Directors one-to-one interviews, attendance at the report Strategic and evaluation underwent the third externally facilitated November Board meeting and culminated in Board evaluation process. This was a group discussion at the December meeting. conducted by Independent Audit Limited. The evaluation concluded that Bupa’s Board The two previous reviews were conducted continued to operate eff ectively in an open by Boardroom Review. and honest manner, providing support and challenge to executive management. Independent Audit Limited has no connection with Bupa, other than having provided the The Board considered the performance of online questionnaire tool used for the internally the Chairman during 2016 and concluded that conducted reviews in 2014 and 2015. In 2016, he continued to provide strong leadership of the Board evaluation process took the form of the Board.

Board performance evaluation action plan 2016 (from the 2015 Board evaluation) 2017 goals

The results from the 2016 action plan (arising from the 2015 internal evaluation) and Priorities arising from the 2016 evaluation are set Governance achievements against the goals set are outlined in the table below. out below and once again the Nomination & Governance Committee will monitor performance against these priorities during the year. We will report on progress in the 2017 Annual Report.

Categories Board action plan for 2016 Achievements against action plan during 2016 Categories Board action plan for 2017

Strategic Continue to balance the There has been a shift in the Board’s Clarity on Keep Bupa’s long term focus number of strategic and Agenda during 2016 to ensure more space medium/ ambitions and strategy operational agenda items. is made available for consideration of long term under review. Explore risk appetite in strategic issues, including the adoption of a strategy relation to long-term strategy. new strategic framework and the ongoing Board submissions to be detailed analysis of operations against amended slightly to balance strategy and risk appetite. the amount of operational and strategic issues discussed.

Customers, Further discuss the activities The Board considered updates from the Focus Continually review the Board Financial statements competition of Bupa’s competitors and Market Units in respect of their competitors on Non- skill set required to lead a and external external perspectives on and also received external perspectives on Executive global organisation and developments Bupa’s markets. Monitor Bupa’s markets during their visits to Chile Director ensure orderly succession succession and oversee further in April and Australia in October. NPS has plans are in place. planning implementation of the Net continued to be rolled out and embedded Promoter System (NPS) across Bupa throughout 2016. across Bupa.

Board Set aside time to ensure The Board’s focus in 2016 shifted to Board Ensure the Board agenda impact there is real clarity about the ensuring that the right individuals were impact continues to have space expectations of the value that appointed as the Group CEO and CFO for adequate discussion the Board can bring to Bupa, respectively. The four most recently of emerging risks and once the four new NEDs have appointed NEDs have brought an opportunities. been in the role for six months. enhanced international lens through which to examine the Board’s global activities. 32 Bupa Annual Report 2016

Governance report Eff ectiveness continued

Board attendance

The following table sets out the attendance of the Company’s Directors at scheduled Board and Committee meetings during 2016:

Nomination & Board Audit Governance Remuneration Risk meetings Committee Committee Committee Committee Number of meetings held 11 7 5 7 5 Chairman Lord Leitch 11/11 – 5/5 7/7 – Executive Directors Evelyn Bourke 11/11–2/4–– Stuart Fletcher1 2/2 – 1/1 – – Joy Linton2 8/8–––– Non-executive Directors Lawrence Churchill 11/11 7/7 5/5 7/7 5/5 Rita Clifton3 4/4 – 2/2 3/3 – Simon Blair4 10/11 3/4 – – 3/3 Roger Davis5 10/11 5/7 – 3/4 1/2 Martin Houston6 10/11 2/3 2/3 7/7 1/2 Clare Thompson7 11/11 7/7 3/3 – 5/5 Sir John Tooke8 10/11–3/3–5/5 Janet Voûte9 11/11 – – 4/4 3/3

1 Stuart Fletcher stepped down from the Board and the Nomination & Governance Committee (N&G) on 4 April. 2 Joy Linton joined the Board on 1 May 2016. 3 Rita Clifton stepped down from the Board and the N&G on 11 May. 4 Simon Blair joined the Board on 12 January and the Audit and Risk Committees on 11 May. He was unable to attend the December Board due to a confl icting board meeting. 5 Roger Davis stepped down from the Risk Committee on 11 May. He was unable to attend the April meeting due to a confl icting board meeting. 6 Martin Houston joined the N&G and resigned from the Audit & Risk Committees on 11 May 2016. He was unable to attend the February Board due to an annual commitment. 7 Clare Thompson joined the N&G on 11 May 2016. 8 Sir John Tooke joined the N&G on 11 May 2016. He was unable to attend the August Board due to a confl icting commitment. 9 Janet Voûte joined the Board and the Risk Committee on 11 May 2016.

2016 Board meetings The Board held 11 scheduled meetings during the year (both in the UK and overseas) and the following table shows key items discussed at those meetings. The Board also attended an annual strategy off site session in June 2016.

Examples of key strategic items covered at Board meetings included:

February – 2015 Outturn & Impact on – Capital & Funding Capacity August – Half Year Results 2016-18 Plan 2016-2018 – IDM Strategy Update September –Cyber Risk – UK MU Update March –PRA Presentation – Digital & Social Media – Bupa Insurance Programme – Approval of 2015 Annual Progress Report & Accounts – Strategic Direction October –ANZ MU Update (meeting held – Global Brand Strategy April – Group CEO Transition –ANZ Customer in Australia) (meeting held – Talent Breakfast Transformation Funding in Chile) Conversations – SLA MU Business Update November – M&A Pipeline & Capacity – Talent & Succession to Transact Review May – Group CEO Recruitment – Brand & Customer – Oasis Dental Care Purchase – 2016 ORSA & Policy Experience – Bupa’s Financial Framework

June –Solvency II – UK MU Clinical Quality December – Approval of 2017–2019 Plan – Speak Up –IDM Organisation Structure –Enterprise Policies – IS&T Transformation & Strategy Refresh – Assets to be Made Available – External Board Evaluation for Sale – IM MU Business Update –Insurance Risk Appetite July – Group CEO Recruitment – Bupa Global Corporate –CFO Appointment Business Strategy – Additional Changes to BET – US Strategic Partnership –Board Strategy Off site Bupa Annual Report 2016 33

Engagement

Association Members Bondholders Other stakeholders report Strategic Bupa maintains a register of around 100 Bupa also has a number of debt securities Across our markets, we engage regularly with Association Members (AMs) (115 as at in issue by its subsidiary company Bupa policymakers and regulators, health and care 31 December 2016) who perform a key Finance plc and is therefore required to professionals, consumer groups, NGOs and governance role ordinarily undertaken by operate in accordance with the UK Listing other key stakeholders. This engagement shareholders. AMs generally serve for an initial Rules, Disclosure and Transparency Rules and enables us to contribute to the health policy term of ten years which can be extended the Market Abuse Regulations in respect of debate and to build an understanding of for further terms of fi ve years. AMs have no its announcements of fi nancial results and issues relevant to our customers and to equity interest and, consequently, no right operations. Briefi ng calls are scheduled for healthcare generally. We also partner with a to dividends. AMs are eminent individuals in bondholders and other interested parties to number of other commercial organisations, their own fi eld, coming from a diverse range discuss the Half Year and Full Year results. to address and positively impact specifi c of sectors, including health and social care, This provides an opportunity for them to health issues as part of our commitment to business, regulatory, academia, as well as question management on the fi nancial help more people access better healthcare. charities and the public sector. Their expertise performance and strategy of Bupa. Our business model on pages 4-5 explains enables them to provide challenge to the how we deliver for our Customers. Board on matters of performance and strategy, and furthermore, to draw upon their skills, knowledge and experience to

help inform future strategy and development. Governance Fundamentally, their role is to hold the Board Calendar of Association Members engagement events in 2016 to account in delivering on our purpose of helping people live longer, healthier, happier March Financial Briefi ng call with the Group CEO and CFO following the lives. AMs are selected via a number of Results announcement of fi nancial results allowed the AMs to understand criteria including having recent and relevant Briefi ng Call and challenge fi nancial and operational performance. experience in their specifi c fi eld; being independent of Bupa; being able to make a May Annual The AGM is preceded by a seminar update in respect of one of contribution; and having experience in the key General Bupa’s business areas. In 2016, the Seminar was “Leading Digital overseas markets in which Bupa operates. Meeting Transformation of the Healthcare Industry”. 48% of AMs attended the 2016 AGM (2015: 50%). The number of attendees increased in Bupa’s AMs have a number of opportunities 2016, by 11 AMs, but comprised a smaller percentage of the total to engage with the entire Board, including at number due to the increase in the number of AMs following the the AGM which is well attended. Details of the extensive 2015 appointment exercise. calendar of events are set out in the table to the right. A summary of the questions asked At the AGM, Bupa proposes a resolution on each substantially separate issue, including a resolution on the Annual Report and at many of the events is circulated to all AMs, Accounts and the Remuneration Report and Policy. Voting at the Board and the Bupa Executive Team the AGM is conducted on a show of hands. The questions raised which ensures that the views of AMs are well by AMs at the 2016 meeting covered a broad range of areas communicated and understood within the such as Bupa’s strategy, Brexit, Top Risks, Customer Satisfaction, Financial statements business. These more formal sessions are Appointment of the new Group CEO, the National Living Wage, combined with regular correspondence on Competition and Digital Opportunities. key changes and developments within Bupa, such as major acquisitions. The Group CEO, July New AMs’ This was an opportunity for newly appointed AMs to gain a further Chairman, Senior Independent Director and Induction understanding of Bupa, our strategy, their role in our governance Company Secretary are available to the Session and how they can assist Bupa to achieve its purpose. 59% of the AMs throughout the year. To ensure that newly appointed AMs attended the induction session in 2016. the AMs are kept fully informed, they also have access to a secure website containing August Half Year As for the Financial Results Briefi ng Call (above). useful information and updates, as well as Results daily media briefi ngs and a calendar of Briefi ng Call forthcoming events. October & AMs’ Briefi ng This was another opportunity for engagement with November Sessions representatives of the Board on matters of strategy and performance. These sessions encourage rigorous challenge and questioning by the AMs. Four briefi ng sessions were held with a total of 45 AMs in attendance during 2016. A short presentation on Bupa’s strategy and development was followed by an in-depth Q&A at each session.

Throughout Updates Regular email updates provided to the AMs throughout the year the year as they arise on business and executive changes. 34 Bupa Annual Report 2016

Governance report Audit Committee report

Role of the Committee 2016 activities The principal role of the Committee is to As set out in last year’s report, the monitor the integrity of Bupa’s fi nancial Committee’s focus for 2016 was to assess statements, the eff ectiveness of the systems the implementation of the EU Audit Reform of internal controls and to monitor the regulations and the approach to and timing eff ectiveness, performance, objectivity and of placing the external audit out to tender; independence of the internal and external the further development of the Internal Control auditors. The Committee also reviews and Risk Management Assessment system regulatory reporting. to ensure its continued eff ectiveness; and developing the assurance process in respect A full description of the Committee’s role is set of IT systems development and digital media. Clare Thompson out in its Terms of Reference on bupa.com. Committee Chair The Committee also undertook core activities such as reviewing fi nancial reporting, approving “During 2016, the Committee Committee governance external audit plans and reviewing fi nancial All members of the Committee are Non- control and reporting policies. oversaw the Finance Development Executive Directors (NEDs) and this applied During 2016, the Committee also: Programme focusing on throughout the year. Martin Houston stepped – Oversaw matters relating to the issue of the accelerated Solvency II down and Simon Blair joined the Committee on 11 May 2016. £400m 5.00% Fixed Rate Subordinated reporting and preparing for the Notes due 2026 by Bupa’s subsidiary Bupa The Group CEO, CFO, Corporate Controller, Finance plc. new Solvency and Financial Chief Internal Auditor, Chief Risk Officer and Condition Report and Regular external auditors are routinely invited to attend – Reviewed the policy on the engagement of meetings. The Committee at least annually holds the external auditor to provide non-audit Supervisory Report.” separate discussions with the external auditor, services and received a quarterly update the Chief Internal Auditor and Chief Actuary on engagements with KPMG and other without management present. In compliance “Big Four” fi rms. with the UK Corporate Governance Code – Oversaw the new Finance Development Committee members (the Code), at least one of the members of Programme to deliver the additional the Committee has recent and relevant Clare Thompson Chair processes, systems and data capabilities to fi nancial experience. The Committee as a Simon Blair ensure continued compliance with Solvency whole has a wide range and depth of fi nancial Lawrence Churchill II Pillar 3 reporting requirements and in and commercial experience, a signifi cant addition to bring together other fi nancial Roger Davis amount of which is in fi nancial services. strategic change activities. The biographies of members can be found on page 25. – Reviewed Solvency II Pillar 3 reporting and plans for narrative reporting in 2017. – Received updates on the approach taken to implement actions recommended by internal Key items covered included: audit, including meetings with management where appropriate. At most meetings the Committee receives reports from Internal Audit, Finance and KPMG and in addition discussed the following: – Held deep dives to discuss the control environment relating to topics such as 9 February – Key Accounting Issues & Areas of Judgement/Outstanding Claims Provision Update/ Fraud Risk Management/Eff ectiveness of Audit Committee cybersecurity, IT controls maturity and third party provider management. 29 February – Review of Systems of Internal Control & Risk Management (ICRMA)/Annual Report & Accounts 2015/Audit & Non-Audit Services Policy Review/Long Term Viability – Received an update on the status of the Statement whistleblowing programme (Speak Up) and reviewed and recommended the April – Solvency II Reporting/ICRMA Process related policy to the Board. June – KPMG Engagement Letter/KPMG Fee Proposal/Solvency II Reporting/EU Audit – Attended awareness training on the new Reform – External Audit Tender Base Erosion Profi t Shifting legislation July – Review of ICRMA/Key Accounting Issues & Areas of Judgement/Draft Half coming into eff ect in 2017. Year Report – Further improved the Auditor Eff ectiveness September – Financial Reporting Issues/External Audit Lead Partner Change/Speak Up Update review process.

December – 2017 Global Internal Audit Plan/Insurance Reserving/Draft SFCR and RSR 2016 Reports Bupa Annual Report 2016 35

Financial reporting The signifi cant issues and areas of judgement discussed in respect of the 2016 reporting period report Strategic The Committee reviewed the appropriateness and how they were addressed are detailed below: of the Half Year and Annual fi nancial statements, which it carried out with both Key issue Committee response management and the external auditors Goodwill and intangible asset The Committee critically reviewed and discussed management reports and included: valuations: outlining the basis of the assumptions used for our most sensitive Cash Signifi cant levels of goodwill and Generating Units (CGUs) and considered these in light of business – Whether the Annual Report was fair, intangibles are held in respect of prior performance. The Committee also received information on goodwill balanced and understandable. acquisitions. Impairment reviews are testing from KPMG. Particular focus was given to Quality HealthCare inherently complex and require a high (QHC) where the cash fl ows are dependent in part upon the opening – Compliance with disclosure requirements. level of judgement to be applied due to of new clinics along with general growth prospects. The Committee – The material areas in which signifi cant the uncertainty involved in forecasting received reports from management regarding an external valuation future cash fl ows, the appropriateness of QHC as a key factor in supporting the carrying value of goodwill. judgements had been applied. of discount rates used and future The Committee is satisfi ed that the assumptions applied were In assessing whether the Annual Report growth rates of the respective business. reasonable and the carrying value of goodwill is appropriate. was fair, balanced and understandable, Claims provisioning: The Committee received reports from management detailing claims the Committee evaluated whether: Calculation of the outstanding claims reserving methodologies and reviewed and approved the approach to provision is based on assumptions claims reserving. In particular, the Committee reviewed and approved Fair and Balanced including claims development, margin of the assessment of margins of prudence, with a focus into areas where – The narrative reporting in the strategic prudence, claims costs infl ation, medical there were changes in methodology or practice. In making these report is consistent with the fi nancial trends and seasonality, which require a judgements, the Committee also considered reports from the external Governance statements, providing challenge and high level of judgement and actuarial auditor and is satisfi ed that the assumptions applied in calculating the expertise. claims provision are appropriate. feedback throughout the production of the Annual Report and Accounts. Property valuations: The Committee considered the results from external valuations Bupa has a signifi cant portfolio of care and discussed these with management in light of current trading – The key judgements referred to in the home and hospital properties which are performance of the businesses in which the properties are used and narrative reporting and the signifi cant revalued to fair value on a periodic basis, the external environment. The Committee considered and challenged issues reported within this Audit with external valuations undertaken Directors’ valuations where no external valuation had been carried out Committee Report are consistent at least triennially. The underlying and received information from management about material changes assumptions involved in the valuations, in valuation and any potential write downs. The Committee also with the fi nancial statements. including earnings, profi tability, reviewed reporting from the external auditors addressing the valuations – Statutory and adjusted measures, such as occupancy levels and future trends are to assess their reasonableness and considered the appropriateness of subject to a high level of judgement. disclosures made. A number of properties are classifi ed as held for sale underlying profi t have been given equal at 31 December 2016. The Committee is satisfi ed that property values prominence and are clearly explained. and disclosures for all properties, including those held for sale, are in – Key Performance Indicators refl ect compliance with fi nancial reporting requirements and are appropriate. those that are used to measure business Pension assets and liabilities: The Committee considered the appropriateness of the assumptions performance and management are able Bupa’s principal defi ned benefi t scheme used in the valuation of the related pension assets and liabilities to explain their relevance in assessing in the UK is The Bupa Pension Scheme. performed by the independent scheme actuary. The Committee Signifi cant judgement is exercised in challenged and reviewed internal management reports to determine the results. determining the actuarial assumptions their conclusions; supported by detailed triennial valuations with annual Financial statements Understandable used in valuing the pension asset/liability. interim reviews produced by the independent scheme actuary and is satisfi ed that the assumptions used in the valuation are appropriate. – Clear, simple explanations are given of The Committee received information from KPMG benchmarking the the business model, Bupa’s strategy and assumptions used in the valuation of pensions liabilities. The Committee accounting policies. concluded that the pension assumptions were appropriate. – Key messages are clearly highlighted Acquisitions and disposals: The Committee considered the proposed accounting for Care Plus and with consistent wording throughout the During 2016 Bupa completed the management’s approach to reporting the acquisition balance sheet Annual Report. acquisition of Care Plus, a Brazilian health given the transaction’s close proximity to year end. The Committee insurer. The purchase of Oasis Dental challenged management and concluded that the approach was – The layout and presentation are clear with Care, subject to regulatory approval in appropriate. Proposed disclosures for the purchase of Oasis Dental Care appropriate language used throughout. 2017, was also announced. were also presented to and challenged by the Committee including the proforma impact on solvency capital. The Committee has also reviewed the going concern assumptions and underlying In addition to the above, the Committee has considered any one-off transactions, such as the principles in the Longer Term Viability early redemption of the securitised loan notes, the disposal of Bupa Home Healthcare and the Statement. Overall, the Committee is satisfi ed acquisition of increased stakes in Bupa Chile and Max Bupa in the year and is satisfi ed that these that the assumptions and principles on have been appropriately recognised and disclosed in the fi nancial statements. which these are based are appropriate and reasonable. They also made an assessment as to whether the requirements of the risk management and internal control section of the Code have been satisfi ed. 36 Bupa Annual Report 2016

Governance report Audit Committee report continued

External auditors Under the new EU Audit Regulation Internal control and risk management Eff ectiveness transitional arrangements, Bupa will be assurance required to rotate audit fi rm at the next The Committee assessed the scope, fee, As noted in the Risks section on pages 17-21, appointment after 17 June 2020. In 2016, objectivity and eff ectiveness of the external Bupa has an ongoing process for the the Committee assessed tendering options audit process during the year. Prior to making identifi cation and management of its principal and decided not to place the external audit a recommendation on the reappointment risks and conducts the Internal Control and out to tender in 2016. After consideration of of KPMG, the Committee reviewed the Risk Management Assessment (ICRMA) to the requirements, the Committee decided to eff ectiveness of their performance against review the eff ectiveness of internal controls progress with the rotation of the audit fi rm for criteria which it agreed, in liaison with and how well risk management and policy the audit of fi nancial year ending 31 December executive management, at the outset of each compliance is embedded in Bupa. This is a 2019 at the earliest, but no later than for year’s audit. During 2016, the Committee fi rst line of defence self-assessment, subject fi nancial year ending 31 December 2021. The further developed the assessment of the to review and challenge by the second and Committee agreed it is likely to be disruptive eff ectiveness of the audit. third lines of defence, the results of which are to rotate the external audit fi rm earlier than for reviewed by the Committee. The Committee The Committee assessed KPMG’s fi nancial year ending 31 December 2019 when considered the results of the ICRMA at both eff ectiveness during Committee meetings signifi cant focus is being placed on delivering the half and full year. The Risk Committee will held in the year. The Committee also accelerated Solvency II reporting. In the assume this responsibility from January 2017. considered the results from: meantime, the Committee will continue to – the annual auditor satisfaction survey sent review the eff ectiveness of KPMG closely. During these reviews, the Committee did not identify any weaknesses which were to senior management across the Group; Auditor independence and non-audit determined to be signifi cant to the and services preparation of the fi nancial statements. To ensure that KPMG’s objectivity and – a survey sent to the Committee The Committee noted that there were no independence is safeguarded, the Committee members along with the Group CEO, signifi cant changes to the control environment has a formal policy addressing Bupa’s CFO, Chief Internal Auditor and the noted in the current year, signifi cant to the relationship with the external auditors, which Corporate Controller. preparation of the fi nancial statements. includes fi nancial approval limits for non-audit The Committee also noted the steps that The Committee considered a number of areas services and restrictions on the nature of had already been, and were planned to be, such as the overall quality of service, timeliness work that can be performed. As outlined in taken by management, to address those areas of the resolution of issues, the quality of the Bupa’s Audit and Non-Audit Services Policy, identifi ed, and the plans to further enhance audit resource and whether the audit plan the Audit Committee Chair or the Audit the internal control systems and strengthen was followed. The Committee is satisfi ed Committee must approve all non-audit related risk management. that KPMG continues to provide an eff ective engagements of £200k and above. In 2016, audit service. this policy was updated and approved by the The approach to the ICRMA continues The Committee requested and reviewed Committee to address the requirements as set to be subject to regular review and the external audit plan, ahead of it being out in the EU Audit regulation. The Committee enhancement by management to ensure approved to have the opportunity to reviews non-audit services provided by KPMG its continued eff ectiveness. challenge resources in meeting the plan. and other audit fi rms, on a quarterly basis, to assess any potential independence issues. Internal audit Mandatory rotation of external auditors As part of the evaluation of the external KPMG has been Bupa’s auditor since 1985 auditors, the Directors confi rmed that they Internal Audit provides the Committee and during this time, Bupa has not put the were satisfi ed that the external auditors had with assurance over the eff ectiveness of audit out to tender. Daniel Cazeaux was part maintained their independence. governance, risk and internal controls. of Bupa’s 2010 audit team and appointed as It reviews the eff ectiveness of controls by Bupa’s lead audit partner after the conclusion The non-audit fees paid to KPMG were undertaking an agreed schedule of internal of the 2013 audit. In accordance with the £1.4m representing a non-audit to audit fee audits each year. Internal audit operates within Financial Reporting Council Ethical Standard ratio of 0.2:1. Of the non-audit fees paid, a three lines of defence model (see page 17). he will rotate off Bupa’s account after the £0.6m was in relation to Solvency II assurance As the third line of defence, it supports Bupa completion of the fi nancial year ended activities and £0.3m was for tax services. in accomplishing its purpose by helping the 31 December 2016 audit. The Audit Committee Tax services contracted with KPMG were Board to protect the assets, reputation and Chair participated in the process to appoint terminated during 2016 to comply with EU sustainability of the organisation, and ensure a new lead audit partner Phil Smart along audit regulation. The audit and non-audit risks to the customer and the Bupa business with Bupa’s Group CEO, CFO and Corporate services are shown in Note 2.3 to the are appropriately managed. It reports its Controller. Phil participated in an induction fi nancial statements. fi ndings to the Committee and assists both process during the latter part of 2016 which The Committee was satisfi ed that KPMG the Board and management to improve the included presentations to and attendance at continued to be independent. In addition, eff ectiveness of governance, risk management Committee meetings. KPMG also annually reports on whether and internal controls. and why it deems itself to be independent. Bupa Annual Report 2016 37

In order to maintain the function’s function continue to be appropriate for the Plans for 2017 report Strategic independence and objectivity, the primary Bupa business. Across our global Internal In 2017, the Committee plans to: reporting line for the Chief Internal Auditor Audit function we have a diverse skill-set is to the Chair of the Committee. Bupa’s with the majority of the team holding – Continue to monitor the ongoing internal auditors have no direct operational accounting or internal auditing qualifi cations, programme of improvements in the responsibility or authority over any of the as well as having gained experience in control environment and receive regular activities audited. Where specifi c skills are insurance, health provision, transformation reports from the Internal Audit function. not available in-house, the Chief Internal or technology assurance. – Oversee the automation and effi ciency Auditor and the Chair of the Committee improvements in accelerated Solvency II have the ability to procure the services of Strengthening linkages with subsidiary Pillar 3 reporting. expert external advisers. During the year, we audit committees appointed PwC as Internal Audit’s fi rst global – Oversee the purchase price accounting co-sourcing provider. Bupa commenced Progress was made in strengthening linkages for major acquisitions such as those onboarding in December, ensuring we were with major subsidiaries. The Committee recently announced for Care Plus and well placed to bring additional expertise and Chairman held meetings with the Chair of Oasis Dental Care. Bupa Chile’s audit committee and the Chief insights to the fore in delivering the 2017 Plan. – Work closely with Bupa’s new KPMG Lead Financial Offi cers and Head of Internal Audit Audit Partner, Phil Smart and receive a The assurance provided by Internal Audit was of our Chilean and Spanish businesses during refreshed audit plan. a crucial part of the Committee’s consideration the Board’s visit to Chile. During the Board’s of Bupa’s overall control environment during visit to Melbourne, the Committee Chairman – Oversee the analysis and implementation Governance the year. In 2016, 106 audits were completed in held meetings with the Chair of the Australian of new accounting standards, particularly line with the Internal Audit Plan approved by board audit committee and Finance and the impact of the new insurance contracts the Committee. There was a particular focus Internal Audit managers of our Australian standard when it is fi nalised. on conduct risk and customer experience, business. The Committee Chair also holds change management activities, critical one-to-one calls with the Chairs of the audit business processes and data and digitalisation. committees of Bupa’s major subsidiaries The Committee received regular updates on throughout the year. internal audit activity as well as management’s progress in addressing audit fi ndings. Whistleblowing The Committee reviewed and approved the The Committee received regular updates on 2016 Plan and budget in December 2015. the adequacy and security of the Company’s The annual Plan is developed within the enhanced whistleblowing process, known context of a three year strategic internal as “Speak Up” which was launched in 2016. audit plan, using a risk based methodology A programme of communications to all Bupa’s including input from senior management people has commenced and the issues raised and the Board. In June, the Committee through this process will be brought to the approved a half year refresh of the 2016 Plan Committee for discussion on an ongoing basis. based on a refreshed risk assessment in line Financial statements with the Global Internal Audit methodology. The Committee also conducted an annual Committee eff ectiveness review review of the Internal Audit Charter and Overall, the Committee considered that recommended it to the Board for approval it was eff ective during 2016 and noted in December 2016. the need to continue strengthening of The function acts in accordance with management’s reporting to the Committee. the Global Institute of Internal Auditors’ International standards. In addition to the external assessment on the eff ectiveness of the function (due to be conducted again in 2018), Internal Audit maintains a quality assurance and improvement programme that includes an evaluation of the function’s adherence to these standards. The programme outcomes were reported to the Committee which concluded that the quality, experience and expertise of the 38 Bupa Annual Report 2016

Governance report Risk Committee report

Role of the Committee Committee governance The principal role of the Committee is The Chief Risk Offi cer continues to have to assist the Board in its leadership unrestricted access to all members of the and oversight of risk across Bupa. Committee. This includes: Sir John Tooke was appointed to the Committee on 1 January 2016 to further – Understanding and, where appropriate, strengthen the clinical membership. optimisation of current and future Simon Blair and Janet Voûte both joined risk exposures. the Committee on 11 May 2016. Roger Davis – Reviewing and recommending overall and Martin Houston stepped down on Lawrence Churchill risk appetite and tolerance to the Board. 11 May 2016. Members of the Committee are Committee Chair all Non-Executive Directors (NEDs) and this – Reviewing the consistency of corporate applied throughout the year; the Group CEO, strategy and risk appetite. “During the year the Committee CFO, Chief Risk Offi cer, Chief Medical Offi cer emphasised the embedding – Reviewing the risk management and Chief Internal Auditor are routinely invited framework including Enterprise Policies, to attend all meetings. Representatives from of the Risk Management process and controls. the external auditors, KPMG, are also invited to attend all meetings. The biographies Framework across the Group, – Receiving and considering reports on all of members can be found on page 25. categories of risk. supported the strengthening David Fletcher became Chief Risk Offi cer of information security – Promoting a risk awareness culture on 1 January 2017. The Committee expresses capabilities, identifi ed longer throughout Bupa. its thanks and appreciation to Gerry Kelly for his excellent support over the last three years, term emerging risks and A full description of the Committee’s role is set out in its Terms of Reference on bupa.com. as Chief Risk Offi cer. continued to strengthen In making this report, the Committee does not relationships with the board wish to duplicate the detailed description of risk committees of our Bupa’s Risks which are set out on pages 17-21 major subsidiaries.” and form part of the strategic report.

Risks see pages 17-21

Committee members Key items covered included:

Lawrence Churchill Chairman Simon Blair February – Country Concentration Risk/Governance of Information/Stress and Scenario Testing/ Clare Thompson Property Risk Concentration/Clinical Quality and Risk Quarterly Report/Clinical Risk Framework/Risk Committee Evaluation Sir John Tooke Janet Voûte April – Emerging Risks/Governance of Information/Draft ORSA Report & Policy/Brexit Impact Assessment/Stress & Scenario Testing/Worldwide Scenario Proposal/Chief Medical Offi cer’s Report July – Review of Insurance Programme/Group Actuarial Function Report – Year End 2015/ Group Risk Appetite Statement Review/Chief Medical Offi cer’s Report/UK Care Homes - Continuous Improvement Programme October – Crisis Management and Business Continuity Review/Remuneration – Risk Considerations/Group Risk Appetite Statements/ICRMA/Chief Medical Offi cer’s Report November – 2017 Insurance Compliance Plan/Information Risk Update/Insurance Risk Appetite/ Health & Safety Update Bupa Annual Report 2016 39

2016 activities Integrating oversight of clinical governance Risk and remuneration oversight report Strategic As set out in last year’s report, the The Committee’s capability was enhanced by During the year, the Committee provided a Committee’s focus for 2016 was to oversee the membership of Sir John Tooke, who had formal report as part of the Remuneration the embedding of Solvency II procedures, previously chaired the Medical Advisory Panel Committee’s assessment of the Company’s monitor enhancements to risk policies and now chairs the new Medical Advisory performance throughout the calendar year in and embedding in the fi rst line, monitor a Council, and by attendance of the Chief relation to risk management and performance. strengthening of our Information Security Medical Offi cer, who has been responsible This process continues to be developed and systems, dynamically monitor changing for the development of an enhanced Clinical as a result, more emphasis on Return on patterns of risk exposure and integrate the reporting system. The Chief Medical Offi cer Capital will be included in future assessments. oversight of Clinical Governance. presents a quarterly assessment of clinical The Chairman of the Committee also risks across Bupa operations. Both Sir John serves as a member of the Remuneration Solvency II Tooke and the Chief Medical Offi cer ensure Committee to ensure close liaison between Solvency II is a major focus and force for that the opportunities and risks arising the two Committees. good in strengthening risk management. from medical innovation are brought to Committee eff ectiveness review The Risk Management Framework, System the Committee’s attention. of Governance and the Senior Insurance Overall, the Committee considered that it was Managers Regime have been implemented. Strengthening linkages with subsidiary risk eff ective during 2016 and noted the need to committees continue to focus on areas such as developing Embedding risk policies Progress was made in strengthening an explicit linkage between Risk Appetite

The Committee encouraged management to linkages with major subsidiaries. Bupa’s suite and Strategy. Governance continue to strengthen the fi rst line of defence of 31 Enterprise Policies has been adopted with a view to embed the appropriate culture by the Boards of our major subsidiaries Plans for 2017 across the business. The Bupa Enterprise and deployment throughout the business Risk Committee plays a leading role as the continued. The Committee Chairman held In 2017, in addition to monitoring Bupa’s Risk most senior fi rst line executive committee. meetings with the Chief Risk Offi cer (CRO) for Profi le, the Committee plans to: During the year, we have seen improvements Spain and Latin America domestic business – Further develop its role alongside the risk in the self assessments provided by the during the Board’s visit to Chile, and with committees of our major subsidiaries. fi rst line via the Internal Control and Risk the Risk Chair and CRO of our Australian Management Assessment. In the most recent business during the Board’s visit to Melbourne. – Ensure an even closer connection between review, the Committee noted high standards In addition, as reported above, the Chairs of risk appetite and Bupa’s strategy. of performance in Australia and Spain and the Australian and Spanish subsidiary board – Focus on the embedding of current continued evolution required in the UK and risk committees attended the Committee’s Enterprise Policies. developing markets. meeting on emerging risks. The Chair of Bupa UK’s insurance company also attended – Continue to articulate emerging risks Strengthening our Information challenging Bupa’s strategy. Security Systems a Group Risk Committee meeting. We have signifi cantly strengthened Bupa’s During 2016, the Committee also considered information security capabilities, including the following:

the ability to detect and respond to hostile Financial statements cyber attacks. We recognise however that New market entry risk assessments it is impossible to claim complete immunity Throughout the year, the Committee from these threats and this remains a key considered the risks associated with Bupa’s area of focus for the business. expansion plans and those associated with each proposed major acquisition. Dynamically monitor changing patterns These reviews included the consideration of risk exposure of whether new market opportunities The Committee receives management’s were within risk appetite and the impact assessment of the top risk profi le each quarter. on Bupa’s solvency position arising from During 2016, the Committee held its fi rst growth through acquisition. examination of longer term emerging risks in a half day session which included participation from the Chairs of our Australian and Spanish board risk committees. A number of the ideas and questions raised have been carried through to our Board strategy sessions. 40 Bupa Annual Report 2016

Governance report Nomination & Governance Committee report

Role of the Committee 2016 activities The Committee leads the process for Board During 2016, the Committee considered the appointments and makes recommendations following: to the Board, as well as reviewing the balance Board succession of skills, experience, knowledge, structure and The Committee focused on Board recruitment composition of the Board and its Committees. during 2016. Evelyn Bourke was appointed as The Committee keeps Bupa’s governance Acting Group CEO when Stuart Fletcher structures under review and makes stepped down in April. The Committee agreed appropriate recommendations to ensure that, the key attributes required of Stuart’s where appropriate, Bupa’s arrangements are successor and considered both internal and Lord Leitch consistent with best practice governance external candidates against these criteria. Committee Chair standards. The Committee also identifi es and Lawrence Churchill in his capacity as the selects suitable Association Member (AM) Senior Independent Director and I, together “In 2016, the Committee oversaw candidates. with Elisa Nardi the Chief People Offi cer, prepared a detailed role specifi cation and the the appointment of a new Group A full description of the Committee’s role is set JCA Group was retained to provide external out in its Terms of Reference on bupa.com. Chief Executive Offi cer to drive search consultancy services. JCA also Bupa forward and enhance our provided consultancy services for other Committee governance strategy and performance. executive roles within Bupa. At the conclusion Members’ biographies can be found on page of this process, the Committee unanimously We also oversaw the appointment 25. Martin Houston, Clare Thompson and Sir agreed to recommend to the Board that of a new Chief Financial Offi cer John Tooke were appointed to the Committee Evelyn be appointed as Bupa’s Group CEO. on 11 May 2016. Evelyn Bourke joined the Upon appointment, Evelyn formally and two new Non-Executive Committee on 25 July 2016. Stuart Fletcher recommended to the Board that Joy, who had Directors to the Board.” stepped down from the Committee on 4 April been Acting CFO, be appointed to the role in a 2016. Rita Clifton stepped down on 11 May permanent capacity. The Committee 2016 following her retirement from the Board. discussed Joy’s performance as Acting CFO The Chief People Offi cer and CFO are invited and concluded that it was supportive of Joy’s to attend meetings where considered appointment as the CFO. appropriate.

Committee members Key items covered included:

Lord Leitch Chairman Evelyn Bourke February – Bupa’s Annual Report & Accounts 2015: Corporate Governance Report/Board Lawrence Churchill Succession & Board Committee Membership/Subsidiary Non-Executive Director Appointment/Association Members Update/Board & Committee Evaluation Process Martin Houston 2016/Board Development & Training Update/Non-Executive Director Expenses Clare Thompson Sir John Tooke May – Group CEO Recruitment Process July – Group CEO Recruitment Update/Appointment of CFO/Subsidiary Non-Executive Director Appointment September – Succession Planning/Association Members Update/Board Evaluation/Committee Terms of Reference December – AM Update, Compliance with UK Corporate Governance Code/Corporate Governance Issues Update Bupa Annual Report 2016 41

Simon Blair and Janet Voûte were both report Strategic appointed as NEDs on 12 January 2016. The recruitment process undertaken with Ridgeway Partners LLP was reported on in the 2015 Annual Report. Our approach to Board diversity is explained on page 29. UK Corporate Governance Code The Committee continued to monitor Bupa’s compliance with the UK Corporate Governance Code (the Code) with an update in December 2016. Governance issues The Committee receives regular updates on emerging governance issues which are subsequently shared with the wider Board. For example, during the year the Committee discussed the Government’s green paper on Governance Corporate Governance Reform, in addition to other governance developments. Association Members The Committee agreed at its meeting in September 2016 that there was no need to identify any further AMs because there were 115 AMs at the year end with only fi ve AMs scheduled to retire during 2017. There would therefore continue to be in excess of 100 AMs, our target number, at the end of 2017. Committee eff ectiveness review Overall, the Committee considered that it was eff ective during 2016 and noted the continued need to focus on succession planning.

Plans for 2017

In 2017, the Committee plans to focus on Financial statements Board succession planning, including identifying the key skills, knowledge and experience that the Board requires for the future and the possible recruitment of a new NED. The Committee will also keep under review the need to undertake a further recruitment exercise for AMs. 42 Bupa Annual Report 2016

Remuneration report Part 1: Committee Chairman’s letter

On behalf of the Board, the Remuneration Tax, Return on Capital Employed and Committee is pleased to present the Customer measures. For both the MBS Directors’ Remuneration Report for 2016. and the LTIP, in addition to the scorecards, the Committee will be applying an overall Role of the Committee adjustment based on risk management across Bupa. We seek to ensure that we are not only rewarding people for delivering great The Committee has worked closely with its customer outcomes and long-term advisers and management in developing these sustainable performance against our agreed plans and the Remuneration Policy, which strategies and plans, but also putting in place refl ect a shared agenda in how Bupa rewards Martin Houston reward structures that attract and motivate future performance, with customers and risk Committee Chairman the very best people and ensure our people management at the heart of what we do. love working at Bupa. I am convinced that we are delivering and at times exceeding 2. Solvency II compliance our goals, though we cannot and will not “This year the Committee Much of our 2016 agenda was focused on rest here. There is still much to achieve. reviewed the Directors’ making sure we both understood and then implemented changes to our policies to Remuneration Policy, compliance 2016 activities ensure compliance with our evolving approach with Solvency II remuneration It has been a busy year for the Committee and to the Solvency II remuneration requirements. requirements, governance for the fi rst time we held a half-day strategy Further, we put in place arrangements to deal meeting and agreed to increase our number with individuals covered by the regulations, arrangements for subsidiary of meetings for 2017 to deal with increasing e.g. Solvency II identifi ed staff . board remuneration committees regulatory requirements. and remuneration packages for I would like to highlight four key areas where 3. Introduction of remuneration committees for subsidiary boards all new BET appointments.” we have focused our time and made tangible and positive progress. We are making excellent progress with the establishment of remuneration committees in 1. Directors’ Remuneration Policy our Australia and New Zealand (ANZ) Market Bupa’s current Directors’ Remuneration Unit, as well as our UK regulated entity Bupa Policy was approved at the 2014 Annual Insurance Limited (BINS). The Hon. Nicola General Meeting (AGM). In line with reporting Roxon will chair the ANZ remuneration requirements applying to listed companies, committee and the chairman of the new which require those companies to submit BINS Remuneration Committee will be the Directors’ Remuneration Policy to nominated by the BINS board shortly. shareholders for approval every three years, Terms of Reference will ensure that the the Committee undertook a detailed review responsibilities of these committees and of the existing policy and propose a number how they interact with this Committee, of changes which are incorporated into the are clear. They will also take account of revised policy and will be presented for any specifi c local regulatory requirements. approval at the 2017 AGM. 4. Executive appointments From 2017, one of the key changes is the The year was dominated by key personnel balanced scorecard for measuring changes at Executive Director and Bupa performance for both the Management Executive Team (BET) levels. As well as the Bonus Scheme (MBS) and the Long Term appointments of the new Group CEO and Incentive Plan (LTIP). The objective for this CFO, there were six new BET appointments. change is to ensure we use measures based The Committee agreed the terms for both on reinforcing the sustainable long-term incoming and outgoing executives and fi nancial strength of Bupa enabling us to retirements contemplated at year end. In all deliver on our purpose; helping people to cases, we carefully reviewed all elements In the Remuneration report: live longer, happier, healthier lives. of remuneration and used benchmarking Part 1: Committee Chairman’s letter For the short-term MBS scorecard, Profi t, prepared by Mercer, remuneration advisors Revenue, Risk Adjusted Profi t, Cost Effi ciency to the Committee and management, to Policy Part 2: and Customer have been set as the measures. calibrate our proposals. Part 3: Implementation (audited) For the LTIP scorecard, we will use Profi t After Bupa Annual Report 2016 43

Performance and Pay in 2016 The Committee approved bonuses of 83.7% Plans for 2017 report Strategic and 87.6% of target bonus opportunity for In 2017, the Committee plans to: Salary the Group CEO and CFO respectively, – Further develop our approach to The Committee has decided in light of salary this payout also includes an individual remuneration to refl ect updated increases awarded in 2016 upon appointment performance modifi er which takes into Solvency II guidance; to Group CEO and CFO, that no further salary account strong individual performance during increases should be awarded for 2017. the year. A partial mandatory deferral of the – Continue with the development of MBS was introduced in 2014 and therefore subsidiary board remuneration committees; Management Bonus Scheme a proportion of these bonuses has been deferred for three years and is subject to – Review new approaches to compensation As you will have seen, our business performed malus and clawback provisions over this and best practice; and solidly in challenging market conditions. period. More details are provided on page 45. We achieved good profi t growth in our – Build on measuring customer and risk and their infl uence on the outcome of three largest Market Units – Australia and Long Term Incentive Plan New Zealand, the UK, and Europe and incentive awards. The 2014-16 LTIP vesting is based on Latin America – while performance within We are committed to being open and performance against Profi t After Tax (PAT) International Markets was impacted by a transparent with our Association Members. and Revenue, and quality and sustainability signifi cant decline in profi t within Bupa Global. In addition to the familiar advisory vote on targets. In reviewing the vesting of this LTIP, the Remuneration Report, we will this year

The Management Bonus Scheme (MBS) for the Committee exercised its discretion to Governance have advisory votes on Bupa’s Remuneration 2016 refl ects Bupa’s performance not only exclude the impact of the redemption of Policy and the proposed LTIP. against profi t and revenue targets, but also secured loan notes, which was deemed to non-fi nancial measures including risk, people be a strategic decision taken to optimise the I am available to our Association Members and customer. Group’s borrowings for the future and the on any aspect of Bupa Remuneration. 2016 one-off charge was not a refl ection of To recognise signifi cant achievements in Martin Houston performance in the 2014-2016 period. As with a year that saw changes to our strategy, Committee Chairman the leadership team, the organisational the MBS, while the Committee noted that structure and to organisational processes, progress had been made during the year on 1 March 2017 the Committee approved adjustments to risk management, the Committee decided to the vesting level of the MBS to mitigate the apply a reduction to the vesting percentage. eff ect of the disposal of BHH and the fact As stated in last year’s Directors Remuneration that the transaction costs relating to the Report, the Committee calculated vesting of purchase of Oasis Dental Care fell in 2016. LTIP using an equal balance of actual and The Committee also discussed the constant exchange rates to ensure the LTIP eff ectiveness of the management of risk. outcome refl ects both actual results and It received input from the Risk and Audit controllable performance. Committees of the main Board as well as Based on this and Bupa’s performance against of the main subsidiary Boards. While the targets calculated as per plan rules, the Financial statements Committee noted that progress had been 2014-16 LTIP vested at 87.65% of target. made during the year, the Committee decided to apply a reduction to the vesting percentage.

