Bupa

Annual Report 2018

2018Annual Report Photo: Place, Manchester. Photographer: Christopher Davies.

Disclaimer: Cautionary statement concerning forward-looking statements This document may contain certain ‘forward-looking statements’. Statements that are not historical facts, including statements about the beliefs and expectations of The British United Provident Association Limited (Bupa) and Bupa’s directors or management, are forward-looking statements. In particular, but not exclusively, these may relate to Bupa’s plans, current goals and expectations relating to future financial condition, performance and results. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend upon future circumstances that may or may not occur, many of which are beyond Bupa’s control and all of which are solely based on Bupa’s current beliefs and expectations about future events. These circumstances include, among others, global economic and business conditions, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of governmental and regulatory authorities, the impact of competition, the timing, impact and other uncertainties of future mergers or combinations within relevant industries. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual future condition, results, performance or achievements of Bupa or its industry to be materially different to those expressed or implied by such forward-looking statements. Other than as required by law, Bupa expressly disclaims any obligations or undertakings to release publicly any updates or revisions to any forward-looking statements to reflect any change in the expectations of Bupa with regard thereto or any change in events, conditions or circumstances on which any such statement is based. To the fullest extent possible by receipt of, and using, this document, you release Bupa and each of its affiliates, advisers, directors, employees and agents, in all circumstances (other than fraud) from any liability whatsoever and howsoever arising from your use of this document. In addition, no responsibility of liability or duty of care is or will be accepted by Bupa or its respective affiliates, advisers, directors, employees and agents, for updating the document (or any additional information), correcting any inaccuracies in it or providing any additional information to any person. Accordingly, none of Bupa or its affiliates, advisers, directors, employees or agents shall be liable (save in the case of fraud) for any loss (whether direct, indirect or consequential) or damage suffered by any person as a result of relying on any statement in, or omission from, the document. 2018 in a snapshot In this report

Financial performance summary1 Strategic Report 01 2018 in a snapshot 2 3 Revenue Statutory profit Underlying profit 02 Chairm an’s Statement before taxation 03 Group CEO’s Review 04 Our business model £11.9bn £502m £613m 06 Marketplace and strategy 08 Our customers -3% AER 2017: £12.2bn -19% AER 2017: £620m -15% AER 2017: £719m 12 Our people 0% CER 2017: £11.9bn -12% CER 2017: £698m 14 Financial performance 16 Corporate responsibility and sustainability 20 Market Unit Reports 24 Financia l Review 29 Longer term viability statement Net cash generated from Solvency II capital operating activities coverage ratio4 30 Risks

£808m 191% Governance 35 Chairman’s introduction -13% AER 2017: £929m 2017: 180% 36 Board of Directors 38 Bupa Executive Team 39 Bupa’s System of Governance 41 Leaders hip 46 Engagement with stakeholders 47 Audit Committee Report Operational highlights 51 Risk Committee Report 54 Nomination & Governance Progressed Awarded health Launched Business Committee Report our health services contract to Mental Health 57 Remunera tion Report transformation provide end-to-end Advantage in the UK 68 Other statutory information programme in healthcare to over , making 80,000 Australian things easier and Defence Force Financial Statements faster for customers personnel 72 Independent Auditor’s Report 79 Finan cial Statements

Set up a new Opened the first Increased our stake in insurance entity in phase of our largest by 5% to Ireland to continue to , Clínica Bupa 39.25% in August 1. We use constant exchange rates (CER) to compare trading serve IPMI5 customers Santiago in performance in a consistent manner with the prior year. living in the EU (but We have retranslated our 2017 results using 2018 average outside the UK and foreign exchange rates. Actual exchange rates (AER) are Ireland), after Brexit as reported in our Financial Statements. 2. Revenues from our associates and joint ventures are +5% excluded from our reported figures. Customer numbers and the appropriate share of profit from these businesses Announced entry into In , acquired Roger Davis became are included in our reported figures. the Turkish health Néctar Seguros, Non-Executive 3. Underlying profit is a non-GAAP financial measure insurance market a digital insurance Chairman following which means it is not comparable to other companies. through the acquisition player, and Ginemed, the retirement of A reconciliation to statutory profit before taxation can of Acıbadem Sigorta a leading provider Lord Leitch in be found in Note 2.0 (page 89). Underlying profit reflects of fertility services. December 2018 our trading performance and excludes a number of items otherwise included in statutory profit, to facilitate Sold our stake in year-on-year comparison. These items include the Torrejón Salud impairment of intangible assets and goodwill arising on business combinations, as well as market movements such as gains or losses on foreign exchange, on return-seeking assets, on property revaluations and other material items not considered part of trading performance. 4. The 2018 Solvency II capital coverage ratio is an estimated value and unaudited. 5. International Private Medical Insurance.