Single figure remuneration 2016 (£000)

Total 18 £000 309 93 215 680 Stuart Fletcher 1,315

376 69 91 180 102 Joy Linton 818 17 729 195 480 416 Evelyn Bourke 1,837

Base Salary Pension Other Benefits Management Bonus Scheme LTIP

For more information please see page 48. 44 Bupa Annual Report 2016

Remuneration report Part 2: Policy

Context The aim of Bupa’s remuneration policy is to promote the long-term success of the Company and motivate management to deliver strong and sustainable business performance aligned with Bupa’s purpose: helping people live longer, healthier, happier lives. The policy is intended to deliver a competitive level and mix of remuneration compared with companies of a similar scale and complexity to Bupa.

Remuneration policy table – Executive Directors

Base Salary Management Bonus Scheme Long Term Incentive Plan Pension Benefi ts

Purpose and link to strategy Core element of remuneration To drive behaviour and to To motivate and incentivise To provide an income after To attract and retain Executive set to attract and retain promote focus on the business delivery of sustained retirement, health security Directors by providing health Executive Directors, refl ecting priorities for the year. performance over the long and family protection benefi ts. and wellbeing benefi ts and their role and contribution. To motivate and incentivise term aligned to Bupa’s providing security for families. delivery of performance over strategic objectives. the annual operating plan.

Operation Salary levels are reviewed Bonus levels and the As Bupa cannot provide For the current Executive Executive Directors are entitled annually with any changes appropriateness of measures incentives based on equity Directors and new to a number of taxable benefi ts becoming eff ective in April. and weightings are reviewed participation, it provides an appointments, the Company which may include private Factors taken into account annually to ensure they continue LTIP in the form of a deferred operates a defi ned contribution health cover for themselves and include: to support the business strategy. cash incentive that is broadly pension scheme, called their family, an annual health refl ective of equity-based plans The Bupa Retirement Savings assessment for themselves – Level of skill, experience Performance over the fi nancial year is measured in comparable companies. Plan. Executive Directors and their partner, life insurance, and scope of responsibilities have the option to take any income protection insurance, of the individual; against stretching fi nancial Awards are usually made on and non-fi nancial performance an annual basis and relate to employer contribution as a cash car allowance and 30 days’ –Overall business targets set at the start of the performance over a three-year allowance or a combination annual holiday. The Group CEO performance, fi nancial year. period. of pension contribution and is entitled to the use of a car and cash allowance. driver instead of a car allowance. scarcity of talent, economic Typically 50% of any bonus Vesting of awards is based climate and market awarded will be deferred for a on the extent to which The benefi ts off ered may conditions; period of up to three years, with performance targets, set and need to be changed from time to time to refl ect changing – Increases across Bupa, the remaining 50% paid in cash. assessed by the Committee, circumstances. and; To account for any loss of value are achieved. over time, a modest uplift will be Any payments will be made – External market data. applied to the deferred amount. at the end of the performance period and a portion may be deferred for up to two years.

Maximum opportunity Salary increases are normally The maximum bonus The maximum award will not Executive Directors who are There is no specifi c maximum in line with those of the Bupa opportunity will not exceed exceed 275% of base salary. eligible to be members of The benefi t spend. employee population. 200% of base salary. Bupa Retirement Savings Plan Larger increases may be given receive employer contributions in certain circumstances of up to 30% of base salary. including where a new recruit has been appointed on lower than market rate salary with the expectation of phased increases to bring it up to market level. The Committee does not consider it appropriate to set a maximum salary level.

Performance metrics None MBS payments are based on Vesting of awards is based None None the achievement of challenging on performance against a fi nancial and non-fi nancial combination of fi nancial and objectives. non-fi nancial measures. No less than 75% of the annual Threshold performance results bonus will be subject to the in a payment of 15% of the achievement of fi nancial maximum. measures which will be aligned No less than 75% of the LTIP will to the strategic priorities of be based on fi nancial measures the business. with the remainder based on measures linked to key strategic priorities of the business. Bupa Annual Report 2016 45

Malus and clawback Circumstances in which the operation of Performance measures and target report Strategic Malus and clawback provisions may be these provisions may be considered include: setting operated at the discretion of the Committee – Misstatement of results; Measures and targets for the MBS are aligned in respect of awards granted under the MBS to delivery of Bupa’s annual operating plan – An error in assessing any relevant and LTIP. Malus (under which awards may and may include personal objectives that performance metric or in the information be reduced, cancelled or made subject to change from year-to-year. additional conditions) may be applied prior or assumptions on which the MBS or LTIP to the payment of the award. Clawback is determined; Measures and targets for the LTIP are set by the Remuneration Committee taking into (requiring a repayment of cash which has – Serious reputational damage to Bupa or account a number of internal and external been delivered) may be operated for up to a relevant business unit; three years following payment of the non- reference points which include historic Bupa deferred element of the MBS and fi ve years – A scenario in which signifi cant risk has performance, internal forward-looking plans from grant for the LTIP. been taken which is outside of Bupa’s or and broader market trends. Targets are set a relevant business unit’s risk appetite; for vesting at threshold, ‘on-target’ and out-performance levels. – Gross misconduct or material breach of employment contract; and – Any other circumstance which the Remuneration Committee in its discretion Governance considers to be similar in nature or eff ect to the above.

Illustrations of the application of the remuneration policy Bupa aims to provide a balance of fi xed and variable compensation that provides stability while also incentivising superior business performance. At target, over 50% of Executive Directors’ remuneration is based on individual and company performance. The graph illustrates the possible variation for diff erent levels of performance.

Remuneration at various levels of performance (£000) Evelyn Bourke Group CEO Total 21 £000 800 240 Fixed pay 1,061

800 240 800 1,100 Financial statements On target1 2,961

800 240 1,600 2,200 Maximum2 4,861

Base Salary Pension Benefits Management Bonus Scheme LTIP

Joy Linton CFO

16 550 165 Fixed pay 731

550 165 413 688 On target1 1,832

550 165 825 1,375 Maximum2 2,931

Base Salary Pension Benefits Management Bonus Scheme LTIP

1 On target fi gures have been calculated on the basis that Bupa achieves target fi nancial and non-fi nancial performance and individual multiplier is set at 100%. 2 Maximum fi gures have been calculated on the basis that Bupa achieves maximum fi nancial and non-fi nancial performance and individual multiplier is set at 200%. 46 Bupa Annual Report 2016

Remuneration report Part 2: Policy continued

Remuneration Committee discretion Approach to remuneration policy on In the case of internal promotions, any The Remuneration Committee has ultimate recruitment of an Executive Director commitments made before appointment may continue to be honoured unless an discretion over all incentive plans relating to Our approach to remuneration on recruitment alternative approach, more closely aligned the Executive Directors and other individuals is to pay no more than is necessary and to the prevailing policy, is agreed by the within its remit. This includes, but is not appropriate to attract the right talent to the role. limited to: Remuneration Committee. The remuneration policy table on page 44 Any special joining arrangements may include – determining the size of the award/payment; sets out the various components which malus and/or clawback, for example, tied to would be considered for inclusion in the – determining whether minimum levels of leaving within a certain period. performance have been met or underlying remuneration package for the appointment of an Executive Director. Typically a new performance is satisfactory before Diff erences in remuneration policy determining vesting of any awards; appointment will have (or be transitioned onto) the same framework that applies to for Executive Directors compared with – determining whether the management of other Executive Directors as set out in the other employees risk has been acceptable, or whether any policy table. Salary would refl ect the skills The Remuneration Policy for the Executive downward adjustments are required; and experience of the individual, and may be Directors is designed to be broadly similar to – choosing or adjusting performance set at a level to allow future salary progression the policy applicable to Bupa employees to measures within the Remuneration Policy to refl ect performance in the role. ensure that they are all aligned to delivering and the plan rules; It would be expected that the structure and sustainable business performance. Although the size of the opportunity varies, the – determining whether individuals are good quantum of the variable pay elements would refl ect those set out in the policy table. underlying principles of the salary review leavers for incentive plan purposes, based cycle, MBS and LTIP remain the same for on plan rules; The Committee reserves the right to make the senior employee population. any remuneration payments or payments for – making one-off adjustments in exceptional Junior employees are not eligible for LTIP circumstances. loss of offi ce where the terms of the payment were agreed (i) before the remuneration awards, although most have an MBS policy came into eff ect or (ii) at a time when opportunity. In some cases, additional the relevant individual was not a Director fl exibility has been introduced for the of the company and, in the opinion of Executive Directors and senior employees the Committee, the payment was not in (e.g. to provide choice to receive cash in consideration for the individual becoming lieu of pension contributions) to allow for a Director of the company. personal circumstances. To facilitate recruitment, the Committee may A small number of senior managers across make compensatory payments and/or awards Bupa participate in the LTIP, based on the for any remuneration arrangements subject same framework as the Executive Directors, to forfeit on leaving a previous employer. with award levels calculated as a percentage We will seek to replicate, as far as practicable, of salary which is scaled down based on the potential value and time horizon of their level of seniority and accountability. such remuneration, as well as performance Vesting of the awards is dependent upon conditions that may apply. In some performance against specifi c fi nancial and circumstances, it might also be necessary non-fi nancial measures over a three-year to set up additional or alternative performance period. arrangements including but not limited to: – Relocation-related expenses; and – International assignment allowances and expenses. Bupa Annual Report 2016 47

Policy on payments for loss of offi ce Provision Policy report Strategic The table to the right summarises the key Notice period and – 12 months’ notice from the Company to the Executive Director. elements of our policy on payment for compensation – Up to 12 months’ base salary (in line with the notice period). Notice period payments loss of offi ce, which will comply with the for loss of offi ce in will either be made as normal (if the Executive Director continues to work during the relevant plan rules and will consider local service contracts notice period or is on garden leave) or at the termination date for any unexpired notice employment legislation. period. Any payments made due to loss of offi ce may include malus or clawback provisions Treatment of MBS – The Committee may make a MBS payment for the year of cessation depending on as described under malus and clawback on loss of offi ce the reason for leaving. Typically, the Committee will take into consideration the on page 45. under plan rules period served during the year and the individual’s performance up to cessation. Any such payment is at the discretion of the Committee.

Service contracts for Executive – Any MBS will be paid at the normal time following the end of the performance Directors year. Executive Directors have a 12-month rolling employment contract. The notice requirements are 12 months from both the Company and Treatment of – An Executive Director’s award will vest in accordance with the terms of the plan the individual, which may be payable in lieu. LTIP on loss and satisfaction of performance conditions measured at the normal completion of The contracts also include specifi c post- of offi ce under the performance period if the reason for leaving is redundancy, pre-agreed Governance termination restrictions. Executive Directors plan rules retirement, early retirement on the grounds of ill health, death or any other special are usually permitted, subject to approval, to circumstance agreed by the Committee. In these cases, fi nal awards will be have one external Non-Executive Director pro-rated based on completed months of service, in 36ths for the actual period of active employment during the plan performance period. The period of active role and to accept and retain the fee for this employment excludes any period of garden leave or other such period when the appointment. This is on the condition that any Executive Director was legally employed but not required to actively carry out external appointment does not give rise to a their duties. For any other reason, they will not be eligible for an LTIP payment. confl ict of interest. – Any LTIP payment will be paid at the normal time e.g. in April following the end of the performance period, or two years later for any deferral.

Pension – Generally pension and benefi t provisions will continue to apply until the and benefi ts termination date.

Remuneration policy table – Non-Executive Directors

Service contracts for Purpose and Financial statements Non-Executive Directors Element link to strategy Operation Terms of engagement for the Non-Executive Fees To attract and provide The Chairman receives an all inclusive fee. stability, refl ecting the NEDs receive a fi xed basic fee. Additional fees are paid for chairing and Directors of Bupa set out the fees and complexity of the membership of Board Committees and/or additional work in relation to benefi ts to which they are entitled as well role and time commitment subsidiaries, and for the Senior Independent Director role. as the expectation of the time commitment required required to eff ectively perform their role. Fees are reviewed annually by the Board with any changes implemented Copies of the standard terms of engagement in July. Key factors taken into account include: are available on bupa.com. –Overall business performance; The table to the right describes the pay – Scope and responsibility of the role; policy as it applies to the Chairman and – Appropriate market data; and Non-Executive Directors. – NEDs are not eligible for any form of variable pay.

Benefi ts To provide health and During their time in offi ce, NEDs are entitled to private health cover wellbeing benefi ts aligned for themselves and their family and an annual health assessment for with Bupa’s purpose themselves and their partner. The Chairman is also entitled to the use of a car and driver. These benefi ts are taxable. Travel and subsistence expenses for attending Bupa meetings are reimbursed as well as the additional tax and NIC, where these are treated as taxable income. 48 Bupa Annual Report 2016

Remuneration report Part 3: Implementation (audited)

The Implementation Report sets out details Detail of performance against metrics The Committee assessed the profi t and of Executive Directors’ and Non-Executive for MBS revenue elements against the targets set at Directors’ pay and shows how the Executive the start of the year and are comfortable For 2016, the Group CEO’s target bonus Directors’ and Non-Executive Directors’ that the amounts earned refl ect Bupa’s opportunity was 100% of salary with a remuneration policy has been implemented underlying fi nancial performance. maximum of 150% of salary. The CFO’s in 2016 and how it will be applied for 2017. target bonus opportunity was 75% of The fi nancial targets for the MBS and actual As well as disclosing remuneration fi gures for salary with a maximum of 112.5% of salary. performance of the Company are shown in the Executive Directors, it includes details on The performance measures used to the table below. the degree to which performance targets have determine the 2016 annual bonus for our been achieved and the resulting level of MBS Our business performed solidly in challenging Executive Directors were as follows: payout and vesting of LTIP. market conditions. We achieved good profit – Group profi t (50% of award) – similar to growth in our three largest Market Units – Set out below is a table showing a single total underlying profi t before taxation, with the Australia and New Zealand, the UK, and fi gure of remuneration for each Executive most signifi cant diff erences being the Europe and Latin America – while Director in 2016. Comparable fi gures for 2015 inclusion of restructuring and transaction performance within International Markets are also included in this table. costs on acquisitions and disposals; was impacted by a signifi cant decline in profi t within Bupa Global. – Group revenue (25% of award) – includes Bupa’s proportionate share of revenue from The MBS for 2016 refl ects Bupa’s performance associates and joint ventures, which is not not only against profi t and revenue targets, included within reported revenue; and but also non-fi nancial measures including risk, people and customer. – Non-fi nancial metrics (25% of award).

Executive Directors: Single total fi gure of remuneration

Salary Benefi ts MBS1 LTIP 1 Pension Total Director Year £000 £000 £000 £000 £000 £000

Evelyn Bourke2 2016 729 17 480 416 195 1,837

2015 523 16 382 215 157 1,293

Joy Linton3 2016 376 91 180 102 69 818

2015––––––

Stuart Fletcher4 2016 309 18 215 680 93 1,315

2015 730 48 681 403 219 2,081 Notes 1 MBS refers to bonus payments earned during that year, and LTIP refers to payouts from the performance period which ended in that year. 2 Evelyn Bourke’s salary was £548,500 from 1 April 2016 and increased to £800,000 upon appointment to Group CEO. She received an allowance for the period she was Acting Group CEO and received cash in lieu of pension contributions. She was a Non-Executive Director of IFG and received a fee of £40,192 in respect of her position, which is not disclosed in the table above. 3 Joy Linton was an international assignee prior to her appointment as CFO. Her salary was AUD 613,380 and she received additional allowances and benefi ts relating to this. She also received an allowance for the period she was Acting CFO. Joy’s salary was increased to £550,000 from 1 August 2016 upon appointment to CFO. The Annual Bonus and LTIP fi gures for the period prior to appointment to CFO are based on AUD and have been converted into GBP in the table above using the 2016 Bupa business Plan exchange rate of 1 GBP : 2.24 AUD which is an internal rate fi xed at the start of the Plan year to report incentives across Bupa. 4 Stuart Fletcher is a former executive director having left Bupa on 31 May 2016. His salary was £753,375 from 1 April 2016 and he received £991,787 as pay in lieu of notice. He received cash in lieu of pension contributions.

2016 MBS payout Evelyn Bourke5 Joy Linton6 Stuart Fletcher7 Threshold On Target Stretch Actual Max Actual Max Actual Max Actual Performance Performance Performance Performance bonus payout bonus payout bonus payout Level Level Level Level % of % of % of % of % of % of £m £m £m £m salary salary salary salary salary salary Group profi t 569.5 632.8 696.1 600.9 64.1% 27.9% 53.9% 30.3% 75.0% 22.8% Group revenue 9,831.9 10,924.3 12,016.7 10,376.2 32.0% 14.0% 26.9% 15.2% 37.5% 11.4% Non fi nancial metrics ––––32.0%14.0%26.9%15.2%37.5%11.4% Total 128.1% 55.8% 107.8% 60.6% 150.0% 45.7%

5 The actual payout fi gures for Evelyn Bourke include an adjustment to the whole bonus for personal performance. Evelyn’s individual multiplier for 2016 was 110%. The fi gure shown for Max Bonus (as % of salary) is pro-rated to refl ect time in roles and salary earned in the year. 6 The actual payout fi gures for Joy Linton include an adjustment to the whole bonus for personal performance. Joy’s individual multiplier for 2016 was 115%. The fi gure shown for Max Bonus (as % of salary) is pro-rated to refl ect time in role and salary earned as an Executive Director in the year. 7 The actual payout fi gures for Stuart Fletcher include an adjustment to the whole bonus for personal performance. Stuart’s individual multiplier for 2016 was 90% and the actual payout was reduced pro-rata based on his time served in 2016. Bupa Annual Report 2016 49

To recognise signifi cant achievements in a year Interests awarded during 2016 Within the LTIP scorecard, profi t after tax is report Strategic that saw changes to our strategy, the leadership During the year, LTIP awards for the 2016-2018 weighted at 75% and revenue is weighted team, the organisational structure and to Plan were made to the Executive Directors. at 15%. For any level of payout to occur for organisational processes, the Committee The Plan covers the three-year performance achievement of revenue performance, a approved adjustments to the vesting level of period to 31 December 2018. Subject to the performance gateway applies in that the the MBS to mitigate the eff ect of the disposal achievement of performance conditions, up to profi t after tax threshold must be achieved. of BHH and the fact that the transaction costs 50% of the award may be paid in April 2019 The remaining 10% weighting for the LTIP is of Oasis Dental Care fell in 2016. with any excess being deferred for a further based on the improvement in the customer and brand dashboard. The targets for the The Committee also discussed the two years. fi nancial measures are set annually within eff ectiveness of the management of risk. each of the plan years. The 2016 metrics It received input from the Risk and Audit are set out in the tables below. Committees of the main Board as well as of the main subsidiary Boards. While the Committee noted that progress had been made during the year, the Committee decided to apply a small reduction to the vesting percentage. Financial targets 2016-2018 LTIP (90% weighting) The Committee approved bonuses of 83.7% 2016 targets Governance and 87.6% of target bonus opportunity for Profi t after tax Revenue the Group CEO and CFO respectively, Weighted 75% Weighted 15% this payout also includes an individual Below threshold performance 0% vesting performance modifi er which takes into < 4% p.a. < 3% p.a. account strong individual performance during Threshold performance 15% vesting 4% p.a. 3% p.a. the year. A partial mandatory deferral of the On-target performance 50% vesting 7% p.a. 5% p.a. MBS was introduced in 2014 and therefore a proportion of these bonuses has been Out-performance 100% vesting 10% p.a. 8% p.a. deferred for three years and is subject to Notes malus and clawback provisions over this Growth is measured as annual growth rate. period. More details are provided on page 45. Straight-line vesting occurs between the discrete levels of achievement.

2014-2016 LTIP vesting The 2014-16 LTIP vesting is based on Customer targets 2016-2018 LTIP (10% weighting) performance against Profi t After Tax (PAT) and Revenue, and quality and sustainability 0% vesting Outcomes and improvements are signifi cantly below expectations targets. In reviewing the vesting of this LTIP, the Committee exercised its discretion to 30% – 70% vesting Outcomes and improvements are broadly in line with expectations Financial statements exclude the impact of the redemption of 70% – 100% vesting Outcomes and improvements are signifi cantly above expectations secured loan notes, which was deemed to be a strategic decision taken to optimise the Group’s borrowings for the future and the The table below shows the detail of the awards made to the Executive Directors in the year. 2016 one-off charge was not a refl ection of performance in the 2014-2016 period. As with Long Term Incentive Plan the MBS, while the Committee noted that progress had been made during the year on 2016-2018 Long-Term Incentive Plan risk management, the Committee decided to Scheme Type Evelyn Bourke Joy Linton Stuart Fletcher1 apply a reduction to the vesting percentage. 200% of 120% of 275% of Basis of award base salary base salary base salary As stated in last year’s Director’s Remuneration Report, the Committee Face value of award (100% of award) £1,070,000 £321,429 £2,021,250 calculated vesting of LTIP using an equal Amount that would vest at on-target performance balance of actual and constant exchange rates (50% of award) £535,000 £160,714 £1,010,625 to ensure the LTIP outcome refl ects both Amount that would vest at threshold performance actual results and controllable performance. (15% of award) £160,500 £48,214 £303,188 Date performance period ends 31 December 2018 Based on this and Bupa’s performance against Payment due date April 2019, and April 2021 (for deferred amount) targets calculated as per plan rules, the 2014-16 LTIP vested at 87.65% of target. 1 Stuart Fletcher will have pro rata vesting applied to any payout based on his employment ending 31 May 2016. 50 Bupa Annual Report 2016

Remuneration report Part 3: Implementation (audited) continued

Historical payout table Management Bonus Scheme Long-term incentive The table to the right shows levels of payout Single fi gure payout against vesting rates to the Group CEO against the maximum of total remuneration maximum against maximum incentive opportunity for the last fi ve years. Year Group CEO (£’000) opportunity % opportunity % 2016 Evelyn Bourke1 1,837 56% 67%

2016 Stuart Fletcher2 1,315 46% 67%

2015 Stuart Fletcher 2,081 62% 30%

2014 Stuart Fletcher 2,812 82% 71%

2013 Stuart Fletcher 1,703 71% **N/A3

20124 Stuart Fletcher 1,670 100% **N/A3

20124 Ray King 1,797 67% 83%

1 Evelyn Bourke was appointed Group Chief Executive Offi cer on 21 July 2016. 2 Stuart Fletcher left Bupa on 31 May 2016 and annual bonus payment refl ects a pro-rated payment. 3 Stuart Fletcher did not receive payouts from these plans. However, the payment to other eligible participants was 83% in 2012 and 84% in 2013. 4 Stuart Fletcher joined Bupa on 1 March 2012 and Ray King retired on 30 June 2012.

Percentage change in remuneration of the Group CEO

The table to the right shows the change in Group CEO Employees salary, benefi ts and short-term incentives Salary 0.5% 2.49% (annual bonus) for the Group CEO in 2016 Benefi ts (excluding pension) -58.37% no material change compared to 2015 alongside a corresponding average fi gure for the Bupa employee Short Term Incentives -18.93% 6.84% comparator group. The UK salaried 5 The UK salaried population refers to the UK-based permanent employees whose records are held on the HR database. population5 has been chosen by the Committee as the most appropriate comparison, as the Group CEO is located in the UK.

Relative importance of spend on pay

The table to the right shows the relative Diff erence importance of spend on pay. Given that Bupa 2016 2015 2016-2015 does not have shareholders and therefore (£m) (£m) (£m) does not pay dividends, cash fl ow used in Remuneration paid to all employees 1,905.2 1,653.7 251.5 investing activities has been shown as an Cash fl ow used in investing activities 310.0 695.3 -385.3 alternative measure.

Payments for loss of offi ce The following was approved by Bupa’s He received a payment of £991,687. This was period of his employment to 31 May 2016, subject Remuneration Committee in accordance with in lieu of 12 months’ salary (£753,375), car to the rules of the scheme. Any such payment Bupa’s Remuneration Policy and Stuart Fletcher’s allowance (£12,300) and pension allowance (subject to any deferral) would be paid in contract of employment. (£226,012). Mr Fletcher’s healthcare and life March or April 2017. He will also receive good cover will continue until 31 May 2017, and the leaver treatment under Bupa’s Long Term Mr Fletcher remained an employee until 31 May company contributed £40,000 plus VAT in Incentive Plans (LTIPs) of which he is a member, 2016 to provide support to the Acting Group respect of outplacement support for him, and with pro rata vesting based on his employment CEO, Evelyn Bourke, who took over Mr £10,000 plus VAT in respect of legal fees ending on 31 May 2016. All MBS and LTIP awards Fletcher’s responsibilities. He continued to incurred by him in connection with his departure. will be subject to the rules of the plans receive his current salary and benefi ts until (including, for example, malus and clawback that date. Bupa will treat Mr Fletcher as eligible for MBS and the satisfaction of any applicable under the 2016 bonus scheme pro rata for the performance conditions). Bupa Annual Report 2016 51

Statement of Implementation of Remuneration Policy in 2017 report Strategic In the current fi nancial year (2017) Bupa intends to implement the remuneration policy as described on pages 44-45. The remuneration of the Group CEO and CFO will be as follows: Salary Management Long-term (eff ective from 1 April) Bonus Scheme Incentive Plan

Evelyn Bourke £800,000 Target opportunity – Fair (on-target) value – 137.5% salary Group CEO (0% increase) 100% salary (£1,100,000) Maximum opportunity – Maximum award – 275% salary 200% salary (£2,200,000) Joy Linton £550,000 Target opportunity – Fair (on-target) value – 125% salary CFO (0% increase) 75% salary (£687,500) Maximum opportunity – Maximum award – 250% salary 150% salary (£1,375,000)

For 2017 onwards the MBS and LTIP have been redesigned, in line with the remuneration policy, to support the Bupa strategy more eff ectively. The targets and the weighting of these were carefully considered to ensure that the right balance of fi nancial and non-fi nancial measures in the short-term and long-term. Governance Strategic Pillar Measure MBS scorecard LTIP scorecard

Strong and sustainable performance Profi t Management Profi t – 50% Profi t after tax – 60%

Revenue 10% –

Return Risk Adjusted Profi t – 10% ROCE – 20%

Cost Cost effi ciency – 10% –

Loved as a true customer champion in health and care Customer 20% 20%

In addition to these measures, both schemes are subject to an overall adjustment based on Risk Management across Bupa. The Committee has the discretion to adjust any payment down to nil if required. The MBS also has an individual multiplier based on personal performance during the year against agreed objectives. As stated in the policy, the underlying principles for reward remain the same for the senior employee population. As a result, both the Management Bonus Scheme and Long Term Incentive Plan are cascaded down through Bupa. The MBS is cascaded even further than the senior employee population and the only change is the level of opportunity. Financial statements Chairman and Non-Executive Director Fees 2016 Fee The table on the right shows the structure of Chairman Fee £400,000 the Chairman and Non-Executive Director fees with eff ect from 1 July 2016. Non-Executive Director basic fee £65,000 Senior Independent Director fee £17,000

Committee chairmanship Audit Committee £25,000

Remuneration Committee £25,000

Risk Committee £25,000

Committee membership Audit Committee £8,000

Remuneration Committee £8,000

Risk Committee £8,000

Nomination & Governance Committee £4,500 52 Bupa Annual Report 2016

Remuneration report Part 3: Implementation (audited) continued

Non-Executive Directors: single total fi gure of remuneration Fees Benefi ts1 Total £000 £000 £000

2016 2015 2016 2015 2016 2015 Lord Leitch (Chairman) 365 345 42 40 407 385 Lawrence Churchill 148 150 14 16 162 166 Simon Blair2 71 – 2 – 73 – Rita Clifton3 34 70 4 6 38 76 Roger Davis 77 31 2 1 79 32 Martin Houston 92 87 34 56 126 143 Clare Thompson 159 86 1 0 160 86 Prof Sir John Tooke 100 84 2 2 102 86 Janet Voûte4 72 – 28 – 100 – Total 1,118 853 129 121 1,247 974

1 Travel and subsistence expenses for attending meetings at Bupa House are treated as taxable income, all Non-Executive Director expenses in relation to this are grossed up to meet the costs of the additional tax and NIC. The benefi ts fi gures refl ect this approach. 2 Simon Blair was appointed as a Non-Executive Director on 12 January 2016. 3 Rita Clifton ceased to be a Non-Executive Director on 11 May 2016. 4 Janet Voûte was appointed as a Non-Executive Director on 12 January 2016.

Committee governance Plans for 2017 Payments to former directors Martin Houston has chaired the Committee During 2017, the Committee intends to: No payments, other than those disclosed since 11 June 2014. under “Payments for loss of offi ce”, were – Further develop our approach to made to former directors in 2016. In addition to the Company Secretary, regular remuneration to refl ect updated attendees at the Remuneration Committee Solvency II guidance; meetings who have provided comment and Committee eff ectiveness review – Continue with the development of advice were the Group CEO, the CFO, the Chief Overall the Committee considered that it was subsidiary board remuneration committees; People Offi cer and the Reward Director. eff ective during 2016 and noted the need to – Review new approaches to compensation ensure that the relationships between the Risk The Committee reviews the quality and and best practice; and and Audit Committees and the Committee independence of their advisors on a regular continue to be well managed, particularly basis. The Committee re-appointed their – Build on measuring customer and risk when considering executive remuneration. advisor, Mercer, from September 2016. and their infl uence on the outcome of incentive awards. Mercer is the independent advisor to the Committee members Remuneration Committee. The Committee is Voting at the Annual General Meeting of the view that Mercer provides independent Martin Houston Chairman remuneration advice to the Committee and The Association Members will be invited to Lawrence Churchill does not have any connections with Bupa vote at the Annual General Meeting on 10 May Roger Davis that may impair its independence. Mercer is 2017 on the Remuneration Policy, Long-term Lord Leitch Incentive Plan and Implementation Report. a member of the Remuneration Consultants’ Janet Voûte Group and voluntarily operates under their code of conduct when providing advice on executive remuneration in the UK. Mercer’s fees for services to the Committee in 2016 were £194,000 on a time and materials basis. Support Key items covered included: to the Committee during the year has included reviewing incentives and performance conditions, advice on remuneration under Solvency II, 12 February – Annual Reward Review - Group CEO, CFO and BET advice on market and best practice guidance, 24 February – LTIP Payout Level for 2013-2015 and 2016 Incentive Targets remuneration benchmarking, drafting remuneration disclosures, and attending July – 2017 Incentive Design, 2016 Management Bonus Scheme and 2016-18 LTIP Committee meetings. Rules/Subsidiary NED Fees and Solvency II

The Terms of Reference for the Committee September – 2017 Incentive Design/Re-appointment of Committee Advisors/Solvency II were reviewed in February 2017 and adopted December by the Board in March 2017. A copy of the – 2017 Incentive Design/Regulatory Update/Committee Terms of Reference Committee’s Terms of Reference is available Review/Group CEO, CFO and Bupa Executive Team Comparator Groups on bupa.com. Bupa Annual Report 2016 53

Report of the Board of Directors

The Directors of The British United managers, to the extent permitted by law Disclosure of information to auditors report Strategic and the Company’s articles of association, Provident Association Limited The Directors who held office at the date of in respect of all losses arising out of, or in approval of this Directors’ Report confirm (‘Bupa’) present their reports and connection with, the execution of their powers, that, so far as they are each aware, there is the financial statements for the duties and responsibilities, as Directors of the no relevant audit information of which the Company or any of its subsidiaries. year ended 31 December 2016. Company’s auditors are unaware; and each Director has taken all the steps which they The Strategic Report and the audited Financial Going concern ought to have taken as a Director to make Statements are presented on pages 1-21, and The Directors confirm that they are satisfied themselves aware of any relevant audit from page 55, respectively. The Governance that the Company and the Group has information, and to establish that the Report on pages 22-52, including the adequate resources to continue in operation Company’s auditors are aware of that Remuneration Report on pages 42-52 all for the foreseeable future. Accordingly, they information. form part of this report. continue to adopt a going concern basis in preparing the financial statements. The Directors have chosen, in accordance Auditors with section 414C(11) of the Companies Act A resolution to reappoint KPMG LLP as 2006, to set out in the Strategic Report on Political contributions auditors will be put to the forthcoming pages 1-21 the following information which No political donations were made, nor any Annual General Meeting of the Company. would otherwise be required by Schedule 7 political expenditure incurred. of the Large and Medium-Sized Companies Health and safety Governance and Groups (Accounts and Reports) Employment policies During 2016 we have implemented lost-time Regulations 2008 to be disclosed in the Bupa considers clear communication with injury reporting across Bupa. There were Directors’ Report: Disclosures concerning employees about employment issues to 837 employee lost-time injuries in 2016. Greenhouse Gas Emissions. be key. Information is given to employees This equates to 1.45 lost-time injuries per about employment matters and about the 100 full-time equivalents. As this is our first Financial results financial and economic factors affecting the report against lost-time injury, benchmarking The results of the Group for 2016 are reported Company’s performance through a wide against previous years is not possible. on pages 55-118. The profit for the financial range of channels to ensure accessibility by all. Going forward we will benchmark against year of £386.8m (2015: profit £278.3m) has The new Bupa People Manager Expectations, the previous year’s performance. We have been transferred to equity. clearly sets out management expectations, launched a programme across our care including the need to listen to our employees homes called the 90 day challenges. This Acquisitions and disposals needs and issues. People Pulse provides the programme aims to help us more fully opportunity for all our employees to raise understand the causes of injury to our Details of the acquisitions and disposals made their views anonymously. A new approach people and implement changes to improve during the year are shown in Note 4.0. to managing performance has simplified safety in areas such as moving and handling performance expectations. Every effort is and slips, trips and falls. Early indications Board of Directors made to inform, consult and encourage are that this programme is having a positive

The Board is responsible for the good the full involvement of staff on matters impact on keeping our people safe and well. Financial statements standing of the Company, the management concerning them as employees and of its assets, including the management of risk affecting the Company’s performance. Modern Slavery Act 2015 and the strategy for its future development. Schemes exist to incentivise, recognise In 2017 we will make our first statement There are 11 scheduled Board meetings each and reward performance. under the Modern Slavery Act, explaining year and other meetings are convened Bupa is committed to being an inclusive the steps we have taken to address the risk as needed. workplace for all its people where we of modern slavery and human trafficking Biographical details of the Non-Executive recognise diversity by providing equal in Bupa’s business and supply chains. Chairman, two Executive Directors and seven opportunities to all. The employment This will be available on bupa.com. Non-Executive Directors who held office at of disabled persons is included in this By order of the Board. the end of the year, are set out on pages commitment and is reflected in our 24-25. Simon Blair and Janet Voûte were membership of Business Disability appointed as Non-Executive Directors on International. The recruitment, training, Julian Sanders 12 January 2016. Joy Linton was appointed as career development and promotion of Company Secretary an Executive Director at the AGM on 14 May disabled persons is based on the aptitudes 2016. Stuart Fletcher and Rita Clifton stepped and abilities of the individual. Should 1 March 2017 down from the Board on 4 April 2016 and employees become disabled during Company number: 432511 11 May 2016 respectively. employment, every effort would be made to continue their employment and, if necessary, As at the date of this report, indemnities are in appropriate training would be provided. force under which the Company has agreed to indemnify the Directors and certain senior 54 Bupa Annual Report 2016

Governance report Statement of Directors’ responsibilities

In respect of the annual report and the The Directors are responsible for keeping financial statements adequate accounting records that are sufficient to show and explain the Parent The Directors are responsible for preparing Company’s transactions and disclose with the Annual Report and the Group and Parent reasonable accuracy at any time the financial Company financial statements in accordance position of the Parent Company and to enable with applicable law and regulations. them to ensure that its financial statements Company law requires the Directors to comply with the Companies Act 2006. prepare Group and Parent Company financial They have a general responsibility for taking statements for each financial year. Under that such steps as are reasonably open to law they have elected to prepare the Group them to safeguard the assets of the Group and the Parent Company financial statements and to prevent and detect fraud and in accordance with IFRS as adopted by the EU other irregularities. and applicable law. The Directors consider that the Annual Report Under company law the Directors must not and financial statements taken as a whole approve the financial statements unless they is fair, balanced and understandable and are satisfied that they give a true and fair view provides the information necessary for of the state of affairs of the Group and Parent Association Members to assess the Group’s Company and of their profit or loss for that position and performance, business model period. In preparing each of the Group and and strategy. Parent Company financial statements, the The Directors have decided to prepare, Directors are required to: voluntarily, a Directors’ Remuneration Report –– Select suitable accounting policies and then in accordance with Schedule 8 to The Large apply them consistently; and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008 –– Make judgements and estimates that are made under the Companies Act 2006, reasonable and prudent; as if those requirements were to apply to –– State whether they have been prepared in the Company. accordance with IFRS as adopted by the The Directors have also decided to prepare, EU; and voluntarily, a Corporate Governance –– Prepare the financial statements on Statement as if the Company was required the going concern basis unless it is to comply with the UK Listing Rules, inappropriate to presume that the Group Disclosure Guidance and Transparency and the Parent Company will continue Rules of the Financial Conduct Authority in business. in relation to those matters. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Bupa Annual Report 2016 55

Financial Statements

Accounting policies that are relevant to the financial statements as Independent auditor’s report 56 report Strategic a whole are described in Section 1 ‘Basis of preparation’. Thereafter, Primary statements 59 the notes to the financial statements have been presented in five Section 1 – Basis of preparation 64 key sections: ‘Results for the year’, ‘Operating assets and liabilities’, Section 2 – Results for the year Operating segments 66 ‘Group Investments’, ‘Risk management and Capital management’, Revenues 69 and ‘Other notes’. Insurance claims 70 For The British United Provident Association Limited on a standalone Other operating expenses 71 Other income and charges 72 basis (the ‘Company’) primary statements and associated notes are Financial income and expense 73 set out in Section 7. Taxation expense 74 Each section sets out the relevant accounting policies applied in Section 3 – Operating assets and liabilities Working capital 75 producing the notes, along with disclosures of any key judgements Intangible assets 78 and estimates used. Property, plant and equipment 82 Investment properties 86 Provisions and other liabilities under insurance contracts issued 87

Provisions for liabilities and charges 89 Governance Post-employment benefits 90 Deferred taxation assets and liabilities 94 Section 4 – Group investments Business combinations and disposals 96 Assets and liabilities held for sale 99 Equity accounted investments 99 Section 5 – Risk management and capital management Financial investments 101 Borrowings 104 Derivatives 106 Capital management 107 Risk management 108 Insurance risk 108 Market risk 110 Credit risk 114 Liquidity risk 115

Section 6 – Other notes Financial statements Related party transactions 117 Commitments and contingencies 118 Section 7 – Company primary statements and associated notes Primary statements 119 Intangible assets 122 Property, plant and equipment 123 Investment properties 123 Post-employment benefits 124 Provisions for liabilities and charges 126 Working capital 126 Risk management 127 Deferred taxation assets and liabilities 127 Related party transactions 128 Commitments and contingencies 129 Investment in subsidiaries 130 Section 8 – Non-controlling interests 137 Section 9 – Five year financial summary 139 International Financial Reporting Standards relevant to Bupa 140 56 Bupa Annual Report 2016

Independent auditor’s report to the members of The British United Provident Association Limited only