01 Bupa Annual Report 2018

Chairman’s Statement

It’s a tremendous honour for me I know how special this Company is, and I want Across the Strategic Report, Evelyn, Joy and to report to you for the first time to thank my predecessor, Lord Leitch, who the CEOs of our four Market Units, outline the leaves a lasting legacy. During his tenure, progress made and challenges faced over 2018, as Chairman. Having served as a the Company quadrupled its revenues and including challenging conditions in Australia, member of the Bupa Board for the trebled the number of customers served. and embedding stronger management of risk past three and a half years, I was It has expanded from its UK origins to become across the organisation. a truly international and delighted to be appointed to the As a company without shareholders, we can healthcare company. He has been an take a long term view of performance, enabling Chair on 1 January 2019. exceptional Chairman and I am delighted he us to balance short term delivery with long term has agreed to remain an Association Member. investment for the future. We know that In appreciation of his commitment to the corporate responsibility and sustainability are community, we have created the Lord Sandy integral to our success. You can read more Leitch Award for Corporate Responsibility about this on pages 16-19. and Sustainability to recognise employees who each year make a real difference to social Strong governance is also key to Bupa’s and environmental causes. performance and our ability to grow safely. The Bupa Board plays a vital role in this. We embark on the next phase of Bupa‘s history Clare Thompson became Senior Independent with strong foundations: financial strength Director in May 2018, with the retirement of and a well-respected brand. I am excited to Lawrence Churchill CBE. Caroline Silver became be working with Evelyn, the Board and the the Chair of the Risk Committee in October. Executive Team in taking Bupa forward. We welcomed Paul Evans, Nicholas Lyons Our strategic framework is bringing focus and Matías Rodríguez Inciarte to the Board as and pace to our efforts as we respond to: Non-Executive Directors, and Michael Hawker ever-changing consumer expectations; will join the Board in April 2019. Simon Blair advances in information technology stepped down from the Board at the end infrastructure, data and digital; evolving of his term in January 2019, and became regulatory environments; and uncertain Chair of the Bupa Chile board. Professor socio-political and economic conditions. Sir John Tooke will be retiring from the Board on 15 May. See page 35 for more information about Bupa’s governance. “ I am excited to be I would like to close by thanking the 80,000 working with Evelyn, people who work at Bupa. Your efforts make the Board and the the difference to our customers. Thank you. Executive Team in Our Strategic Report from pages 1-34 was reviewed and approved by the Board of taking Bupa forward.” Directors on 13 March 2019.

Roger Davis By order of the Board. Chairman

Roger Davis Chairman

02 Strategic Report Governance Financial Statements

Group CEO’s Review

“We are focused on improving customer In 2018, revenue was flat at £11.9bn and underlying profit was down 12% experience and year-on-year at constant exchange delivering sustainable rates (CER). performance.”

Evelyn Bourke This was driven by the effect of our divestment Group CEO of part of the UK aged care business, and challenges in our Australian aged care and health insurance businesses. These results were partially offset by good performance across a number of our businesses, including our health insurance businesses in the UK and Spain. The Group’s Combined Operating Ratio (COR)1 remained constant at 93%. Underlying profit in our Australian aged care business fell significantly due to funding pressures, lower occupancy and higher costs. We are also addressing a number of compliance issues in our care homes in Australia. The health insurance sector in Australia had a challenging year with affordability pressures impacting take-up and the Government restricting premium increases to a level lower than claims inflation. Our customer numbers decreased by 1.6% as a result of both cost of living pressures and product changes in the infrastructure, including preparing for the In December, we announced that Hisham first half of 2018 which were poorly received implementation of GDPR which came into El-Ansary, our current Bupa Australia and New and which we have taken steps to address. effect in May. Zealand (ANZ) Chief Financial and Strategy Officer, will become the new Chief Executive We are investing in strength and depth within Our strategic framework places customers Officer (CEO) of that Market Unit in April 2019. our existing markets and geographies, and front and centre. We continued to invest in Richard Bowden, current ANZ CEO, will be selectively expanding into new markets to future growth by further improving our services retiring as planned after over two decades ensure strong and sustainable performance. to customers, especially in digital. We are with the Company. innovating in health insurance to meet For example, in Spain, we acquired digital customers’ evolving expectations, broadening health insurance provider, Néctar Seguros, as the services we offer. In Australia, we well as Ginemed, a leading provider of fertility Outlook progressed our health insurance transformation services. In August, we increased our stake Looking ahead, conditions in some of our key programme, which is delivering benefits for our in Bupa Arabia by a further 5% to 39.25%. markets will continue to be challenging with a customers, such as real-time claims payments We entered the Turkish health insurance number of economic and political headwinds, and online benefit statements. Our Spanish market through the acquisition of Acıbadem particularly in Australian aged care and health health insurance business continued to enhance Sigorta in January 2019. We continue to invest insurance. Implementation of IFRS 16 Leases our Blua offering, which includes a range of in the dental sector, including acquiring in 2019 will lower our solvency coverage by both standalone digital health insurance 24 practices in the UK and Ireland. We now 16 percentage points and we expect an impact products and digital enhancements to have over 900 dental centres across the UK, on our profits over the early years. However, traditional products. In the UK, we launched Ireland, Australia, Spain, Chile, , Bupa’s strong financial position means we are Business Mental Health Advantage to corporate , and Hong Kong. well placed to continue to invest to meet the customers, meeting a growing customer need. We have been preparing for Brexit scenarios, needs of customers. This financial strength We also strengthened our ongoing focus including a situation where the UK leaves enables us to balance short term delivery with on privacy and information technology the EU with no transition period or with no long term investment for sustainable growth, trade deal in place. We set up a new insurance while maintaining a focus on cost efficiency. entity in Ireland to maintain service for our international private medical insurance customers living in the EU (but outside the 1. Combined Operating Ratio is an alternative performance measures for insurance businesses. It is calculated based UK and Ireland), once the UK leaves the EU. on incurred claims and operating expenses divided by net Evelyn Bourke earned premiums. The Group Combined Operating Ratio is calculated based on the S.05.01 Prudential Regulation Group CEO Authority (SII) form. Our Group COR is unaudited.