Opinions and conclusions arising from our audit –– Our response – For assets subject to impairment tests our procedures included challenging the cash flow forecasts and the 1) Our opinion on the financial statements is unmodified We have audited the financial statements of The British United underlying assumptions, based on our understanding of the relevant Provident Association Limited for the year ended 31 December 2016 business and the sector and economic environment in which it set out on pages 59-138. In our opinion: operates. We compared forecasts to business plans and also previous forecasts to actual results to assess the performance of –– the financial statements give a true and fair view of the state of the the business and the accuracy of forecasting. We challenged the Group’s and of the Parent company’s affairs as at 31 December 2016 forecast periods utilised in the models and performed sensitivity and of the Group’s profit for the year then ended; testing using different forecast periods. We compared the Group’s –– the Group financial statements have been properly prepared in assumptions to externally derived data as well as our own sector accordance with International Financial Reporting Standards as knowledge in relation to key inputs such as the projected cash flows adopted by the European Union (IFRS as adopted by the EU); for these cash generating units, terminal growth rates, cost inflation and discount rates and applied sensitivities in evaluating the Group’s –– the Parent company financial statements have been properly assessments. Where external valuation specialists were used, we prepared in accordance with IFRS as adopted by the EU and as considered the external valuation report and assessed the valuer as applied in accordance with the provisions of the Companies Act an independent expert. Our own valuation specialists assisted us in 2006; and evaluating the assumptions and methodologies used by the Group, –– the financial statements have been prepared in accordance with in particular those relating to terminal growth rates and discount the requirements of the Companies Act 2006. rates, and in evaluating these assumptions with reference to valuations of similar businesses. For intangible assets subject to 2) Overview amortisation, we considered indicators of impairment, focusing in Materiality: Group financial £28 million (2015: £31 million) particular on the extent to which assets are still being utilised and the statements as a whole levels of customer attrition and operating margin compared to the 4.3% (2015: 5.6%) of normalised Group profit before tax assumptions applied when the assets were acquired. We assessed Coverage 91% (2015: 95%) of Group profit before tax whether the Group’s disclosures over the goodwill impairment review, including the disclosures regarding the sensitivity of the Risks of material misstatement vs 2015 outcome of the impairment reviews to changes in key assumptions Recurring risks Goodwill and intangibles impairment were appropriate. Valuation of properties Valuation of general insurance contracts Valuation of properties £2,766.5m (2015: £2,541.6m). Refer to page 35 (Audit Committee Report) and Notes 3.2 and 3.3 3) Our assessment of risks of material misstatement In arriving at our audit opinion above on the financial statements, the –– The risk - The Group revalues its freehold, leasehold and investment risks of material misstatement, in decreasing order of audit significance, properties, including care homes, hospitals and offices primarily in that had the greatest effect on our audit were as follows (unchanged the UK, Spain, Australia and New Zealand, to fair value on a periodic from 2015): basis with external valuations being performed on at least a triennial basis and retirement villages in New Zealand being subject to an Carrying value of goodwill in Bupa Care Services UK and New Zealand, external valuation annually. A full external valuation of freehold, Bupa Chile and Quality HealthCare businesses £429.3m (2015: leasehold and investment properties in the UK and Chile was £361.7m). Carrying value of intangible assets £959.5m (2015: £884.3m). performed by chartered surveyors during 2016. Directors’ valuations Refer to page 35 (Audit Committee Report) and Note 3.1. were performed for other properties where there is an indication that the carrying value differed significantly from fair value. The principal –– The risk – As described in Note 3.1, impairment is assessed based on assumptions underpinning these valuations including operating cash discounted cash flow projections. For the Bupa Care Services UK flows, future profitability and competitor activity require the exercise and New Zealand cash generating units, cash flow forecasts require of a high level of judgement. a high level of judgement in respect of fee rate and cost of care. In the Bupa Chile and Quality HealthCare cash generating units, –– Our response – For businesses where the properties are subject to key assumptions are revenue growth and gross margin, particularly a directors’ valuation, our procedures included critically assessing in respect of assets such as clinics and hospitals which are under the assumptions applied by reference to external benchmarks and development, the discount rate and terminal growth rate. These forecasts, along with any reports from external chartered surveyors. two businesses were acquired more recently and there is a low level For properties that were valued externally, primarily in the UK, of headroom in the impairment calculations. For intangible assets New Zealand and Chile we critically assessed any external valuers’ subject to impairment tests, cash flow forecasts are sensitive to reports considering the qualifications of the external valuers and expected benefits to be derived from the assets, and the period the assumptions applied by the external valuers. For properties over which they will be earned. For intangible assets subject to classified as held for sale, we also challenged any adjustments that amortisation there is a high level of judgement when determining have been made to the valuations provided by the external valuers. whether indicators of impairment exist. For properties such as hospitals and care homes, we also challenge the valuation models, by comparing past cash flow projections to Bupa Annual Report 2016 57

actual performance. We used our own valuation specialists to assist 4) Our application of materiality and an overview of the scope report Strategic us in challenging the key assumptions relating to operating cash of our audit flows, occupancy rates, future profitability, discount rates, market Materiality – amount basis £28m (2015: £31m) multiples and competitor activity used in the valuations. Where 4.3% of Group profit before tax normalised to appropriate, we assessed the Group’s disclosures regarding the exclude loss on early redemption of secured loan valuation basis applied, revaluation gains and any impairment losses. notes of £635.2m (2015: 5.6% of Group profit before tax normalised to exclude the impairment Valuation of general insurance contracts – provisions for claims within of goodwill in Bupa Care Services UK and the provisions under insurance contracts issued £889.6m (2015: £657.1m). write down of UK care home valuations) Refer to page 35 (Audit Committee Report) and Note 3.4.1. Component materiality £21m (2015: £23m) Threshold for reporting £1.4m (2015: £1.5m) plus other identified –– The risk – The Group’s operations include a number of general uncorrected and corrected misstatements if warranted on qualitative insurance entities writing health insurance policies primarily in the differences to the grounds UK, Spain, Australia, USA and Chile. The process of recognising the Audit Committee provision for claims arising from general insurance contracts is an Of the Group’s over 50 (2015: over 50) reporting components, we inherently complex area, requiring judgement and actuarial expertise. subjected eight (2015: eight) to audits for Group reporting purposes. This complexity arises from calculating the actuarial best estimate These components were located in UK, Spain, Poland, USA, Australia, and the margin over best estimate using historical data which is New Zealand and Chile. We also subjected three components (2015: sensitive to external inputs, such as claims cost inflation and medical three) to specified risk-focused audit procedures over goodwill and trends, as well as the actuarial methodology that is applied and the Governance intangible assets (one component (2015: one component)), property assumptions on current and future experience. (one component (2015: one component)) and tax (one component –– Our response – Our procedures included inspecting the claims (2015: one component)). These three components were not individually reserving reports for each insurance business and evaluating and financially significant enough to require an audit for Group reporting testing the key controls over the provisioning process, including purposes, but did present specific individual risks that needed to controls over the completeness and accuracy of the data that be addressed. supports key calculations, such as the data in respect of current and The components within the scope of our work accounted for the historical claims. This data provides us with evidence over trends following percentages of the Group’s results: in claims and their costs which drive the assumptions for claims, in current and preceding financial years, which have not yet been Group Group profit Group total Number of revenue before tax assets paid at the date of the financial statements. These assumptions components (%) (%) (%) include historical claims experience, claims cost inflation and medical Audits for Group trends as well as the level of margin that is applied. We used our reporting purposes own actuarial specialists to assist us in evaluating and challenging 2016 8 89% 91% 93% the assumptions on current and future experience used by the Group 2015 8 87% 93% 87% in each territory, as set out in the claims reserving reports, comparing Specified risk-focused them to expectations based on the Group’s historical experience, audit procedures current trends and our own industry knowledge in each territory. 2016 3 2% 2% 5% For some elements of the business, we calculated our own estimate 2015 3 2% 2% 3% Financial statements of the provision using the company’s data set for comparison Total (2016) 11 91% 93% 98% against the provision calculated by the company, and considered Total (2015) 11 89% 95% 90% the impact of any significant differences. We applied sensitivities to the assumptions in assessing the appropriateness and adequacy These audits were all performed by component auditors. For the of the provisions recognised by the Group. We used our industry remaining components, we performed analysis at an aggregated group knowledge to benchmark the Group’s reserving methodologies level to re-examine our assessment that there were no significant risks and claims experience. We assessed whether the Group’s disclosures of material misstatement within these. The segment disclosures in in relation to the assumptions in respect of provisions for claims in Note 2.0 set out the individual significance of specific countries. respect of general insurance business were appropriate. The Group audit team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The Group audit team approved the component materiality of £21m (2015: £23m), having regard to the mix of size and risk profile of the Group across the components. The Group team performed procedures on the items excluded from normalised Group profit before tax. 58 Bupa Annual Report 2016

Independent auditor’s report to the members of The British United Provident Association Limited only continued

The Group audit team visited four (2015: five) component locations whole are fair, balanced and understandable and provide the in UK, Spain, Australia and Hong Kong (2015: UK, Spain, Australia, information necessary for members to assess the Group’s position Hong Kong and USA), to assess the audit risk and strategy. Telephone and performance, business model and strategy; or conference meetings were also held with these component auditors –– the Audit Committee Report on pages 34-37 does not appropriately and others that were not physically visited. At these visits and meetings, address matters communicated by us to the audit committee. the findings reported to the Group audit team were discussed in more detail, and any further work required by the Group audit team was then Under the Companies Act 2006 and under the terms of our performed by the component auditor. engagement we are required to report to you if, in our opinion: 5) Our opinion on other matters prescribed by the Companies Act –– adequate accounting records have not been kept by the Parent 2006 and under the terms of our engagement is unmodified company, or returns adequate for our audit have not been received In addition to our audit of the financial statements, the directors have from branches not visited by us; or engaged us to audit the information in the Directors’ Remuneration –– the Parent company financial statements and the part of the Report that is described as having been audited, which the directors Directors’ Remuneration Report which we were engaged to audit have decided to prepare as if the company were required to comply are not in agreement with the accounting records and returns; or with the requirements of Schedule 8 to The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 –– certain disclosures of directors’ remuneration specified by law are not (SI 2008 No. 410) made under the Companies Act 2006. made; or In our opinion: –– we have not received all the information and explanations we require for our audit. –– the part of the Directors’ Remuneration Report which we were engaged to audit has been properly prepared in accordance In addition to our audit of the financial statements, the directors have with Schedule 8 to The Large and Medium-sized Companies and engaged us to review their Corporate Governance Statement as if Groups (Accounts and Reports) Regulations 2008 made under the company were required to comply with the Listing Rules and the the Companies Act 2006, as if those requirements were to apply Disclosure Rules and Transparency Rules of the Financial Conduct to the company; and Authority in relation to those matters. Under the terms of our engagement we are required to review: –– the information given in the Strategic Report and the Directors’ Report for the financial year is consistent with the financial –– the directors’ statements, set out on pages 16 and 53, in relation to statements. going concern and longer-term viability; and Based solely on the work required to be undertaken in the course of the –– the part of the Corporate Governance Statement on pages 22-23 audit of the financial statements and from reading the Strategic Report relating to the company’s compliance with the eleven provisions of and the Directors’ Report: the 2014 UK Corporate Governance Code specified for our review. –– we have not identified material misstatements in those reports; and We have nothing to report in respect of the above responsibilities. –– in our opinion, those reports have been prepared in accordance with the Companies Act 2006. Scope and responsibilities 6) We have nothing to report on the disclosures of principal risks As explained more fully in the Directors’ Responsibilities Statement set Based on the knowledge we acquired during our audit, we have out on page 54, the directors are responsible for the preparation of the nothing material to add or draw attention to in relation to: financial statements and for being satisfied that they give a true and fair view. A description of the scope of an audit of financial statements is –– the directors’ statement of longer-term viability on page 16, provided on the Financial Reporting Council’s website at www.frc.org. concerning the principal risks, their management, and, based on that, uk/auditscopeukprivate. This report is made solely to the company’s the directors’ assessment and expectations of the group’s continuing members as a body and is subject to important explanations and in operation over the three years to 31 December 2019; or disclaimers regarding our responsibilities, published on our website at –– the disclosures in Note 1.4 of the financial statements concerning the www.kpmg.com/uk/auditscopeukco2014b, which are incorporated use of the going concern basis of accounting. into this report as if set out in full and should be read to provide an understanding of the purpose of this report, the work we have 7) We have nothing to report in respect of matters on which we are undertaken and the basis of our opinions. required to report by exception Under ISAs (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identified other information in the annual report that contains a material Daniel Cazeaux (Senior Statutory Auditor) inconsistency with either that knowledge or the financial statements, for and on behalf of KPMG LLP, Statutory Auditor a material misstatement of fact, or that is otherwise misleading. Chartered Accountants In particular, we are required to report to you if: 15 Canada Square London –– we have identified material inconsistencies between the knowledge E14 5GL we acquired during our audit and the directors’ statement that they consider that the annual report and financial statements taken as a 1 March 2017 Bupa Annual Report 2016 59

Consolidated Income Statement for the year ended 31 December 2016

2016 2015 report Strategic Note £m £m Revenues Gross insurance premiums 2.1 8,044.3 7,059.0 Premiums ceded to reinsurers 2.1 (53.9) (48.6) Net insurance premiums earned 7,990.4 7,010.4

Revenues from insurance service contracts 2.1 18.7 42.6 Care, health and other revenues 2.1 3,038.8 2,775.4 Total revenues 11,047.9 9,828.4

Claims and expenses Insurance claims incurred 2.2 (6,332.9) (5,505.8) Reinsurers’ share of claims incurred 2.2 42.9 37.1 Net insurance claims incurred (6,290.0) (5,468.7) Share of post-taxation results of equity accounted investments 4.2 30.3 22.4 Other operating expenses 2.3 (4,197.3) (3,803.8)

Impairment of goodwill 3.1 – (114.1) Governance Other income and charges 2.4 (38.9) (40.6) Total claims and expenses (10,495.9) (9,404.8)

Profit before financial income and expense 552.0 423.6

Financial income and expense Financial income 2.5 212.1 68.7 Financial expense 2.5 (241.2) (118.0) Net financial expense (29.1) (49.3)

Profit before taxation expense 522.9 374.3

Taxation expense 2.6 (136.1) (96.0)

Profit for the financial year 386.8 278.3

Attributable to: Financial statements Bupa 381.6 278.3 Non-controlling interests 5.2 – Profit for the financial year 386.8 278.3

Notes 2-6 form part of these financial statements. 60 Bupa Annual Report 2016

Consolidated Statement of Comprehensive Income for the year ended 31 December 2016

2016 2015 Note £m £m Profit for the financial year 386.8 278.3

Other comprehensive income/(expense)

Items that will not be reclassified to the Income Statement Remeasurement (losses)/gains on pension schemes 3.6 (14.6) 16.9 Unrealised gains/(losses) on revaluation of property 3.2 63.5 (84.6) Taxation credit on income and expenses recognised directly in other comprehensive income 2.6 13.3 19.4

Items that may be reclassified subsequently to the Income Statement Foreign exchange translation differences on goodwill 3.1 335.5 (96.0) Other foreign exchange translation differences 453.6 (89.3) Net (loss)/gain on hedge of net investment in overseas subsidiary companies (86.7) 8.5 Change in fair value of underlying derivative of cash flow hedge 5.4.2 2.0 1.2 Reclassification of foreign exchange translation differences to profit or loss on disposal of subsidiary 4.0 2.0 (4.1) Taxation expense on income and expenses recognised directly in other comprehensive income 2.6 (0.2) (0.4) Unrealised losses on available-for-sale assets (0.2) – Total other comprehensive income/(expense) 768.2 (228.4) Comprehensive income for the year 1,155.0 49.9

Attributable to: Bupa 1,136.0 55.4 Non-controlling interests 19.0 (5.5) Comprehensive income for the year 1,155.0 49.9

Notes 2-6 form part of these financial statements. Bupa Annual Report 2016 61

Consolidated Statement of Financial Position as at 31 December 2016

2016 2015 report Strategic Note £m £m Non-current assets Intangible assets 3.1 3,391.4 2,862.0 Property, plant and equipment 3.2 2,851.6 2,838.7 Investment property 3.3 391.3 270.9 Equity accounted investments 4.2 302.9 238.0 Financial investments 5.0 1,061.9 831.9 Derivative assets 5.2 50.9 51.3 Assets arising from insurance business 3.0.2 2.2 0.2 Deferred taxation assets 3.7 7.1 2.5 Trade and other receivables 3.0.1 112.5 96.9 Restricted assets 3.0.4 55.8 45.1 Post-employment benefit net assets 3.6 481.3 413.4 8,708.9 7,650.9

Current assets Financial investments 5.0 1,110.7 1,356.4 Derivative assets 5.2 9.4 6.0 Inventories 3.0.5 92.2 82.9 Assets arising from insurance business 3.0.2 1,164.7 980.5 Assets held for sale 4.1 505.3 – Governance Trade and other receivables 3.0.1 501.6 539.0 Restricted assets 3.0.4 4.2 10.8 Cash and cash equivalents 3.0.3 1,412.7 1,194.1 4,800.8 4,169.7 Total assets 13,509.7 11,820.6

Non-current liabilities Subordinated liabilities 5.1 (1,302.0) (909.5) Other interest bearing liabilities 5.1 (522.8) (726.8) Derivative liabilities 5.2 (10.4) (10.3) Provisions under insurance contracts issued 3.4.1 (33.9) (27.6) Post-employment benefit net liabilities 3.6 (85.1) (59.5) Provisions for liabilities and charges 3.5 (42.0) (27.5) Deferred taxation liabilities 3.7 (229.5) (224.1) Other payables 3.0.6 (24.3) (19.9) (2,250.0) (2,005.2)

Current liabilities Subordinated liabilities 5.1 (14.7) (9.9) Other interest bearing liabilities 5.1 (82.1) (427.9) Derivative liabilities 5.2 (11.6) (22.1) Provisions under insurance contracts issued 3.4.1 (2,227.5)

(2,594.8) Financial statements Other liabilities under insurance contracts issued 3.4.2 (143.0) (72.1) Liabilities directly associated with assets held for sale 4.1 (45.5) – Provisions for liabilities and charges 3.5 (64.7) (69.1) Current taxation liabilities (54.9) (43.6) Trade and other payables 3.0.6 (1,673.4) (1,519.6) (4,684.7) (4,391.8) Total liabilities (6,934.7) (6,397.0) Net assets 6,575.0 5,423.6

Equity Property revaluation reserve 706.1 632.3 Income and expenditure reserve and other reserves 5,228.2 4,797.9 Cash flow hedge reserve 14.7 20.8 Foreign exchange translation reserve 595.3 (96.9) Equity attributable to Bupa 6,544.3 5,354.1 Equity attributable to non-controlling interests 30.7 69.5 Total equity 6,575.0 5,423.6

Approved by the Board of Directors and signed on its behalf on 1 March 2017 by

Lord Leitch Joy Linton Chairman Chief Financial Officer

Notes 2-6 form part of these financial statements. 62 Bupa Annual Report 2016

Consolidated Statement of Cash Flows for the year ended 31 December 2016

2016 2015 Note £m £m Operating activities Profit before taxation expense 522.9 374.3

Adjustments for: Net financial expense 2.5 29.1 49.3 Depreciation, amortisation and impairment 345.7 454.7 Deferred consideration on disposal of Bupa Ireland Limited 2.4 – (25.5) Other non-cash items 28.4 13.0

Changes in working capital and provisions: Increase in provisions and other liabilities under insurance contracts issued 123.7 99.4 Increase in assets under insurance business (50.0) (64.9) Change in net pension asset/liability (56.2) (51.7) Increase in trade and other receivables, and other assets (26.6) (37.4) Increase in trade and other payables, and other liabilities 119.8 82.3 Cash generated from operations 1,036.8 893.5

Income taxation paid (142.0) (102.7) Increase in cash held in restricted assets 3.0.4 (3.8) (2.7) Net cash generated from operating activities 891.0 788.1

Cash flow from investing activities Acquisition of subsidiary companies, net of cash acquired 4.0 (127.5) (156.3) Increase in equity accounted investments (31.8) (7.5) Acquisition of non-controlling interests in subsidiary company 4.0 (95.1) – Disposal of subsidiary companies, net of cash disposed of 21.9 – Deferred consideration on disposal of Bupa Ireland Limited 2.4 – 25.5 Purchase of intangible assets 3.1 (103.1) (88.8) Purchase of property, plant and equipment (361.9) (262.6) Proceeds from sale of property, plant and equipment 19.1 9.2 Purchase of investment property 3.3 (37.7) (35.0) Disposal of investment property 3.3 0.6 0.4 Net (purchase of)/proceeds from financial investments, excluding deposits with credit institutions (142.7) 108.8 Net withdrawal from/(investment into) deposits with credit institutions 509.9 (334.8) Interest received 38.3 45.8 Net cash used in investing activities (310.0) (695.3)

Cash flow from financing activities Proceeds from issue of interest bearing liabilities and drawdowns on other borrowings 556.0 102.0 Repayment of interest bearing liabilities and other borrowings (903.8) (90.4) Interest paid (101.3) (112.3) (Payments for)/receipts from hedging instruments (77.7) 33.4 Dividends paid to non-controlling interests (2.1) (3.6) Net cash used in financing activities (528.9) (70.9)

Net increase in cash and cash equivalents 52.1 21.9 Cash and cash equivalents at beginning of year 1,194.1 1,187.6 Effect of exchange rate changes 166.5 (15.4) Cash and cash equivalents at end of year 3.0.3 1,412.7 1,194.1

Notes 2-6 form part of these financial statements. Bupa Annual Report 2016 63

Consolidated Statement of Changes in Equity for the year ended 31 December 2016

Income and report Strategic expenditure Foreign Property reserve and Cash flow exchange Total Non- revaluation other hedge translation attributable controlling Total reserve reserves reserve reserve to Bupa interests equity Note £m £m £m £m £m £m £m 2016 At beginning of year 632.3 4,797.9 20.8 (96.9) 5,354.1 69.5 5,423.6 Retained profit for the financial year – 381.6 – – 381.6 5.2 386.8

Other comprehensive income/(expense) Unrealised profit on revaluation of property 3.2 63.5 – – – 63.5 – 63.5 Realised revaluation profit on disposal of property (6.6) 6.6 – – – – – Remeasurement loss on pension schemes 3.6 – (14.6) – – (14.6) – (14.6) Unrealised loss on available-for-sale assets – (0.2) – – (0.2) – (0.2) Foreign exchange translation differences on goodwill 3.1 – – – 335.5 335.5 – 335.5 Other foreign exchange translation differences 21.9 0.3 (7.9) 425.3 439.6 14.0 453.6 Net loss on hedge of net investment in overseas subsidiary companies – – – (86.7) (86.7) – (86.7)

Change in fair value of underlying derivative of cash flow hedge 5.4.2 – – 2.0 – 2.0 – 2.0 Governance Foreign exchange reserve on disposal of subsidiary – – – 2.2 2.2 (0.2) 2.0 Taxation (expense)/credit on income and expense recognised directly in other comprehensive income 2.6 (5.0) 2.4 (0.2) 15.9 13.1 – 13.1 Other comprehensive income/(expense) for the year, net of taxation 73.8 (5.5) (6.1) 692.2 754.4 13.8 768.2

Total comprehensive income/(expense) for the year 73.8 376.1 (6.1) 692.2 1,136.0 19.0 1,155.0 Acquisition of subsidiary companies attributable to non- controlling interest 4.0 – 54.2 – – 54.2 (55.7) (1.5) Dividends paid to non-controlling interests – – – – – (2.1) (2.1) At end of year 706.1 5,228.2 14.7 595.3 6,544.3 30.7 6,575.0

2015 At beginning of year 707.9 4,590.7 20.0 71.4 5,390.0 78.4 5,468.4 Retained profit for the financial year – 278.3 – – 278.3 – 278.3

Other comprehensive income/(expense) Unrealised loss on revaluation of property 3.2 (84.6) – – – (84.6) – (84.6) Financial statements Realised revaluation profit on disposal of property (0.2) 0.2 – – – – – Remeasurement gain on pension schemes 3.6 – 16.9 – – 16.9 – 16.9 Foreign exchange translation differences on goodwill 3.1 – – – (96.0) (96.0) – (96.0) Other foreign exchange translation differences (6.8) 0.1 – (77.1) (83.8) (5.5) (89.3) Net gain on hedge of net investment in overseas subsidiary companies – – – 8.5 8.5 – 8.5 Change in fair value of underlying derivative of cash flow hedge 5.4.2 – – 1.2 – 1.2 – 1.2 Foreign exchange reserve on disposal of subsidiary – (0.4) – (3.7) (4.1) – (4.1) Taxation credit/(expense) on income and expense recognised directly in other comprehensive income 2.6 16.0 3.4 (0.4) – 19.0 – 19.0 Other comprehensive income/(expense) for the year, net of taxation (75.6) 20.2 0.8 (168.3) (222.9) (5.5) (228.4)

Total comprehensive income/(expense) for the year (75.6) 298.5 0.8 (168.3) 55.4 (5.5) 49.9 Liability for future acquisition of minority interest 3.0.6 – (91.1) – – (91.1) – (91.1) Dividends paid to non-controlling interests – (0.2) – – (0.2) (3.4) (3.6) At end of year 632.3 4,797.9 20.8 (96.9) 5,354.1 69.5 5,423.6

Notes 2-6 form part of these financial statements. 64 Bupa Annual Report 2016

Notes to the Financial Statements for the year ended 31 December 2016

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

1.1 Basis of preparation The financial statements of subsidiaries are included in the consolidated The British United Provident Association Limited (‘Bupa’ or the financial statements from the date that control commences to the ‘Company’), the ultimate Parent entity of the Group, is a company date that control ceases. Non-controlling interests in the net assets of incorporated in England and Wales. The Company is limited by subsidiaries are identified separately from the Group’s equity. Non- guarantee. controlling interests consist of the amount of those interests at the date of the original acquisition and the non-controlling shareholder’s share of Both the Company financial statements and the Group’s consolidated changes in equity since this date. Intra-Group related party transactions financial statements have been prepared under International Financial and outstanding balances are eliminated in the preparation of the Reporting Standards (IFRS) as adopted by the EU. The appropriate consolidated financial statements of the Group. provisions of the Companies Act 2006 applicable to companies reporting under IFRS have also been complied with. A summary of The consolidated financial statements are presented in sterling, which IFRS that are relevant for the Group is included on page 140. is the Group’s presentational currency. The functional currency is identified at statutory entity level. These vary across the Group and The financial statements were approved by the Board of Directors on include sterling, Australian dollar, euro and US dollar. Each Group 1 March 2017. The directors have reviewed and approved the Group’s entity then translates its results and financial position into the Group’s accounting policies which have been applied consistently to all the presentational currency, sterling, for presentation in the Group years presented, unless otherwise stated. For the purposes of consolidated financial statements. The immediate impact on Bupa’s consolidation, the accounting policies of subsidiary companies financial position following the UK’s decision to leave the EU in June have been aligned with those of the Parent company. 2016 has seen a strengthening across all our key financial metrics due The financial statements are prepared on a going concern basis and to the weakening of sterling. under the historical cost convention, modified by the revaluation of property, investment property, financial investments at fair value 1.3 Accounting estimates and judgements through profit or loss, available-for-sale financial assets and derivative The preparation of financial statements requires the use of certain instruments. accounting estimates and assumptions that affect the reported assets, liabilities, income and expenses. It also requires management to 1.2 Basis of consolidation exercise judgement in applying the Group’s accounting policies. The consolidated financial statements for the year ended 31 December The areas involving a higher degree of judgement or complexity, 2016 comprise those of the Company and its subsidiary companies or where assumptions are significant to the consolidated financial (together referred to as the ‘Group’), and the share of results of equity statements, are set out below and in more detail in the related notes: accounted investments.

Area Judgement Note Claims provisioning Expected claims payments and expense required to settle existing insurance contract obligations. Calculation of the 3.4.1 outstanding claims provision is based on assumptions including claims development, margin of prudence, claims costs inflation, medical trends and seasonality. Property valuations Bupa has a significant portfolio of care home, hospital and office properties and fluctuations in the value of this 3.2, 3.3 portfolio can have a significant impact on the Statement of Financial Position, Income Statement and solvency position of the Group. Goodwill and intangible Recognised on business combinations with the latter valued at the date of acquisition at fair value. Goodwill and 3.1 assets intangible assets with indefinite lives are tested for impairment on an annual basis; other intangible assets are tested if a trigger of impairment is identified. The judgemental areas within this process include the inputs within the discount rate and the forecast cash flows. Pension assets and liabilities The principal defined benefit scheme in the UK is the Bupa Pension Scheme. The judgemental area relates to the 3.6.2 assumptions used in the valuation of the related pension liabilities performed by the independent scheme actuary.

Other judgements: –– Taxation (Note 2.6) –– Assets and liabilities held for sale (Note 4.1) –– Provisions (Note 3.5) –– Financial investments (Note 5.0) –– Business combinations and disposals (Note 4.0) Bupa Annual Report 2016 65

1.4 Going concern 1.6 Forthcoming financial reporting requirements report Strategic Management has conducted a detailed assessment of the Group’s The following financial reporting standards have been issued but are going concern status based on its current position and forecast results. not effective for the year ended 31 December 2016 and have not been They have concluded that the Group has adequate resources to early adopted by the Group. operate for the next twelve months. In making this assessment, (a) Amendments to IFRS 4: Applying IFRS 9 Financial Instruments management have considered the discussions with the relationship with IFRS 4 Insurance Contracts banks as well as forecasts which take account of reasonably possible IFRS 9 modifies the classification and measurement of financial assets, changes in trading performance, solvency capital and recently the recognition of impairment and hedge accounting. Under IFRS 9, announced acquisitions. all financial assets will be measured at either amortised cost or fair Details of the Group’s business activities, together with the factors likely value, with the basis of classification depending on the business to affect its future development, performance and position are set out model and the contractual cash flow characteristics of the financial in the Strategic Report on pages 1-21. The financial position of the assets. In September 2016, the IASB issued Amendments to IFRS 4, Group, its cash flows, liquidity position and borrowing facilities are ‘Insurance Contracts’ regarding the implementation of IFRS 9, ‘Financial described in the Financial Review on pages 12-15. Instruments’, introducing two approaches: an overlay approach (giving companies that issue insurance contracts the option to recognise in The Group’s £800.0m bank facility was unutilised at 31 December 2016, Other Comprehensive Income, rather than the Income Statement, with the exception of £6.4m of outstanding letters of credit required for any volatility that could arise when IFRS 9 is applied before the new general business purposes. The Group has extended this facility from insurance contracts standard is issued); or, a deferral approach (giving

2017 to 2021 with the option of extending this further to 2022. Governance companies whose activities are predominantly connected with An additional committed bank facility of £250.0m was agreed insurance an optional temporary exemption from applying IFRS 9 during June 2016. This facility was cancelled following the issuance until 2021). The mandatory effective date for applying IFRS 9 is for of the £400.0m unguaranteed subordinated bond issued on annual periods beginning on or after 1 January 2018. The standard 8 December 2016. was adopted into EU law on 22 November 2016. The impact of IFRS 9 on the financial statements is currently being evaluated by the Group, Refer to the Longer-Term Viability Statement in the Strategic Report but cannot be fully assessed until the insurance contracts standard is which considers the Group’s ability to continue in operation and meet finalised. The amendments to IFRS 4 are pending EU endorsement. its liabilities as they fall due, over a period of three years. In making this assumption, management have considered the discussions with the (b) IFRS 15 Revenue Recognition relationship banks including the review of external ratings, forecasts IFRS 15 establishes principles that an entity can apply to report that consider reasonably possible changes in trading performance, the information about the nature, amount, timing and uncertainty of solvency capital position and the Group’s financial and operational risk revenue and cash flows arising from a contract with a customer. framework. It has been concluded that Bupa is a going concern and It replaces IAS 11: Construction Contracts, IAS 18: Revenue, IFRIC 13: accordingly the financial statements have been produced on a going Customer Loyalty Programmes, IFRIC 15: Agreements for the concern basis. Construction of Real Estate and IFRIC 18: Transfers of Assets from Customers. The standard will come into effect for annual periods beginning on or after 1 January 2018. The Group has reviewed the 1.5 New financial reporting requirements effect of this change and does not expect a significant impact to the All newly effective financial reporting standards applicable to the financial statements. Financial statements Group for the first time for the year ended 31 December 2016 have been reviewed and it has been concluded that they have no material (c) IFRS 16 Leases impact on the financial statements of the Group. These include: IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and supersedes IAS 17 Leases; (a) IAS 1 Disclosure initiative IFRIC 4 Determining whether an Arrangement contains a Lease; SIC-15 The amendments to IAS 1 Presentation of Financial Statements are Operating Leases-Incentives; and SIC-27 Evaluating the Substance designed to further encourage companies to apply professional of Transactions Involving the Legal Form of a Lease. The mandatory judgement in determining which information to disclose in their effective date for applying IFRS 16 is for annual periods beginning on or financial statements. after 1 January 2019. The impact of IFRS 16 on the financial statements (b) Amendments to The Companies Partnerships and Groups is currently being evaluated by the Group. See Note 6.1 Commitments (Accounts and Reports) Regulations 2015 and contingencies for operating lease disclosures under the current The amendment under section 410 of the UK Companies Act for accounting standards. companies to include all subsidiaries, associated undertakings and significant holdings in undertakings other than subsidiary undertakings has been extended to declare the registered address, shareholding and class of shares. Bupa has included a full listing of all entities meeting this criteria, shareholding and class of shares grouped by the registered country of the entities in the Annual Report and Accounts. 66 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

(d) IAS 7 Disclosure initiative 1.7 Events occurring after the reporting period The IASB requires the following changes in assets/liabilities arising On 9 February 2017, Bupa completed the purchase of 100% of the from financing activities to be disclosed: (i) changes from financing issued share capital of Oasis Dental Care, with an enterprise value of cash flows; (ii) changes arising from obtaining or losing control of £835.0m, following regulatory referral from the European Commission subsidiaries or other businesses; (iii) the effect of changes in foreign to the UK Competition and Markets Authority (CMA). exchange rates; (iv) changes in fair values; and (v) other changes. The Group expects that this would take the format of a reconciliation between the opening and closing balances for liabilities arising from financing activities. Comparative information will not be required. The amendments to IAS 7 will be effective from 1 January 2017, pending EU endorsement. (e) IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses The amendments to IAS 12 will be effective from 1 January 2017, pending EU endorsement. The impact of this is currently being evaluated by the Group. The Group has reviewed the effect of all other amendments to IFRS and interpretations effective for accounting periods beginning on or after 1 January 2017 and do not expect them to have a significant impact on the financial statements.

Note 2.0 Operating segments in brief The Group is managed through four Market Units based on Operating segments geographic locations and customers. Management monitors the operating results of the Market Units separately to assess performance and make decisions about the allocation of resources. The segmental disclosures are reported consistently with the way the business is managed and reported internally.

Reorganisation during the year led to four Market Units being reported Markets (resulting from the merger of International Development from the previous five; the newly formed Market Units being Europe Markets and Bupa Global). Comparatives have been restated to reflect and Latin America (resulting from the transfer of LUX MED into the this change. The new structure enhances collaboration and synergies previous Spain and Latin America Market Unit) and International across the business.

Reportable segments Services and products Australia and New Zealand Health insurance, health assessments, health coaching and international health cover Dental provision in Australia and New Zealand, optical care within Australia Nursing, residential and respite care in Australia and New Zealand Retirement villages and telecare services within New Zealand UK Health insurance, dental services, health assessments and related products Nursing, residential, care villages and respite care Management and operation of a private hospital providing medical and ancillary services to patients Home healthcare products and services1 Europe and Latin America Health insurance and related products sold in Spain Management and operation of hospitals, clinics and dental centres in Spain providing medical and ancillary services to patients Provision of nursing, residential and respite care in Spain Medical subscription, health insurance, diagnostics and operation of clinics and hospitals in Poland Health insurance and operation of outpatient clinics and hospitals in Chile International Markets International health insurance to individuals, small businesses and corporate customers in over 190 countries Domestic health insurance and related products within Hong Kong, Thailand, China, Saudi Arabia and India Diagnostics, primary healthcare and day care clinics in Hong Kong

1 Bupa Home Healthcare was sold to Celesio on 1 July 2016. Bupa Annual Report 2016 67

The operating results of each Market Unit, which form the operating –– Net gains/losses on disposal of businesses and transaction costs on report Strategic segments on which the information in this section has been prepared, business combinations – gains/losses on disposal of businesses are are regularly reviewed by the Group Chief Executive Officer (the not considered part of the continuing business and are one-off in Group’s chief operating decision maker) to assess performance and nature; transaction costs incurred for acquisitions or disposals are make decisions about the allocation of resources. not related to the ongoing trading performance of the business. The segmental underlying profit includes items directly attributable –– Net property revaluation gains/losses – short-term fluctuations to a segment as well as those that can be allocated on a reasonable which would distort underlying trading performance. Includes basis. Central expenses and net interest margin comprise income unrealised gains or losses on investment properties, deficit on and expenses generated at the Centre, which cannot be specifically revaluations and property impairment losses. allocated to the operating segments. –– Realised and unrealised foreign exchange gains/losses – short-term A key performance measure of operating segments utilised by the fluctuations outside of management control, which would distort Group is underlying profit. This measurement basis distinguishes underlying trading performance. underlying profit from other constituents of the IFRS reported profit –– Other Market Unit non-underlying items – include impairment of before tax, excluding items relating to business combinations and investment in associate, Market Unit restructuring costs (which are disposals, fluctuations in foreign exchange, property revaluations and one-off and outside the normal operations of the business) and net investment return on return-seeking assets, along with other one-off gains/losses on disposal of fixed assets (not part of the continuing items. Adjustments made exclude items derived from the application business or trading activity). of Group accounting policies which are not directly related to the Governance underlying trading performance of the business. –– Early termination of secured loans – relates to the one-off impact of UK care homes securitisation redemption. The adjustments made to reported profit before tax are to exclude the following: –– Gains on return seeking assets, net of hedging – fluctuations on investments are not considered to be directly related to underlying –– Amortisation and impairment of intangible assets and goodwill trading performance. arising on business combinations – impairment reviews are performed at least annually. Although driven by trading –– Central non-underlying items – items which management believe are performance, goodwill impairments are considered to be one-off not representative of the underlying results of the business and which and not reflective of the ongoing trading performance of the would distort underlying results. business. Amortisation and impairment of internally generated intangible assets and purchased computer software is included within underlying profit. Financial statements 68 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

The total underlying profit of the reportable segments is reconciled below to profit before taxation expense in the Consolidated Income Statement.

Australia and Europe and International New Zealand UK Latin America Markets Total 2015 2015 2016 2015 2016 2015 2016 (restated) 2016 (restated) 2016 2015 £m £m £m £m £m £m £m £m £m £m (i) Revenues Total revenues for reportable segments 4,360.6 3,648.4 2,786.1 2,858.1 2,474.7 2,027.4 1,427.9 1,296.2 11,049.3 9,830.1 Inter segment income – – (0.2) (0.3) – – (0.1) (0.5) (0.3) (0.8) External revenues for reportable segments 4,360.6 3,648.4 2,785.9 2,857.8 2,474.7 2,027.4 1,427.8 1,295.7 11,049.0 9,829.3

Net reclassifications to other expenses or financial income and expense (1.1) (0.9) Consolidated total revenues 11,047.9 9,828.4

(ii) Segment result Underlying profit for reportable segments1 344.4 279.5 194.9 182.6 165.6 90.0 65.9 127.1 770.8 679.2 Central expenses and net interest margin (70.1) (96.7) Consolidated underlying profit before taxation 700.7 582.5

Non-underlying items: Amortisation and impairments of intangible assets and goodwill arising on business combinations (14.4) (13.0) (14.7) (118.7) (28.3) (14.8) (13.3) (14.1) (70.7) (160.6) Net (losses)/gains on disposal of businesses and transaction costs on business combinations2 (0.3) (0.6) 9.7 (1.6) (0.1) (1.7) (2.8) 0.1 6.5 (3.8) Net property revaluation gains/(losses)3 17.8 2.3 (35.3) (67.7) (6.3) 3.7 – – (23.8) (61.7) Realised and unrealised foreign exchange (losses)/gains (0.3) 0.2 (0.3) (0.1) (2.5) (2.0) 22.5 (9.8) 19.4 (11.7) Other Market Unit non-underlying items4 (1.0) (1.1) (12.7) (0.4) (0.7) 1.4 (0.9) (2.3) (15.3) (2.4) Early termination of secured loans (112.3) – Gains on return-seeking assets, net of hedging 22.9 7.0 Central non-underlying items5 (4.5) 25.0 Total non-underlying items (177.8) (208.2) Consolidated profit before taxation expense 522.9 374.3

1 Underlying profit for reportable segments includes share of post-taxation results of equity accounted investments. International Markets includes Bupa Arabia, Max Bupa and Highway to Health. For further information please refer to Note 4.2. 2 Includes £12.3m profit on disposal of Bupa Home Healthcare in 2016 (see Note 2.4). 3 2016 includes £11.2m write down on reclassification as held for sale in the UK (see Note 2.4). 2015 includes a property and equipment write down in UK Care Services of £67.8m, of which £8.7m is equipment (see Note 3.2). 4 Includes £11.0m UK Market Unit restructuring costs and £4.2m net losses on disposal of fixed assets in 2016; includes £1.1m Market Unit restructuring costs, £0.7m impairment of investment in associate and £0.6m net losses on disposal of fixed assets in 2015. 5 Includes £25.5m receipt of deferred consideration in relation to the sale of Bupa Ireland Limited in 2015 (see Note 2.4).

Australia and Europe and International New Zealand UK Latin America Markets Total 2015 2015 2016 2015 2016 2015 2016 (restated) 2016 (restated) 2016 2015 £m £m £m £m £m £m £m £m £m £m (iii) Other information Amortisation and depreciation costs for reportable segments 61.9 52.5 93.9 106.9 64.6 70.9 36.6 33.2 257.0 263.5 Non-cash (expense)/income for reportable segments (209.9) (166.4) (30.7) (35.8) 64.8 (77.5) (7.8) 12.3 (183.6) (267.4) Unallocated non-cash income/(expense) 15.9 (31.2) Total non-cash expenses (167.7) (298.6)

Australasia UK Spain Rest of the World Total 2015 2015 2016 2015 2016 2015 2016 (restated) 2016 (restated) 2016 2015 £m £m £m £m £m £m £m £m £m £m (iv) Geographic information Consolidated total revenues 4,360.6 3,648.4 3,344.1 3,378.8 1,414.6 1,168.2 1,928.6 1,633.0 11,047.9 9,828.4 Consolidated non-current assets1 3,418.1 2,720.0 1,980.3 1,600.1 522.9 444.5 1,646.5 1,593.2 7,567.8 6,357.8

1 Consolidated non-current assets excludes financial investments, restricted assets, assets arising from insurance business, deferred taxation assets and post-employment benefit net assets. Bupa Annual Report 2016 69 Strategic report Strategic Note 2.1 Revenues in brief The Group generates revenues from its underwriting activities Revenues (insurance premiums), trading activities through the provision of insurance management services (insurance service contracts) and the provision of healthcare services (care, health, dental and other).

Revenue stream Recognition policy Insurance premiums Gross insurance premiums Gross insurance premiums represent the premiums earned relating to risk exposure for the reported financial year. They comprise gross premiums written, adjusted for the change in the provision for unearned premiums for premiums written relating to periods of risk in subsequent financial years. Premiums are shown gross of commissions payable and net of insurance premium taxes that may apply in certain jurisdictions. Premiums ceded to reinsurers Premiums ceded to reinsurers represent reinsurance premiums payable for contracts entered into that relate to risk mitigation for the reported financial year. These comprise written premiums ceded to reinsurers, adjusted for the reinsurers’ share of the movement in the gross provision for unearned premiums. Governance Premiums, losses and other amounts relating to reinsurance treaties are recognised over the period from inception of a treaty to expiration of the related business. Insurance service contracts Contracts entered into by the Group’s general insurance entities that do not result in the transfer of significant insurance risk to the Group are accounted for as insurance service contracts. These contracts mainly relate to the administration of claims funds on behalf of corporate customers. Revenues from service contracts are recognised as the services are provided. Some of these contracts contain financial liabilities representing deposits repayable to the customer. These are measured at amortised cost. The claims fund deposit held on behalf of customers is reported within other payables, accruals and deferred income as appropriate. Care, health, dental and other The Group generates income from fees receivable from the operation of its care homes, hospitals, dental centres and other healthcare and wellbeing centres. Revenues from insurance service contracts are recognised as the services are provided, with the exception of an element of revenue for performance based service contracts which is recognised as deferred income. The accounting policy for deferred income for performance based service contracts is explained in Note 3.0.6. Service concession receivables The Group also operates two public hospitals in Spain under separate service concession arrangements granted by the local governments (the grantors). Revenue is recognised from the construction of infrastructure and for operation of the hospitals. Construction revenues are recognised in line with the stage of completion of the work performed. Operational revenues are recognised in the period in which the services are provided, in line with the service concession arrangements. The accounting policy for the service concession receivables is explained in Note 3.0.1.

Total Revenues 2016 2015 Financial statements £m £m Gross premiums written 8,058.1 7,139.3 Change in gross provision for unearned premiums (13.8) (80.3) Gross insurance premiums 8,044.3 7,059.0

Gross premiums written ceded to reinsurers (59.3) (50.3) Reinsurers’ share of change in gross provisions for unearned premiums 5.4 1.7 Premiums ceded to reinsurers (53.9) (48.6)

Net insurance premiums earned 7,990.4 7,010.4

Revenues from insurance service contracts 18.7 42.6 Care, health and other revenues 3,038.8 2,775.4 Total revenues 11,047.9 9,828.4 70 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

Note 2.2 Insurance claims in brief Insurance claims relate to the Group’s insurance underwriting Insurance Claims activities. Insurance claims incurred are amounts payable under insurance contracts arising from the occurrence 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 Note 3.4 for details See ‘Assets arising from insurance business’ within Note 3.0.2 for of the claims provision. 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

2016 2015 £m £m Insurance claims paid 6,335.4 5,593.8 Change in gross provisions for claims 62.6 (0.5) 6,398.0 5,593.3 Risk Equalisation Trust Fund levy (net of recoveries) (65.1) (87.5) Insurance claims incurred 6,332.9 5,505.8

Recoveries from reinsurers on claims paid (45.3) (36.1) Reinsurers’ share of change in gross provisions for claims 2.4 (1.0) Reinsurers’ share of claims incurred (42.9) (37.1)

Net insurance claims incurred 6,290.0 5,468.7 Bupa Annual Report 2016 71 Strategic report Strategic Note 2.3 Other operating expenses in brief Other operating expenses include staff costs, overheads, Other operating expenses depreciation, amortisation of intangible assets, and gains or losses on foreign exchange transactions incurred as a consequence of operating our businesses. Costs in relation to handling claims are included within insurance claims. Operating expenses exclude insurance claims, finance costs and taxation.

Other operating expenses 2016 2015 Note £m £m Staff costs 2.3.1 1,962.1 1,712.0 Acquisition costs 2.3.2 258.2 226.0 Medical supplies and fees 794.9 878.6 Governance Property costs 181.8 165.9 Operating lease rentals 148.1 126.5 Marketing costs 124.3 110.2 Catering and housekeeping costs 75.2 68.1 Consultancy fees 53.5 47.3 Net loss on foreign exchange transactions 58.6 15.0 Amortisation of intangible assets 3.1 120.2 116.0 Impairment of intangible assets 3.1 35.0 – Depreciation expense 3.2 161.7 147.5 Other operating expenses (including auditors’ remuneration) 2.3.3 223.7 190.7 Total other operating expenses 4,197.3 3,803.8

2.3.1 Staff cost and employee numbers Employee numbers The average number of full-time equivalent employees, including Staff costs The below table represents the total employee benefit expenses Executive Directors, employed by the Group during the year was: incurred by the Group during the period. 2015 Average employee numbers 2016 (restated) 2016 2015 Financial statements £m £m Australia and New Zealand 13,287 12,006 UK 27,333 Wages and salaries 1,910.7 1,653.7 26,960 Europe and Latin America 21,033 Social security costs 128.3 114.3 22,503 International Markets 3,361 Contributions to defined contribution schemes 32.7 29.6 3,588 Centre 285 Other pension amounts (2.7) 5.6 331 64,018 Total staff costs 2,069.0 1,803.2 Total employee numbers 66,669 (91.2) Staff costs relating to claims handling reported in claims (106.9) The total employee headcount as at 31 December 2016 was 86,423 Staff costs in operating expenses 1,962.1 1,712.0 (2015: 83,635). Directors’ Remuneration Report is described on pages 42-52 of Reorganised Market Unit structure is detailed in Note 2.0. this report. 72 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

2.3.2 Acquisition costs 2.3.3 Auditors’ remuneration 2016 2015 2016 2015 £m £m £m £m Commission for direct insurance 253.8 214.4 Fees payable to the Company’s auditor for the audit of the Company’s annual accounts 0.8 Other acquisition costs paid 14.2 14.6 0.8 Fees payable to the Company’s auditor and its Changes in deferred acquisition costs (9.8) (3.0) associates for: Total acquisition costs 258.2 226.0 – the audit of the Company’s subsidiaries pursuant to legislation 4.8 3.9 The movement in deferred acquisition cost is detailed in Note 3.0.2. – audit-related assurance services 0.8 0.7 Total audit fees payable to the Company’s auditors, KPMG LLP and its associates 6.4 5.4 Fees payable to other auditors: Audit of overseas subsidiary companies 0.5 0.2 Total audit fees 6.9 5.6 Fees payable to the Company’s auditor and its associates for other services: Tax compliance services 0.2 0.3 Tax advisory services 0.1 0.1 Corporate finance services – 1.0 All other non-audit services 1.1 1.5 Total non-audit fees 1.4 2.9 Total auditors’ remuneration 8.3 8.5

In addition, fees in respect of the audit of The Bupa Pension Scheme were £56,000 (2015: £49,000).

Note 2.4 Other income and charges in brief Other income and charges comprise income or expenses that are Other income and charges related to the investing and divesting activities of the Group.

Other income and charges 2016 2015 Note £m £m Net gain on disposal of business1 4.0.b 10.7 25.4 Movement in investment in associates provision – (0.7) (Deficit)/surplus on revaluation of property 3.2 (30.9) 3.6 Write down of property2 3.2 ,4.1 (14.5) (68.2) Net loss on disposal of property, plant and equipment3 (4.2) (0.7) Total other income and charges (38.9) (40.6)

1 2016 includes £12.3m profit on disposal of Bupa Home Healthcare, which was sold to Celesio on 1 July 2016 and £1.6m loss on liquidation of Bupa Middle East Holdings. 2015 includes deferred consideration on 2007 disposal of Bupa Ireland Limited of £25.5m. 2 Includes £11.2m write down on reclassification as held for sale. 3 Includes loss on disposal of two office buildings which were sold in the year. Bupa Annual Report 2016 73 Strategic report Strategic Note 2.5 Financial income and expense in brief Financial income and expense are earned/(incurred) from the Financial income and expense Group’s financial assets and liabilities, and non-financial assets such as investment property.

Financial income Included within ‘net realised gains on financial investments designated Interest income, except in relation to assets classified at fair value at fair value through profit or loss’ and ‘investments designated at fair through profit or loss, is recognised in the Income Statement as it value through profit or loss’ is a net gain, after hedging, on the Group’s accrues, using the effective interest method. Any mark to market return seeking asset portfolio of £22.9m (2015: net gain of £7.0m). movements are split between realised or unrealised. No financial investments designated at fair value through profit or loss are held for trading. A gain of £39.3m was recognised on the early Changes in the value of financial assets designated as at fair value termination of the financial investment which provided security against through profit or loss are recognised within financial income as an the repayment of the secured loans issued by UK Care No.1 Limited. unrealised gain or loss while the asset is held. Upon realisation of these assets, the change in fair value since the last valuation is recognised 2016 net foreign exchange gain includes a £63.5m gain on the retranslation of US dollar and sterling investments held in Bupa Egypt within financial income as a realised gain or loss. Governance as a result of a devaluation of the Egyptian pound in November 2016. 2016 2015 Note £m £m Interest income: Financial expense Loans and receivables 41.2 40.8 Interest payable on borrowings is calculated using the effective Investments designated as available interest method. for sale 1.3 – 2016 2015 Investments held to maturity 2.8 2.6 £m £m Investments designated at fair value Interest expense on financial liabilities at amortised cost 86.3 114.3 through profit or loss 3.3 1.7 Finance charges in respect of finance leases 0.8 1.2 Net realised gains on financial investments designated at fair value through profit Loss on early repayment of debt 151.6 – or loss 5.4 13.6 Other financial expenses 2.5 2.5 Realised gain on early termination of Total financial expense 241.2 118.0 long term investment 39.3 – A loss of £151.6m was recognised following the early redemption of the Net increase/(decrease) in fair value: secured loans issued by UK Care No.1 Limited in April 2016. This has Investments designated at fair value been partially offset by a £39.3m gain (in financial income) on the early through profit or loss 19.7 (4.4) termination of the financial investment which provided security against

Investment property 3.3 21.2 11.6 the A1 notes. Financial statements Net foreign exchange translation gains 77.9 2.8 Total financial income 212.1 68.7 74 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

Note 2.6 Taxation expense in brief Taxation expense on the profit for the year comprises current and Taxation expense deferred taxation and considers foreign tax, double tax relief and absorbs adjustments in respect of prior periods.

The taxation expense on the profit for the year comprises current (ii) Reconciliation of effective taxation rate and deferred taxation. Income taxation is recognised in the Income 2016 2015 Statement except to the extent that it relates to items recognised £m £m directly in Other Comprehensive Income, in which case it is recognised Profit before taxation expense 522.9 374.3 directly in the Statement of Comprehensive Income. Taxation at the domestic UK corporation tax rate of 20.00% (2015: 20.25%) 104.6 75.8 (i) Recognised in the Income Statement Effect of: 2016 2015 £m £m Different taxation rates in foreign jurisdictions 28.1 25.8 Current taxation expense Non-deductible expenses 0.9 17.0 UK taxation on income for the year 33.8 20.8 Current income taxation adjustments in respect of prior periods (3.0) (27.6) Adjustments in respect of prior periods (3.2) (18.8) Deferred taxation adjustments in respect of prior periods 2.7 – 30.6 2.0 Changes in taxation rate 2.7 7.4 Double taxation relief (2.9) (2.5) Movement on deferred taxation asset not recognised 0.1 (2.3) Foreign taxation on income for the year 136.4 109.0 Group relief not paid for – (0.1) Adjustments in respect of prior years 0.2 (8.8) Taxation expense at the effective rate of 26.0% 136.6 100.2 (2015: 25.6%) 136.1 96.0

Total current taxation 164.3 99.7 (iii) Current and deferred taxation recognised directly in Deferred taxation income Other Comprehensive Income Origination and reversal of temporary differences (33.6) (11.1) 2016 2015 Taxation Taxation Adjustments in respect of prior periods 2.7 – benefit/ benefit/ Changes in taxation rates 2.7 7.4 (expense) (expense) £m £m Current taxation credit in respect of: Total deferred taxation (28.2) (3.7) Other foreign exchange translation differences 15.9 – Taxation expense 136.1 96.0 Deferred taxation (charge)/credit in respect of: Current taxation is the expected taxation payable on the taxable profit Unrealised (loss)/profit on revaluation of property (10.3) 16.0 for the year, using taxation rates enacted or substantively enacted at Remeasurement gain on pension schemes 7.7 3.4 the balance sheet date, and any adjustments to taxation payable in Change in fair value of underlying derivative of respect of previous years. cash flow hedge (0.2) (0.4) Taxation credit on income and expenses recognised The Group is subject to taxation audits in the territories in which it directly in Other Comprehensive Income 13.1 19.0 operates and considers each issue on its merits when deciding whether to hold a provision against the potential taxation liability that may arise. However the amount that is ultimately paid could differ from the amount initially recorded and this difference is recognised in the period in which such a determination is made. Bupa Annual Report 2016 75 Strategic report Strategic Note 3.0 Working capital in brief Working capital represents the assets and liabilities the Group Working capital generates through its trading activity. The Group therefore defines working capital as trade and other receivables, assets and liabilities arising from insurance business, inventory, cash and trade and other payables.

3.0.1 Trade and other receivables A financial asset has been recognised for each arrangement to the Current trade and other receivables are carried at amortised cost less extent that the Group has an unconditional contractual right to receive impairment losses. Non-current trade and other receivables are carried cash from, or at the direction of, the grantors for the services provided at present value based on discounted cash flows, with the exception of per capita head of the population covered. The service concession prepayments carried at cost. receivables are carried at amortised cost less impairment losses, and relates to construction revenues which are recognised in line with the 2016 2015 stage of completion of the work performed and are included in place £m £m of the related asset, as at the end of the contract the ownership of Non-current the hospitals reverts to the grantors. The receivable also relates to Governance Service concession receivables (a) 89.9 77.7 operational revenues, which are recognised in the period in which the Other receivables 6.5 6.8 services are provided, in line with the service concession arrangements. Prepayments 10.6 8.1 Under IFRIC 12, revenue is recognised based on the average operating Investment receivables and accrued margin for the life of the contract. The operating margin is based on investment income 5.5 4.3 historic performance plus projections and this margin is reassessed Total non-current other receivables 112.5 96.9 based on changes in expected performance, with an adjustment made to the current year results to bring the contract performance to date in Current line with the revised margin. Trade receivables – net of impairment losses (b) 256.2 183.6 In 2015 the financial asset was impaired by £52.0m due to the impact Service concession receivables (a) 123.4 107.4 on our business case projections of customers from within our Other receivables 94.8 86.4 catchment area seeking treatment at other facilities, accentuated Prepayments 49.0 62.2 by the introduction of the Free Choice Act in Valencia in 2015. Accrued income 50.5 26.4 (b) Impairment of financial assets Investment receivables and accrued investment income 0.3 0.4 Financial assets comprise trade and other receivables and financial investments. Refer to Note 5.0 for financial investments. Total current trade and other receivables 501.6 539.0 If they are not already held at fair value, financial assets are assessed

Total trade and other receivables 614.1 635.9 at each reporting date to determine whether there is any objective Financial statements evidence that they are impaired. A financial asset is considered The above balance is stated net of provisions for impairment losses. impaired if objective evidence indicates that one or more events that Information regarding the ageing of trade and other receivables is have occurred since the initial recognition of the asset have had a shown in Note 5.4.3. negative impact on the estimated future cash flows of that asset. The fair value of non-current investment receivables and accrued An impairment loss in respect of a financial investment measured at investment income is £5.2m (2015: £4.0m). The carrying value of the amortised cost is calculated as the difference between its carrying other non-current receivable balances are a reasonable approximation amount and the present value of the estimated future cash flows of the fair value. discounted at the effective interest rate at the date the investment was made. (a) Service concession receivables The Group has recognised two service concession receivables in Significant financial assets are tested for impairment on an individual respect of the public-private partnership arrangement with the basis. The remaining financial assets are assessed collectively in groups Valencian and Madrid Governments (the grantors). Under the that share similar credit risk characteristics. arrangement with the Valencian Government, the Sanitas business was contracted to build and operate the Manises hospital for the grantor for All impairment losses are recognised in the Income Statement. 15 years. Under the current arrangement with the Madrid Government, Impairment losses on trade receivables amounting to £5.4m the Sanitas business was contracted to operate the Torrejón hospital for (2015: £4.7m) have been charged to other operating expenses. the grantor for 30 years. 76 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

3.0.2 Assets arising from insurance business (c) Reinsurers’ share of insurance provisions Financial assets arising from insurance business, excluding reinsurers’ The recoverables due from reinsurers are shown within assets arising share of insurance provisions, are held at amortised cost. Valuation of from insurance business and are assessed for impairment at each reinsurers’ share of insurance provisions is discussed in Note 3.4. balance sheet date.

2016 2015 Reinsurers’ share of insurance provisions are further analysed in £m £m Note 3.4. Non-current (d) Medicare rebate Deferred acquisition costs (a) 2.2 0.2 In Australia, the government provides a rebate to health insurers Total non-current assets arising from in respect of the premiums paid for private health insurance. insurance business 2.2 0.2 Rebates due from the government but not received at the balance sheet date are recognised in assets arising from insurance business. Current Insurance debtors (b) 952.8 799.8 3.0.3 Cash and cash equivalents Reinsurers’ share of insurance provisions (c) 19.3 4.8 Deferred acquisition costs (a) 103.5 87.8 Cash and cash equivalents comprise cash balances, call deposits and Medicare rebate (d) 72.9 67.3 other short-term highly liquid investments (including money market funds) with original maturities of three months or less which are subject Risk Equalisation Trust Fund recoveries 16.2 20.8 to an insignificant risk of change in value. Total current assets arising from insurance business 1,164.7 980.5 Bank overdrafts of £nil (2015: £nil) that are repayable on demand and form an integral part of the Group’s Capital Management Policy (see Total assets arising from Note 5.3) are included as a component of cash and cash equivalents insurance business 1,166.9 980.7 for the purpose of the statement of cash flows. The above balance is stated net of provision for impairment losses. 2016 2015 £m £m Information regarding the ageing of insurance debtors, Medicare rebate and Risk Equalisation Trust Fund recoveries is shown in Note 5.4.3. Cash at bank and in hand 998.7 684.2 Short-term deposits 414.0 509.9 (a) Deferred acquisition costs Cash and cash equivalents 1,412.7 1,194.1 Acquisition costs represent commissions payable and other expenses related to the acquisition of insurance contract revenues written during the financial year. Acquisition costs that have been paid that 3.0.4 Restricted assets relate to subsequent periods are deferred and recognised in the Restricted assets are amounts held in respect of specific obligations Income Statement in the relevant period on a straight line basis. and potential liabilities and may be used only to discharge those The movement in deferred acquisition costs is as follows: obligations and potential liabilities if and when they crystallise.

2016 2015 2016 2015 £m £m £m £m At the beginning of the year 88.0 84.6 Non-current restricted assets 55.8 45.1 Acquisition costs deferred 341.8 288.0 Current restricted assets 4.2 10.8 Acquisition costs released to Income Statement (332.0) (285.0) Total restricted assets 60.0 55.9 Foreign exchange 7.9 0.4 The restricted assets balance of £60.0m (2015: £55.9m) is split At end of year 105.7 88.0 between non-current and current. The non-current restricted assets (b) Insurance debtors balance of £55.8m (2015: £45.1m) consists of cash deposits held to Impairment releases in respect of insurance debtors amounting secure a charge over the non-registered pension arrangement to £5.6m (2015: release of £2.2m) have been recognised in other maturing after 2022 (see Note 6.0). Included in current restricted assets operating expenses in the Income Statement, detailed in Note 2.3. is £3.2m (2015: £2.1m) in respect of claims funds held on behalf of corporate customers and £0.3m acquired restricted assets in relation to Care Plus. Bupa Annual Report 2016 77

3.0.5 Inventories (a) Deferred income report Strategic Inventories are stated at the lower of cost and net realisable value. In respect of the Group’s revenue and deferred revenue for Cost is determined using the first-in first-out method, or methods performance based health service contracts, estimates are made by that approximate this and includes costs incurred in acquiring the the Group based on the most recent performance evaluation data inventories and in bringing them to their current location and condition. available at the year end and these estimates are utilised if they are determined to be reliable. Reliable estimates can only be made on an Inventories relating to drugs, prostheses, consumables and housing individual contract basis once the results of an initial performance stock were £92.2m (2015: £82.9m). evaluation are available, and revenue is deferred until the first reliable Inventory write downs of £1.3m (2015: £0.1m) were made during the evaluation is available. year. The Group consumed £384.4m (2015: £496.8m) of inventories, Where the results of the final performance assessment differ from the which are recognised within other operating expenses in the Income estimation or if an updated reliable estimate is available, the difference Statement. is recognised in the period in which such determination is made. Where reliable estimates are not available, the Group recognises revenue only 3.0.6 Trade and other payables to the extent of the contract costs recognised that the Group believes are recoverable. Trade and other payables (excluding deferred income) are carried at amortised cost. (b) Accommodation bond liabilities Accommodation bonds are non-interest bearing deposits paid by 2016 2015 £m £m some residents of care homes held in Bupa Aged Care Australia as Governance Non-current payment for a place in the care home facility. These deposits are repayable when the resident leaves the facility. The bonds are Accruals 9.0 8.5 recorded as the proceeds received, net of retention and any other Other payables 14.1 10.3 amounts deducted at the election of the bondholder. Deferred income (a) 1.2 1.1 Total non-current other payables 24.3 19.9 (c) Other payables Included within 2015 other payables is £91.1m in relation to the

Current mandatory offer to market for the remaining 26.3% of Bupa Chile shares which were external to Bupa. This transaction completed in Accruals 462.1 416.3 February 2016. Accommodation bond liabilities (b) 558.5 369.6 Trade payables 134.6 261.8 Other payables (c) 414.7 354.0 Deferred income (a) 70.7 75.3 Social security and other taxes 32.8 42.6 Total current trade and other payables 1,673.4 1,519.6

Total trade and other payables 1,697.7 1,539.5

The fair value of other payables and accruals are £424.1m (2015: Financial statements £363.5m) and £495.2m (2015: £424.6m) 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 Note 5.4.4. 78 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

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

Goodwill Other intangible assets Goodwill represents the excess of the cost of a business combination Intangible assets, other than goodwill, that are acquired as part of over the fair value of the Group’s share of identifiable assets, liabilities a business combination are capitalised at fair value. and contingent liabilities of the acquired subsidiary company at the Intangible assets acquired separately are stated at cost less date of business combination. The carrying value of goodwill may be accumulated amortisation and impairment. adjusted up to 12 months from the date of acquisition, as the allocation of the purchase price to identifiable intangible assets is finalised within Amortisation is charged to the Income Statement on a straight line that period. Goodwill arising on business combinations is capitalised basis as follows: and presented as part of intangible assets in the Consolidated –– Computer software 2-7 years Statement of Financial Position. –– Brand and trademarks 10 years-indefinite Goodwill is stated at cost less accumulated impairment losses. Impairment reviews are performed annually or more frequently if there –– Technology and databases 10 years is an indication that the carrying value may be impaired. Impairment –– Distribution networks 10-11 years reviews are performed at the level of the relevant cash generating unit (CGU). A CGU is the smallest identifiable group of assets that generates –– Customer relationships 4-15 years cash inflows that are largely independent of the cash inflows from –– Present value of acquired in-force business 20 years other assets or groups of assets. Where the fair value of net assets acquired is greater than the consideration paid, the excess is recognised –– Customer contracts 4-6 years immediately in the Income Statement. –– Licences to operate care homes term of licence –– Leases term of lease Intangible assets that are subject to amortisation are reviewed for impairment if circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised in the Income Statement to reduce the carrying amount to the recoverable amount. Bed licences held by the Group have been attributed an indefinite useful life due to the fact that these licences, which are issued by the Australian Government, have no expiry date. Intangible assets with an indefinite useful life, or not yet available for use, are subject to annual impairment reviews. Bupa Annual Report 2016 79

Intangible assets report Strategic Computer Brands/ Customer Goodwill software Trademarks relationships Other Total £m £m £m £m £m £m 2016 Cost At beginning of year 2,352.0 654.2 295.9 463.4 266.6 4,032.1 Assets arising on business combinations 118.8 0.4 – (2.8) – 116.4 Additions – 92.2 – 0.8 10.1 103.1 Disposals of subsidiary companies (58.5) (2.9) (3.1) (22.9) (1.1) (88.5) Disposals – (3.5) – – – (3.5) Other – 6.6 – – 3.8 10.4 Foreign exchange 360.5 38.8 60.6 74.8 35.3 570.0 At end of year 2,772.8 785.8 353.4 513.3 314.7 4,740.0

Amortisation and impairment loss At beginning of year 374.3 438.4 75.8 179.4 102.2 1,170.1 Amortisation for year – 70.3 7.1 34.2 8.6 120.2 Governance Impairment loss – 14.3 10.5 – 10.2 35.0 Disposals of subsidiary companies (58.4) (2.0) (3.1) (22.9) (1.1) (87.5) Disposals – (2.2) – – – (2.2) Other – 6.6 – – 3.8 10.4 Foreign exchange 25.0 25.0 12.9 27.6 12.1 102.6 At end of year 340.9 550.4 103.2 218.3 135.8 1,348.6

Net book value at end of year 2,431.9 235.4 250.2 295.0 178.9 3,391.4 Net book value at beginning of year 1,977.7 215.8 220.1 284.0 164.4 2,862.0

2015 Cost At beginning of year 2,416.5 592.9 313.3 472.3 268.5 4,063.5 Assets arising on business combinations 59.7 0.2 – 2.0 – 61.9 Additions – 82.1 – 0.8 5.9 88.8 Disposals of subsidiary companies (24.7) – – – – (24.7) Disposals – (12.1) – – – (12.1) Financial statements Other – (2.2) – – – (2.2) Foreign exchange (99.5) (6.7) (17.4) (11.7) (7.8) (143.1) At end of year 2,352.0 654.2 295.9 463.4 266.6 4,032.1

Amortisation and impairment loss At beginning of year 288.4 382.5 72.0 153.5 95.0 991.4 Amortisation for year – 69.8 6.5 30.4 9.3 116.0 Impairment loss 114.1 – – – – 114.1 Disposals of subsidiary companies (24.7) – – – – (24.7) Disposals – (11.7) – – – (11.7) Other – 0.3 – – – 0.3 Foreign exchange (3.5) (2.5) (2.7) (4.5) (2.1) (15.3) At end of year 374.3 438.4 75.8 179.4 102.2 1,170.1

Net book value at end of year 1,977.7 215.8 220.1 284.0 164.4 2,862.0 Net book value at beginning of year 2,128.1 210.4 241.3 318.8 173.5 3,072.1 80 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

Intangible assets of £3,391.4m (2015: £2,862.0m) includes £724.1m Taxation has been applied to the pre-taxation management operating (2015: £668.5m) which is attributable to other intangible assets arising profits based on the statutory taxation rates in the country of operation. on business combinations (included within customer relationships, Future post-taxation cash flows have been discounted at post-taxation brand/trademarks and other) as follows: discount rates. Discount rates used for the value in use calculations for 2016 2015 each of the Group’s CGUs are based on considerations of the specific £m £m risks associated with the business plans of each CGU, as well as external Customer relationships 295.0 284.0 factors. These include the market assessment of the time value of Bed licences (within Bupa Aged Care Australia) 123.1 102.7 money and the risks inherent in the relevant country where the cash Brand and trademarks 250.2 220.1 flows are generated. Licences to operate care homes 22.7 34.6 Cash flow projections beyond the forecast periods have been Customer contracts 6.8 3.4 extrapolated by applying a terminal growth rate between 2.0% and Leases 9.3 10.7 3.5% (2015: 2.5% and 3.7%) for all CGUs. The terminal growth rates Distribution networks 19.3 8.5 represent an estimate of the long-term growth rate for each of the Present valuation of acquired in-force business 1.1 1.1 CGUs, taking into account the future and past growth rates and Total 724.1 668.5 external sources of data. The values assigned to the key assumptions are based on past Impairment testing of goodwill experience of the CGUs and assessment of future trends in the relevant industry. Intangible assets with indefinite useful lives are tested at least annually for impairment by comparing the net carrying value with the The following table summarises the pre-taxation discount rates used for recoverable amount, using value in use (VIU) calculations for all cash impairment testing for the main CGUs: generating units (CGUs) with the exception of Quality HealthCare 2016 2015 goodwill which is determined on a fair value less costs of disposal % % (FVLCD) basis which has been externally valued. Bupa Australia Health Insurance 9.3 9.6 In arriving at the value in use for each cash generating unit (CGU), key Bupa Aged Care Australia 8.7 9.0 assumptions have been made regarding future projected cash flows, Bupa Health Services Australia 11.0 11.5 discount rates and terminal growth rates. The main assumptions upon Bupa Care Services New Zealand 8.8 8.8 which the cash flow projections are based include premiums and claims Bupa Care Services UK 7.9 8.2 costs for our Health Insurance businesses, fee rate, cost of care and Bupa Cromwell Hospital 10.0 9.6 occupancy for our care services businesses and revenue growth and Dental UK 7.7 n/a gross margins for hospitals and clinics. These valuation techniques are Bupa Chile 12.6 12.8 classified within level three of the IFRS 13 fair value hierarchy. Sanitas Seguros 10.1 11.3 Aside from those mentioned below, cash flow projections have been LUX MED 10.3 10.5 based on management operating profit projections for a three year Quality HealthCare 10.5 10.4 period which have been approved by the Board. Cash flow projections Bupa Global 10.3 11.0 for Bupa Care Services UK and Bupa Chile are based on five years. LUX MED and Bupa Care Services New Zealand are based on longer All CGUs are valued at the higher of VIU and FVLCD. periods of seven and ten years respectively as the business model of these CGUs requires investment beyond a three year period to reach a steady state of operation. As part of the FVLCD valuation of Quality HealthCare, the external valuer produced a valuation of the business using a range of cash flow projections, looking ahead over periods up to twelve years, as well as using other market inputs. Bupa Annual Report 2016 81

The recoverable amount of all CGUs is determined to be higher than Sensitivity to changes in key assumptions report Strategic their respective carrying amounts, resulting in no impairment to A sensitivity analysis has been performed on the key assumptions used goodwill. In 2015, a partial impairment of the goodwill relating to Bupa to determine the value in use for each CGU as at 31 December 2016. Care Services UK (£114.1m) was recorded, along with impairment of property (£171.0m) and equipment (£8.7m) following the introduction Other than as disclosed below, management believes that no of the National Living Wage from April 2016, and challenging trading reasonably probable change in any of the key assumptions would conditions. cause the carrying value of any goodwill or intangible asset with an indefinite useful life to exceed its recoverable amount. The following table summarises goodwill by CGU as at 31 December: It is possible that a change in key assumptions could cause the 2016 2015 £m £m impairment of goodwill for Bupa Care Services New Zealand, Bupa Australia and New Zealand Care Services UK, Bupa Chile, Bupa Health Services, LUX MED and Quality HealthCare. The table below shows the decrease required in Bupa Australia Health Insurance 928.8 785.7 the terminal growth rate or increase required in discount rate for the Bupa Aged Care Australia 283.3 239.8 recoverable amount of the CGU to equal the carrying amount. Bupa Health Services Australia 311.3 252.5 Decrease in Bupa Care Services New Zealand 38.2 31.5 Terminal terminal Increase in UK growth growth discount Headroom rate rate rate Bupa Care Services UK 87.4 84.0 £m % % % 1

UK Dental (restated) 21.3 Governance 38.0 Bupa Care Services New Zealand 4.7 2.8 0.1 0.1 Bupa Cromwell Hospital 16.2 16.2 Bupa Care Services UK 63.8 2.5 0.4 0.4 Other (restated)1 2.5 2.5 Bupa Chile 10.4 3.2 0.1 0.1 Europe and Latin America Bupa Health Services 102.4 3.0 2.1 1.9 Bupa Chile 142.4 179.9 LUX MED 53.3 3.5 0.8 0.6 LUX MED 196.0 223.2 Quality HealthCare 22.5 3.5 0.5 0.3 Sanitas Seguros 38.6 29.0 Other 10.1 5.2 International Markets Impairment of other intangible assets Quality HealthCare 123.8 103.8 At 31 December 2016, the recoverable amounts of other intangible Bupa Global 67.8 67.8 assets with indefinite useful lives were tested in respect of their carrying Care Plus 82.8 n/a amounts, resulting in an impairment of £15.0m. £10.5m was recognised Total 2,431.9 1,977.7 in relation to impairment of brands arising on business combinations in Bupa Chile and £4.5m in relation to impairment of computer software 1 Goodwill attributable to the UK Dental CGU in 2015 has been presented separately from projects not yet completed in Bupa Global. In the prior year there were Other UK. no impairments of intangible assets with indefinite lives. Intangible assets that are subject to amortisation were reviewed, resulting in an impairment of £20.0m. £10.2m was recognised in Financial statements relation to the impairment of UK care home licences arising on business combinations, £4.2m for IT software in Bupa Care Services UK and £5.6m for IT software in Bupa Global. In the prior year there was an impairment of £0.7m to intangible assets. 82 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

Note 3.2 Property, plant and equipment in brief Property, plant and equipment are the physical assets utilised by Property, plant and equipment the Group to carry out business activities and generate revenues and profits. Most of the assets held relate to care homes and hospital properties and equipment, and office buildings.

Equipment Leased assets Equipment (including leasehold improvements) is stated at historical Leases are classified as finance leases when the terms of the lease cost less subsequent depreciation and impairment losses. substantially transfer all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Depreciation On initial recognition, the leased asset is measured at the amount equal Freehold land and assets under construction, included within to the lower of its fair value and the present value of the minimum lease freehold or leasehold properties as appropriate, are not depreciated. payments. Subsequent to initial recognition, the asset is accounted Depreciation on other items of property, plant and equipment is for in accordance with the accounting policy applicable to that asset. calculated using the straight line method to allocate cost or revalued Finance lease liabilities, net of finance charges in respect of future amount less residual value over estimated useful lives, as follows: periods, are included within other interest bearing liabilities (see Note 5.1). The interest element of the obligation is allocated over the lease –– Freehold buildings 50 years term to reflect a constant rate of interest on the outstanding obligation. –– Leasehold buildings shorter of useful life Leasehold land, where no option to obtain title exists, is treated as an or lease term operating lease. Assets classified as being under operating leases are –– Equipment shorter of useful life not capitalised and therefore not recognised within the balance sheet (leasehold improvements) or lease term (Note 6.1). Payments made under operating leases are recognised as prepayments within trade and other receivables within Note 3.0.1 and –– Equipment 3-10 years are recognised in the Income Statement on a straight line basis over the term of the lease within other operating expenses (Note 2.3). Impairment The amount included in property, plant and equipment in respect Impairment reviews are undertaken where there are indications that the of equipment held under finance leases is £0.3m (2015: £0.1m). carrying value of an asset may not be recoverable. An impairment loss on assets carried at cost is recognised in other income and charges to reduce the carrying value to the recoverable amount. An impairment loss on assets carried at the revalued amount is recognised in the revaluation reserve, except where an asset is revalued below historical cost, in which case the loss on historical cost is recognised in the Income Statement within other income and charges. Bupa Annual Report 2016 83

Property, plant and equipment report Strategic Freehold Leasehold Leasehold property property Improvements Equipment Total Note £m £m £m £m £m 2016 Cost or valuation At beginning of year 2,188.0 111.1 103.1 1,006.6 3,408.8 Additions through business combinations 20.5 – 0.5 3.6 24.6 Additions 200.6 1.0 20.4 130.4 352.4 Transfer to assets held for sale 4.1 (367.8) (8.6) – (184.4) (560.8) Disposals (29.4) – (12.7) (18.5) (60.6) Disposals of subsidiaries – (7.2) – (5.8) (13.0) Revaluations 5.4 9.5 – – 14.9 Other 10.4 (17.4) 46.1 (38.0) 1.1 Foreign exchange 233.7 2.0 21.4 105.5 362.6 At end of year 2,261.4 90.4 178.8 999.4 3,530.0

Depreciation and impairment loss Governance At beginning of year 65.4 23.8 42.3 438.6 570.1 Depreciation charge for year 34.2 5.7 13.0 108.8 161.7 Transfer to assets held for sale 4.1 – – – (70.5) (70.5) Disposals (14.8) – (11.5) (12.0) (38.3) Disposals of subsidiaries – (6.4) – (3.7) (10.1) Revaluations (12.9) 1.9 – – (11.0) Other 1.2 (2.0) (2.2) 1.7 (1.3) Foreign exchange 10.0 0.1 7.6 60.1 77.8 At end of year 83.1 23.1 49.2 523.0 678.4

Net book value at end of year 2,178.3 67.3 129.6 476.4 2,851.6 Net book value at beginning of year 2,122.6 87.3 60.8 568.0 2,838.7

2015 Cost or valuation At beginning of year 2,250.9 149.8 52.2 986.3 3,439.2 Additions through business combinations 27.8 – – 19.1 46.9 Financial statements Additions 129.3 1.2 11.1 132.1 273.7 Disposals (10.3) (1.8) (3.7) (71.5) (87.3) Revaluations (162.1) (14.1) – – (176.2) Other 17.3 (23.1) 45.5 (35.8) 3.9 Foreign exchange (64.9) (0.9) (2.0) (23.6) (91.4) At end of year 2,188.0 111.1 103.1 1,006.6 3,408.8

Depreciation and impairment loss At beginning of year 58.4 34.9 15.4 414.9 523.6 Depreciation charge for year 33.5 3.9 9.5 100.6 147.5 Disposals (3.5) (1.7) (2.9) (69.7) (77.8) Revaluations (33.8) (4.4) – – (38.2) Impairments 11.2 – – 8.9 20.1 Other (1.6) (8.7) 8.7 1.3 (0.3) Foreign exchange 1.2 (0.2) 11.6 (17.4) (4.8) At end of year 65.4 23.8 42.3 438.6 570.1

Net book value at end of year 2,122.6 87.3 60.8 568.0 2,838.7 Net book value at beginning of year 2,192.5 114.9 36.8 571.4 2,915.6 84 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

Freehold and leasehold properties Polish properties carried out in 2016 was performed independently Freehold and leasehold properties comprise care homes, care villages, by Knight Frank Chartered Surveyors and in Chile by Tinsa and Phi clinics, hospitals and offices and are initially measured at cost and Partners. Revaluations were effective as of 30 November in the year in subsequently at revalued amount less accumulated depreciation and which they were undertaken. Directors’ valuations were performed in impairment losses. These properties are subject to periodic valuations the year where it was identified that carrying value differed significantly performed by external independent valuers. At each revaluation date, from fair value. accumulated depreciation (and impairment) is eliminated against Care homes and hospitals are valued with regard to their trading the gross carrying value of the asset. Borrowing costs relating to the potential based on discounted cash flow techniques, the principal acquisition or construction of qualifying assets are capitalised as part assumptions are: quantifying a fair, maintainable level of trade and of the cost of that asset. profitability; levels of competition; and assumed ability to renew existing licences, consents, certificates or permits. Revaluation of properties Valuations are performed with sufficient regularity to ensure that At each revaluation date, accumulated depreciation is eliminated the carrying value does not differ significantly from fair value at the against the gross carrying amount of the asset. balance sheet date. The revaluation of certain UK properties and The significant assumptions used in the calculation of the fair values of the material level three freehold and leasehold properties in the Group are:

Freehold and Leasehold Property Australia New Zealand UK Spain Chile LUX MED Average occupancy rate 93.9% 92.1% 86.5% 96.3% 69.1% N/A Average capitalisation rate 15.1% 14.7% 13.5% 9.1% 8.2% 10.0%

Level Two Level Three UK UK, Australia and New Zealand, Europe and Latin America All UK properties apart from those held by Bupa Care Services UK are All care homes in the Group and hospitals in Spain, Chile and Poland classified as level two with fair values being determined by an external are classified as level three. Their valuations are determined based valuer based on market values of similar properties which have been on a capitalisation of earnings approach. A multiple is applied to each carried out in November 2016. facility’s earnings to project the financial performance of the facility to determine its value in use. The multiple applied for each facility is set Europe and Latin America based on qualitative and quantitative indicators of the facility’s current Regional offices and clinics in Spain and Poland are valued by external and future performance and assumes normal prudent management valuers based on market value and these are classified as level two. of the facility. Unobservable inputs for these properties include the Bupa Chile offices, medical centres and clinics are valued based on average capitalisation rate which is the average rate of return on a replacement cost and market comparables which are observable property based on the income that the property is expected to inputs and therefore these properties are classified as level two. generate. It considers trends in earnings and land values. For all properties except those in Poland, the average occupancy is also an unobservable input. Bupa Annual Report 2016 85

Sensitivity analysis The table below shows the date at which properties were last subject report Strategic The sensitivity analysis below considers the impact on the year end to external valuation. valuation of level three properties, and is based on a change in Leasehold assumption while holding all other assumptions constant. In practice, Freehold Property and this is unlikely to occur and changes in assumptions may be correlated. Property Improvement £m £m 0.5% absolute 0.5% absolute Valuation – December 2016 1,037.2 42.2 Australia increase decrease Valuation – December 2015 176.3 38.6 Average occupancy rate £2.0m increase £2.0m decrease Valuation – December 2014 11.8 3.0 Average capitalisation rate £15.0m decrease £16.0m increase Valuation – December 2013 774.1 0.2 Assets held at cost 1 262.0 185.2 0.5% absolute 0.5% absolute New Zealand increase decrease Cost or valuation 2,261.4 269.2 Average occupancy rate £1.3m increase £1.3m decrease 1 Primarily relates to assets under construction and initial fair value of additions. Average capitalisation rate £7.3m decrease £7.9m increase Gains and losses on revaluation are recognised in the property 0.5% absolute 0.5% absolute revaluation reserve, except where an asset is revalued below historical UK increase decrease cost, in which case the deficit is recognised in the Income Statement. Average occupancy rate £10.3m increase £10.3m decrease Where a revaluation reverses the losses taken to the Income Statement