03 Bupa Annual Report 2018

Our business model

Bupa is a company limited by We were established in 1947 when 17 British health systems work and enabling us to deliver guarantee with no shareholders, provident associations and other UK funding excellent customer experiences. organisations such as hospital contributory We are an international company, with strong with profits reinvested in schemes came together. Their aim was to local businesses. This ensures we adapt to the business for the benefit of enable people to fund high-quality healthcare. and connect with local health systems and current and future customers. Today, we describe our purpose as helping customer needs. people live ‘longer, healthier, happier lives’. We directly employ around 80,000 people, Health insurance is the core of what we do principally in the UK, Australia, Spain, Poland, with 15.7 million1 customers across the world. Chile, New Zealand, Hong Kong, Turkey, the US, We also deliver certain health services where Brazil, the Middle East and Ireland. We also have they complement our position in health associate businesses in and . insurance, giving us greater insight into how

How we create value

Health insurance Provision

Globally, health insurance revenue accounts for 73% Provision revenue accounts for 18% 1 of our business, with 15.7m insurance customers of our business. We directly provide healthcare to around 15m people – We have domestic health Earned premiums by insurance businesses in key insurance business in our health , and Australia, the UK, Spain, Chile, 1. Bupa Health dental centres Saudi Arabia, India, Hong Kong 4 Insurance (Australia) and Brazil. From January 2019, 44% Clinics We operate over 350 health clinics we also have a domestic health in Spain, Chile, Poland, the UK, Brazil, insurance business in Turkey. 2. Bupa UK Insurance 18% Hong Kong, Australia and China. In some countries, we also 3 provide international health 3. Sanitas Seguros insurance, travel insurance 1 (Spain) 13% 2 Hospitals We also run hospitals in Spain, and dental insurance. 4. Other 25% Chile, Poland and one in the UK. – In most of these countries we offer health insurance for In Australia and New Zealand, insurance corporate businesses and small made up around 80% of the total Market and medium-sized enterprises, Unit revenue; around 60% in Europe and Provision revenue by Market Unit as well as for individuals. Latin America and in the UK; and 90% 4 1. Europe and Latin America 50% in International Markets. 3 – Our offer is different from 2. UK 28% country to country to adapt 3. Australia and New Zealand 15% to local circumstances and 4. International Markets 7% regulations. 2 1

Dental Dental care is an area of We provide dental insurance We have over 900 dental centres growth for us across provision in Australia, the UK, Spain, Chile across the UK, Ireland, Australia, and insurance. and Brazil. Spain, Chile, New Zealand, Poland, Brazil and Hong Kong.

Aged care

Residential aged In Australia and New Zealand, In the UK, we run 138 care homes In Spain, we look after around we look after 10,200 residents in and seven Richmond villages. 6,000 residents in 46 homes and care revenue 121 care homes. We also have We care for 6,800 residents. we operate five day care centres. accounts for 9% of over 30 retirement villages in our business with New Zealand. 23,000 residents

1. Excludes Acıbadem Sigorta (Turkey). 04 Strategic Report Governance Financial Statements

We create value for

Customers >  Read more about customers Our customers are our primary stakeholder, as we are a company without shareholders. on pages 8-11

People Partners Society As a service business, everything we do for We work with a wide range of partners Alongside our stakeholders, we play an our customers is delivered through our including other health providers, active role in our communities and take people. They are critical to our success. brokers, distributors, and partners care of the environment. We want them to love working at Bupa and in our associate businesses and make a difference for our customers. joint ventures.

> Read more about our people > Read more about our how we on pages 12-13 do this on pages 16-19

The resources we have to create value +

Status and purpose Financial strength Governance Brand health A private company limited by A robust capital base, We operate in regulated sectors Our brand is known and guarantee without shareholders, strong profitability and with strong internal controls trusted for quality experiences with profits reinvested in cash generation and risk management for customers the business

The values that guide us every day Passionate Caring Open Authentic Accountable Courageous Extraordinary

05 Bupa Annual Report 2018

Marketplace and strategy

We operate in highly localised Our businesses are influenced by global trends. exceeds supply. This will result in a greater need marketplaces from both a We are seeing customer expectations evolving for supplementary services and innovation in all our markets. Younger people have in the private sector to enable affordability. geographic and a sector different needs for health insurance than Competition is intensifying, and we are seeing perspective. Our strategy, previous generations. For example, they value players, old and new, seeking to address operating model and priorities personalised, flexible services that cover changing customer expectations and improve reflect the specific dynamics broader health and lifestyle solutions, with customer experience. Technology is providing strong digital elements, more than the new ways to serve customers with increasing of each market context, traditional health insurance products. At the use of digital in all aspects of our businesses, healthcare system and local same time, people are living longer and looking and new standards of personalisation, speed, regulations. to remain active and healthy, with a focus on data and simplicity. ‘ageing well’. We are focused on keeping customers front We are seeing rising costs of healthcare, linked and centre to allow us to better understand and to medical innovation and to an increasing respond in agile ways to their evolving needs. chronic disease burden because of a growing Our geographic diversity allows us to identify and ageing population. Governments and trends and help our customers navigate local consumers are facing increasing cost pressures healthcare systems. It also allows us to monitor and a funding gap, where economic growth trends globally and locally, to see how they fails to keep up with rising demand and medical evolve and could eventually affect businesses costs. There are also ongoing challenges related in other geographies and hence be able to to a shortage of clinicians, as the number of proactively pivot as appropriate to local professionals required to meet demand circumstances.

Global trends and key areas influencing our markets

Change in Changing consumer Evolving regulatory socio-political Strong expectations environment and economic competition environment

Ageing population and Increasing use Advances in medical Shortages of rising chronic disease of digital technology clinicians

06 Strategic Report Governance Financial Statements

Strategic framework

Our strategic framework guides our activity across the Group. Each business uses it to frame their agenda, focused on the three pillars and five priorities.

Our three pillars Our operating approach

People Invest in strength and depth Our people love Prioritising existing businesses and geographies, working at Bupa with selective expansion into new markets and related and making a business lines. difference for our customers Win locally, enabled globally Meeting the individual and local needs of our customers, while leveraging broader capabilities to support these.

Be ever-focused on quality, efficiency, safety and compliance Recognising that we need to uphold the highest Performance standards and enable healthcare that is affordable Customers Strong and sustainable for customers. A true customer champion, performance providing outstanding with disciplined Integrate corporate responsibility experiences risk and capital management and sustainability An holistic agenda across customers, people, business ethics, community and environmental considerations.

Our five priorities

Putting our customers Maximising value front and centre through healthcare Delivering truly outstanding, co-ordination personalised customer experiences, A trusted co-ordinator and guide ensuring high-quality clinical outcomes to healthcare services, delivering and value for money. efficient, seamless experiences with positive health outcomes.

Engaging and empowering Expanding into related our people to deliver business lines Our people operate in an environment Targeted expansion in services such that enables and inspires them to as dental and digital which our make a real difference for customers, customers want and which enhance and are themselves healthier and our brand and deepen our connection happier. with customers.

Digital transformation and continuous improvement Making things easier, faster, more personalised and responsive for our customers, employees, providers and partners.

> Read more at www.bupa.com/corporate/who-we-are/

07 Bupa Annual Report 2018

Performance Our customers

Our goal is to be loved as a true customer champion. We do this Meeting the needs by providing access to the very of our customers, best healthcare through a range of insurance products, and by now and in the future delivering high-quality, empathetic Customer expectations continue to evolve care in our clinics, hospitals and and rise. We use human-centred design aged care facilities. (HCD) to innovate and ensure the needs of both today’s customers and the customers of tomorrow are at the Globally, we serve 15.7 million1 health insurance forefront of our thinking. customers and directly provide healthcare to around 15 million people in our clinics and hospitals. We look after around 23,000 aged care residents in Australia and New Zealand, the UK and Spain. We know we need to deliver an outstanding ongoing experience to our customers in a way Keeping health Blua digital proposition, Spain that is personal to them. In 2018, we continued insurance relevant Originally launched in 2016, Blua continues to go to build on the progress we made in 2017, from strength to strength providing a distinctive We know that customers need to be able making Bupa a more customer-centric range of digital health insurance products and to access their benefits wherever they are. digital enhancements to traditional products, organisation. We are investing in digitisation to provide including video consultations, online appointments online and mobile app access and products and access to health and wellbeing coaching. Our Customer Excellence Framework requires and services. businesses to listen, learn and act on customer feedback (see pages 10 and 11). Extending benefits to Business Mental Health Advantage, UK We track how we are performing on our meet new customer needs Mental health is a big priority for our corporate customer excellence journey using our Customer customers. We launched Business Mental Health Dashboard (see page 9). Customer metrics In 2018, we extended the benefits of the Advantage, the most extensive mental health products we offer based on what our form part of our management incentive scheme. coverage in the UK market. This new proposition customers see as a priority. gives our corporate customers access to a much We are committed to meeting customer broader spectrum of services, in addition to expectations and responding to new regulatory treatments for conditions that may not have requirements. We strengthened our ongoing been covered traditionally. focus on privacy and information technology infrastructure, including preparing for the Better engagement and implementation of GDPR which came into interaction with our customers effect in May. Customers need to be able to engage and interact with us in a way that is convenient for them. In 2018, we took steps to personalise and simplify the ways in which customers can access our services, providing more options and digital access to get in touch how they want, when they want.

Bupa Touch We are piloting the Bupa Touch app in our domestic and international health insurance businesses in the UK. It allows our customers to digitally access their policy and health information on the go, as well as the opportunity to book GP appointments easily when needed. We are continuing to introduce new features in response to customer needs.