Average capitalisation rate £29.2m decrease £32.0m increase in prior years, the credit is recognised in the Income Statement. Governance A £68.4m revaluation gain (2015: £36.5m) and £4.9m write 0.5% absolute 0.5% absolute down loss (2015: £121.1m) have been recognised in the property Spain increase decrease revaluation reserve. Average occupancy rate £0.1m increase £0.2m decrease In the current year, a revaluation deficit of £30.9m (2015 surplus: £3.6m) Average capitalisation rate £14.1m decrease £16.0m increase and write down of £14.5m (2015: £68.2m) were charged to the Income Statement (see Note 2.4). 0.5% absolute 0.5% absolute Chile increase decrease Recognised in the carrying amount of freehold property is £158.4m Average occupancy rate £0.8m increase £0.8m decrease (2015: £113.0m) in relation to freehold property in the course of Average capitalisation rate £0.6m decrease £0.7m increase construction. Historical cost of the Group’s revalued assets 0.5% absolute 0.5% absolute LUX MED increase decrease 2016 2015 £m £m Average capitalisation rate £0.3m decrease £0.1m increase Historical cost of revalued assets 2,153.8 2,081.3 The table below sets out the reconciliation of the opening and closing Accumulated depreciation based on historical cost (176.9) (296.6) balances for property classified as level three fair value measurement Historical cost net book value 1,976.9 1,784.7 as at 31 December 2016. Depreciation charge for the year on historical cost 41.6 43.1 Financial statements

Leasehold Freehold Property and The historical cost of all property, plant and equipment is £3,194.1m Property Improvement (2015: £3,087.2m). £m £m At 1 January 2016 1,999.5 113.5 Reclassification of property levels 33.9 (7.8) Additions 186.1 5.0 Transfer to assets held for sale (367.8) (8.6) Disposals (6.7) (0.2) Revaluation and write down through the Income Statement (15.7) (0.9) Revaluation and write down through Other Comprehensive Income 58.5 27.7 Depreciation (33.3) (5.5) Other (7.6) (1.8) Foreign exchange 218.6 10.8 At 31 December 2016 2,065.5 132.2 86 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

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

Investment properties are measured at fair value, determined The remaining carrying value of investment properties of £384.8m individually, on a basis appropriate to the purpose for which the (2015: £264.7m), primarily consisting of the Group’s portfolio of property is intended and with regard to recent market transactions retirement villages in New Zealand, was valued by management using for similar properties in the same location. internally prepared discounted cash flow projections, supported by the terms of any existing lease and other contracts, and when possible, by In an active market, the portfolio is valued annually by an independent external evidence such as current market rents for similar properties valuer, holding a recognised and relevant professional qualification, in the same location and condition. Discount rates are used to reflect and with recent experience in the location and category of investment current market assessments of the uncertainty in the amount or timing property being valued. of the cash flows. The discounted cash flow projections are reviewed In New Zealand, the retirement village market is fragmented as each by an independent valuer, Deloitte. These properties are categorised village is unique due to building configuration and location. Growth in as level three within the fair value hierarchy. new developments is also restricted due to a lack of suitable sites and Significant assumptions used in the valuation include: transactions are not frequent given the relatively high value of each village. As a result, no active market exists for the retirement villages Australia and New Zealand from which values can be derived. These properties are valued using Discount rate 9.0% discounted cash flow projections based on reliable estimates of future Capital growth rate 2.6% cash flows. Provision for capital replacement 0.4% Any gain or loss arising from a change in the fair value is recognised Vacancy period 3 months in the Income Statement within financial income and expense. Turnover in apartments and villas 4–7 years

The following table sets out the reconciliation of the opening and (i) Investment properties closing balances for investment properties classified as level three 2016 2015 fair value measurements as at 31 December 2016: £m £m Total At 1 January 2016 270.9 242.0 £m Additions 35.0 37.7 At 1 January 2016 264.7 Disposals (0.4) (0.6) Additions 37.7 Increase in fair value 11.6 21.2 Unrealised gains recognised in financial income 21.0 Reclassifications to Property, Plant and Equipment (1.0) – Foreign exchange 61.4 Foreign exchange 62.1 (16.3) At 31 December 2016 384.8 At 31 December 2016 391.3 270.9 The sensitivity analysis below considers the impact on the year end The historical cost of investment properties is £210.5m (2015: £173.9m). valuation of level three investment properties, and is based on a change In the current year, a revaluation surplus of £21.2m (2015: £11.6m) was in assumption while holding all other assumptions constant. In practice, credited to the Income Statement. this is unlikely to occur and changes in assumptions may be correlated. 0.5% absolute 0.5% absolute Of the £391.3m (2015: £270.9m) of investment properties in the balance Australia and New Zealand increase decrease sheet as at 31 December 2016, £6.5m (2015: £6.2m) was either valued Discount rate £8.8m decrease £10.0m increase based on active market prices by external valuers, Knight Frank, Capital growth rate £24.4m increase £21.1m decrease Chartered Surveyors or Chilean valuers Tinsa or Phi Partners. These properties are categorised as level two within the fair value hierarchy. Bupa Annual Report 2016 87

(ii) Leases as lessor During the year ended 31 December 2016, the Group’s retirement report Strategic Investment properties include commercial properties which are leased village portfolio generated £13.4m (2015: £9.8m) of income which to third parties. The leases contain an initial non-cancellable period of was recognised as revenue in the Income Statement. Total direct between one and three years. Subsequent renewals are negotiated operating expenses of these retirement villages amounted to £8.5m with the lessee. (2015: £6.6m). £0.3m (2015: £0.3m) was recognised as rental income in the Income Statement for other investment properties held by the The Group leases out its investment properties under operating leases. Group. Direct operating expenses of these properties amounted to The future lease receipts under non-cancellable leases are as follows: £nil (2015: £0.1m). 2016 2015 £m £m Less than one year 0.2 0.2 Between one and five years 1.0 1.0 More than five years 0.5 0.8 Total 1.7 2.0

Note Governance 3.4 Provisions and other liabilities under insurance contracts issued in brief Provisions and other liabilities under The provisions and other liabilities under insurance contracts issued insurance contracts issued arise from the Group’s underwriting activities. The provisions mainly relate to unearned premiums, which are deferred revenues that relate to future periods; and claims, where an estimate is made of the expense required to settle existing insurance contract obligations. The other liabilities primarily consist of obligations to repay deposits and commissions payable.

3.4.1 Provisions under insurance contracts issued Provision for claims The gross provision for claims represents the estimated liability arising Unearned premiums The unearned premium provision represents premiums written that from claims episodes in current and preceding financial years which relate to periods of risk in future accounting periods. It is calculated on a have not yet given rise to claims paid. The provision includes an straight line basis, which is not materially different from a calculation allowance for claims management and handling expenses. based on the pattern of incidence of risk. The gross provision for claims is estimated based on current Financial statements information, and the ultimate liability may vary as a result of subsequent information and events. Adjustments to the amount of claims provision for prior years are included in the Income Statement in the financial year in which the change is made. In setting the provisions for claims outstanding, a best estimate is determined on 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 by regulation or one that provides an appropriate degree of confidence. 88 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

Provision is made for unexpired risks when unearned premiums, net of associated acquisition costs, are insufficient to meet expected claims and administrative expenses. The expected claims are calculated having regard only to contracts commencing prior to the balance sheet date. The methods used and estimates made for claims provisions are reviewed regularly.

2016 2015 Gross Reinsurance Net Gross Reinsurance Net £m £m £m £m £m £m General insurance business Provisions for unearned premiums (a) 1,705.2 (11.6) 1,693.6 1,570.4 (3.0) 1,567.4 Provisions for claims (b) 889.6 (6.6) 883.0 657.1 (0.9) 656.2

Long-term business Provisions for life insurance benefits 33.9 (1.1) 32.8 27.6 (0.9) 26.7 Total insurance provisions 2,628.7 (19.3) 2,609.4 2,255.1 (4.8) 2,250.3

Non-current 33.9 – 33.9 27.6 – 27.6 Current 2,594.8 (19.3) 2,575.5 2,227.5 (4.8) 2,222.7 Total insurance provisions 2,628.7 (19.3) 2,609.4 2,255.1 (4.8) 2,250.3

(a) Analysis of movements in provisions for unearned premiums At beginning of year 1,570.4 (3.0) 1,567.4 1,499.4 (9.3) 1,490.1 Premiums deferred 8,058.1 (57.3) 8,000.8 7,136.4 (48.6) 7,087.8 Deferred premiums released to income (8,044.5) 51.9 (7,992.6) (7,051.8) 47.0 (7,004.8) Transfers (0.2) (4.2) (4.4) (7.6) 7.6 – Foreign exchange 121.4 1.0 122.4 (6.0) 0.3 (5.7) At end of year 1,705.2 (11.6) 1,693.6 1,570.4 (3.0) 1,567.4

(b) Analysis of movements in provisions for claims At beginning of year 657.1 (0.9) 656.2 683.1 (5.7) 677.4 Additions through business combinations 17.3 – 17.3 – – – Cash paid to settle claims (6,269.4) 44.9 (6,224.5) (5,505.1) 35.4 (5,469.7) Decrease for prior years’ claims (3.5) – (3.5) (4.8) (0.2) (5.0) Increase for current year claims 6,399.9 (42.4) 6,357.5 5,596.2 (36.2) 5,560.0 Risk Equalisation Trust Fund levy (65.2) – (65.2) (87.5) – (87.5) Transfers 42.4 (8.0) 34.4 (5.8) 5.8 – Foreign exchange 111.0 (0.2) 110.8 (19.0) – (19.0) At end of year 889.6 (6.6) 883.0 657.1 (0.9) 656.2

Assumptions for general insurance business is undertaken to derive assumptions for reserving that are appropriate The process of recognising liabilities arising from general insurance and can be applied to relatively homogeneous groups of policies. entails the estimation of future payments to settle incurred claims and Such sub-portfolios may be defined by product line, risk profile, associated claims handling expenses, as well as assessing whether geography or market sector. Various established reserving methods additional provisions for unexpired risk are required. The principal for general insurance are considered, typically basic chain ladder, assumptions in the estimation of the liability relate to the expected Bornhuetter-Ferguson and pure risk cost methods. Additional frequency, severity and settlement patterns of insurance claims, which consideration is given to the treatment of large claims, claim are expected to be consistent with recently observed experience seasonality, claims inflation and currency effects, for which and trends. The aim of claims reserving is to select assumptions and appropriate adjustments to assumptions and methods are made. reserving methods that will produce the best estimate of the future While there is some diversity in the development profile of health cash outflows for the subject claims; it is an uncertain process which insurance claims across the Group, such claims are generally highly also requires judgements to be made. The resulting provisions for predictable in both frequency and average amount, and claims are outstanding claims incorporate a margin for adverse deviation, over settled quickly following the medical event for which benefit is claimed. and above the best estimate liability, the quantum of which reflects Medical expenses claims are typically, substantially fully-settled the level of this uncertainty. within just a few months. Claims management practices such as Claims development patterns are analysed in each of the Group’s pre-authorisation of the claim with the insurer, electronic claims insurance entities; where distinct sub-portfolios with different settlement and effective network provider arrangements can claims cost and development characteristics exist, further analysis reduce the development period to four to six months. Bupa Annual Report 2016 89

Insurance provisions are inevitably estimates. Actual experience of Liability adequacy tests report Strategic claims costs and/or administrative expenses may well vary from that Liability adequacy tests are performed for Bupa’s insurance portfolios. anticipated in the reserving estimates. For short duration contracts, a premium deficiency is recognised if the sum of expected costs of future claims and claim adjustment expenses, The following table shows the sensitivities to such variation: capitalised deferred acquisition costs, and maintenance expenses Increase in Increase in exceeds the corresponding unearned premiums while considering claims expenses anticipated investment income. Such a deficiency would be 2016 immediately recognised in the Income Statement. Change in variable % 5.0 10.0 Reduction in profit net of reinsurance before taxation £m 67.1 19.3 3.4.2 Other liabilities under insurance contracts issued Other liabilities under insurance contracts issued consist of payables to 2015 insurance creditors other than policyholders.

Change in variable % 5.0 10.0 2016 2015 Reduction in profit net of reinsurance £m £m before taxation £m 61.1 15.4 Reinsurers’ deposits 5.7 2.6 Reinsurance payables 26.7 18.9 These variances would reduce the amount of profit that would Commissions payable 13.8 12.2 otherwise emerge in subsequent periods. Since premium provisions Other insurance payables 38.4 include profit margins and claims provisions include prudence margins, 96.8 Governance variance from expectations can be absorbed by these margins. Total other liabilities under insurance contracts issued 143.0 72.1 Bupa’s long-term insurance business does not form a core part of its operations.

Note 3.5 Provisions for liabilities and charges in brief A provision is recognised when the Group is expected to make future Provisions for liabilities payments as a result of a past event. and charges

These payments can result from a legal obligation or a constructive Although provisions are made where payments can be reliably obligation, where an expectation has been set by the Group. estimated, the amounts provided are based on a number of A provision is made where an outflow of resources is probable assumptions which are inherently uncertain and therefore the amount and where the payments can be reliably estimated. If the effect is that is ultimately paid could differ from the amount recorded. Financial statements material, provisions are determined by discounting the estimated future payments at a pre-taxation rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

Customer Long service Provisions for remediation and annual contingent and legal Insurance Unoccupied Regulatory leave consideration provisions provisions property provisions Other Total £m £m £m £m £m £m £m £m At beginning of year 47.3 22.8 2.3 9.6 2.8 3.7 8.1 96.6 Acquisitions through business combinations 0.1 8.9 0.6 – – – – 9.6 Charge for year 43.3 1.1 4.4 7.5 0.6 0.7 3.2 60.8 Released in year (0.6) (4.7) (1.4) – (1.6) (1.0) (0.2) (9.5) Utilised in year – cash (38.1) (13.8) (0.5) (6.9) – (3.3) (0.6) (63.2) Disposal of subsidiary companies – – – – – – (0.3) (0.3) Foreign exchange 9.1 2.8 0.5 – – – 0.3 12.7 At end of year 61.1 17.1 5.9 10.2 1.8 0.1 10.5 106.7

Non-current 17.0 11.0 – 7.6 1.8 – 4.6 42.0 Current 44.1 6.1 5.9 2.6 – 0.1 5.9 64.7 Total provisions for liabilities and charges 61.1 17.1 5.9 10.2 1.8 0.1 10.5 106.7 90 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

Long service and annual leave Insurance provisions The long service leave provision relates to territories where employees The insurance provision is in respect of the Group’s self insurance are legally entitled to substantial paid leave after completing a certain and covers the excess that arises on claims made in relation to losses length of qualifying service. Uncertainty around both the amount and arising from damage to property, business interruption and medical, timing of future outflows arises as a result of variations in employee employee or public liability. Any outflows relating to this provision are retention rates, which may vary based on historical experience. The dependent on the frequency and value of claims submitted as well as annual leave provision relates to territories where the annual entitlement the excess amount specified within individual policies with insurers. of leave is not required to be taken within a predetermined time nor The fund is actuarially assessed twice a year to ensure that the provision does it expire. Therefore uncertainty exists around the timing of future is adequate. outflows as well as around the amount of future outflows due to wage inflation. Unoccupied property In prior years, the Group entered into non-cancellable leases for Provisions for contingent consideration property which it no longer occupies. The Group has provided for lease Contingent consideration is a financial liability largely related to obligations, net of sub-lease receivables. The lease obligations are earn-out payable on acquisitions of dental practices in Australia and payable monthly, quarterly or annually, within a range of one to 13 years, the UK. The deferred consideration arising from the purchase of Dental the average being five years. The future net outflows are uncertain and Corporation Ltd (Australia) on 31 May 2013 was fully paid during the are affected by the Group’s ability to sub-let unoccupied property. year with the remaining balance in Australia relating to payments to practice principals. In the UK, the deferred consideration relates to Regulatory provisions the acquisition of dental centres. This balance is reviewed at each reporting period and any fair value adjustments are recorded in the Regulatory provisions relate to levies payable to customer protection Income Statement. bodies by the Group’s various regulated entities. Such levies are generally determined on a ‘capped percentage of revenues’ basis. Payments are normally made annually, although the frequency Customer remediation and legal provisions may be increased or decreased at the discretion of the customer Customer remediation provisions relate to the costs of compensating protection bodies. customers for losses or damages associated with a failure to comply with regulations or to treat customers fairly. Legal provisions relate to Other potential and ongoing legal claims and represent the discounted fair value of total estimated liabilities. Due to the nature of these provisions, Other provisions include amounts relating to payments under the timing and potential cost is uncertain. legislation and restructuring costs.

Note

The main defined benefit scheme is The Bupa Pension Scheme 3.6 which has been closed to new entrants since 1 October 2002. Post-employment benefits The principal defined contribution pension scheme is The Bupa Retirement Savings Plan. The National Employment Savings Trust (NEST) has been used to Post-employment benefits in brief meet the Group’s automatic enrolment duties for UK employees. The Group operates several funded defined benefit and defined contribution pension schemes for the benefit of employees and directors, in addition to an unfunded (non-registered) and a post-retirement medical benefit scheme.

Defined contribution pension schemes Defined benefit post-employment schemes The defined contribution pension schemes provide employees with The defined benefit pension schemes provide benefits based on final a retirement fund accumulated through investment of contributions pensionable salary. The Group’s net obligation in respect of defined made by Bupa and the employees. Members of the scheme use benefit pension and the post-retirement medical scheme is calculated their funds to secure benefits at retirement. Benefits are not known separately for each scheme and represents the present value of the in advance and the investment and longevity risks are assumed defined benefit obligation less, for funded schemes, the fair value of solely by the members of the scheme. Contributions payable by scheme assets. The discount rate used is the yield at the balance sheet the relevant sponsoring employers are defined in the scheme rules date on high quality corporate bonds denominated in the currency in or plan specifications and these contributions are recognised as which the benefit will be paid. When the calculation results in a benefit an expense in the Income Statement as incurred. to the Group, the recognised asset is limited to the present value of any future refunds from the scheme or reductions in future contributions to the scheme. Bupa Annual Report 2016 91

The charge to the Income Statement for defined benefit schemes Defined benefit post-employment schemes report Strategic represents the following: current service cost calculated on the The principal defined benefit scheme in the UK is The Bupa Pension projected unit credit method, net interest cost, past service costs Scheme. Contributions by employees and by Group companies and administrative expenses. are paid into separate funds administered by a corporate trustee. The scheme has been closed to new entrants since 1 October 2002, All remeasurements are recognised in full in the Statement of but its existing members continue to accrue pension entitlements. Comprehensive Income in the period in which they occur. Contributions by Group companies to this scheme are made in accordance with the recommendations of the independent (i) Amount recognised in the Consolidated Income scheme actuary. Statement The amounts charged/(credited) to other operating expenses for the The independent scheme actuary for The Bupa Pension Scheme year are: performs detailed triennial valuations together with annual interim reviews. Both triennial and interim valuations use the attained age 2016 2015 method, recognising the closure of the scheme to new entrants. £m £m Current service cost 9.1 10.2 At the most recent triennial valuation, as at 1 July 2014 the scheme’s Past service cost 0.7 – independent actuary recommended payment of employer Gains on curtailments – (0.4) contributions at the rate of 24.8%. In addition to these employer Net interest on defined benefit liability/asset (14.2) (10.7) contributions a payment equivalent to the employee contribution

of 7% of pensionable salaries is paid as part of the Group’s salary Governance Administrative expenses 1.7 2.0 sacrifice arrangement (known as PeopleChoice Pensions). There is a Total amount (credited)/charged to Consolidated Income Statement (2.7) 1.1 corresponding reduction in members’ wages and salaries as a result. The expected contributions payable in 2017, with regards to the The charge to operating expenses in respect of cash contributions to accumulation of future benefits, are £6.8m in respect of The Bupa defined contribution schemes is £32.7m (2015: £29.2m). Pension Scheme and £6.2m in respect of PeopleChoice Pensions. There are several other smaller defined benefit pension schemes (ii) Amount recognised directly in Other Comprehensive operated by UK and overseas subsidiaries. The defined benefit pension Income schemes are assessed by independent scheme actuaries in accordance The amounts charged/(credited) directly to Equity: with UK or local practice and under IAS 19 as at 31 December 2016

2016 2015 for the purposes of inclusion in the Group’s consolidated financial £m £m statements. Complete disclosure of these other defined benefit pension Actual return less expected return on assets (396.6) 44.5 schemes is not practicable within this report but they are disclosed Loss/(gain) arising from changes to financial assumptions 437.2 (45.1) within the financial statements of the relevant sponsoring employer Gain arising from changes to experience assumptions (25.7) (19.5) of each scheme. (Gain)/loss arising from changes to demographic assumptions (0.3) 3.2 Unfunded schemes Total remeasurement losses/(gains) charged/(credited) Financial statements directly to Equity 14.6 (16.9) Unfunded defined benefit pension arrangements exist for certain employees and former employees to provide benefits in addition to The cumulative amount of remeasurement losses recognised directly in the funded pension arrangements provided by the Group. There are Equity is £25.1m (2015: £10.5m). no separate funds or assets in the Statement of Financial Position to support the unfunded schemes; however, provisions included in the Statement of Financial Position in respect of these liabilities and assets 3.6.1 Group post-employment benefit schemes are ring fenced to support these liabilities. Defined contribution pension schemes The principal defined contribution pension scheme in the UK is the The latest valuation of these arrangements was performed as at Bupa Retirement Savings Plan. This scheme has been in effect since 31 December 2016 under IAS 19 by the Group’s independent actuary. 1 October 2002 and is available to permanent employees of The British The charge to the Consolidated Income Statement in respect of these United Provident Association Limited and Bupa Insurance Services arrangements and the assessment of the related pension liability as Limited to join on a voluntary basis. There are several other contract at 31 December 2016 have been made in accordance with this latest based defined contribution arrangements available to employees valuation, which used the same principal assumptions as adopted at of other employers within the Group to join on a voluntary basis. 31 December 2016 under IAS 19 for The Bupa Pension Scheme. The Group automatically enrols any eligible non-pensioned Post-retirement medical benefit scheme employees into the National Employment Savings Trust (NEST). The Group also provides unfunded post-retirement medical benefits for certain former employees. These benefits were granted under an agreement which closed to new entrants in 1992. The latest valuation of this scheme was carried out on 31 December 2016 by an actuary employed by the Group using the same key assumptions as adopted at 31 December 2016 under IAS 19 for The Bupa Pension Scheme. 92 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

(iii) Assets and liabilities of schemes Post-retirement medical Pension schemes benefit scheme Total 2016 2015 2016 2015 2016 2015 Note £m £m £m £m £m £m Present value of funded obligations (iv) (1,764.2) (1,356.3) – – (1,764.2) (1,356.3) Fair value of scheme assets (v) 2,225.0 1,761.5 – – 2,225.0 1,761.5 Net assets of funded schemes 460.8 405.2 – – 460.8 405.2 Present value of unfunded obligations (iv) (54.0) (42.8) (10.6) (8.5) (64.6) (51.3) Net recognised assets/(liabilities) 406.8 362.4 (10.6) (8.5) 396.2 353.9

Represented on the Statement of Financial Position Net liabilities (85.1) (59.5) Net assets 481.3 413.4 Net recognised assets 396.2 353.9

(iv) Present value of funded schemes’ obligations The movements in the present value of schemes’ obligations are:

Post-retirement medical Pension schemes benefit scheme Total 2016 2015 2016 2015 2016 2015 £m £m £m £m £m £m At beginning of year 1,399.1 1,431.8 8.5 11.4 1,407.6 1,443.2 Current service costs 9.1 10.2 – – 9.1 10.2 Past service costs 0.7 – – – 0.7 – Interest on obligations 54.1 53.0 0.3 0.4 54.4 53.4 Contribution by employees 0.5 0.6 – – 0.5 0.6 Loss/(gain) arising from changes to financial assumptions 435.8 (45.1) 1.4 – 437.2 (45.1) (Gain)/loss arising from changes to experience assumptions (26.8) (19.5) 1.1 – (25.7) (19.5) (Gain)/loss arising from changes to demographic assumptions (0.3) 6.0 – (2.8) (0.3) 3.2 Benefits paid (56.6) (36.6) (0.7) (0.5) (57.3) (37.1) Gains on curtailment – (0.4) – – – (0.4) Foreign exchange 2.6 (0.9) – – 2.6 (0.9) At end of year 1,818.2 1,399.1 10.6 8.5 1,828.8 1,407.6

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

2016 2015 £m £m At beginning of year 1,761.5 1,728.5 Interest income 68.6 64.2 Return on assets excluding interest income 396.6 (44.5) Contributions by employer 50.1 49.7 Contributions by employees 0.5 0.6 Administration expenses (1.7) (2.1) Benefits paid (54.0) (33.9) Foreign exchange 3.4 (1.0) At end of year 2,225.0 1,761.5 Bupa Annual Report 2016 93

The market values of the assets of the funded schemes’ are as follows: report Strategic

2016 2016 2015 2015 £m % £m % Debt instruments 494.1 22 587.7 34 Gilts 801.6 36 524.6 30 Corporate bonds 767.8 35 462.3 26 Cash/other assets 77.5 4 89.0 5 Equities 51.7 2 65.8 4 Diversified growth funds 23.7 1 24.0 1 Government bonds 7.0 – 6.5 – Property 1.6 – 1.6 – Total market value of the assets of the funded schemes 2,225.0 1,761.5

All assets have a quoted market price.

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

Funded schemes Unfunded schemes 2016 2015 2016 2015 Section % % % % Inflation rate (a) 3.2 3.1 3.3 3.2 Rate of increase in salaries (a) 3.7 3.7 3.8 3.7 Rate of increase to pensions in payment (a) 3.1 3.0 3.2 3.1 Rate of increase to pensions in deferment (a) 2.3 2.2 2.2 2.2 Discount rate for scheme assets and obligations (a) 2.7 3.9 2.9 3.9 Medical cost trend rate (b) – – 4.0 4.0

(a) Actuarial assumptions underlying the valuation of obligations (b) Medical cost trend rate The inflation assumption is set by reference to the difference between The medical cost trend rate is the assumed additional escalation of the yield on long-term fixed interest gilts and the real yield on index- medical costs over and above the assumed inflation rate. It is assumed linked gilts, with a deduction of 0.2% to reflect an inflation risk premium. that such an effect will continue during the remaining run-off of the The rate of increase of pensions in payment is the same as the inflation liability. Assumed medical cost trend rates have an impact on the rate, with the exception of benefits which receive fixed increases in amounts recognised in the Consolidated Income Statement. A one payment as defined under the respective scheme rules. percentage point change in assumed medical cost trend rates would Financial statements result in the following increase and decrease in the post-retirement The rate of increase in salaries is equal to the long-term expected medical benefit obligation. annual average salary pay increase for the employees who are members of the respective schemes. This assumption is set relative 1% point 1% point 1% point 1% point increase decrease increase decrease to the inflation rate assumption. 2016 2016 2015 2015 £m £m £m £m The discount rate used to value scheme liabilities is the yield at the balance sheet date on high quality corporate bonds of Effect on post-retirement medical benefit obligation 1.6 (1.3) 1.1 (0.9) appropriate term. Effect on the aggregate of current service cost and interest cost 0.1 (0.1) 0.1 (0.1) 94 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

(c) Mortality assumptions (d) Assumptions over duration of liabilities The trustees of The Bupa Pension Scheme have undertaken a The weighted average duration of the defined benefit obligation is scheme specific mortality investigation as part of the 1 July 2014 approximately 22 years. triennial valuation. (e) Sensitivity analysis of the principal assumptions used to measure The trustees shared the conclusion drawn from this analysis with the scheme liabilities directors, who have adopted assumptions in line with this analysis for The sensitivity analysis provided below is based on a change in an the purposes of IAS 19 valuation as at 31 December 2016. assumption while holding all other assumptions constant. In practice, this is unlikely to occur and experience variations for some of the The mortality tables adopted at 31 December 2016 are the S2PA assumptions may be correlated. When calculating the sensitivity of year of birth mortality tables using the CMI projection model, with the defined benefit obligation to significant actuarial assumptions a long-term rate of improvement of 1.5% pa adjusted by -0.1 years the same method (projected unit credit method) has been applied as (male non-pensioners); -0.2 years (female non-pensioners); -0.3 years when calculating the pension liability recognised within the Statement (male pensioners) and -0.5 years (female pensioners). The average life of Financial Position. The methods and types of assumption did expectancies at age 60 based on these tables for a male currently not change. aged 60 (45) is 28.1 years (29.6 years) and for a female currently aged 60 (45) is 30.2 years (31.8 years).

Assumption Change in assumption Indicative impact on Scheme liabilities Discount rate Increase/decrease by 0.25% Decrease/increase by £90m Rate of inflation Increase/decrease by 0.25% Increase/decrease by £81m Rate of increase in salaries Increase/decrease by 0.25% Increase/decrease by £9m Rate of mortality Increase by one year Increase by £50m

Note 3.7 Deferred taxation assets and liabilities in brief Deferred tax is an amount which recognises the differences between Deferred taxation assets the carrying amounts of assets and liabilities for financial reporting and liabilities and the amounts used for taxation purposes. An example is the variance between the carrying value of equipment due to depreciation being charged for financial reporting purposes and written down allowances being applied for the 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 which, probable that future taxable profits will be available against which the at the time of the transaction, affects neither the accounting profit nor asset can be utilised. taxable profit or loss. Deferred taxation assets and liabilities are offset when they relate to The amount of deferred taxation recognised is based on the expected 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. Bupa Annual Report 2016 95

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

Assets Liabilities Net 2016 2015 2016 2015 2016 2015 £m £m £m £m £m £m Accelerated capital allowances – – (99.6) (94.4) (99.6) (94.4) Post-employment benefit liability – – (67.1) (64.5) (67.1) (64.5) Revaluation of properties to fair value – – (39.7) (32.7) (39.7) (32.7) Employee benefits (other than post-employment) 30.5 23.8 – – 30.5 23.8 Provisions 24.4 23.0 – – 24.4 23.0 Taxation value of losses carried forward 43.2 38.1 – – 43.2 38.1 Goodwill and intangible assets – – (109.2) (105.4) (109.2) (105.4) Other 4.2 1.4 (9.1) (10.9) (4.9) (9.5) Deferred taxation assets/(liabilities) 102.3 86.3 (324.7) (307.9) (222.4) (221.6) Allowable netting of deferred tax assets and liabilities (95.2) (83.8) 95.2 83.8 – – Net deferred taxation assets/(liabilities) 7.1 2.5 (229.5) (224.1) (222.4) (221.6)

Recognised deferred taxation assets Unrecognised deferred taxation assets Governance Deferred taxation assets relating to the carry forward of employee As at 31 December 2016, the Group had deductible temporary benefits, other provisions, unused taxation losses and other deferred differences relating to intangible assets of £7.7m (2015: £6.7m), taxation assets are recognised to the extent that it is probable that trading losses of £72.0m (2015: £58.0m) and capital losses of £66.7m future taxable profits will be available against which the deferred (2015: £43.4m) for which no deferred taxation asset was recognised taxation assets can be utilised. due to uncertainty of utilisation of those temporary differences. Movement in net deferred taxation (liabilities)/assets

Recognised Acquisitions Recognised in Other through Disposal of At beginning in Income Comprehensive business subsidiary Foreign At end of year Statement Income combinations undertakings exchange of year £m £m £m £m £m £m £m 2016 Accelerated capital allowances (94.4) 13.2 – (0.1) (0.6) (17.7) (99.6) Post-employment benefit (liability)/asset (64.5) (10.2) 7.7 – – (0.1) (67.1) Revaluation of properties to fair value (32.7) 7.7 (10.3) – – (4.4) (39.7) Employee benefits (other than post-employment) 23.8 2.9 – – (0.3) 4.1 30.5 Provisions 23.0 (0.6) – – – 2.0 24.4 Taxation value of losses carried forward 38.1 1.5 – – – 3.6 43.2 Goodwill and intangible assets (105.4) 12.1 – – – (15.9) (109.2) Financial statements Other (9.5) 1.6 (0.2) 0.9 0.1 2.2 (4.9) Total (221.6) 28.2 (2.8) 0.8 (0.8) (26.2) (222.4)

2015 Accelerated capital allowances (109.0) 8.0 – (0.8) – 7.4 (94.4) Post-employment benefit (liability)/asset (56.4) (11.6) 3.4 – – 0.1 (64.5) Revaluation of properties to fair value (58.9) 9.1 16.0 – – 1.1 (32.7) Employee benefits (other than post-employment) 25.9 (0.8) – – – (1.3) 23.8 Provisions 18.0 5.0 – – – – 23.0 Taxation value of losses carried forward 35.8 3.3 – – – (1.0) 38.1 Goodwill and intangible assets (122.2) 13.1 – – – 3.7 (105.4) Other 15.7 (22.4) (0.4) 0.1 – (2.5) (9.5) Total (251.1) 3.7 19.0 (0.7) – 7.5 (221.6) 96 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

Note 4.0 Business combinations and disposals in brief A business combination refers to the acquisition of a controlling Business combinations interest in a business, which is further defined as an integrated set and disposals of activities and assets that is capable of being conducted and managed for the purpose of providing economic benefits to the owners. A disposal refers to the sale of a subsidiary.

(a) Acquisitions A number of acquisitions were made during the year ended 31 December 2016, the most significant being Care Plus: Business combinations are accounted for using the acquisition method. Identifiable assets and liabilities acquired and contingent liabilities Percentage Date of acquisition of holdings assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non- Australia and New Zealand controlling interest. Dental Centres – various Various UK The identification and valuation of intangible assets arising on business UK Care No.1 Limited1 18 February 2016 100.0% combinations is subject to a degree of judgement. We engage The Links and The Lindsay care homes 5 October 2016 100.0% independent third parties, including Deloitte, EY and Knight Frank, to assist with the identification and valuation process. This is performed Dental Centres - various Various in accordance with the Group’s policies. Europe and Latin America Bupa Chile2 8 January and 26 February 2016 26.3% The excess of the cost of acquisition over the fair value of the Group’s Dental Centres – various Various share of the identifiable assets acquired is recorded as goodwill. Torrejón3 22 April 2016 10.0% Acquisition accounting must be completed within 12 months of the Elegimosalud S.L. 21 December 2016 100.0% transaction date. Sport Medica S.A.4 29 February 2016 17.6% Costs related to the acquisition are expensed as incurred. Euro Dental 29 February 2016 International Markets Care Plus 22 December 2016 100.0%

1 UK Care No.1 Limited was previously fully consolidated as 100% non-controlling interest 2 Increased shareholding of 73.7% to full ownership in two stages; 26% on 8 January 2016 and the remaining 0.3% on 26 February 2016 3 Increased shareholding from 50% to 60% 4 Increased shareholding of 82% to 99.63% Bupa Annual Report 2016 97

Care Plus (provisional) Other report Strategic Carrying Carrying value at Fair value value at Fair value acquisition adjustments Fair value acquisition adjustments Fair value 2016 Business combinations £m £m £m £m £m £m Intangible assets 0.3 – 0.3 0.1 (2.8) (2.7) Property, plant and equipment 2.5 – 2.5 23.2 (2.9) 20.3 Inventories – – – 0.1 – 0.1 Financial investments 41.0 – 41.0 – – – Trade and other receivables 3.0 – 3.0 (2.2) – (2.2) Assets arising from insurance business 1.3 (0.8) 0.5 – – – Restricted assets 0.3 – 0.3 – – – Cash and cash equivalents 1.0 – 1.0 1.8 – 1.8 Deferred tax liabilities – 0.8 0.8 (0.5) 0.5 – Trade and other payables (12.3) (2.6) (14.9) (15.2) 2.4 (12.8) Insurance liabilities (17.3) – (17.3) – – Provisions for liabilities and charges (0.6) – (0.6) (0.2) – (0.2) 19.2 (2.6) 16.6 7.1 (2.8) 4.3 Governance

Net assets acquired 16.6 4.3 Goodwill 74.4 44.4 Acquisition of non-controlling interests in subsidiary company – 2.0 Consideration 91.0 50.7

Consideration satisfied by: Cash 91.0 41.3 Deferred consideration – 9.4 Total consideration paid 91.0 50.7

Purchase consideration settled in cash 91.0 41.3 Additional 26.3% acquisition of Bupa Chile – 93.1 Cash acquired on acquisition (1.0) (1.8) Net cash outflow on acquisition 90.0 132.6

Note that fair value adjustments relating to current year acquisitions are provisional and will be finalised during 2017.

2016 acquisitions The acquisition balance sheet for Care Plus is provisional, subject to a Financial statements On 22 December 2016, the Group acquired 100% of Care Plus, a purchase price allocation exercise, which will be finalised during 2017. premium health insurer in Brazil, for £91.0m (BRL 431.0m). The business If the transaction had occurred on 1 January 2016, Care Plus would have provides dental insurance as well as health insurance and has small contributed £149.9m (BRL 709.9m) revenue and £6.8m (BRL 32.2m) occupational health, travel insurance and clinics businesses. profit before taxation for the year ended 31 December 2016. Care Plus serves more than 400 Brazilian companies with around The Group acquired 100% ownership of Bupa Chile in 2016 for £93.1m 100,000 members, providing a range of health insurance products. (CLP 95.1bn). The transaction occurred in two stages; on 8 January Bupa’s international insurance business specialises in products and 2016 the Group secured a further 26% interest in Bupa Chile taking services for customers looking for international coverage with its shareholding to 99.7%, with the remaining 0.3% shareholding access to the healthcare they need anytime, anywhere in the world. acquired on 26 February 2016. As a result of the transaction, the The acquisition will therefore enable customers in Brazil to access an Group recognised a decrease in non-controlling interest of £38.6m expanded range of products with access to healthcare professionals and an equivalent increase in the income and expenditure reserve. and providers in Brazil and around the world. This development sees Bupa extend its operations in Latin America in line with its strategy of selective geographic expansion. 98 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

There has been continued expansion of the dental business across the was deferred, giving rise to £21.7m of goodwill. In addition, Bupa Group. In Australia, ten centres have been acquired in 2016 for a total acquired five UK dental centres in the year, for a total consideration consideration of £12.7m (AU$23.2m) of which £1.6m is deferred, giving of £5.3m, net of cash acquired, resulting in goodwill of £6.0m. The rise to £12.2m of goodwill. Additional UK dental centres were acquired goodwill represents the premium paid to acquire established dental in the period, for a total consideration of £19.0m, of which £4.9m is practices including the value of dentists (assembled workforce) and deferred, resulting in goodwill of £16.7m. In Spain, the Group has other intangibles that do not meet the recognition criteria of IAS 38. acquired six further dental centres for a consideration of £5.1m (€6.3m) In Spain, the Group acquired further dental clinics for a consideration for which goodwill of £4.4m has been recognised. Finally, in Poland, the of £1.7m for which goodwill of £1.7m was realised. Group acquired Euro Dental, a dental centre for a total consideration of Further investment of £37.1m was made in Poland during 2015 with £1.2m (PLN 6.3m), for which £1.2m of goodwill has been recognised. the acquisition of Medicor, a health clinics, diagnostics and pharmacy There has also been expansion of our aged care business, including business; TK Medyk, a diagnostic imaging company; Magodent, the acquisition of The Links and The Lindsay care homes in the UK an oncology provider and associated properties. In total, goodwill for a total consideration of £7.4m, resulting in £3.4m goodwill and the amounting to £21.9m was recognised for these acquisitions. The acquisition of La Seu care home in Valencia for a total consideration goodwill recognised primarily represents a premium paid to acquire a of £4.4m (€5.4m) for which goodwill of £3.9m has been recognised. leading oncology provider in Poland to enable delivery of coordinated oncology care as well as further expansion of our geographical reach During the year, there have also been several changes in ownership across Poland. interests. On 18 February 2016, the Group acquired the shareholding of UK Care No.1 Limited for £0.9m, recognising a reduction in non- On 2 December 2015, Bupa acquired 100% of Hadrian Healthcare controlling interest during the year of £13.1m and an equivalent increase Limited, a care services business comprising five homes and two in the income and expenditure reserve. On 29 February 2016 the Group development sites in the north of England for £34.7m, exclusive of also acquired 17.63% interest in Sport Medica for £1.1m (PLN 6.0m), acquisition costs, with net assets (debt free) of £27.5m and resulting which has been recorded within the income and expenditure reserve, in goodwill of £7.2m. The goodwill represents a portfolio premium taking our ownership to 99.63% and on 22 April 2016, the Group for acquiring a care home business. acquired an additional 10% interest in Torrejón, taking our ownership to 60%. (b) Disposals On 21 December 2016, a web-based start-up company specialising in At the date when the Group ceases to have control in an entity it sports medical services, Healthia.es was acquired in Spain for £0.3m results in recognition of a gain or loss on sale of the interest and on (€0.4m), for which goodwill of £0.4m has been recognised. Acquisition the revaluation of any retained non-controlling interest. accounting was also completed for the 2015 LUX MED acquisitions, giving rise to an additional £2.2m goodwill. Any amounts relating to the entity that have previously been recognised in the Statement of Comprehensive Income are reclassified Acquisition transaction costs expensed in the year ended 31 December to the Income Statement. The net gain made on the sale of businesses 2016, within other operating expenses, total £4.2m (£1.2m Care Plus, is included within other income and charges in the Consolidated £3.0m Other). Income Statement. 2015 acquisitions 2016 Disposals and liquidation Fair value Cash proceeds of £27.7m were received on the sale of Bupa Home £m Healthcare which completed on 1 July 2016, with a net gain on disposal Purchase consideration settled in cash 97.4 of £12.3m taking into account £8.8m net assets divested and £6.6m Additional 17.3% acquisition of Bupa Chile 59.2 transaction costs. Cash acquired on acquisition (0.3) On 23 March 2016, Bupa Middle East Holdings W.L.L., a holding Net cash outflow on acquisition 156.3 company in Bahrain which was part of International Markets was liquidated. A net loss of £1.6m was recognised and is included within On 5 December 2015, the Group exercised its option to acquire an other income and charges in the Consolidated Income Statement. additional 17.3% of the shares of Bupa Chile, for a total consideration of £59.2m (CLP 62.8bn), bringing the total ownership to 73.7% at 2015 Disposals and liquidation 31 December 2015. During 2015, £25.5m deferred consideration was received in relation to the disposal of Bupa Ireland Limited in 2007 and is included within The exercise of the option triggered a mandatory offer to market for other income and charges in the Consolidated Income Statement. the remaining 26.3% shareholding, as required by local legislation in Chile. As a result, a liability of £91.1m (CLP 95.1bn) was recognised On 8 July 2015, Bupa Health Care Asia Pte Ltd, a holding company in in other payables with the corresponding entry in the income and Singapore, which was part of the International Developments Markets expenditure reserve recorded at 31 December 2015. Market Unit (now International Markets) was liquidated. A net gain of £0.3m was recognised and is included within other income and charges During 2015 the Group continued to expand its dental businesses in the Consolidated Income Statement. in Australia, Spain and the UK. In Australia, a total of 18 clinics were acquired in 2015 for a total consideration of £21.9m, of which £4.0m Bupa Annual Report 2016 99 Strategic report Strategic Note 4.1 Assets and liabilities held for sale in brief Non-current assets, or disposal groups comprising assets and Assets and liabilities held for sale liabilities are classified as held for sale if it is highly probable that they will be recovered primarily through sale rather than continuing use and a sale is considered to be highly probable.