1. Excludes Acıbadem Sigorta (Turkey).

08 Strategic Report Governance Financial Statements

How we measure our performance

We use our global Customer Dashboard to track how we are performing for our customers. The dashboard brings together metrics from all our Market Units into one holistic scorecard across three areas: how customers feel about Bupa (Feel), how our customers are behaving (Do) and what our customers are telling us (Say).

How our customers We know our stuff feel about us As part of our most recent brand survey in our three largest markets #1 In 2018, we introduced new consistent (Australia, Spain and the UK), Consumer ranking brand measures. These track our three core consumers ranked us number brand principles: whether customers think one ‘Experts in healthcare’ against we ‘know our stuff’, ‘make things easy’ and our health insurance competitors. ‘show that we care’.

What our customers do 1 Our ‘Do’ measurement includes: customer numbers and insurance lapse rates, visit 15.7m 15m 23,000 numbers in our dental centres and health Health insurance customers Provision customers Aged care residents clinics, and occupancy rates in our hospitals and aged care facilities.

What our customers Net promoter scores for priority areas in 2018 (increase since 2017) say about us We measure net promoter scores (NPS) and monitor complaints to understand what Health Insurance Provision customers are saying about their experience Australia 2 with us. We use the scores alongside the Clinics Dental provision New domestic verbatim feedback to ensure that we are UK customers Australia fixing the things that go wrong and doing Visits +66 (+1) Visits +67 (+3) +35 (+7) more of the things customers value. Poland Europe and Latin America Spain (+0.6) In our Market Units we capture customer Overall experience +23.6 Overall experience +65.3 (+5.4) feedback at different moments in the Overall customer customer journey, so we can focus on journey Australia Australia (+3.1) (+4) the areas that are most important to our +62.9 Medical Visa Services +54 Visits +67 (+3) customers in each market. UK Hong Kong (+6.7) In 2018, specific customer priority areas Patient experience Quality Healthcare visits +18.7 (+6) were targeted in each of our businesses +60 Aged Care to drive operational focus and alignment. Hospitals (overall experience) Australia +45 (+1) Spain +66.4 (+3.7) UK +49 (+4) Chile +24 (+2) Spain +52.5 (+2.5) UK Cromwell3 2. NPS measurement to commence 2019 (2018 NHS Visits +60 (+13) friends and family measurement used). 3. Out-patient.

09 Bupa Annual Report 2018

Performance Our customers: our Customer Excellence Framework

We care about our customers’ 01 opinions. We collect and analyse Putting the customer voice front and centre in Australia their feedback to find ways to In our health insurance business in Australia, we improve and respond. Across Bupa, Listen introduced a speech analytics programme that businesses use our Customer converts customer calls into data which we can Listening to our customers helps analyse. Now we can target calls that present Excellence Framework to listen, us understand what they need opportunities to improve our interaction with learn and act. and expect from us. Digital customers. The programme has driven an increase in our NPS. technology platforms enable customers to give us feedback at Improving how we listen In 2018, we introduced new real-time the moments that matter most feedback platforms in many of our markets to them, quickly and easily. to our customers in Spain and increased the number of touchpoints In 2018, we built on the success of our customer in the customer journey. listening app which allows employees to listen directly to what customers are saying about us. Teams across Spain have held workshops where they can listen and make suggestions, many of which have been implemented.

02 Learn We translate the information customers provide, sharing and learning from the insights.

Customer Focus Customer Buddies sessions in Australia programme in the UK Customer Focus sessions continue to have We launched a ‘Customer Buddies’ programme a big impact. In 2018, we made over 2,500 in the UK, pairing Bupa leaders with customers commitments to our customers through these to better understand the experience we provide sessions. For example, in dental we covered direct from the customer. topics such as improving waiting times, training and environment, leading to the Below: Customer Focus sessions in Australia. introduction of new standard practices in our centres.

Learning when we don’t get things right In our health insurance business in Australia, we communicated changes to some of our products, aimed at improving transparency and reducing out-of-pocket costs, which some customers and providers perceived as detrimental. We listened to feedback and made further changes.