Classification as held for sale An office building in the UK is presented as held for sale at 31 December Assets held for sale are measured at the lower of their carrying amount 2016 following the decision to sell the property. and fair value less costs to sell. Impairment losses on initial classification As a result of a review of the UK care services business, a number of as held for sale and subsequent gains or losses on remeasurement are homes are also held for sale at 31 December 2016, comprising the recognised in profit or loss. assets and liabilities of Bupa Care Homes Limited (one of the Group On classification as held for sale, intangible assets and property, plant companies in which some UK care homes are held) and certain assets and equipment are no longer amortised or depreciated. and liabilities of other Group companies. On classification as held for sale a write down of £11.2m has been Assets and liabilities classified as held for sale recognised in other income and charges in the Income Statement Governance with regards to expected costs to sell. 2016 2015 £m £m Assets held for sale Property, plant and equipment 479.0 – Trade and other receivables 26.3 Total assets classified held for sale 505.3 –

Liabilities associated with assets held for sale Trade and other payables (45.5) Total liabilities classified as held for sale (45.5) –

Net assets classified as held for sale 459.8 –

Note Financial statements 4.2 Equity accounted investments in brief Equity accounted investments comprises associated companies and Equity accounted investments joint ventures.

Associated companies and joint ventures are accounted for using the When the Group’s share of losses exceeds its interest in an equity equity method and are initially recognised at cost. The cost of the accounted investment, the carrying amount of that interest (including investment includes transaction costs. any long-term interests that, in substance, form part of the Group’s net investment), is reduced to nil. In addition, the recognition of Associated companies include those entities in which the Group has further losses is discontinued except to the extent that the Group significant influence, but no right to direct the activities which has an obligation to make payments on behalf of the equity determine the variable returns it receives from the entity. Joint ventures accounted investment. include those entities over the activities of which the Group has joint control, established by contractual agreement and requiring unanimous Associates and joint ventures consent for strategic financial and operating decisions. The Group also During 2016, no capital injections were made in our investment in has the rights to the net assets. Bupa Arabia (2015: £3.9m). 100 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

During 2016, capital injections of £23.8m (2015: £2.2m) were made in The consolidated financial statements include the Group’s share of Max Bupa Health Insurance Company Limited, £21.9m of which was to income and expenses, and Other Comprehensive Income, after increase the Group’s shareholding from 26% to 49%. This investment adjustments to align the accounting policies with those of the Group has been reclassified from a joint venture to an associate as the Group where materially different, from the date that significant influence exercises significant influence. Max Bupa continues to be accounted for or control commences until the date that significant influence or using the equity method. control ceases. Distributions to shareholders are currently restricted by local regulatory The carrying amount of equity accounted investments is £302.9m requirements which are re-assessed on a regular basis. (2015: £238.0m). All equity investments are included on a coterminous basis.

The Group’s principal equity accounted investments are:

Business Share of Principally Country of activity issued capital operates in incorporation Bupa Arabia for Cooperative Insurance Company Associate Insurance 26.25% Saudi Arabia Saudi Arabia Highway to Health, Inc Associate Insurance 49.00% USA USA Max Bupa Health Insurance Company Limited Associate Insurance 49.00% India India

(i) Summarised financial information for associates and joint financial statements of the relevant associates and joint ventures, and ventures not the Group’s share of those amounts. They have been amended to reflect adjustments made by the Group when using the equity method, The tables below provide summarised financial information for including fair value adjustments and modifications for differences in those associates and joint ventures that are material to the Group. accounting policy. The information disclosed reflects the amounts presented in the

Bupa Arabia Highway to Health Max Bupa 2016 2015 2016 2015 2016 2015 £m £m £m £m £m £m Cash and cash equivalents 48.8 144.5 85.5 51.2 3.5 2.5 Other current assets 1,038.0 888.6 57.2 47.4 2.8 2.9 Current assets 1,086.8 1,033.1 142.7 98.6 6.3 5.4 Non-current assets 460.3 79.6 7.8 6.1 75.5 55.6 Current liabilities (1,109.2) (783.5) (87.6) (63.2) (21.3) (16.3) Non-current liabilities – (27.8) (0.2) (0.2) (31.2) (23.6) Net assets 437.9 301.4 62.7 41.3 29.3 21.1

Reconciliation to carrying amounts

Opening net assets 301.4 179.9 41.3 31.5 21.1 16.8 Profit/(loss) for the period 124.1 112.5 10.1 5.8 (4.9) (7.3) Other comprehensive expenses (21.1) (4.6) – – – – Dividends paid (31.5) – – – – – Other reserve movements 65.0 13.6 11.3 4.0 13.1 11.6 Closing net assets 437.9 301.4 62.7 41.3 29.3 21.1 % ownership 26.25% 26.25% 49.00% 49.00% 49.00% 26.00% Reporting entity’s share 114.9 79.1 30.7 20.2 14.3 5.5 Fair value and local accounting differences (20.2) (8.5) 133.1 138.4 18.4 0.4 Carrying amount 94.7 70.6 163.8 158.6 32.7 5.9 Reporting entity’s share of profit/(loss) 26.3 23.7 5.1 2.6 (0.1) (1.9)

(ii) Individually immaterial associates and joint ventures In addition to the interests in associates disclosed above, the Group also has interests in a number of individually immaterial associates that are accounted for using the equity method. The aggregate carrying amount of these associates is £11.7m (2015: £2.9m). The reporting entity’s share of loss recognised during the year for these associates was £1.0m (2015: £2.0m). Bupa Annual Report 2016 101 Strategic report Strategic Note 5.0 Financial investments in brief The Group generates cash from its underwriting, trading and Financial investments financing activities and invests the surplus cash in financial investments. These include government bonds, corporate bonds, pooled investments funds and deposits with credit institutions.

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: available-for-sale (AFS), at fair value through profit or loss, fair value through the profit or loss. held to maturity, and 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 The accounting policy for the impairment of financial investments is Group has transferred substantially all risks and rewards of ownership. detailed in Note 3.0.1. The analysis of derivatives is disclosed in Note 5.2.

Financial investments Governance Financial investments are analysed as follows:

Carrying Carrying value Fair Value value Fair Value 2016 2016 2015 2015 £m £m £m £m Non-Current Available-for-sale Corporate debt securities 192.2 192.2 – – Government debt securities 17.2 17.2 – –

Designated at fair value through profit or loss Government debt securities 62.6 62.6 49.8 49.8 Corporate debt securities and secured loans 207.0 207.0 242.2 242.2 Pooled investment funds 212.9 212.9 110.9 110.9 Deposits with credit institutions – – 0.1 0.1

Held to maturity Corporate debt securities and secured loans 128.9 135.7 98.7 99.2

Government debt securities 43.4 43.8 0.6 0.6 Financial statements

Loans and receivables Deposits with credit institutions 197.1 201.6 241.0 246.0 Corporate debt securities and secured loans – – 88.2 130.0 Other loans 0.6 0.6 0.4 0.4 Total non-current financial investments 1,061.9 1,073.6 831.9 879.2

Current Designated at fair value through profit or loss Government debt securities 26.2 26.2 19.3 19.3 Corporate debt securities and secured loans 10.1 10.1 3.1 3.1 Pooled investment funds 39.8 39.8 35.0 35.0 Deposits with credit institutions 4.9 4.9 1.0 1.0

Held to maturity Corporate debt securities and secured loans 158.2 158.4 103.0 103.2 Government debt securities 0.7 0.7 – –

Loans and receivables Deposits with credit institutions 870.8 872.4 1,195.0 1,196.0 Total current financial investments 1,110.7 1,112.5 1,356.4 1,357.6

Total financial investments 2,172.6 2,186.1 2,188.3 2,236.8 102 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

Classification Criteria and treatment Available-for-sale Available-for-sale assets are non-derivative financial assets designated on initial recognition as available for sale or any other instruments that are not classified in the below categories. Available-for-sale assets are measured at fair value in the balance sheet. Fair value changes on available-for-sale assets are recognised directly in equity, through the Statement of Changes in Equity, except for interest and foreign exchange gains or losses which go through the Income Statement. The cumulative gain or loss that was recognised in equity is recognised in the Income Statement when an available-for-sale financial asset is derecognised. Fair value through profit or loss Financial investments designated at fair value through profit or loss consist of investments or instruments where management make decisions based upon their fair value. The investments are carried at fair value, with gains and losses arising from changes in this value recognised in the Income Statement in the period in which they arise. Held to maturity Held to maturity investments are non-derivative financial assets which are quoted on an active market, with fixed or determinable payments and fixed maturity that an entity has the positive intention and ability to hold to maturity. This is assessed at each reporting date. Held to maturity investments are measured at amortised cost using the effective interest method, less any impairment losses. Any discount or premium on purchase is amortised over the life of the investment through the Income Statement. Loans and receivables Loans and receivables are carried at amortised cost calculated using the effective interest method, less impairment losses.

Fair value of financial investments These may include reference to the current fair value of other Fair value is a market-based measurement for assets for observable investments that are substantially the same and discounted cash market transactions where market information might be available. flow analysis. The objective of a fair value measurement is to estimate the price at Financial investments carried at fair value are measured using different which an orderly transaction to sell the asset or to transfer the asset valuation inputs categorised into a three level hierarchy. The different would take place between market participants at the measurement levels have been defined by reference to the lowest level input that is date under current market conditions (i.e. an exit price at the significant to the fair value measurement, as follows: measurement date from the perspective of a market participant that holds the asset). –– Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; Fair values disclosed in the table have been calculated as follows: –– Level 2: inputs other than quoted prices included within level one that –– debt securities, pooled investment funds, deposits with credit are observable for the asset or liability, either directly (i.e. as prices) or institutions, other loans – quoted price if available or discounted indirectly (i.e. derived from prices); and expected future principal and interest cash flows; and –– Level 3: inputs for the asset or liability that are not based on –– listed securities – quoted price. observable market data (unobservable inputs). 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 by using valuation techniques corroborated by independent third parties. Bupa Annual Report 2016 103

An analysis of financial investments by valuation method is as follows: report Strategic

Non-current Current Total Total Level 1 Level 2 Non-current Level 1 Level 2 Current £m £m £m £m £m £m 2016 Available-for-sale Corporate debt securities 192.2 – 192.2 – – – Government debt securities 17.2 – 17.2 – – –

Designated at fair value through profit or loss Government debt securities 37.6 25.0 62.6 26.2 – 26.2 Corporate debt securities and secured loans 30.6 176.4 207.0 10.1 – 10.1 Pooled investment funds 124.0 88.9 212.9 39.8 – 39.8 Deposits with credit institutions – – – 4.9 – 4.9

Held to maturity Corporate debt securities and secured loans 135.7 – 135.7 158.4 – 158.4

Government debt securities 43.3 0.5 43.8 0.7 – 0.7 Governance

Loans and receivables Deposits with credit institutions – 201.6 201.6 – 872.4 872.4 Corporate debt securities and secured loans – – – – – – Other loans – 0.6 0.6 – – – Total 580.6 493.0 1,073.6 240.1 872.4 1,112.5

2015 Designated at fair value through profit or loss Government debt securities 22.7 27.1 49.8 19.3 – 19.3 Corporate debt securities and secured loans 42.6 199.6 242.2 3.1 – 3.1 Pooled investment funds 35.2 75.7 110.9 35.0 – 35.0 Deposits with credit institutions 0.1 – 0.1 – – – Other loans – – – 1.0 – 1.0

Held to maturity Corporate debt securities and secured loans 68.8 30.4 99.2 94.4 8.8 103.2

Government debt securities 0.5 0.1 0.6 – – – Financial statements

Loans and receivables Deposits with credit institutions – 246.0 246.0 – 1,196.0 1,196.0 Corporate debt securities and secured loans – 130.0 130.0 – – – Other loans – 0.4 0.4 – – – Total 169.9 709.3 879.2 152.8 1,204.8 1,357.6

Currently the Group does not hold any level three financial investments. There have been no significant transfers between the valuation methods. The Group uses a market interest curve as at the balance sheet date to discount financial instruments, borrowings and derivatives, where the fair value cannot otherwise be found from quoted market values. The range of interest rates used is as follows:

2016 2015 % % Sterling assets and liabilities 0.6-0.9 1.1-2.0 Australian dollar assets and liabilities 1.7-2.8 2.1-2.0 Euro assets and liabilities (0.8)-(0.5) (0.4)-(0.2) US dollar assets and liabilities 0.9-3.2 0.6-2.3 104 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

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

Subordinated liabilities Other interest bearing liabilities Subordinated liabilities are stated at amortised cost using the effective Other interest bearing liabilities consist of senior unsecured bonds, interest method. The carrying value is adjusted for the gain or loss secured loans, bank and other loans and finance lease liabilities. on hedged risk; changes in the fair value of derivatives that mitigate These borrowings are recognised initially as proceeds receivable interest rate risk resulting from the fixed interest rate of the bonds are less attributable transaction costs, net of any discount on issue. recognised in the Income Statement as an effective fair value hedge Subsequent to initial recognition, they are stated at amortised cost, of this exposure. with any difference between cost and redemption value being The interest expense on the bonds is recognised as a financial expense. recognised in the Income Statement over the period of the borrowings on an effective interest basis. The Group holds callable subordinated perpetual guaranteed bonds with a corresponding fair value hedge. The amortised cost of these borrowings is adjusted for the fair value of the risk being hedged.

2016 2015 Non-current Current Total Non-current Current Total Note £m £m £m £m £m £m Subordinated liabilities Callable subordinated perpetual guaranteed bonds 330.0 5.9 335.9 330.0 5.9 335.9 Fair value adjustment in respect of hedged interest rate risk 50.9 – 50.9 51.3 – 51.3 Callable subordinated perpetual guaranteed bonds at fair value (a) 380.9 5.9 386.8 381.3 5.9 387.2 Other subordinated debt (b) 921.1 8.8 929.9 528.2 4.0 532.2 Total subordinated liabilities 1,302.0 14.7 1,316.7 909.5 9.9 919.4 Other interest bearing liabilities Senior unsecured bonds (c) 399.3 1.1 400.4 387.1 366.8 753.9 Secured loans (d) – – – 233.5 4.3 237.8 Bank loans (e) 117.1 75.6 192.7 97.0 50.2 147.2 Finance lease liabilities (f) 6.4 5.4 11.8 9.2 6.6 15.8 Total interest bearing liabilities 522.8 82.1 604.9 726.8 427.9 1,154.7

Total borrowings 1,824.8 96.8 1,921.6 1,636.3 437.8 2,074.1

(a) Callable subordinated perpetual guaranteed bonds (b) Other subordinated debt In December 2004, Bupa Finance plc issued £330.0m of callable On 25 April 2013, Bupa Finance plc issued £500.0m of unguaranteed subordinated perpetual guaranteed bonds, which are guaranteed by subordinated bonds which mature on 25 April 2023. Interest is payable Bupa Insurance Limited. Interest is payable on the bonds at 6.125% on the bonds at 5.0% per annum. In the event of the winding up of per annum. The bonds have no fixed maturity date but a call option is Bupa Finance plc the claims of the bondholders are subordinated to exercisable by Bupa Finance plc to redeem the bonds on 16 September the claims of other creditors of that company. 2020. In the event of the winding up of Bupa Finance plc or Bupa On 8 December 2016, Bupa Finance plc issued £400.0m of Insurance Limited the claims of the bondholders are subordinated to unguaranteed subordinated bonds which mature on 8 December 2026. the claims of other creditors of these companies. Interest is payable on the bonds at 5.0% per annum. In the event of The total hedged fair value of the callable subordinated perpetual winding up of Bupa Finance plc the claims of the bondholders are guaranteed bonds, net of accrued interest, is £386.8m (2015: £387.2m). subordinated to the claims of other creditors of that company. The valuation adjustment is the change in value arising from interest Subordinated debt of £35.5m (€41.6m) issued by Torrejón Salud S.A. rate risk which is matched by the fair value of swap contracts in place matures on 31 December 2022. Interest accrues on the debt at to hedge this risk. EURIBOR +6%. In the event of a winding up of Torrejón Salud S.A., the claims of the holder of the debt are subordinated to the claims of the senior creditors of that company. Bupa Annual Report 2016 105

(c) Senior unsecured bonds In January 2017, Bupa Finance plc signed a £650.0m committed facility report Strategic On 2 July 2009, Bupa Finance plc issued £350.0m of 7.5% senior with one of its lending banks to ensure sufficient funding would be unsecured bonds. The bonds were repaid in July 2016. made available to complete the acquisition of Oasis Dental Care in 2017. On 17 June 2014, Bupa Finance plc issued £350.0m of senior unsecured (f) Obligations under finance leases bonds, guaranteed by the Company, which mature on 17 June 2021. Future minimum payments under finance leases are as follows: Interest payable on the bonds is 3.375% per annum. Future Present value Future Present value minimum of minimum minimum of minimum On 30 June 2012, Cruz Blanca Salud SA, now Bupa Chile issued UF lease lease lease lease 1.6m (Unidad de Fomento - an inflation linked currency commonly payments payments payments payments used in Chile) (£38.0m) of inflation linked senior unsecured bonds 2016 2016 2015 2015 £m £m £m £m which mature on 30 June 2033. Payable within one year 5.9 5.4 7.3 6.6 (d) Secured loans Payable after one year but During the year the secured loans were repaid early (2015: £237.8m). within five years 6.0 5.4 9.2 8.4 The secured loan balance related to secured loan notes issued by UK Payable after five years 1.3 1.0 1.2 0.8 Care No.1 Limited. These secured loans were redeemed on 1 April 2016. Total gross payments 13.2 17.7 A £175.0m Class A1 note was due to mature in 2029 and a £60.0m Less: finance charges Class A2 note was due to mature in 2031. The A1 and A2 loan notes included above (1.4) (1.9) had fixed interests of 6.3% and 7.5% respectively. The loan notes were Total payments net of secured by fixed and floating charges over the assets and undertakings finance charges 11.8 11.8 15.8 15.8 Governance of UK Care No.1 Limited. The security included UK Care No.1 Limited’s overriding lease interest, and the rental income receivable thereunder, held in a number of the Group’s care homes. Fair value of financial liabilities The fair value of a financial liability is defined as the amount for which (e) Bank loans and bank overdraft a financial liability could be exchanged in an arm’s-length transaction Bank loans are £192.7m (2015: £147.2m), this includes a tri syndicated between informed and willing parties. Fair values disclosed in the table loan held in Especializada y Primaria L’Horta-Manises S.A.U. of £26.8m below have been calculated as follows: (2015: £24.8m) and a portfolio of loans held in Bupa Chile totalling £146.8m (2015: £113.0m). –– Subordinated liabilities – quoted price if available or discounted expected future principal and interest cash flows; Bupa maintains a £800.0m revolving credit facility which was renegotiated in August 2015 and matures in July 2021 as a result of –– Senior unsecured bonds – quoted price; and an optional year extension triggered during 2016. There is a second –– Secured loans – quoted price. option to extend by a further one year. The facility was undrawn at 31 December 2016 with the exception of £6.4m of outstanding letters The fair values of quoted liabilities in active markets are based on of credit for general business purposes. current bid prices. The fair values of financial liabilities for which there is no active market, are established using valuation techniques Drawings under the £800.0m facility are guaranteed by the Company corroborated by independent third parties. These may include and other Group subsidiary companies. The overdraft facilities are reference to the current fair value of other instruments that are subject to cross guarantees within the Group. The bank loans and substantially the same and discounted cash flow analysis. Financial statements overdrafts bear interest at commercial rates linked to LIBOR, or EURIBOR, or at a commercial fixed rate. Financial liabilities are categorised into a three level hierarchy, a description of the different levels is detailed in Note 5.0 along with An additional committed bank facility of £250.0m was agreed in June the market interest rates used to discount financial liabilities, where 2016. This facility was cancelled following the issuance of the £400.0m the fair value cannot otherwise be found from quoted market values. unguaranteed subordinated bond issued on 8 December 2016.

An analysis of borrowings by valuation method is as follows:

2016 2015 Level 1 Level 2 Total Level 1 Level 2 Total £m £m £m £m £m £m Subordinated liabilities 1,312.9 46.1 1,359.0 870.6 32.3 902.9 Senior unsecured bonds 377.2 59.3 436.5 719.4 38.7 758.1 Secured loan – – – 314.8 - 314.8 Bank loans – 192.7 192.7 - 147.2 147.2 Finance lease liabilities – 11.8 11.8 – 15.8 15.8 Total 1,690.1 309.9 2,000.0 1,904.8 234.0 2,138.8

Currently the Group does not hold any level three financial liabilities. 106 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

Note 5.2 Derivatives in brief A derivative is a financial instrument whose value is based on one Derivatives or more underlying assets. The Group uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risk. Derivatives are not held for speculative reasons.

Derivatives that have been purchased or issued as part of a hedge that All derivatives are disclosed as level two in the three level hierarchy. subsequently do not qualify for hedge accounting are accounted for at 2016 2015 fair value through profit or loss. £m £m Derivative financial instruments are initially recognised and Derivative assets subsequently measured at fair value. Non-current* 50.9 51.3 Current 9.4 6.0 Fair values are obtained from market observable pricing information Total derivative assets 60.3 57.3 including interest rate yield curves. The value of foreign exchange forward contracts is established using listed market prices. Derivative liabilities Fair values have been calculated for each type of derivative as follows: Non-current (10.4) (10.3) –– The fair value of currency forward contracts, swaps and options is Current (11.6) (22.1) determined using forward exchange rates derived from market Total derivative liabilities (22.0) (32.4) sourced data at the balance sheet date, with the resulting value * See fair value hedges in Note 5.4.2.2. discounted back to present value; –– The fair value of interest rate swaps is determined as the present value of the estimated future cash flows based on observable yield curves. Bupa Annual Report 2016 107 Strategic report Strategic Note 5.3 Capital management in brief Bupa is a company limited by guarantee, has no shareholders and Capital management is funded through retained earnings and borrowings. The Group’s capital management objective is to maintain sufficient capital to protect the interests of its customers, investors, regulators and trading partners while deploying capital efficiently and managing risk to enable Bupa to continue to deliver its purpose in a sustainable manner. All profits are therefore reinvested to develop the Group’s business for the benefit of current and future customers.

There have been no changes to the Group’s capital management At least annually, the Group carries out an Economic Capital objectives during the year. Assessment (ECA) in which it makes its own quantification of how much capital is required to support its risks. The ECA is used to The Group’s capital resources are managed in line with the Group assess how well the Standard Formula SCR reflects the Group’s Capital Management Policy. All regulated entities within the Group actual risk profile. maintain sufficient capital resources to meet any minimum capital requirement required by the local Regulators. In addition the Group and The ECA forms part of the Own Risk and Solvency Assessment (ORSA) Governance regulated entities maintain a buffer in excess of the regulatory minimum which comprises all the activities by which the Group establishes the requirements in line with their capital risk appetites. During the year, the level of capital required to meet its solvency needs over the planning Group and its subsidiaries complied with all externally imposed capital period given the Group’s strategy and risk appetite. The conclusions requirements to which they were subject. from these activities are summarised in the ORSA Report which is reviewed by the Risk Committee, approved by the Board and The Group’s capital position is kept under constant review and is submitted to the PRA annually. reported monthly to the Board. At 31 December 2016, Bupa’s eligible Own Funds, determined in The Group has target ranges for solvency, leverage and interest cover accordance with the Solvency II valuation rules, were £4.2bn1 (2015: ratios with a view to maintaining an A-/A3 long-term senior credit rating £3.1bn), which was in excess of the Group estimated SCR of £2.1bn1 for Bupa Finance plc. The Bupa Group as a whole is not rated by any (2015: £1.8bn). This represented a solvency coverage ratio of 204%1 rating agency. Individual debt issues and certain subsidiaries within the (2015: 178%2). The Solvency II rules superseded those of the IGD. Group have public ratings. 1 The Solvency II Capital Position (Own Funds and Solvency Capital Requirement) and The Group’s capital comprises equity, exclusive of any non-controlling related disclosures are estimated values and unaudited. interests, together with eligible subordinated debt. The Group has 2 The Solvency Coverage Ratio was updated to 178% from the 180% estimate disclosed in £330.0m of callable subordinated perpetual guaranteed bonds, a the 2015 Annual Report and Accounts. £500.0m dated hybrid bond which matures on 25 April 2023 and a £400.0m dated hybrid bond which matures 8 December 2026. These bond issues are accounted for as liabilities in the IFRS based Financial statements financial statements, but are treated as solvency capital for regulatory and management purposes. Since 1 January 2016, the Group has been subject to the requirements of the Solvency II Directive and must hold sufficient capital to cover its Group Solvency Capital Requirement (SCR) which takes account of all the risks in the Group, including those related to non-insurance businesses. The Group SCR is calculated in accordance with the Standard Formula specified in the Solvency II legislation. Bupa has obtained approval from the Prudential Regulation Authority (PRA) to substitute the insurance premium risk parameter in the Standard Formula with an Undertaking Specific Parameter (USP) which reflects Bupa’s own loss experience. 108 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

Note 5.4 Risk management in brief The Bupa Risk Committee has responsibility to the Board for the Risk management oversight of risk. It recommends to the Board a risk appetite that reflects Bupa’s purpose and expresses the degree of risk Bupa should accept in delivering on its strategy.

Bupa operates a ‘Three Lines of Defence’ model. The Group has exposure to a number of risks from its use of financial instruments and risks associated with its insurance business. These 1. Business management is responsible for the identification and have been categorised into the following types of risk, and details of assessment of risks and controls. the nature, extent, and how the Group has managed these risks is 2. Risk functions provide support and challenge the completeness described below: and accuracy of risk assessments and the adequacy of (i) Insurance risk mitigation plans. (ii) Market risk 3. Internal audit provides independent and objective assurance on the robustness of the risk management framework, and the (iii) Credit risk appropriateness and effectiveness of internal controls. (iv) Liquidity risk The current principal risks of the Group, its inherent risks and how they are mitigated are described on pages 19-21. The Group has adopted a risk management strategy that endeavours to mitigate these risks, which is approved by the Board. In managing these exposures, the Corporate Finance Executive Committee reviews and monitors any significant investment and market risks.

Note 5.4.1 Insurance risk in brief Insurance risk only affects the general insurance businesses in the Insurance risk Group. It consists of underwriting and pricing risks which relate to inadequate tariffs of insurance products as well as reserving risk which relates to the potential inadequacy of claims provisions.

(i) Underwriting risk (ii) Pricing risk Underwriting risk refers to the potential deviation from the actuarial Pricing risk relates to the setting of adequate premium rates taking into assumptions used for setting insurance premium rates which could lead consideration the volume and characteristics of the insurance policies to premium inadequacy. Underwriting risk is therefore concerned with issued. External influences to pricing risk include (but are not limited to) both the setting of adequate premium rates (pricing risk) as well as the competitors’ pricing and product design initiatives, and regulatory management of claims (claims risk) for insurance policies underwritten environments. The level of influence from these external factors can by the Group. vary significantly between regions and largely depend on the maturity of health insurance markets and the role of the regulator. Thorough actuarial analysis performed on a regular basis combined with an understanding of local market dynamics and the ability to change insurance premium rates when necessary can act as effective risk mitigations. In every general insurer in the Group, the dominant product or policy category is of an annually renewable health insurance contract. This permits insurance premium rate revisions to respond reasonably quickly to changes in customer risk profiles, claims experience and market considerations. The ability to review benefit levels and premium rates is a significant mitigant to pricing risk. The Group underwrites no material general insurance business that commits it to cover risks at premiums fixed beyond a twelve-month period from inception or renewal. Bupa Annual Report 2016 109

(iii) Claims risk (v) Other risks related to underwriting health insurance report Strategic Claims risk is the risk of failure in managing Bupa’s exposure to claims business inflation and fluctuations in claims leading to losses. This can be driven Claims provisions are not discounted and their short-term nature by an adverse fluctuation in the amount and incidence of claims means that changes in interest rates have no impact on reserving risk. incurred, higher than expected future claims on existing policies with In addition, the future premium income and claims outflows of health past exposures, and external factors such as medical inflation. Claims insurance premium liabilities are largely unaffected by changes in reserving risk is part of claims risks and it is a risk of mis-estimation of interest rates. However, changes to inflationary factors such as wage claims reserve. inflation and medical provider cost inflation affect the financial Claims risk is managed and controlled by means of pre-authorisation soundness of health insurance businesses. of claims, outpatient benefit limits, the use of consultant networks None of the Group’s general insurance contracts contain embedded and agreed networks of hospitals and charges. Specific claims derivatives so the contracts do not give rise to interest rate risk. management processes vary across the Group depending on local requirements, market environment and practice. The Group is exposed to foreign currency risk through some of the insurance liabilities which are settled in a local currency. Where possible Future adverse claims experience, for example, which is caused by these liabilities are matched to assets in the relevant currency to hedge external factors such as medical inflation, will affect cash flows after this exposure. the date of the financial statements. Recent adverse claims experience is reflected in these financial statements in claims paid and in the The majority of the Group’s general insurance activities are single line health portfolios. Even though only one line of business is involved, the movement in the claims provisions. Governance Group does not have significant concentration of insurance risk for the Generally, the Group’s health insurance contracts contain terms and following reasons: conditions that provide for the reimbursement of incurred medical expenses for treatment related to acute medical conditions. The –– broad geographical diversity across several markets – UK, Spain, contracts do not provide for capital sums or indemnified amounts. Australia, Latin America, the Middle East, Hong Kong and Thailand; Therefore claims experience is underpinned by prevailing rates of –– product diversity between domestic and expatriate, and individual illness. Additionally, claims risk is generally mitigated by insurers running and corporate health insurance; and control processes to ensure that both the treatments and the resulting reimbursements are appropriate. –– a variety of claims type exposures across diverse medical providers; consultants, nursing staff, clinics, individual hospitals and hospital groups. (iv) Reserving risk The Group as a whole, and its principal general insurance entities, are Reserving risk is the risk that provisions made for claims prove to be well diversified. Only in selected circumstances does the Group use insufficient in light of later events and claims experience. There is a reinsurance. The reinsurance used does not give rise to a material relatively low exposure to reserving risk compared to underwriting risk counterparty default credit risk exposure to the Group. due to the very short-term nature of our claims development patterns. The short-term nature of the Group’s general insurance contracts means that movements in claims development assumptions are (vi) Catastrophe risk generally not significant. The development claims settlement patterns Either a natural disaster or a manmade disaster could potentially lead to Financial statements are kept under constant review to maintain the validity of the a large number of claims and thus higher than expected claims costs. assumptions and hence, the validity of the estimation of recognised In the majority of jurisdictions Bupa is not liable. Such risks are further general insurance liabilities. reduced by excess of loss cover by Bupa and external providers. The amount of claims provision at any given time that relates to Bupa’s Centre Risk Function oversee the risk management of this potential claims payments that have not been resolved within one risk exposure, and Bupa’s Centre Actuarial Function oversee and year is relatively small in the context of the Group. Also, of the small implement strategic improvements to ensure overall adequacy of provisions that do relate to longer than one year, it is possible to these arrangements. predict with reasonable confidence the outstanding amounts. 110 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

Note 5.4.2 Market risk in brief Market risk is the risk of financial impacts due to changes in fair values Market risk or future cash flows of financial instruments from fluctuations in interest rates, foreign exchange rates, commodity prices, credit spreads and equity prices. The focus of the Group’s long-term financial strategy is to facilitate growth without undue balance sheet risk.

In order to reduce the risk of assets being insufficient to meet future The following significant exchange rates applied during the year: policyholder obligations, the Group actively manages assets using an Average rate Closing rate approach that balances duration, quality, diversification, liquidity and 2016 2015 2016 2015 investment return. Australian dollar 1.8234 2.0370 1.7106 2.0210 The Group manages market risk by ensuring that the majority of its Chilean peso 916.9790 1,001.2247 826.5939 1,044.1436 cash and investments are held with highly rated credit institutions. Danish krone 9.1092 10.2797 8.7032 10.1194 Where the Group has moved away from straight money market Euro 1.2234 1.3782 1.1703 1.3560 investments and invested in a limited portfolio of return seeking assets Hong Kong dollar 10.5167 11.8520 9.5722 11.4186 (principally bonds), the Group uses a value at risk analysis (VaR) to New Zealand dollar 2.1963 2.1544 quantify risk, taking account of asset volatility and correlation between 1.9473 1.7786 asset classes. This portfolio is held in the UK and Australian insurance Polish zloty 5.3394 5.7671 5.1584 5.7834 companies and was £390.4m at 31 December 2016 (2015: £342.8m). Thai bhat 47.8002 52.3953 44.2258 53.0735 The one year VaR measured at a 95% confidence level attributable US dollar 1.3547 1.5288 1.2345 1.4734 to the portfolio is £31.0m at 31 December 2016 (2015: £20.8m). In the consolidated financial statements, where a loan between Group entities results in an exchange gain or loss, then it is recognised in the 5.4.2.1 Foreign exchange risk Statement of Comprehensive Income to the extent that it relates to the The Group is exposed to foreign exchange risks arising from Group’s net investment in overseas operations. commercial transactions and from recognising assets, liabilities and Bupa has exposure to foreign exchange risk arising from its overseas investments in overseas operations. The Group is exposed to both operations. Key exposures are to the Australian dollar, euro, Polish transaction and translation risk. The former is the risk that a company’s zloty, New Zealand dollar, Hong Kong dollar, Chilean peso, US dollar, cash flows and realised profits may be impacted by movements Brazilian real, Singapore dollar and Thai baht. Currency exposures in foreign exchange rates. The latter arises from translating the as at 31 December are as follows: financial statements of a foreign operation into the Group’s presentational currency. Net currency exposure Net currency Currency including The results and financial position of the Group’s foreign entities that do exposure contracts hedges not have a functional currency of sterling are translated into sterling £m £m £m as follows: 2016 –– assets and liabilities at the exchange rate at the balance sheet date; Australian dollar 2,623.2 (248.9) 2,374.3 and Euro 771.4 (384.7) 386.7 New Zealand dollar 491.4 – 491.4 –– income and expenses at average rates for the period. Polish zloty 439.8 – 439.8 All foreign exchange differences arising on translation are Chilean peso 366.7 3.6 370.3 recognised initially in the Statement of Comprehensive Income, Hong Kong dollar 337.8 18.6 356.4 and only in the Income Statement in the period in which the entity US dollar 248.1 (219.1) 29.0 is eventually disposed. Brazilian real 37.3 4.8 42.1 Singapore dollar 32.7 21.0 53.7 Thai baht 17.9 – 17.9 Other 19.1 (3.8) 15.3 Total foreign denominated net assets 5,385.4 (808.5) 4,576.9 Percentage of Group net assets 81.9% 69.6% Bupa Annual Report 2016 111

Net currency The impact of a hypothetical strengthening/weakening of sterling report Strategic exposure against the currencies below, with all other variables constant, Net currency Currency including exposure contracts hedges would have increased/(decreased) equity and profit by the amounts £m £m £m shown below:

2015 Strengthening 10% Weakening 10% Australian dollar 2,158.1 (79.0) 2,079.1 (Losses)/ Euro 681.8 (329.0) 352.8 gains Gains/(losses) included in Losses included in Gains Polish zloty 391.4 – 391.4 Income included in Income included in New Zealand dollar 366.8 – 366.8 Statement Equity Statement Equity £m £m £m £m Hong Kong dollar 284.7 – 284.7 2016 Chilean peso 170.0 – 170.0 Australian dollar (32.5) (215.8) 39.7 263.8 US dollar 183.8 (128.5) 55.3 Euro (13.2) (39.8) 16.2 48.6 Danish krone 7.0 7.5 14.5 US dollar 5.2 (7.4) (6.4) 9.1 Thai baht 16.0 – 16.0 New Zealand dollar (3.7) (44.7) 4.5 54.6 Other 21.6 – 21.6 Chilean peso (1.2) (40.0) 1.5 48.9 Total foreign denominated net assets 4,281.2 (529.0) 3,752.2 Polish zloty 1.3 (33.7) (1.6) 41.1 Percentage of Group net assets 78.9% 69.2% Hong Kong dollar (0.7) (32.4) 0.9 39.6 Governance Certain forward currency contracts are entered into to hedge net Singapore dollar 0.1 (4.9) (0.1) 6.0 monetary asset exposure and future cash flows of the Group, and Thai baht – (3.8) – 4.7 do not form part of designated hedging arrangements. Brazilian real 0.1 (1.6) (0.1) 2.0 Other (4.6) (1.4) 5.7 1.7 Foreign currency transactions in the Group’s subsidiary companies are measured using the functional currency of the subsidiary company, Total sensitivity (49.2) (425.5) 60.3 520.1 which is based on the primary economic environment in which the subsidiary operates. The transactions are translated into the functional 2015 currency at the exchange rate ruling at the date of the transaction. Australian dollar (25.2) (189.0) 30.8 231.0 Euro (7.1) (32.1) 8.7 39.2 Monetary assets and liabilities denominated in foreign currencies are US dollar (4.0) (5.0) 4.9 6.1 translated into the functional currency at the exchange rate ruling at the balance sheet date; the resulting foreign exchange gain or loss is New Zealand dollar (1.5) (33.3) 1.9 40.8 recognised in operating expenses, except where the gain or loss arises Polish zloty (1.1) (35.6) 1.3 43.5 on financial assets or liabilities, when it is presented in financial income Chilean peso 1.1 (15.5) (1.3) 18.9 or financial expense as appropriate. Hong Kong dollar (0.5) (25.9) 0.6 31.6 Danish krone (0.7) (1.3) 0.9 1.6 Non-monetary assets and liabilities, denominated in a foreign currency at historical cost (with the exception of deferred acquisition costs Other (1.0) (4.8) 1.2 5.9 and unearned premiums) are translated using the exchange rate at Total sensitivity (40.0) (342.5) 49.0 418.6 the date of the transaction; therefore no exchange differences arise. Financial statements Deferred acquisition costs and unearned premiums denominated in Foreign exchange hedging activities foreign currency are translated at the average exchange rate for the period. Foreign exchange differences that arise on retranslation are The Group manages its exposure to foreign exchange risk by entering recognised in operating expenses. into hedging transactions using derivative financial instruments. The Group applies fair value, cash flow and net investment hedge Non-monetary assets and liabilities denominated in a foreign currency accounting. at fair value are translated using the exchange rate ruling at the date that the fair value was determined. Foreign exchange differences that The hedging relationship between a hedging instrument and a arise on retranslation are recognised in operating expenses. hedged item is formally documented. Documentation includes the risk management objectives and the strategy in undertaking the Transactional exposures arise primarily in the International Markets hedge transaction. businesses as a result of differences between the currency of local revenues and costs. A programme is in place to hedge a signficant (a) Fair value hedges proportion of material currency exposures using forward foreign Where a derivative financial instrument hedges the change in fair value exchange contracts. These contracts are not designated hedges, but of a recognised asset or liability or an unrecognised firm commitment, reduce the impact of foreign exchange volatility on the Company’s any gain or loss on remeasurement of the hedging instrument at fair economic balance sheet and corresponding Solvency II capital position. value is recognised in the Income Statement. The hedged item is fair The remaining currency exposures are deemed to be acceptable but valued for the hedged risk with any adjustment being recognised in are kept under review by management. the Income Statement. 112 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

The Group holds foreign currency forward contracts that hedge the If an external foreign currency denominated loan is used as a hedge, Group’s currency exposure, which arises from holding US dollar and the portion of the exchange gains or losses arising from the euro denominated financial investments classed as corporate debt retranslation, that is found to be an effective hedge, is recognised in the securities and secured loans and government debt securities. Statement of Other Comprehensive Income. The same treatment is applied to both the realised and unrealised exchange gains and losses (b) Cash flow hedges arising from foreign currency forward contracts and foreign currency Where a derivative financial instrument hedges the change in cash collar options. flows related to a recognised asset or liability, a firm commitment or a highly probable forecast transaction, it is accounted for as a cash These hedging relationships are documented and tested as required flow hedge. by IAS 39. The effectiveness of a cash flow hedge is the degree to which the All foreign currency forward contracts and collar options are accounted cash flows attributable to a hedged risk are offset by changes in the for on a fair value basis. cash flows of the hedging instrument. The effective portion of any Australian dollar translation exposure gain or loss on the hedging instrument is recognised directly in Other The Group’s Australian dollar translation exposure of £2,623.2m Comprehensive Income until the forecast transaction occurs and (AU$4,487.3m) (2015: £2,158.1m (AU$4,361.4m)) arises from the net results in the recognition of a financial asset or liability which impacts assets of Australian dollar denominated businesses. At 31 December the Income Statement. The ineffective portion of the gain or loss is 2016, the Group held foreign currency forward contracts totalling a recognised in the Income Statement. notional £206.9m (AU$353.9m) (2015: £45.7m (AU$92.4m)) and collar If the hedged cash flow is no longer expected to take place, all options totalling £58.5m (AU$100.0m) (2015: £99.9m (AU$200.0m)) to deferred gains and losses are released to the Income Statement hedge a portion of net assets, which have been designated as hedges immediately. If the hedging instrument or hedge relationship is under IAS 39. At 31 December 2016, options in the money had a fair terminated but the hedged transaction is still expected to occur, the value liability of £9.1m (2015: £nil). In 2016, a £13.3m loss (2015: £nil) is cumulative gain or loss at that point remains in Other Comprehensive reflected in Other Comprehensive Income. Collar options totalling Income and is recognised in accordance with the above policy when AU$100.0m mature within one year (2015: AU$100.0m) from the the transaction occurs. balance sheet date. The forward contracts mature within one year from the balance sheet date. In 2016, a foreign currency forward contract of BRL 452.0m (£102.8m) was entered into to hedge the cash outflows in relation Euro translation exposure to the acquisition of Care Plus, acquired in December 2016. Euro translation exposure of £771.4m (€902.7m) (2015: £681.8m The hedge resulted in a net cash flow hedge reserve loss of £8.0m. (€924.5m)) arises from the net assets of euro denominated businesses. At 31 December 2016, the Group held euro forward foreign exchange In 2015 there were no derivative financial instruments assigned in contracts totalling £314.6m (€368.2m) (2015: £231.3m (€313.7m)) to cash flow hedge relationships to hedge foreign exchange risks. hedge a portion of these net assets, all of which have been designated At 31 December 2016, the cash flow hedge reserve amounts to £14.7m as hedges under IAS 39. The forward contracts mature within one (2015: £20.8m). year from the balance sheet date and are rolled forward on an ongoing basis. (c) Net investment hedging The Group applies hedge accounting to its foreign currency exposure Effect of foreign exchange hedging transactions on a net investment basis. By designating opposing instruments in the The impact of net investment currency hedging activity is set out same currency, the net exposure to currency fluctuations is reported. below. The ineffective portion of all hedges recognised in the Income The Group uses foreign currency forward contracts, foreign currency Statement was £nil (2015: £nil). zero cost collar options and foreign currency borrowings to hedge its (Losses)/gains included in Other Comprehensive Income are: net investment foreign exchange risk. Currency contracts A collar option is an instrument that combines the purchase of a cap 2016 2015 and the sale of a floor to specify a range in which a foreign currency £m £m rate will fluctuate. The instrument insulates the buyer against the risk of Euro (47.0) 12.2 a significant weakening of a foreign currency rate, but limits the benefit Danish krone (27.5) (4.5) of a strengthening of that foreign currency rate. Collar options are only Australian dollar (12.2) 0.8 exercised, at specified intervals, if the benchmark rate is exceeded. 8.5 Settlement amounts are calculated by reference to the agreed Total (86.7) notional amounts. Bupa Annual Report 2016 113

5.4.2.2 Interest rate risk The impact of a hypothetical rise of 100 bps in interest rates at the report Strategic Interest rate risk is the risk that the fair value or future cash flows of reporting date, on an annualised basis, would have increased equity a financial instrument will fluctuate because of changes in market and surplus by £2.4m (2015: £8.6m). The impact of a fall of 100 bps in interest rates. interest rates, on an annualised basis, would have the inverse effect. This calculation is based on the assumption that all other variables, The Group is exposed to interest rate risk arising from fluctuations in particular foreign exchange rates, remain constant. in market rates. This affects both the return on floating rate assets, the cost of floating rate liabilities and the balance sheet value of its Interest rate hedging activities investment in fixed rate bonds. Floating rate assets represent a natural The Group applies fair value hedges and cash flow hedges to hedge hedge for floating rate liabilities. its exposure to interest rate risk. The net balance on which the Group is exposed as at 31 December 2016 was £1,860.7m (2015: £2,153.8m). The rate at which maturing (i) Fair value hedges deposits are reinvested represents a significant potential risk to the Interest rate swaps totalling £330.0m have been entered into to swap Group, in currencies such as sterling and Australian dollar where the the fixed rate coupon on the £330.0m callable subordinated perpetual Group has a significant net floating cash position. guaranteed bond to a floating rate. The swaps mature in September 2020. These interest rate swaps are designated as fair value hedges The Group has also used interest rate swaps to manage interest rate of the underlying interest rate risk on the debt. The fixed receipt exposure whereby the requirement to settle interest at fixed rates has occurs annually on the payment of the bond coupon in September. been swapped for floating rates. This increases the ability to match

The variable payment is settled quarterly and the rate is reset on the Governance floating rate assets with floating rate liabilities. floating element at this time. In the year ended 31 December 2016, The anticipated repayment profile of interest bearing financial liabilities the fair value movement in the bond attributable to the hedged is as follows: risk amounted to a £0.4m gain (2015: £10.8m gain). The fair value movement on the interest rate swaps amount to £0.4m loss Variable Fixed Total £m £m £m (2015: £10.8m loss). 2016 2017 (33.1) (63.7) (96.8) (ii) Cash flow hedges 2018 (20.3) (8.3) (28.6) During 2009, interest rate swaps were designated to hedge the 2019 (3.7) (3.1) (6.8) variability of cash flows associated with £26.7m (€31.3m) (2015: £29.7m 2020 (385.7) (2.7) (388.4) (€40.3m)) of floating rate debt in Especializada Y Primaria L’Horta 2021 (6.7) – (6.7) Manises which matures on 30 December 2018. The swaps currently 2022-2026 (54.3) (1,271.5) (1,325.8) cover 70.0% of the floating rate loan principal balance outstanding at After 2026 (28.9) (39.6) (68.5) the balance sheet date. At 31 December 2016, the fair value of the Total (532.7) (1,388.9) (1,921.6) interest rate swap liability was £1.8m (€2.1m) (2015: £2.3m (€3.1m)). During 2016, a gain of £0.5m (€0.8m) (2015: £0.7m (€1.0m)) was recognised through Other Comprehensive Income. 2015 2016 (27.3) (410.0) (437.3) Within the Bupa Chile business, cross currency swaps have been Financial statements 2017 (16.0) (8.2) (24.2) designated to hedge the variability of cash flows associated with 2018 (15.7) (7.2) (22.9) £31.8m (CLP 26.3bn) (2015: £37.6m (CLP 39.3bn)) of floating rate debt 2019 (2.9) (2.9) (5.8) maturing June 2018. The interest payments have been swapped from floating rate CLP to fixed rate UF (Unidad de Fomento – an inflation 2020 (385.0) (3.0) (388.0) linked currency commonly used in Chile). At 31 December 2016, the 2021-2025 (17.3) (867.1) (884.4) fair value of the interest rate swap liability was £8.6m (CLP 7.1bn) After 2025 (46.7) (264.8) (311.5) (2015: £7.6m (CLP7.9bn)). During 2016, a loss of £1.0m (gain of Total (510.9) (1,563.2) (2,074.1) CLP 1.3bn) (2015: gain of £0.4m (CLP 0.4bn)) was recognised through Other Comprehensive Income. Variable loans are repriced at intervals of between one and six months. Interest is settled on all loans in line with agreements and is settled at During 2016, interest rate forwards were designated to hedge the least annually. variability of cash flows associated with the £400.0m subordinated debt issued in December 2016. The interest rate depended on the UK government bond benchmark rate on debt pricing date plus a fixed credit spread. The interest rate forwards were settled in December 2016 with a gain of £0.4m recognised through Other Comprehensive Income. 114 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

Note 5.4.3 Credit risk in brief Credit risk is the risk that those that are in debt to the Group default Credit risk on their obligation. Examples of credit risk would be non-payment of a trade receivable or a corporate bond failing to repay the capital sum and related interest.

Credit risk is the risk of loss in the value of financial assets due to The investment profile (including financial investments, restricted counterparties failing to meet all or part of their contractual obligations. assets and cash and cash equivalents) at 31 December is as follows: Investment exposure with external counterparties is managed by 2016 2015 £m ensuring there is a sufficient spread of investments and that all £m counterparties are rated at least A by two of the three key rating Investment grade counterparties 3,336.9 3,254.7 agencies used by the Group (unless specifically approved by the Non-investment grade counterparties 308.4 183.6 Corporate Finance Executive Committee). Total 3,645.3 3,438.3

Investment grade counterparties include restricted assets of £60.0m (2015: £55.9m). Non-investment grade counterparties are those rated below BBB–/Baa3, and mainly comprise corporate bonds, government bonds and pooled investment funds of £224.3m (2015: £128.9m), cash and cash equivalents of £84.1m (2015: £54.7m) and other loans of £nil (2015: £0.2m). Information regarding the ageing and impairment of financial and insurance assets is shown below.

Total carrying Neither value in past due 6 months- Greater than the balance or impaired 0-3 months 3-6 months 1 year 1 year Impairment sheet £m £m £m £m £m £m £m 2016 Debt securities and other loans 847.1 – – – – – 847.1 Pooled investment funds 252.7 – – – – – 252.7 Deposits with credit institutions 1,072.8 – – – – – 1,072.8 Reinsurers’ share of insurance provisions 19.3 – – – – – 19.3 Insurance debtors1 870.8 140.0 14.1 34.5 - (17.5) 1,041.9 Investment receivables and accrued investment incomes 0.3 - - - 5.5 – 5.8 Trade and other receivables2 279.7 68.1 11.3 63.1 96.4 (20.4) 498.2 Total financial and insurance assets 3,342.7 208.1 25.4 97.6 101.9 (37.9) 3,737.8

2015 Debt securities and other loans 605.3 – – – – – 605.3 Pooled investment funds 145.9 – – – – – 145.9 Deposits with credit institutions 1,437.1 – – – – – 1,437.1 Reinsurers’ share of insurance provisions 4.8 – – – – – 4.8 Insurance debtors1 800.3 68.8 6.0 26.4 4.5 (18.2) 887.8 Investment receivables and accrued investment income 2.6 0.1 – 0.1 1.9 – 4.7 Trade and other receivables2 281.6 134.0 16.8 21.3 96.0 (15.3) 534.4 Total financial and insurance assets 3,277.6 202.9 22.8 47.8 102.4 (33.5) 3,620.0

1 Comprises insurance debtors, Medicare rebate and Risk Equalisation Trust Fund recoveries detailed in Note 3.0.2 2 Comprises trade receivables, other receivables and service concession receivables detailed in Note 3.0.1 Bupa Annual Report 2016 115

The carrying amount of financial and insurance assets of £3,737.8m The Group considers notified disputes, significant changes in the report Strategic (2015: £3,620.0m) and cash, cash equivalents and restricted assets counterparty’s financial position and collection experience in of £1,472.7m (2015: £1,250.0m) included on the Group balance sheet determining which assets should be impaired. The credit quality of represents the maximum credit exposure. receivables is managed at a local business unit level with uncollectable amounts being impaired when necessary. The movement in the allowance for impairment in respect of financial and insurance assets during the year was as follows: Assets pledged as security include £60.0m (2015: £55.9m) of cash held in restricted access deposits. 2016 2015 £m £m The Group holds notional cash pools with banks under which At beginning of year 33.5 34.9 overdrafts can net with cash balances held by other members of the Impairment loss recognised 5.9 5.0 Group. In these circumstances, where the criteria of IAS 32 are met, Additions through business combinations 1.4 – cash balances and overdrafts are offset in the statement of financial Disposals through business combinations (0.9) – position. The amounts offset total £169.0m (2015: £207.5m). Bad debt provision released in year (4.5) (7.5) The Group enters into derivative transactions under International Swaps Foreign exchange 5.5 (1.9) and Derivative Association (ISDA) master netting agreements. Under At end of year 37.9 33.5 such agreements the amounts owed to each counterparty may be offset as a single amount in certain circumstances. The Group does not The Group believes no impairment allowance is necessary in respect of offset these balances in the Statement of Financial Position as the right financial assets not past due date. of offset is enforceable only on the occurrence of a future event such Governance as a default.

Note 5.4.4 Liquidity in brief Liquidity risk is the risk that the Group will not have available funds to Liquidity risk meet its liabilities when they fall due.

The Group’s main source of short-term funding is via an £800.0m The Group monitors funding risk as well as compliance with existing revolving credit facility which matures in July 2021 and was undrawn at financial covenants within the banking arrangements. There were no 31 December 2016, with the exception of £6.4m of outstanding letters concerns regarding bank covenant coverage in 2016 and that position of credit for general business purposes. An additional committed bank is not expected to change in the foreseeable future. facility of £250.0m was agreed in June 2016 and then cancelled The Group enjoys a strong liquidity position and adheres to strict following the issuance of the £400.0m unguaranteed subordinated liquidity management policies as set by the Risk Committee as well bond on 8 December 2016.

as adhering to certain liquidity parameters, as defined by regulatory Financial statements In January 2017, Bupa Finance plc signed a £650.0m committed facility authorities for specific regulated entities within the Group. with one of its lending banks to ensure sufficient funding would be Liquidity is managed by currency and by considering the segregation made available to complete the purchase of Oasis Dental Care in 2017. of accounts required for regulatory purposes; short-term operational This commitment in addition to further liquidity obtained following the working capital requirements are met by cash-in-hand and committed £400.0m bond issue in December, ensure that Bupa will retain good bank facilities. quality liquidity following completion of the acquisition. 116 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

The contractual maturities of financial liabilities and the expected maturities of insurance liabilities including estimated interest payments of the Group as at 31 December are as follows:

Other Provisions liabilities under under Other interest insurance insurance Trade Subordinated bearing contracts contracts and other Derivative liabilities liabilities issued issued payables1 liabilities Total £m £m £m £m £m £m £m 2016 2017 (65.2) (45.2) (2,594.8) (143.0) (1,569.9) (11.6) (4,429.7) 2018 (65.2) (42.4) (33.9) – (7.5) (10.4) (159.4) 2019 (65.2) (20.6) – – (8.6) – (94.4) 2020 (391.0) (21.4) – – (2.5) – (414.9) 2021 (45.0) (364.4) – – (1.1) – (410.5) 2022-2026 (1,092.0) (63.9) – – (3.3) – (1,159.2) After 2026 – (80.6) – – (0.1) – (80.7) Total (1,723.6) (638.5) (2,628.7) (143.0) (1,593.0) (22.0) (6,748.8) Carrying value in the Statement of Financial Position (1,316.7) (604.9) (2,628.7) (143.0) (1,593.0) (22.0) (6,308.3)

2015 2016 (45.2) (452.8) (2,227.3) (72.1) (1,401.7) (22.1) (4,221.2) 2017 (45.2) (57.2) (0.2) – (7.3) (1.5) (111.4) 2018 (45.2) (53.9) (0.2) – (4.4) (8.8) (112.5) 2019 (45.2) (36.8) (0.3) – (1.2) – (83.5) 2020 (370.2) (419.2) (0.4) – (1.0) – (790.8) 2021-2025 (610.3) (128.8) (6.1) – (3.9) – (749.1) After 2025 – (241.2) (20.4) – (0.9) – (262.5) Total (1,161.3) (1,389.9) (2,254.9) (72.1) (1,420.4) (32.4) (6,331.0) Carrying value in the Statement of Financial Position (919.4) (1,154.7) (2,255.1) (72.1) (1,420.5) (32.4) (5,854.2)

1 Comprised of trade payables, other payables, accomodation bond liabilities and accruals detailed in Note 3.0.6. The total liability is split by remaining duration in proportion to the cash flows expected to arise during that period. Interest payments are included in the cash flows for subordinated liabilities and other interest-bearing liabilities. Maturity profile of financial assets The maturity profile of financial assets as at 31 December, which are available to fund the repayment of liabilities as they crystallise, is as follows:

Corporate Cash and Deposits with Government debt Pooled cash credit debt securities and investment equivalents institutions securities other loans funds Total £m £m £m £m £m £m 2016 2017 1,412.7 875.7 26.9 168.3 39.8 2,523.4 2018 – 99.0 8.5 186.4 135.5 429.4 2019 – 65.4 68.7 219.6 7.7 361.4 2020 – 29.3 0.6 32.3 2.0 64.2 2021 – – 0.9 52.0 5.5 58.4 2022-2026 – 3.4 20.6 38.4 38.8 101.2 After 2026 – – 23.9 – 23.4 47.3 Total 1,412.7 1,072.8 150.1 697.0 252.7 3,585.3 2015 2016 1,194.1 1,195.2 24.2 126.0 47.8 2,587.3 2017 – 90.9 2.1 110.4 3.9 207.3 2018 – 88.3 2.0 30.7 2.0 123.0 2019 – 35.1 0.1 24.7 3.6 63.5 2020 – 24.8 14.0 50.9 40.9 130.6 2021-2025 – 2.8 27.2 104.5 35.7 170.2 After 2025 – – 0.1 88.4 12.0 100.5 Total 1,194.1 1,437.1 69.7 535.6 145.9 3,382.4 Bupa Annual Report 2016 117 Strategic report Strategic Note 6.0 Related party transactions in brief These are transactions between the Group and related individuals or Related party transactions entities by nature of influence or control. The Company has such relationships with its subsidiaries, key management personnel, equity accounted investments and associated pension arrangements. The disclosure 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- (ii) Transactions in relation to the non-registered pension length basis. arrangements Where the Company enters into financial guarantee contracts to The Company has made pension commitments to certain current and guarantee the indebtedness of other companies within the Group, the former Executive Directors and key management personnel through Company considers these to be insurance arrangements, and accounts a non-registered pension arrangement which mirrors the terms of for them as such. In this respect, provision for expected claims is made The Bupa Pension Scheme (see Note 3.6), maturing after 2022. on an incurred basis. These unfunded benefits are governed by The Law Debenture Pension Governance Trust Corporation Plc which is the trustee of the non-registered pension There were no material transactions during the year with any related arrangement, and is secured by a charge over £55.8m (2015: £45.1m) parties, as defined by IAS 24, other than those disclosed in this note. of cash deposits (see Note 3.0.4). The increase in the charge of £10.7m during 2016 mainly reflects changes in market conditions and market- (i) Transactions with key management personnel related changes in the underlying actuarial assumptions. The key management personnel are the Group’s Executive and Non-Executive Directors and includes the Chief Executive Officers of the Group’s Market Units. No director had any material interest in any contracts with Group companies at 31 December 2016 (2015: £nil) or at any time during the year. The remuneration of the Group’s Executive and Non-Executive Directors is disclosed on pages 48-52. The total remuneration of the Market Unit Chief Executive Officers is as follows:

2016 2015 £m £m Short-term employee benefits 4.1 4.6

Long-term incentive plan 2.0 0.9 Financial statements Post-employment benefits 0.8 0.6 Total 6.9 6.1

The total remuneration of key management personnel is included in staff costs (see Note 2.3). 118 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

Note 6.1 Commitments and contingencies in brief A commitment is future expenditure that is committed to as at Commitments and contingencies 31 December 2016. These commitments fall under non-cancellable operating lease payments and contracted capital expenditure. Contingent assets and liabilities are those that are considered possible at year end, whose existence will be determined by a future event.

(i) Operating leases (ii) Capital commitments The total value of future non-cancellable operating lease rentals is Capital expenditure for the Group contracted at 31 December 2016 payable as follows: but for which no provision has been made in the financial statements, amounted to £128.7m (2015: £141.6m), of which £109.7m (2015: £99.8m) 2016 2015 £m £m related to property, plant and equipment and £19.0m (2015: £41.8m) Less than one year 142.0 117.0 related to investment property. Between one and five years 390.3 354.2 More than five years 460.0 630.6 (iii) Contingent assets and contingent liabilities Total operating leases 992.3 1,101.8 The Group currently has no contingent assets. The Group leases a number of properties under operating leases. The The Group has contingent liabilities arising in the ordinary course of leases typically run for a period of between 10 and 25 years, with an business, including losses which might arise from litigation, from which option to renew the lease after that date. Lease payments are reviewed it is anticipated that the likelihood of any material unprovided liabilities regularly in accordance with the terms and conditions of the individual arising is remote. lease agreements. None of these leases include contingent rentals. Some of the leased properties have been sub-let by the Group. Both (iv) Pensions contributions the leased properties and the sub-leases expire between 2019 and The Group had an obligation to make a final special contribution to 2024. Sub-lease receipts of £0.7m (2015: £0.8m) are expected to be The Bupa Pension Scheme amounting to £40.0m for the year ended received during the next financial year. The Group has an unoccupied 31 December 2016, which was made in December 2016. property provision of £1.8m (2015: £2.9m) in respect of these leases (see Note 3.5). The Group leases out some of its investment properties as a lessor, see Note 3.3 for details. Bupa Annual Report 2016 119 Strategic report Strategic Note 7.0 Company Primary Statements and Associated Notes in brief Company Primary Statements This section consists of the Company’s primary statements including and Associated Notes Statement of Financial Position, Statement of Cash Flows and Statement of Changes in Equity. Notes 7.1-7.11 form the associated notes to the Company financial statements. The Company accounting policies are aligned with those of the Group, described in Notes 2-6.

Statement of Financial Position as at 31 December 2016

2016 2015 Note £m £m Non-current assets

Intangible assets 7.1 27.8 29.8 Governance Property, plant and equipment 7.2 21.1 25.1 Investment in subsidiary companies 7.11 200.1 200.1 Investment property 7.3 0.1 0.2 Other receivables 7.6 0.3 0.3 Post-employment benefit assets 7.4 474.0 408.4 723.4 663.9

Current assets Trade and other receivables 7.6 93.2 58.5 Current taxation asset 0.2 0.2 Cash and cash equivalents 3.7 8.5 97.1 67.2 Total assets 820.5 731.1

Non-current liabilities Post-employment benefit net liabilities 7.4 (64.6) (51.3) Provisions for liabilities and charges 7.5 (10.7) (5.4) Deferred taxation liabilities 7.8 (59.0) (56.5) Other payables 7.6 (7.8) (7.4) (142.1) (120.6) Financial statements

Current liabilities Provisions for liabilities and charges 7.5 (3.1) (5.1) Trade and other payables 7.6 (90.6) (76.9) (93.7) (82.0) Total liabilities (235.8) (202.6)

Net assets 584.7 528.5

Equity Income and expenditure reserve 584.3 528.1 Foreign exchange translation reserve 0.4 0.4 Total equity 584.7 528.5

Approved by the Board of Directors and signed on its behalf on 1 March 2017 by

Lord Leitch Joy Linton Chairman Chief Financial Officer

Notes 7.1-7.11 form part of these financial statements. 120 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

Income Statement for the year ended 31 December 2016 The profit for the financial year recorded within the accounts of the Company, The British United Provident Association Limited (Bupa), is £58.1m (2015: £67.3m). In accordance with the exemption granted under Section 408 of the Companies Act 2006, a separate Income Statement and Statement of Comprehensive Income for the Company have not been presented. The average number of full-time equivalent employees, including Executive Directors, employed by the Company during the year was 1,689 (2015: 2,067).

Statement of Cash Flows for the year ended 31 December 2016

2016 2015 Note £m £m Operating activities Profit before taxation expense 40.1 50.7

Adjustments for: Net financial expense 0.4 0.2 Depreciation, amortisation and impairment 16.8 17.2 Other non-cash items 1.1 –

Changes in working capital and provisions: Changes in net pension asset/liability 7.4 (56.0) (52.2) Increase/(decrease) in provisions for liabilities and charges 1.8 (4.8) Decrease in trade and other receivables, and other assets 7.6 1.9 74.8 Increase in trade and other payables, and other liabilities 19.8 (56.0) Cash generated from operations 3.6 29.9 Net cash generated from operations 25.9 29.9

Cash flows from investing activities Purchase of intangible assets 7.1 (21.6) (32.3) Proceeds from sale of intangible assets 7.1 – 15.0 Purchase of property, plant and equipment 7.2 (8.7) (4.8) Interest received – 0.1 Net cash used in investing activities (30.3) (22.0)

Cash flow from financing activities Interest paid (0.4) (0.4) Net cash used in financing activities (0.4) (0.4)

Net (decrease)/increase in cash and cash equivalents (4.8) 7.5 Cash and cash equivalents at beginning of year 8.5 1.0 Cash and cash equivalents at end of year 3.7 8.5

Notes 7.1-7.11 form part of these financial statements. Bupa Annual Report 2016 121

Statement of Changes in Equity report Strategic for the year ended 31 December 2016

Foreign Income and exchange expenditure translation Total reserve reserve equity Note £m £m £m 2016 At beginning of year 528.1 0.4 528.5 Profit for the financial year 58.1 – 58.1

Other comprehensive (expense)/income: Remeasurement loss on pension scheme 7.4 (3.7) – (3.7) Taxation charge on income and expenses recognised directly in other comprehensive income 7.8 1.8 – 1.8 Other comprehensive income for the year, net of taxation (1.9) – (1.9)

Total comprehensive income for the year 56.2 – 56.2 At end of year 584.3 0.4 584.7 Governance

2015 At beginning of year 449.7 0.4 450.1 Profit for the financial year 67.3 – 67.3

Other comprehensive income: Remeasurement gain on pension scheme 7.4 11.0 – 11.0 Taxation charge on income and expenses recognise directly in other comprehensive income 7.8 0.1 – 0.1 Other comprehensive income for the year, net of taxation 11.1 – 11.1

Total comprehensive income for the year 78.4 – 78.4 At end of year 528.1 0.4 528.5 Financial statements

Notes 7.1-7.11 form part of these financial statements. 122 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

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

Intangible assets – Computer software 2016 2015 £m £m Cost At beginning of year 90.0 74.6 Additions 21.6 32.3 Disposals (15.1) (15.0) Transfer to property, plant and equipment – (1.9) At end of year 96.5 90.0

Amortisation and impairment loss At beginning of year 60.2 50.0 Amortisation for year 9.2 10.2 Impairment loss 1.8 – Disposals (2.5) – At end of year 68.7 60.2

Net book value at end of year 27.8 29.8 Net book value at beginning of year 29.8 24.6 Bupa Annual Report 2016 123 Strategic report Strategic Note 7.2 Property, plant and equipment in brief Property, plant and equipment are the physical assets utilised by the Property, plant and equipment Company to carry out business activities and generate revenues and profits. The majority of the assets held relate to office buildings, IT and other office equipment.

Property, plant and equipment 2016 2015 Leasehold Leasehold property Equipment Total property Equipment Total £m £m £m £m £m £m Cost or valuation At beginning of year 19.0 54.1 73.1 18.8 47.5 66.3 Additions – 8.7 8.7 0.2 4.6 4.8 Disposals – (11.5) (11.5) – 1.9 1.9

At the end of the year 19.0 51.3 70.3 19.0 54.0 73.0 Governance

Depreciation and impairment loss At beginning of year 12.1 35.9 48.0 10.5 30.5 41.0 Depreciation charge for year 1.3 4.5 5.8 1.6 5.4 7.0 Disposals – (4.6) (4.6) – – – At the end of the year 13.4 35.8 49.2 12.1 35.9 48.0

Net book value at end of year 5.6 15.5 21.1 6.9 18.1 25.0 Net book value at beginning of year 6.9 18.1 25.0 8.3 17.0 25.3

The company had no finance leased properties in the current or prior year. Financial statements Note 7.3 Investment properties in brief Investment properties are physical assets that are not occupied by Investment properties the Group and are leased to third parties to generate rental income.

There is currently only one office building recognised as an investment property at £0.1m (2015: £0.2m). 124 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

Note 7.4 Post-employment benefits in brief The Company operates a defined benefit and a defined Post-employment benefits contribution pension scheme for the benefit of employees and Directors, in addition to an unfunded and post-retirement medical benefit scheme.

The defined benefit scheme is The Bupa Pension Scheme which The Company is the sponsoring employer for The Bupa Pension has been closed to new entrants since 1 October 2002. The principal Scheme, the unfunded pension scheme and post-retirement medical defined contribution pension scheme is The Bupa Retirement benefit scheme described in Note 3.6. The actuarial assumptions Savings Plan. underlying the valuation of obligations are detailed in Note 3.6.2.

(i) Assets and liabilities of schemes The assets and liabilities in respect of the defined benefit funded pension scheme, unfunded pension and post-retirement medical benefit scheme are as follows:

Post-retirement Pension scheme benefit scheme Total 2016 2015 2016 2015 2016 2015 Note £m £m £m £m £m £m Present value of funded obligations (ii) (1,662.6) (1,262.2) – – (1,662.6) (1,262.2) Fair value of scheme assets (iii) 2,136.6 1,670.6 – – 2,136.6 1,670.6 Net assets of funded schemes 474.0 408.4 – – 474.0 408.4 Present value of unfunded obligations (ii) (54.0) (42.8) (10.6) (8.5) (64.6) (51.3) Net recognised assets/(liabilities) 420.0 365.6 (10.6) (8.5) 409.4 357.1

Represented on the Statement of Financial Position as: Net assets 474.0 408.4 Net liabilities (64.6) (51.3) Net recognised assets 409.4 357.1

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

Post-retirement Pension scheme medical benefit scheme Total 2016 2015 2016 2015 2016 2015 £m £m £m £m £m £m At beginning of year 1,305.0 1,332.2 8.5 11.4 1,313.5 1,343.6 Current service cost 7.6 8.5 – – 7.6 8.5 Past service costs 0.7 – – – 0.7 – Interest on obligations 50.7 49.3 0.3 0.4 51.0 49.7 Contributions by employees 0.1 0.1 – – 0.1 0.1 Losses/(gains) arising from changes to financial assumptions 418.4 (41.7) 1.4 – 419.8 (41.7) Gains arising from changes to experience assumptions (24.4) (17.2) 1.1 – (23.3) (17.2) Losses/(gains) arising from changes to demographic assumptions – 6.2 – (2.8) – 3.4 Benefits paid (52.9) (32.4) (0.7) (0.5) (53.6) (32.9) Group transfer1 11.4 – – – 11.4 – At end of year 1,716.6 1,305.0 10.6 8.5 1,727.2 1,313.5

1 The Clinovia pension scheme was part of the Bupa Home Healthcare business disposed of in 2016. On disposal, the pension scheme was transferred to Bupa Limited from Bupa Finance plc. Bupa Annual Report 2016 125

(iii) Fair value of funded scheme’s assets report Strategic The movements in the fair value of the funded schemes’ assets are:

2016 2015 £m £m At beginning of year 1,670.6 1,637.5 Interest income 65.4 61.0 Return on assets excluding interest income 392.8 (44.5) Contributions by employer 48.4 48.0 Contributions by employees 0.1 0.1 Administrative expenses (1.7) (1.5) Benefits paid (50.3) (30.0) Group Transfer 11.3 – At end of year 2,136.6 1,670.6

2016 2015 The market value of the assets of the funded scheme is as follows: £m £m

Debt instruments 494.2 587.7 Governance Gilts 801.6 522.5 Corporate bonds 753.7 450.1 Cash/other assets 53.5 – Diversified growth funds 8.8 67.9 Equities 24.8 42.4 Total market value of the assets of the funded scheme 2,136.6 1,670.6

All assets have a quoted market price.

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

2016 2015 £m £m Current service cost 7.6 8.5 Past service cost 0.7 – Net interest on defined benefit liability/asset (14.4) (11.3) Administrative expenses 1.5 1.6 Financial statements Total amount charged to Income Statement (4.5) (1.3)

(v) Amounts recognised directly in Other Comprehensive Income The amounts (credited)/charged directly to equity are:

2016 2015 £m £m Actual return less return on assets included within profit and loss (392.8) 44.5 Loss arising from changes to financial assumptions 419.8 (41.7) Gain arising from changes to experience assumptions (23.3) (17.2) Gain arising from changes to demographic assumptions – 3.4 Total remeasurement losses/(gains) charged/(credited) directly to Equity 3.7 (11.0)

The cumulative amount of actuarial losses recognised directly in equity is £0.6m as at 31 December 2016 (2015: £0.2m). 126 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

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

Provisions for liabilities and charges Unoccupied Insurance property Other Total £m £m £m £m At beginning of year 9.7 0.8 – 10.5 Charge for year 7.5 – 2.7 10.2 Released in year – – – – Utilised in year – cash (6.9) – – (6.9) At end of year 10.3 0.8 2.7 13.8

Non-current 7.6 0.7 2.4 10.7 Current 2.7 0.1 0.3 3.1 Total provisions for liabilities and charges 10.3 0.8 2.7 13.8

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

7.6.1 Trade and other receivables 7.6.2 Trade and other payables 2016 2015 2016 2015 £m £m £m £m Non-current Non-current Prepayments 0.3 0.3 Amounts owed to subsidiary companies 0.3 0.3 Total non-current other receivables 0.3 0.3 Accruals 7.5 7.1 Total non-current trade and other payables 7.8 7.4 Current Amounts owed by subsidiary companies 78.1 41.5 Current Other receivables 2.9 0.7 Amounts owed to subsidiary companies 22.9 19.8 Prepayments 12.2 16.3 Other payables 6.3 6.5 Total current trade and other receivables 93.2 58.5 Accruals 61.4 50.6 Total current trade and other payables 90.6 76.9 Total trade and other receivables 93.5 58.8 Total trade and other payables 98.4 84.3 Bupa Annual Report 2016 127 Strategic report Strategic Note 7.7 Risk management in brief The Board is responsible for identifying, evaluating and managing Risk management risks faced by the Company and considers the acceptable level of risk, the likelihood of these risks materialising, how to reduce the risk and the cost of operating particular controls relative to the benefit of managing the related risks.

The Group’s risk management strategy is outlined in detail within Note 5.4. The risks faced by the Company have been assessed as part of the 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 £6.7m (2015: £9.2m). The Company believes amounts owed to it by

subsidiary companies carry no credit risk. Governance Liquidity risk The contractual maturity of financial liabilities, held by the Company, fall due within one year.

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

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

Assets Liabilities Net 2016 2015 2016 2015 2016 2015 Financial statements £m £m £m £m £m £m Accelerated capital allowances 5.5 2.5 – – 5.5 2.5 Post-employment benefit liability – – (69.6) (64.5) (69.6) (64.5) Revaluation of properties to fair value 0.1 0.2 – – 0.1 0.2 Employee benefits (other than post-employment) 4.0 2.8 – – 4.0 2.8 Provisions 0.7 2.1 – – 0.7 2.1 Other 0.3 0.4 – – 0.3 0.4 Net deferred taxation asset/(liability) 10.6 8.0 (69.6) (64.5) (59.0) (56.5)

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. 128 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

Movement in net deferred taxation (liabilities)/assets

Recognised Recognised in in Other At beginning Income Comprehensive At end of year Statement Income of year £m £m £m £m 2016 Accelerated capital allowances 2.5 3.0 – 5.5 Post-employment benefit (asset)/liability (64.5) (6.9) 1.8 (69.6) Revaluation of properties to fair value 0.2 (0.1) – 0.1 Employee benefits (other than post-employment) 2.8 1.2 – 4.0 Provisions 2.1 (1.4) – 0.7 Other 0.4 (0.1) – 0.3 Total (56.5) (4.3) 1.8 (59.0)

2015 Accelerated capital allowances 2.5 – – 2.5 Post-employment benefit liability (58.6) (5.9) – (64.5) Revaluation of properties to fair value 0.1 – 0.1 0.2 Employee benefits (other than post-employment) 2.9 (0.1) – 2.8 Provisions 4.1 (2.0) – 2.1 Other 0.1 0.3 – 0.4 Total (48.9) (7.7) 0.1 (56.5)

Note 7.9 Related party transactions in brief These are transactions between the Company and related individuals Related party transactions or entities by nature of influence or control. The Company has such relationships with its subsidiaries, key management personnel and associated pension arrangements. The disclosure of transactions with these parties 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 (ii) Transactions in relation to the non-registered pension personnel and with its subsidiary companies (see Note 7.11). arrangements These transactions are disclosed in Note 6.0. (i) Transactions with key management personnel The key management personnel for the Company are the same as for the Group. These transactions are disclosed in Note 6.0. The total remuneration of key management personnel is included in staff costs (see Note 2.3). Bupa Annual Report 2016 129

(iii) Transactions and balances with subsidiary companies report Strategic Transactions during the year Balance at 31 December 2016 2015 2016 2015 £m £m £m £m Income Statement Management charges received 228.1 229.8 Interest income – 0.1 Interest expense (0.1) (0.1) Income received 2.4 2.5 Expenses paid (including rental expense £6.0m (2015: £5.6m)) (7.7) (7.6) Dividends received 147.6 138.3

Statement of Financial Position Amounts owed by subsidiary companies 36.6 (75.4) 78.1 41.5 Amounts owed to subsidiary companies (3.1) 66.4 (22.9) (19.8) Loans from subsidiary companies – 0.2 (0.3) (0.3)

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. Governance

Note 7.10 Commitments and contingencies in brief A commitment is future expenditure that is committed to as at Commitments and contingencies 31 December 2016. These commitments primarily consist of contracted capital expenditure. Contingent liabilities include bank loan and bond issue guarantees.

(i) Commitments (iv) Contingent assets and liabilities Capital expenditure for the Company contracted as at 31 December The Company has given guarantees in respect of the £350.0m bond 2016 but for which no provision has been made in the financial issued in 2014 by Bupa Finance plc. statements amounted to £38.0m (2015: £0.2m). The Company is party to an £800.0m revolving credit facility, together with various other companies within the Group. The revolving credit Financial statements (ii) Operating leases facility was undrawn at 31 December 2016 (2015: £nil). There are £6.4m The Company has £51.9m of operating lease obligations (2015: £51.6m). of outstanding letters of credit required for general business purposes. The Company has joint and several liability for all obligations under the agreement. (iii) Pensions contributions The Group has no obligation to make a special contribution to The Bupa Pension Scheme for the year ending 31 December 2017. 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. 130 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

Note 7.11 Investments in subsidiaries in brief Below is a summary of all investments in subsidiaries held by the Investments in subsidiaries Company.

Carrying value of investment in subsidiaries Name Share class Investments in subsidiary companies are carried at cost less impairment Ebbgate Nursing Homes Limited £1.00 Ordinary in the Company’s accounts. Dividends received from subsidiaries are Ebbgate Nursing Homes (London) Limited £1.00 Ordinary recognised in the Income Statement when the right to receive the Goldsborough Estates Limited £1.00 Ordinary dividend is established. Richmond Care Villages Holdings Limited £1.00 Ordinary As at 31 December 2016, the Company held investments in subsidiaries Richmond Care Villages (Property) Limited £1.00 Ordinary of £200.1m (2015: £200.1m). Richmond Coventry Limited £1.00 Ordinary Richmond Letcombe Limited £1.00 Ordinary In accordance with Section 409 of the Companies Act 2006 a full list of subsidiaries, associated undertakings and significant holdings Richmond Nantwich Developments Limited £1.00 Ordinary in undertakings other than subsidiary undertakings, the registered Richmond Nantwich Limited £1.00 Ordinary addresses and the effective percentage of equity owned, as at Richmond Nantwich Properties Limited £1.00 Ordinary 31 December 2016 are disclosed below. Richmond Northampton Limited1 £1.00 Ordinary Richmond Northampton Management Limited1 £1.00 Ordinary

1 Fully owned subsidiaries registered at Bridge House, Richmond Painswick Management Company Limited £1.00 Ordinary Richmond Villages Operations Limited £1.00 Ordinary Outwood Lane, Horsforth, Leeds, LS18 4UP, England Watertight Investments Limited £1.00 Ordinary Unless stated otherwise, the subsidiaries below are 100% held by Group companies.