10 Strategic Report Governance Financial Statements

03 Improving claims experience Finding solutions for insurance in Bupa Global customers in Spain In 2018, we continued to focus on improving the claims We want to make sure our customers are getting Act journey, making it easier for customers to process the best health outcomes. Sometimes we encounter their claims. In Bupa Global, customers told us situations where a condition may not be covered We work to empower our they want us to deliver a clearer, more personalised by a customer’s policy. This doesn’t mean that we people to act and improve service as well as pay their claims quicker. can’t help. Our health insurance business in Spain the customer experience. We’ve responded by creating an action plan that adopted an ‘alternatives to saying no’ approach, has almost halved the claims turnaround time. supporting our customers and guiding them to the other options available. Transforming customer experience in Poland Evolving our engagement with LUX MED, our Polish business, embarked on a SMEs and corporates in the UK customer experience transformation journey. We evolved Bupa Connect, our online platform We launched the Patient Forum to discuss customer for our SMEs and corporate customers. It allows feedback themes looking at where we can make them to self-serve: accessing and renewing policy changes that will have the most impact for customers. details, invoicing and renewing quotes. In 2018, we upgraded the children’s play areas in the paediatric departments of around half our clinics, and evolved our paediatric care approach, Providing care where our aged delivering more personalised care to young patients. care customers need it in Spain We introduced a new blood collection process The needs of our older customers are changing, as well as taking new approaches to the infection and we need to evolve with them. Sanitas Mayores, season, endocrinology and ophthalmology. our residential aged care business in Spain, launched the service ‘Sanitas en Casa Contigo’ Greater transparency in Australia (‘Sanitas at Home with You’) which provides home care to the elderly and training for informal carers In our Australian health insurance business, customers at home, underpinned by a digital platform. said they needed greater transparency around exactly what they are covered for and what must be paid for by them. We enhanced the customer digital Improving the experience for experience, including the myBupa customer app, so most customers can see their product details and insurance customers in Hong Kong remaining allowance, giving customers greater In Hong Kong, our insurance and clinic businesses clarity around their health insurance. collaborated on new initiatives to benefit our customers. We developed a new dental insurance plan offering Bupa customers dental protection at a preferential rate. Customers can also enjoy cashless experiences when visiting our dental centres. We also significantly reduced pre-authorisation in our health clinics, as well as replacing traditional paper vouchers with e-vouchers, saving time and enhancing the clinic experience.

Introducing new services in Saudi Arabia Bupa Arabia launched two programmes, ‘Tebtom’ and ‘Rahatkom’, offering a range of additional services such as home-based vaccines and tests.

11 Bupa Annual Report 2018

Performance Our people

As a service business, everything 01 02 we do for our customers is delivered through our people. We can only Compliance and Wellbeing and safety succeed through them. We directly internal controls When our people are at their physical employ around 80,000 people, and mental best, they can deliver principally in the UK, Australia, We work to create a culture that serves exceptional customer experiences. the interests of our customers by We seek to keep our people healthy Spain, Poland, Chile, New Zealand, operating internal controls Hong Kong, Turkey, the US, Brazil, and safe, promoting positive and flexible on compliance. working environments. We want our the Middle East and Ireland. We also people to experience the benefits we have associate businesses in Saudi offer to our customers through Smile, Arabia and India. our internal health and wellbeing programme.

We want Bupa to be a place where people love to work and make a real difference for our customers. We invest to give them the right tools, training, information, recognition and Speak Up Performance Energy reward. We work to attract and retain the best We have a confidential ‘Speak Up’ Performance Energy is our global wellbeing and talent. We listen to our people and promote a whistleblowing process across our business. resilience programme. We regularly run campaigns positive, flexible working environment and a and events to raise awareness and offer a range diverse and inclusive culture so everyone can of support services tailored to local needs. be their authentic selves at work. We want all Information security and privacy In 2018, we invested in embedding Performance In 2018, we continued to embed the Bupa Code our people to be happier and healthier through Energy through our platform on the topic, within our culture, launching quarterly global working at Bupa. Our seven values and the with a special focus on our manager population. internal campaigns focused on how we treat Supporting our people on their mental wellbeing Bupa Code, our code of conduct, set clear customer and employee data. expectations for our people to help them will continue to be a focus area for us. look after the interests of our customers, our partners and Bupa, now and into the future. In 2018, we made good progress on our People 76% strategy. We invested in an improved tool for of our People Pulse respondents rate listening, learning and acting on feedback. work-life balance favourably at Bupa. We strengthened our focus on information security and privacy awareness and training. Bupa Week We identified diversity and inclusion as an In 2018, our annual Bupa Week recognition and important area for us, as we know that engagement campaign, explored the theme of having an open culture and representing the caring leadership with our manager community communities we serve is critical for our success. and teams, to see how we look after our own health and wellbeing.

Listening, learning and acting on what our people are telling us Our new People Pulse tool provides more 100% sophisticated insights, benchmarking with In 2018, all of our Market Units achieved other companies so we can listen, learn and their mandatory learning objectives. act. In 2018, the overall level of engagement at Bupa was high at 78%.

Lost time injury rate1 Globally, our lost time injury rate in 2018 was 1.56 per 100 employees. All of our businesses reported safety performance that is better than 78% local benchmarks. Overall engagement

1. Accidents that involve one or more complete day/shift absences 12 from work but not including the day/shift during which the accident occurred per 100 employees (full time equivalent). Strategic Report Governance Financial Statements

03 04 05 Diversity and Talent and Recognition inclusion development We have a number of global recognition programmes, including our Global Sales We welcome diversity and seek to create We are committed to ensuring that our Awards, our Global Clinical Excellence and a safe, happy and inclusive environment for people have the knowledge, skills and Health and Safety Awards, and our Bupa our people. We don’t tolerate any form tools to provide exceptional customer Awards. Many of our Market Units have of discrimination or harassment. We service. We build strong talent pipelines additional local award schemes. understand the importance of making to meet our business needs and create sure our workforce fully represents the career pathways. Almost 70% of our communities in which we operate. Working people feel they have good opportunities towards a fully diverse and inclusive to grow at Bupa, according to our workforce is not only the right thing to Pulse survey. do, it’s critical to our long term success.