Name Share class Fully owned subsidiaries registered at Bupa House, ANS 2003 Limited £0.01 Ordinary 15-19 Bloomsbury Way, London, WC1A 2BA, England ANS Limited £0.10 Ordinary Unless stated otherwise, the subsidiaries below are 100% held by Bede Village Management Limited £1.00 Ordinary Group companies. Belmont Care Limited1 £0.50 Ordinary Name Share class Bridge Health Investments Limited £1.00 Ordinary Andrew Greenwood Ltd £1.00 Ordinary Bupa Care Homes (AKW) Limited £1.00 Ordinary Aqua Dental Spa Limited £1.00 Ordinary Bupa Care Homes (ANS) Limited £1.00 Ordinary BHS (Holdings) 2006 Limited £1.00 Ordinary £1.00 Special share Bupa Care Homes (Holdings) Limited £1.00 Ordinary Bupa Care Homes (Bedfordshire) Limited £1.00 Ordinary Bupa Care Homes (PT Lindsay) Limited £1.00 Ordinary Bupa Care Homes (BNH) Limited £1.00 Ordinary Bupa Care Homes (PT Lindsay Prop) Limited £1.00 Ordinary Bupa Care Homes (BNHP) Limited1 £1.00 Ordinary Bupa Care Homes (PT Links Prop) Limited £1.00 Ordinary Bupa Care Homes (CFCHomes) Limited £1.00 Ordinary Bupa Care Homes (PT Links) Limited £1.00 Ordinary Bupa Care Homes (CFG) plc £0.25 Ordinary Bupa Care Homes (PT) Limited £1.00 Ordinary Bupa Care Homes (CFHCare) Limited £1.00 Ordinary Bupa Dental Services Limited £1.00 Ordinary €0.000001 redeemable preference Bupa Europe Investments Limited1 £1.00 Ordinary Bupa Care Homes (Developments) Limited £1.00 Ordinary Bupa Europe Limited £1.00 Ordinary Bupa Care Homes (GL) Limited £1.00 Ordinary Bupa Finance plc2 £1.00 Ordinary Bupa Care Homes (HH Bradford) Limited £1.00 Ordinary Bupa Financial Investments Limited1 £1.00 Ordinary Bupa Care Homes (HH Hull) Limited £1.00 Ordinary Bupa Global Holdings Limited €1.00 Ordinary €0.01 Ordinary Bupa Care Homes (HH Leeds) Limited £1.00 Ordinary £1.00 Ordinary Bupa Care Homes (HH Northumberland) Limited £1.00 Ordinary Bupa Health at Work Limited1 £1.00 Ordinary Bupa Care Homes (HH Scunthorpe) Limited £1.00 Ordinary Bupa Healthcare Services Limited £1.00 Ordinary Bupa Care Homes (HH) Limited £1.00 Ordinary Bupa Insurance Limited £1.00 Ordinary Bupa Care Homes (Partnerships) Limited £1.00 Ordinary Bupa Insurance Services Limited £1.00 Ordinary Bupa Care Homes Group Limited £1.00 Ordinary Bupa Investments Limited £1.00 Ordinary Bupa Care Homes Limited £1.00 Ordinary Bupa Care Services Limited £0.20 Ordinary Calverguild Limited £1.00 Ordinary Bupa Annual Report 2016 131

Name Share class Name Share class report Strategic Bupa Investments Overseas Limited AUD 1.00 Redeemable preference Bupa Health Services Pty Ltd AUD Ordinary CLP 1.00 Redeemable preference Bupa HI Holdings Pty Ltd AUD Ordinary €1.00 Redeemable preference PLN 1.00 Redeemable preference Bupa HI Pty Ltd AUD Ordinary US$1.00 Redeemable preference Bupa Innovations (ANZ) Pty Ltd AUD Ordinary £1.00 Ordinary Bupa Medical (GP) Pty Ltd AUD Ordinary Bupa Limited1 £1.00 Ordinary Bupa Medical Services Pty Limited AUD Ordinary Bupa Occupational Health Limited £1.00 Ordinary Bupa Optical Pty Ltd AUD Ordinary Bupa Pension Scheme Trustees Limited1 £1.00 Ordinary Bupa Telehealth Pty Ltd AUD Ordinary Bupa Secretaries Limited £1 .00 Ordinary Bupa Wellness Pty Limited AUD Ordinary Bupa Treasury Limited £1.00 Ordinary DC Holdings WA Pty Ltd AUD Ordinary Bupa Trustees Limited £1.00 Ordinary Dental Care Network Pty Ltd AUD Ordinary Bupa Wellness Group Limited1 £0.01 Ordinary Dental Corporation Australia Fair Pty Ltd AUD Ordinary Cranbrook Dental Practice Limited £1.00 Ordinary Dental Corporation Cox Pty Ltd AUD Ordinary David Row Limited £1 .00 Ordinary Dental Corporation Gerber Pty Ltd AUD Ordinary Health Dialog UK Limited1 £1.00 Ordinary Dental Corporation Holdings Limited AUD Ordinary In Store Dental Limited £1.00 Ordinary Dental Corporation Levas Pty Ltd AUD Ordinary

K R Postlethwaite Ltd £1.00 Ordinary Governance Dental Corporation Petrie Pty Ltd AUD Ordinary Lab 53 Limited £1.00 Ordinary Dental Corporation Pty Ltd AUD Ordinary Occupational Health Care Limited £1.00 Ordinary Dr Chris Hardwicke Pty Ltd AUD Ordinary £1.00 Redeemable preference Gerber Dental Group Pty Ltd AUD Ordinary Paul Coulthard Ltd £1.00 Ordinary Larry Benge Pty Limited AUD Ordinary Perlan Limited £1.00 Ordinary Scott Petrie (Dental) Pty Ltd AUD Class E Personal Effectiveness Centre Limited £1.00 Ordinary AUD Class F Plainprime Limited1 £1.00 Ordinary AUD Ordinary Stephen E B Jones Ltd £1.00 Ordinary Store Dental Care Limited £1.00 Ordinary The Smile Centres Limited £1 .00 Ordinary Fully owned subsidiaries registered at 3rd Floor, Ultimate Smile Spa Ltd £1.00 Ordinary Skyline Tower, 39 Wang Kwong Road, Kowloon Bay, Kowloon, Hong Kong Unless stated otherwise, the subsidiaries below are 100% held by Fully owned subsidiaries registered at Level 16, 33 Exhibition Group companies. Street, Melbourne VIC 3000, Australia Name Share class Unless stated otherwise, the subsidiaries below are 100% held by Allied Medical Practices Guild Limited HKD 1.00 Ordinary Group companies. Case Specialist Limited HKD 1.00 Ordinary Financial statements Name Share class DB Health Services Limited HKD 1.00 Ordinary Australia Fair Dental Care Pty Ltd AUD Ordinary Great Option Limited HKD 1.00 Ordinary Bupa Aged Care Australasia Pty Limited AUD Ordinary Jadeast Limited HKD 1.00 Ordinary AUD Preference Jadefairs International Limited HKD 1.00 Ordinary Bupa Aged Care Australia Holdings Pty Ltd AUD Ordinary Jadison Investment Limited HKD 1.00 Ordinary Bupa Aged Care Australia Pty Ltd AUD Ordinary Jadway International Limited HKD 1.00 Ordinary Bupa Aged Care Holdings Pty Ltd AUD Ordinary Marvellous Way Limited HKD 1.00 Ordinary Bupa ANZ Finance Pty Ltd AUD 1.00 Ordinary Megafaith International Limited HKD 1.00 Ordinary Bupa ANZ Group Pty Ltd AUD Ordinary Quality HealthCare Dental Services Limited HKD 1.00 Ordinary Bupa ANZ Healthcare Holdings Pty Ltd AUD Ordinary Quality HealthCare Medical Centre Limited HKD 100.00 Ordinary Bupa ANZ Insurance Pty Ltd AUD Ordinary Quality HealthCare Medical Services Limited HKD 1.00 Ordinary AUD Preference Quality HealthCare Nursing Agency Limited HKD 1.00 Ordinary Bupa ANZ Property 1 and 2 Limited AUD Ordinary Quality HealthCare Physiotherapy Services Limited HKD 1.00 Ordinary Bupa ANZ Property 3 and 3A Pty Ltd AUD Ordinary Quality HealthCare Professional Services Limited HKD 1.00 Ordinary Bupa Dental Corporation Limited AUD Ordinary Quality HealthCare Psychological Services Limited HKD 1.00 Ordinary Bupa Disability Services Pty Ltd AUD 1.00 Ordinary Quality Healthcare TPA Services Limited HKD 1.00 Ordinary 132 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

Fully owned subsidiaries registered elsewhere Unless stated otherwise, the subsidiaries below are 100% held by Group companies.

Name Country Share class Bupa Aged Care Property No.2 Trust Level 19, 201 Kent Street, Sydney 2000, Australia Australia AUD 1 .00Unit Bupa Aged Care Property No.3 Trust Level 14, 255 George Street, Sydney, NSW 2000, Australia Australia AUD 1.00 Unit Bupa Aged Care Property No.3A Trust Level 14, 255 George Street, Sydney, NSW 2000, Australia Australia AUD 1.00 Unit Bupa Aged Care Property Trust Level 19, 201 Kent Street, Sydney 2000, Australia Australia AUD 1.040422 Units AUD 1.00 Unit AUD 1.178896 Units Amedex Insurance Company (Bermuda) Limited Crawford House, 4th Floor, 50 Cedar Avenue, Hamilton, HM11, Bermuda Bermuda BMD 1.00 Ordinary Bupa Insurance (Bolivia) S.A Santa Cruz – AV. San Martin No 1800, Equipetrol, Bolivia Bolivia BOB 100.00 Ordinary Bupa Do Brasil Saúde Ltda Rua James Watt, 84, 10th floor, CEP 04576-050, São Paulo, Brazil Brazil BRL 1.00 Quota Care Plus Medicina Assistencial Ltda City of Barueri, State of São Paulo, at Avenida Sagitário, No. 138, office 1905 Brazil R$ 1.00 Quota and 1906, Zip Code 06473-073 Care Plus Negócios Em Saúde Ltda City of Barueri, State of São Paulo, at Avenida Sagitário, No. 138, office 2113, Brazil R$ 1.00 Quota Zip Code 06473-073 Personal System Serviços Médicos e Av. das Nações Unidas, no. 12,901, unit 901, Torre Oeste, Bloco C, Centro Brazil R$1.00 Quota Odontológicos Ltda Empresarial Nações Unidas, Brooklin Paulista, Zip Code-04578-000 Service Care Participações e Negócios S.A. Av. Sagitário, no. 138, 19th floor – conjunto 1915, Condomínio Alpha Square Brazil R$ Common shares Torre 2, City of Barueri, State of São Paulo R$ Preferred shares Bupa Guernsey No 2 Limited 1st & 2nd Floors, Elizabeth House, Les Ruettes Brayes, St Peter Port, GY1 1EW, Channel Islands £1.00 Ordinary Guernsey Bupa Holdings (Guernsey) Limited PO Box 34, St Martin’s House, Le Bordage, St Peter Port, Guernsey, GY1 4AU, Channel Islands £1.00 Ordinary Channel Islands Bupa Holdings (Jersey) Limited1 13 Castle Street, St Helier, JE4 5UT, Jersey Channel Islands NZD 1.00 Ordinary Bupa LeaseCo Holdings Limited PO Box 34, St Martin’s House, Le Bordage, St Peter Port, Guernsey, GY1 4AU, Channel Islands £1 .00Ordinary Channel Islands Bupa LeaseCo. (Guernsey) Limited PO Box 34, St Martin’s House, Le Bordage, St Peter Port, Guernsey, GY1 4AU, Channel Islands £1.00 Ordinary Channel Islands UK Care No. 1 Limited PO Box 34, St Martin’s House, Le Bordage, St Peter Port, Guernsey, GY1 4AU, Channel Islands £1 .00 Ordinary Channel Islands Virgo Limited1 PO Box 34, St Martin’s House, Le Bordage, St Peter Port, Guernsey, GY1 4AU, Channel Islands £1.00 Ordinary Channel Islands Bupa Chile S.A. Cerro Colorado 5240, Piso 11, Las Condes, Santiago, Chile Chile CLP Ordinary Bupa Chile Servicios Corporativos SpA Cerro Colorado 5240, Piso 7, Las Condes, Santiago, Chile Chile CLP Ordinary Bupa Inversiones Latam S.A. Cerro Colorado 5240, Piso 11, Las Condes, Santiago, Chile Chile CLP Ordinary Cruz Blanca Compania De Seguros De Vida S.A. Cerro El Plomo 6.000, piso 2, Las Condes, Santiago, Chile Chile CLP Ordinary Grupo Bupa Sanitas Chile Uno, SpA Avenida El Golf 40, piso 20, Las Condes, Santiago, Chile Chile CLP 1,000.00 Ordinary Inmobiliaria Y Constructora CBS S.A. Cerro Colorado 5240, Piso 11, Las Condes, Santiago, Chile Chile CLP Ordinary Inversiones Clinicas CBS S.A. Cerro Colorado 5240, Piso 11, Las Condes, Santiago, Chile Chile CLP Ordinary Proisa Aseosorias SpA Cerro Colorado 5240, Piso 7, Las Condes, Santiago, Chile Chile CLP Ordinary Servicios Clinicos Domiciliarios S.A. Cerro Colorado 5240, Piso 11, Las Condes, Santiago, Chile Chile CLP Ordinary Servicios De Personal Clinico CBS Dos S.A. Cerro Colorado 5240, Piso 11, Las Condes, Santiago, Chile Chile CLP Ordinary Bupa Consulting (Beijing) Co. Ltd. Room 07-08, 3rd floor, Building 1, 21st Century Plaza, 40A Liangmaqiao Road, China HKD 1.00 Ordinary Chaoyang District, Beijing, 100125, China Guangzhou Bupa First Outpatient Facility Unit 305A -305, 3/F, GT Land Autumn Plaza, No.11, 13 ZhuJiang East Road, China CNY 1.00 Ordinary Company Limited ZhuJiang New Town, Tianhe District, Guangdong Province, China Guangzhou Bupa Hospital Management Unit 03, 13/F, No.604 RenMin North Road, Yuexiu District, Guangzhou, China China CNY 1.00 Ordinary Company Limited Quality EAP (Macau) Limited Rua De Xangai No. 175 Edif., Associacao Comercial De Macau, 11 Andar, K, Macau China MOP 1.00 Ordinary Quality Healthcare Medical Services (Macau) Rua De Xangai No. 175 Edif., Associacao Comercial De Macau, 11 Andar, K, Macau China MOP 1.00 Ordinary Limited Bupa Denmark Services A/S Palaegade 8, 1261 Copenhagen K, Denmark Denmark DKK 100.00 Ordinary Amedex Medical Group, S.R.L. Av. Gustavo Melia Ricart, No. 81, Terre Profesional Biltmore II, Suite 1007, Piantini, Dominican DOP 1,000.00 Quota Santo Domingo, Dominican Republic Republic Bupa Dominicana, S.A. Av. Winston Churchill, corner with Rafael Augusto Sanchez, Plaza Acropolis, Dominican DOP 1,000.00 Apt. P2-D, Santo Domingo, Dominican Republic Republic Ordinary Bupa Egypt Insurance Bupa Global S.A.E. Building 55, Street 18, Maadi, Cairo, Egypt Egypt EGP 10.00.Ordinary Bupa Annual Report 2016 133

Name Country Share class report Strategic Bupa Egypt Services LLC Building 55, Street 18, Maadi, Cairo, Egypt Egypt EGP 100.00 Ordinary Bupa Malta Investments No. 1 Limited1 9/3a International Commercial Centre, Casemates Square, Gibraltar Gibraltar £1.00 Ordinary Bupa Malta Investments No. 2 Limited1 10/8 International Commercial Centre, Casemates Square, Gibraltar Gibraltar £1.00 Ordinary Bupa Guatemala, Compania de Seguros, S.A. Quinta avenida número cinco guión cincuenta y cinco, Zona catorce de esta Guatemala GTQ 1.00 Ordinary ciudad, Edificio Europlaza World Business Center, Torre III, undécimo nivel, área corporativa número un mil, Guatemala Bupa (Asia) Limited 18/F Berkshire House, 25 Westlands Road, Quarry Bay, Hong Kong Hong Kong HKD 10.00 Ordinary Bupa International Limited 18/F Berkshire House, 25 Westlands Road, Quarry Bay, Hong Kong Hong Kong HKD 1.00 Ordinary Bupa Limited 18/F Berkshire House, 25 Westlands Road, Quarry Bay, Hong Kong Hong Kong HKD 1.00 Ordinary Bupa Mexico, Compania de Seguros, S.A. de C.V. Montes Urales, No. 745, Piso 1, Colonia Lomas de Chapultepec I Seccion, Mexico MXN 1,000.00 Capital C.P. 11000, Mexico City Stock Series E (fixed) MXN 1,000 Capital Stock Services M (variable) Bupa Servicios Administrativos de Salud, Montes Urales, No. 745, Piso 1, Colonia Lomas de Chapultepec I Seccion, Mexico US$1.00 Ordinary S. de R.L. de C.V.1 C.P. 11000, Mexico City Bupa Servicios de Evaluacion Medica, Montes Urales, No. 745, Piso 1, Colonia Lomas de Chapultepec I Seccion, Mexico US$1.00 Ordinary S. de R.L. de C.V. C.P. 11000, Mexico City

Bupa Servicios Ejecutivos de Salud, Montes Urales, No. 745, Piso 1, Colonia Lomas de Chapultepec I Seccion, Mexico US$1.00 Ordinary Governance S. de R.L. de C.V.1 C.P. 11000, Mexico City BI Healthcare Holdings BV B-tower, sixth floor, Schiphol Boulevard 409, 1118 BK Amsterdam, Netherlands Netherlands €1.00 Ordinary Bupa Holdings Overseas Cooperatief B.A. B-tower, sixth floor, Schiphol Boulevard 409, 1118 BK Amsterdam, Netherlands Netherlands € Membership capital Bupa Care Services NZ Limited Level 5, 5-7 Kingdon Street, Newmarket, Auckland, New Zealand New Zealand NZD Ordinary Bupa Retirement Villages Limited Level 5, 5-7 Kingdon Street, Newmarket, Auckland, New Zealand New Zealand NZD Ordinary Dental Corporation (NZ) Limited Level 5, 5-7 Kingdon Street, Newmarket, Auckland, New Zealand New Zealand NZD 1.00 Ordinary Bupa Panama S.A. Prime Time Tower, Floor 25, Office 25 b La Rotonda Ave, Costa del Este, Panama Panama US$1,000.00 Ordinary Integramedica Peru S.A.C. Av. Guardia Civil 664 San Isidro, Lima, Peru Peru PEN Ordinary Centrum Medyczne Diagnostyka sp. z.o.o. Postepu 21 C Street, 02-676, Warsaw, Poland Poland PLN 100.00 Ordinary Centrum Opieki Medycznej Comed Sp. z.o.o. ul. Elblaska 135, 80-718, Gdansk, Poland Poland PLN 500.00 Ordinary Diagnostic – Med. Centrum Diagnostyki Grunwaldzka 16/18 Street, 60-780, Poznan, Poland Poland PLN 500.00 Ordinary Radiologicznej Sp. z.o.o. Elba 1 Sp. z.o.o. ul. Postepu 21 C Street, 02-676, Warsaw, Poland Poland PLN 50.00 Ordinary Elblaska Sp. z.o.o. ul. Postepu 21 C Street, 02-676, Warsaw, Poland Poland PLN 50.00 Ordinary Euro-Clinic Sp. z.o.o. ul. Pilotow, nr 2, 31-462, Krakow, Poland Poland PLN 50.00 Ordinary Lux Med Lodz Sp. z.o.o. ul. Postepu 21 C Street, 02-676, Warsaw, Poland Poland PLN 50.00 Ordinary LUX MED Sp. z.o.o. ul. Postepu 21 C Street, 02-676, Warsaw, Poland Poland PLN 500.00 Ordinary Financial statements LUX-MED Investment Spolka Akcyjna ul. Postepu 21 C Street, 02-676, Warsaw, Poland Poland PLN 50.00 Series A PLN 50.00 Series B PLN 50.00 Series C Medicor Centrum Medyczne sp. z.o.o. 35-068 Rzeszow, Stanislawa Jablonskiego, 2/4 Street, Poland Poland PLN 1,000.00 Ordinary Medicor sp. z.o.o. 35-068 Rzeszow, Stanislawa Jablonskiego, 2/4 Street, Poland Poland PLN 1,000.00 Ordinary Medika Uslugi Medyczne Sp. z.o.o. Kuznicka 1 Street, 72-010, Police, Poland Poland PLN 50.00 Ordinary Megamed Sp. z.o.o. Czapliniecka 93/95, 97-400, Belchatow, Poland Poland PLN 1,000.00 Ordinary Tomograf Sp. z.o.o. ul. Stefana Batorego 17/19, 87-100 Torun, Poland Poland PLN 500.00 Ordinary Amedex Services Ltd. (St Kitts) Amory Building, Victoria Road, Basseterre, St. Kitts, Saint Kitts and Nevis Saint Kitts US$1.00 Capital Stock and Nevis Bupa Singapore Holdings Pte Ltd 600, North Bridge Road, #05-01 Parkview Square, 188778, Singapore Singapore SGD Ordinary Elegimosalud S.L.U Calle Ribera Del Loira , 52 – 28042, Madrid, Spain Spain €1.00 Ordinary

Especializada y Primaria L’Horta-Manises, S.A.U. Avenida Generalitat Valenciana no 501, Valencia, Spain Spain €1.00 Ordinary Grupo Bupa Sanitas S.L.U. C/ Ribera del Loira no 52, 28042 Madrid, Spain Spain €100.00 Ordinary La Seu Valencia S.L.U. calle Gobernador Viejo, 21, Valencia, Spain Spain €1.00 Ordinary Sanitas Emision S.L.U. C/ Ribera del Loira no 52, 28042 Madrid, Spain Spain €1.00.Ordinary Sanitas Holding, S.L.U. C/ Ribera del Loira no 52, 28042 Madrid, Spain Spain €1.00 Ordinary Sanitas Mayores Navarra S.L. Avda Marcelo Celayeta, 144 – Pamplona (31014), Spain Spain €60.10 Ordinary Sanitas Mayores Pais Vasco S.A. c/ Eguskiaguirre no.8, 48902, Baracaldo, Bilbao, Spain Spain €120.00 Ordinary Sanitas Mayores S.L. Calle Tuset 5 – 11, Barcelona, Spain Spain €651.28 Ordinary 134 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

Name Country Share class Sanitas Nuevos Negocios S.L.U. Calle Ribera Del Loira, 52 – 28042, Madrid, Spain Spain €1.00 Ordinary Sanitas S.L. de Diversificacion S.U. C/ Ribera del Loira no 52, 28042 Madrid, Spain Spain €6.02 Ordinary Sanitas, S.A. de Hospitales S.U. C/ Ribera del Loira no 52, 28042 Madrid, Spain Spain €6.01 Ordinary LMG Forsakrings AB Box 27093, 102 51, Stockholm, Sweden Sweden €1,000.00 Ordinary Bupa Global Middle East (DIFC) Limited Unit 10, Level 3, Gate Village Building 10, Dubai International Financial Centre, United Arab US$1.00 Ordinary Dubai, UAE, PO Box 507019, United Arab Emirates Emirates Bupa Care Homes (Carrick) Limited 39 Victoria Road, Glasgow, G78 1NQ United Kingdom £1.00 Ordinary Cromwell Health Group Limited Cromwell Hospital, Cromwell Road, London, SW5 0TU United Kingdom £1.00 A Ordinary Medical Services International Limited Cromwell Hospital, Cromwell Road, London, SW5 0TU United Kingdom £1.00 Ordinary Bupa Insurance Company 17901 Old Cutler Road, Suite 400, Palmetto Bay FL 33157, United States United States US$1.25 Capital Stock Bupa Investment Corporation, Inc. 17901 Old Cutler Road, Suite 400, Palmetto Bay FL 33157, United States United States US$1.00 Capital Stock Bupa U.S. Holdings, Inc. 17901 Old Cutler Road, Suite 400, Palmetto Bay FL 33157, United States United States US$0.01 Common Stock Bupa Worldwide Corporation 17901 Old Cutler Road, Suite 400, Palmetto Bay FL 33157, United States United States US$5.00 Capital Stock U.S.A. Medical Services Corporation 17901 Old Cutler Road, Suite 400, Palmetto Bay FL 33157, United States United States US$5.00 Capital Stock Altai Investments Limited PO Box 957, Offshore Incorporations, Centre, Road Town, Tortola, Virgin Islands, Virgin Islands, HKD 1.00 Ordinary British British USD 1.00 Ordinary Berkshire Group Limited PO Box 957, Offshore Incorporations, Centre, Road Town, Tortola, Virgin Islands, Virgin Islands, USD 1.00 Ordinary British British Dynamic People Group Limited PO Box 957, Offshore Incorporations, Centre, Road Town, Tortola, Virgin Islands, Virgin Islands, USD 1.00 Ordinary British British

Subsidiary undertakings Effective holdings Name Registered Address Country Share class (%) Bupa Servicios de Salud SpA3 Cerro Colorado 5240, Piso 11, Las Condes, Santiago, Chile Chile CLP Ordinary 100.00 Examenes De Laboratorio S.A.4 Avenida Italia 1056, Providencia, Santiago, Chile Chile CLP Ordinary 100.00 Integramedica S.A.5 Cerro Colorado 5240, Piso 11, Las Condes, Santiago, Chile Chile CLP Ordinary 100.00 Sonorad I S.A. 4 Las Bellotas No.200, Providencia, Sanitago, Chile Chile CLP Ordinary 100.00 Sonorad II S.A. 4 Las Bellotas No.200, Providencia, Sanitago, Chile Chile CLP Ordinary 100.00 Isapre Cruz Blanca S.A. Cerro Colorado 5240, Piso 7, Las Condes, Santiago, Chile Chile CLP Ordinary 99.01 Clinica Renaca S.A. Anabaena 336, Jardin del Mar, Renaca, Vina del Mar, Chile Chile CLP Ordinary 88.60 Desarrollo E Inversiones Medicas S.A. Anabaena 336, Jardin del Mar, Renaca, Vina del Mar, Chile Chile CLP Ordinary 88.60 Inmobiliaria Centro Medico Antofagasta S.A. Manuel Antonio Matta 1945, Antofagasta, Chile Chile CLP Ordinary 85.44 Inversiones Clinicas Pukara S.A. Manuel Antonio Matta 1945, Antofagasta, Chile Chile CLP Ordinary 85.43 Centro Medico Antofagasta S.A. Manuel Antonio Matta 1945, Antofagasta, Chile Chile CLP Ordinary 85.43 Inmobiliaria Somequi S.A. Manuel Antonio Matta 1945, Antofagasta, Chile Chile CLP Ordinary 85.43 Servicios Y Abastecimiento A Clinicas S.A. Manuel Antonio Matta 1945, Antofagasta, Chile Chile CLP Ordinary 85.43 Sociedad De Resonancia Magnetica Del Norte Manuel Antonio Matta 1945, Antofagasta, Chile Chile CLP Ordinary 85.43 S.A. Sociedad Medico Quirurgica De Antofagasta S.A. Manuel Antonio Matta 1945, Antofagasta, Chile Chile CLP Ordinary 85.43 Sociedad Medica Imageneologia Clinica Renaca Anabaena 336, Jardin del Mar, Renaca, Vina del Mar, Chile Chile CLP Social Rights 70.88 Limitada Sociedad De Inversiones Pacasbra S.A. Doctor Juan Noe 1370, Arica, Chile Chile CLP Ordinary 69.19 Centro De Diagostico Avanzado San Jose S.A. Doctor Juan Noe 1370, Arica, Chile Chile CLP Ordinary 69.98 Corporacion Medica de Arica S.A. Doctor Juan Noe 1370, Arica, Chile Chile CLP Ordinary 68.97 Promotora De Salud S.A. Anabaena 336, Jardin del Mar, Renaca, Vina del Mar, Chile Chile CLP Ordinary 67.03 Recaumed S.A. Cerro Colorado 5240, Piso 11, Las Condes, Santiago, Chile Chile CLP Ordinary 58.40 Bupa Ecuador S.A. Compania de Seguros6 Av. Republica de El Salvador N34-229, 4th Floor, Quito, Ecuador USD 1.00 Capital 100.00 Ecuador Stock Central Medical Diagnostic Centre Limited 3rd Floor, Skyline Tower, 39 Wang Kwong Road, Kowloon Bay, Hong Kong HKD 1.00 Ordinary 70.00 Kowloon, Hong Kong Bupa Annual Report 2016 135

Effective holdings report Strategic Name Registered Address Country Share class (%) Central MRI Centre Limited 3rd Floor, Skyline Tower, 39 Wang Kwong Road, Kowloon Bay, Hong Kong HKD 1.00 Ordinary 70.00 Kowloon, Hong Kong Central PET/CT Scan Centre Limited 3rd Floor, Skyline Tower, 39 Wang Kwong Road, Kowloon Bay, Hong Kong HKD 1.00 Ordinary 70.00 Kowloon, Hong Kong MediPeru S.A.C Av. Guardia Civil 664 San Isidro, Lima, Peru Peru PEN Ordinary 99.97 Anglolab S.A. Av. Guardia Civil 664 San Isidro, Lima, Peru Peru PEN Ordinary-A 70.00 Pory 78 Sp. z.o.o. Pory 78 Street, 02-757 Warsaw, Poland Poland PLN 100 Ordinary 98.91 Centrum Diagnostyki Obrazowej Sp. z.o.o. Broniewskiego 89 Street, 01-876, Warsaw, Poland Poland PLN 50 Ordinary 98.54 Centrum Edukacji Medycznej CEMED Sp. z.o.o. Broniewskiego 89 Street, 01-876, Warsaw, Poland Poland PLN 7,000.00 98.54 Ordinary Service Medica Sp. z.o.o. Pory 78 Street, 02-757 Warsaw, Poland Poland PLN 50.00 Ordinary 98.54 Sport Medica S.A. Pory 78 Street, 02-757 Warsaw, Poland Poland PLN 1.00 Ordinary-A 98.54 PLN 1.00 Ordinary-B PLN 1.00 Ordinary-C PLN 1.00 Ordinary-D PLN 1.00 Ordinary-E PLN 1.00 Ordinary-F Niepubliczny Zaklad Opieki Zdrowotnej Porebskiego 9 Street, 81-185, Gdynia, Poland Poland PLN 200.00 88.15 Governance Przychodnia Lekarska “POGORZE” Sp. z.o.o. Ordinary Lux Med Tabita Sp. z.o.o. ul. Dluga 43, 05-510 Konstancin Jeziorna, Poland Poland PLN 100.00 Ordinary 88.00 Magodent Sp. z.o.o. ul. Gen. Augusta Emila Fieldorfa “Nila” 40, Warszawa, Poland PLN 50.00 Ordinary 80.00 04-125, Poland Endoterapia Sp. z.o.o. Brzeska 12 Street, 03-737, Warsaw, Poland Poland PLN 1,000.00 80.00 Ordinary Sanitas S.A. de Seguros C/ Ribera del Loira no 52, 28042 Madrid, Spain Spain €0.68 Ordinary 99.90 Torrejon Salud, S.A. Calle Mateo Inurria 1, Urb. Soto de Henares, 28850– Torrejón Spain €1,000 Ordinary 60.00 de Ardoz, Madrid, Spain Bupa Health Insurance (Thailand) Public 98, Sathorn Square Office Tower, 14th-15th Floor, North Thailand THB 100.00 Ordinary 74.83 Company Limited Sathorn Road, Silom, Bangrak, Bangkok 10500, Thailand Healthcare Management Company Limited 98, Sathorn Square Office Tower, 14th-15th Floor, North Thailand THB 100.00 Ordinary 73.99 Sathorn Road, Silom, Bangrak, Bangkok 10500, Thailand THB 100.00 Preference Minor Health Enterprises Limited 98, Sathorn Square Office Tower, 14th-15th Floor, North Thailand THB 100.00 Ordinary 61.75 Sathorn Road, Silom, Bangrak, Bangkok 10500, Thailand THB 100.00 Preference Financial statements 136 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

Significant holdings in undertakings other than subsidiary undertakings Associates

Effective Name Registered Address Country Direct/Indirect Share class holdings (%) Centro De Imagenes Medicas Doctor Juan Noe 1370, Arica, Chile Chile Indirect CLP Ordinary 48.28 Avanzadas San Jose S.A. Sociedad Instituto De Manuel Antonio Matta 1945, Antofagasta, Chile Chile Indirect CLP Social Rights 42.71 Cardiologia Del Norte Limitada Forsikringens DataCenter A/S Lautrupvang 3A, DK-2750 Ballerup, Denmark Denmark Indirect DKK 1.00 Ordinary 33.33 Max Bupa Health Insurance Max House, 1, Dr Jha Marg, Okhla, New Delhi, 110020, India India Indirect INR 10.00 Ordinary 49.00 Company Limited Endoterapia PFG Sp. z.o.o Al. Niepodleglosci 18, 02-653, Warsaw, Poland Poland Indirect PLN 50.00 Ordinary 32.00 Bupa Arabia For Cooperative Al-Khalidiyah-Nour Al Ehsan 3538, Unit 1 Jeddah 7505-23423, Saudi Arabia Indirect SAR 10.00 Ordinary 26.25 Insurance Company P.O. Box 23807, Jeddah, 21436, Saudi Arabia Bupa Holdings (Thailand) 98, Sathorn Square Office Tower, 14th-15th Floor, North Thailand Indirect THB 100.00 Ordinary 49.00 Limited Sathorn Road, Silom, Bangrak, Bangkok 10500, Thailand Healthcode Limited Swan Court, Waterman’s Business Park, Kingsbury Crescent, United Kingdom Indirect £1.00 A Ordinary 20.00 Staines, Surrey, England, TW18 3BA, UK £1.00 E Ordinary Highway to Health, Inc One Radnor Corporate Center, Suite 100, Radnor, PA 19087, United States Indirect US$0.01 Ordinary 49.00 United States HTH Re, Ltd United States United States Indirect US$1.00 Ordinary 49.00 HTH Worldwide, LLC United States United States Indirect US$1.00 Ordinary 49.00 Worldwide Insurance United States United States Indirect US$1.00 Ordinary 49.00 Services, LLC

Joint Ventures

Effective Name Registered Address Country holdings (%) Mobile Dental Pty Ltd Level 16, 33 Exhibition Street, Melbourne VIC 3000, Australia Australia 49.00 SmartGenRx Pty Limited Level 16, 33 Exhibition Street, Melbourne VIC 3000, Australia Australia 38.71 Bupa Middle East Holdings Flat 41, Building No. 962, Road 1812, Block 318, Manama/Al Hoora, Bahrain Bahrain 50.00 Two W.L.L. Alpha Medical MRI (TST) 3rd Floor, Skyline Tower, 39 Wang Kwong Road, Kowloon Bay, Kowloon, Hong Kong Hong Kong 65.00 Limited Centrum Edukacyjne Marszalkowska 99 A lok. 5B Street, 00-693, Warsaw, Poland Poland 49.27 Medycyny Sportowej Sp. z.o.o. Nazer Bupa Medical P.O. Box 5958 Jeddah 21432, Khaldyah Dist. Bin Suliman Centre 6th floor, Prince Sultan Road, Jeddah, Saudi Arabia 50.00 Equipment Company Saudi Arabia Limited Bupa CSH Limited Bupa House, 15-19 Bloomsbury Way, London, WC1A 2BA, England United Kingdom 50.00 Fulford Grange Medical Bridge House, Outwood Lane, Horsforth, Leeds, LS18 4UP, England United Kingdom 50.00 Centre Limited1

1 Dormant 2 Directly owned by The British United Provident Association Limited. 3 Bupa Servicios de Salud SpA is 99.99861% owned by the Group. 4 Examenes De Laboratoria S.A., Sonorad I S.A. and Sonorad II S.A. are 99.99860% owned by the Group. 5 Integramedica S.A. is 99.9986% owned by the Group. 6 Bupa Ecuador is 99.999846% owned by the Group. Bupa Annual Report 2016 137 Strategic report Strategic Note 8.0 Non-controlling interests in brief Additional disclosure is provided for entities which are consolidated Non-controlling interests where the Company does not hold a 100% interest.

(i) Consolidation of entities in which the Group holds less (ii) Subsidiary significant restrictions than 50% There are no significant restrictions on the subsidiaries ability to access Bupa Health Insurance (Thailand) plc or use the assets to settle the liabilities of the Group. The Group’s The directors have concluded that the Group controls Bupa Health insurance entities are subject to local regulatory requirements. Insurance (Thailand) plc and its holding companies; Bupa Holdings (Thailand) Ltd, Minor Health Enterprises Ltd and Healthcare (iii) Non-controlling interests (NCI) Management Co Ltd. Set out below is summarised financial information for each subsidiary The Group holds 25% of the voting rights of Bupa Health Insurance that has non-controlling interests material to the Group. The amounts (Thailand) Plc directly along with a 49% minority interest in the disclosed for each subsidiary are before intercompany eliminations. holding companies mentioned above, that in turn hold the other Bupa acquired 56.4% of the shares in Bupa Chile on 24 February

75% of the voting rights. The articles of these holding companies Governance require shareholder decisions to be unanimous, meaning that the 2014 and on 5 December 2015 exercised its option to acquire an holding companies are unable to exercise any actions without the additional 17.3% of the shares, bringing the total ownership to 73.7% Group’s agreement. at 31 December 2015. The Group acquired 100% ownership of Bupa Chile in 2016 with the transaction occurring in two stages; on 8 January Eurocredit Investment Fund 1 plc 2016 the Group secured a further 26% interest, with the remaining 0.3% Eurocredit Investment Fund is a structured entity set up for the purpose shareholding acquired on 26 February 2016. Please see acquisitions in of investing in primary and secondary secured loans. Bupa is the only Note 4.0 for further detail. company contributing investment capital but the nominal share capital is held by a charitable trust. The Group participates in the risks and On 22 April 2016, the Group increased its shareholding in Torrejón Salud rewards, but 100% minority interest is recognised due to the Group S.A. From 50% to 60%. holding no share of the ownership. UK Care No 1 Limited During 2016, the Group acquired 100% of UK Care No 1 Limited, a structured entity incorporated for the purposes of issuing the Group’s secured loans which were repaid in 2016. In 2015, 100% minority interest was recognised due to the Group holding no share of the ownership but participating in the risks and rewards. Financial statements 138 Bupa Annual Report 2016

Notes to the Financial Statements continued for the year ended 31 December 2016

Torrejón Torrejón Bupa Chile Bupa Chile 40.0% NCI 50.0% NCI 0.0% NCI 26.3% NCI 2016 2015 2016 2015 Summarised Statement of Financial Position £m £m £m £m Current assets 60.2 41.9 – 109.9 Current liabilities (45.0) (32.5) – (172.4) Current net assets/(liabilities) 15.2 9.4 – (62.5) Non-current assets 89.9 77.8 – 387.3 Non-current liabilities (88.4) (73.9) – (139.9) Non-current net assets 1.5 3.9 – 247.4 Net assets 16.7 13.3 – 184.9 Accumulated NCI 6.7 6.7 – 48.6

Torrejón Torrejón Bupa Chile Bupa Chile 40.0% NCI 50.0% NCI 0.0% NCI 26.3% NCI 2016 2015 2016 2015 Summarised Statement of Other Comprehensive Income £m £m £m £m Revenue 81.1 71.0 – 656.3 Profit for the period 1.3 (5.9) – (1.9) Profit allocated to NCI 0.5 (3.0) – (1.2) Dividends paid to NCI – – – (1.4)

Torrejón Bupa Chile 2016 2015 2016 2015 Summarised cash flows £m £m £m £m Cash flow from operating activities (6.9) (3.3) – 0.4 Cash flow from investing activities – – – (16.6) Cash flow from financing activities 5.8 2.5 – 5.0 Net decrease in cash and cash equivalents (1.1) (0.8) – (11.2) Bupa Annual Report 2016 139 Strategic report Strategic Note 9.0 Five year financial summary in brief The five year financial summary provides a five year time summary Five year financial summary in order to better understand trends.

2016 2015 2014 2013 2012 £m £m £m £m £m Revenue – segmental analysis Australia & New Zealand 4,360.6 3,648.4 3,759.6 3,791.8 3,554.0 UK 2,785.9 2,857.8 2,711.2 2,573.5 2,528.8 Europe & Latin America 2,474.7 2,027.4 2,036.3 1,497.2 1,190.8 International Markets 1,427.8 1,295.7 1,271.6 1,196.6 1,099.3 Net reclassifications to other expenses or financial income and expense (1.1) (0.9) (0.9) (0.4) 0.9 Unallocated central revenues – – – – 0.1 Consolidated total revenues 11,047.9 9,828.4 9,777.8 9,058.7 8,373.9 Reorganised Market Unit structure is detailed in Note 2.0. Governance

Claims and expenses Operating expenses (including claims) (10,436.3) (9,250.1) (9,143.9) (8,497.8) (7,840.4) Impairment of goodwill – (114.1) – (20.7) – Impairment of other intangible assets arising on business combinations (20.7) – (0.7) (12.8) – Other income and charges (38.9) (40.6) 12.9 (7.1) (3.2) Total claims and expenses (10,495.9) (9,404.8) (9,131.7) (8,538.4) (7,843.6)

Profit before financial income and expense 552.0 423.6 646.1 520.3 530.3 Financial income and expense (29.1) (49.3) (36.9) (5.9) 54.8 Profit before taxation expense 522.9 374.3 609.2 514.4 585.1

Taxation expense (136.1) (96.0) (86.4) (103.0) (134.9)

Profit for the financial year 386.8 278.3 522.8 411.4 450.2

Attributable to: Financial statements Bupa 381.6 278.3 515.7 405.6 439.7 Non-controlling interests 5.2 – 7.1 5.8 10.5 Profit for the financial year 386.8 278.3 522.8 411.4 450.2

Equity Property revaluation reserve 706.1 632.3 707.9 700.2 631.9 Income and expenditure reserve and other reserves 5,228.2 4,797.9 4,590.7 3,940.6 3,544.9 Cash flow hedge reserve 14.7 20.8 20.0 25.0 25.1 Foreign exchange translation reserve 595.3 (96.9) 71.4 182.8 590.1 Equity attributable to Bupa 6,544.3 5,354.1 5,390.0 4,848.6 4,792.0 Equity attributable to non-controlling interests 30.7 69.5 78.4 22.2 25.9 Total equity 6,575.0 5,423.6 5,468.4 4,870.8 4,817.9 140 Bupa Annual Report 2016

International Financial Reporting Standards relevant to Bupa

International Financial Reporting Standards (IFRS) Interpretations IFRS 3 Business combinations IFRIC 4 Determining whether an arrangement contains a lease IFRS 4 Insurance contracts IFRIC 9 Reassessment of embedded derivatives IFRS 5 Non-current assets held for sale and discontinued IFRIC 10 Interim financial reporting and impairment operations IFRIC 12 Service concession arrangements IFRS 7 Financial instruments: disclosures IFRIC 13 Customer loyalty programmes IFRS 8 Operating segments IFRIC 14 The limit on a defined benefit asset, minimum funding IFRS 10 Consolidated financial statements requirements and their interaction IFRS 11 Joint arrangements IFRIC 16 Hedges of a net investment in a foreign operation IFRS 12 Disclosure of interests in other entities IFRIC 17 Distributions of non-cash assets to owners IFRS 13 Fair value measurement IFRIC 18 Transfer of assets from customers IFRIC 21 Levies International Accounting Standards (IAS) SIC 15 Operating leases – incentives IAS 1 Presentation of financial statements SIC 27 Evaluating the substance of transactions involving the IAS 2 Inventories legal form of a lease IAS 7 Cash flow statements SIC 29 Service concession arrangements: disclosures IAS 8 Accounting policies, changes in accounting estimates SIC 32 Intangible assets – website costs and errors IAS 10 Events after the reporting date IAS 12 Income taxes IAS 16 Property, plant and equipment IAS 17 Leases IAS 18 Revenue IAS 19R Employee benefits IAS 20 Accounting for government grants and disclosure of government assistance IAS 21 The effects of changes in foreign exchange rates IAS 23 Borrowing costs IAS 24 Related party disclosures IAS 27 Consolidated and separate financial statements IAS 28 Investments in associates IAS 32 Financial instruments: presentation IAS 36 Impairment of assets IAS 37 Provisions, contingent liabilities and contingent assets IAS 38 Intangible assets IAS 39 Financial instruments: recognition and measurement IAS 40 Investment property Designed and produced by: Friend www.friendstudio.com Print: Pureprint Group This report has been printed on Edixion Challenger Offset which is FSC® certified and made from 100% Elemental Chlorine Free (ECF) pulp. The mill and the printer are both certified to ISO 14001 environmental management system and registered to EMAS the eco management Audit Scheme. The report was printed using vegetable-based inks by a CarbonNeutral® printer. Bupa Registered office

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Cover photo Our cover photo was taken at our Sanitas La Zarzuela hospital in Spain. Our Spanish business is leading the way in the development of digital technology to enhance care and services, aiming to provide a seamless, comprehensive experience for clinicians and patients. The photograph shows how clinicians are able to share and discuss scans with patients in a more personalised interaction.