Everyone’s welcome Driving disruptive innovation Recognising our Sales We launched Disruptive in Spain, an initiative and Clinical teams to unleash people’s potential by giving In 2018, we hosted our Global Sales Awards to participants the responsibility to drive disruptive recognise the people and teams helping us to innovation. Working closely with startups, attract and retain customers and drive strong in the six months since it was launched, and sustainable performance. Our Clinical 40% of participants have taken on new roles. Excellence and Health and Safety Awards are We also created a new business line thanks to an opportunity to globally recognise the great the programme. performance of our clinical teams. In 2018, we celebrated examples of clinical innovation, We launched our ‘Everyone’s welcome’ initiative. collaboration and clinical excellence across This pledge encapsulates our commitment our Market Units. to promoting and celebrating diversity and inclusion, encouraging everyone to bring their whole selves to work. Bupa Awards The Bupa Awards recognise and celebrate Gender diversity people who live our Bupa values. Each finalist delivered in a key area of our strategic framework. In 2018, we maintained female representation on A new category for 2018, the Chairman’s Award the Board above the minimum 33% set by the for Corporate Responsibility and Sustainability Women on Boards Davies Review, and our (CRS), recognised Bupa’s increasing Executive Team are 36% female. We are also commitment to the CRS agenda. proud signatories of the HM Treasury’s Women Global development initiatives in Finance Charter and The 30% Club. In 2018, we furthered global development Winners of the inaugural award were our initiatives to help leaders prepare for expanded 12 volunteers who travelled to Greece to give free, We are increasingly getting better data on roles, and we continued our HIT programme, emergency treatment to Syrian refugees during gender representation across all of our markets. which brings small, high-impact teams together a trip organised by the Bupa UK Foundation, In the UK, we published our 2018 Gender Pay to help solve business-critical issues. through oral health charity Dentaid. Gap report, which explains more about our “It was a privilege to care for refugee patients. analysis of the current situation and the steps we Training As a team we were able to give those most in are taking to narrow that gap. These are: we will need a reason to smile during hard times.” continue to build a strong pipeline of female Each Market Unit has its talent; we will work towards more balanced own mandatory training Neil Sikka gender representation in recruitment; and we programme tailored to local Chief Dental Officer, representing ‘Giving will do more to support people returning needs, including compliance refugees a reason to smile’, winner of the to work and those with parental and caring and regulatory requirements. Chairman’s award for CRS 2018. responsibilities. Our Gender Pay Gap report is available on bupa.com. The Global Nurse Fellowship This programme gives nurses the opportunity to Access and disability apply for a global nurse scholarship, creating In Australia, we launched our Access and opportunities for them to share best practice and Disability Inclusion Action Group to ensure that innovation across Bupa and giving them access we are building a workplace with no barriers for to a global mentoring programme. people with disabilities.

13 Bupa Annual Report 2018

Performance Financial performance

Our key financial metrics help keep us focused on both in-year performance and longer-term sustainability. Our key financial metrics include revenue, statutory profit before taxation, underlying profit, net cash generated from operating activities and Solvency II capital coverage ratio.

Revenue The sales we make through underwriting Revenue Statutory profit health insurance, managing insurance on behalf before taxation of others and the provision of care, health, dental and other related services. Statutory profit before taxation £11.9bn £502m Our profitability as reported on the face of the Consolidated Income Statement. -3% AER 2017: £12.2bn -19% AER 2017: £620m 0% CER 2017: £11.9bn Underlying profit Underlying profit is a non-GAAP financial measure which means it is not comparable to other companies. A reconciliation to statutory profit before taxation can be found in Note 2.0 (page 89). Underlying profit reflects our trading performance and excludes a number of items otherwise included in statutory profit, to facilitate year-on-year Revenue was flat on last year at £11.9bn (2017: Statutory profit before taxation was £502m comparison. These items include the £11.9bn) at CER, with growth in Europe and Latin (2017: £620m) representing a decline of impairment of intangible assets and goodwill America and in International Markets. Revenue 19% at AER. This was driven by the reduced arising on business combinations, as well as in Australia and New Zealand was flat on 2017. trading profitability on prior year, with the market movements such as gains or losses on In the UK, revenue declined due to the strategic quantum of non-underlying items comparable, decision to divest part of our UK aged care but slightly higher than 2017. foreign exchange, on return-seeking assets, on portfolio in December 2017 and February 2018. property revaluations and other material items not considered part of trading performance.

Net cash generated from operating activities Our trading view of cash generation, before changes in investing or financing cash flows.

Solvency II capital coverage ratio 11.9 A measure of our regulatory solvency and 11.9 620 ability to absorb unexpected losses where 523 our eligible capital resources are divided 502 by our capital requirement.

The 2018 Solvency II capital coverage ratio 374 is estimated and unaudited.

2017 2018 2015 2016 2017 2018

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Underlying profit Net cash generated from Solvency II capital operating activities coverage ratio £613m £808m 191% -15% AER 2017: £719m -13% AER 2017: £929m 2017: 180% -12% CER 2017: £698m

Underlying profit decreased by 12% to £613m Net cash generated from operating activities Our estimated solvency coverage ratio at (2017: £698m) at CER. The growth in our Europe fell by 13% to £808m compared to last year 31 December 2018 of 191% was 11 percentage and Latin America and International Market (2017: £929m). This was broadly in line with points higher than last year (2017: 180%). Units was more than offset by the decline in the reduction in operating profit. Our solvency position strengthened through our aged care business in the UK following the the profits generated during the year partly divestments, and in our Australian aged care offset by acquisitions and capital expenditure. and health insurance businesses.

698 929 204 891 191 613 180 788 808 178

2017 2018 2015 2016 2017 2018 2015 2016 2017 2018

15 Bupa Annual Report 2018

Performance Corporate responsibility and sustainability

Corporate responsibility and sustainability (CRS) are integral to Customer everything we do. Our CRS agenda Our responsibilities begin with the integrity of the services we spans five pillars: Customer, provide and the way we treat our customers. We aim to deliver Ethics, People, Community and exceptional service and value for money and to help customers navigate the complex world of healthcare. We know we don’t Environment. In 2018, we made always get everything right, and we encourage feedback. good progress across all of these. We look to put things right and to learn from issues. With no shareholders, customers are our focus.

We have established a new community > See page 8 for more about Customers framework, as part of our commitment to playing an active role in the communities we operate in. This is an area of further focus for Ethics 2019 (see page 18). Our purpose and values help to maintain a culture of ethical We continue to improve how we measure behaviour and a customer-first approach. We promote our CRS progress. Our non-financial transparency, quality, medically evidenced treatment and care. information is now reported to the Board The Bupa Code provides clear direction in making the right quarterly, alongside financial performance. choices, and our performance management, risk management, We comply with applicable regulations on governance and audit processes underpin this. A confidential non-financial reporting and publish our report ‘Speak Up’ channel helps us to identify when we fall short so on Gender Pay Gap in the UK (see People that we can put things right. pages 12 and 13). In Spain, we will report our Gender Pay Gap for the first time in June 2019. We publish our statement on modern slavery People (see bupa.com for more information) and our annual carbon footprint. We know that our people are vital to our success. We seek to promote an open and positive working environment, encouraging Each Market Unit integrates CRS into their feedback and championing diversity and inclusion so everyone business plans to align it with local priorities. feels valued. We support and empower our people to be at their We annually review compliance with Group physical and mental best. We invest in this through our employee policy and discuss CRS with the Bupa health and wellbeing initiatives and our global resilience Executive Team and the Board. programme, Performance Energy. > See page 12 for details on our People agenda

Community We want to make a positive contribution to wider society, particularly in health and wellbeing. We invest in the communities in which we operate through volunteering, fundraising, donations and partnerships, and have dedicated Foundations in Australia, the UK and Spain to channel some of our investment.

> See pages 18 and 19 for more on our community strategy and progress

Right: Making a dementia-friendly community in Rotorua, New Zealand

Environment Healthy people need a healthy planet, and we must play our part. In 2018, we reduced our absolute carbon emissions year-on-year, a reduction of 37% against our 2009 baseline. Over 65%1 of the energy we use around the world comes from renewable sources either self-generated or purchased from certified renewable sources. 1. In 2018, Bupa’s total carbon footprint was 110,907 tCO2e. This includes Scope 1 emissions of 34,443 tCO2e; Scope 2 emissions of 61,278 tCO2e; and Scope 3 emissions of Right: Bupa Sutherland Aged Care solar installation, Australia 15,186 tCO2e.

16 Strategic Report Governance Financial Statements

Campaigning to improve Building greater Creating a movement data transparency in transparency for our for building healthy cities Hong Kong customers in Australia Our ‘Sanitas Healthy Cities’ project We published a report on Hong Kong’s In Australia, we launched a costs promotes healthy lifestyles in the private healthcare market, highlighting calculator to provide health insurance workplace and advocates sustainable the key role of data transparency in customers with a better understanding cities and cleaner environments. For the improving consumers’ experience of of the costs of medical procedures. fourth year, corporate customers, healthcare and the sustainability of the This tool shifts the balance of power employees and wider communities healthcare system. back towards customers in their joined to celebrate the cause in . discussions with doctors and hospitals. It was extended in 2016 to Santiago and Above: Fourth year of our Healthy to Antofagasta (Chile) in 2018. Cities project in Madrid

Our approach to human rights and combatting modern The Bupa Code slavery We continued to promote the Bupa Code In our human rights and modern slavery statements we share our commitment to with global internal communications respecting and promoting the human rights of our customers, people and supply campaigns and online training. chains, and the steps we are taking to prevent modern slavery and human trafficking in our businesses and supply chains.

> Read our modern slavery and human rights statement on bupa.com

Digital Smile in Spain A Great Place to Work in Supporting R U OK? Day In Spain, 4,400 employees enrolled in our Saudi Arabia In Australia, our businesses recorded health promotion programme ‘Sanitas Our associate business in the Kingdom a 30% increase in participation in the Smile’. In 2018, we launched the Smile app of Saudi Arabia was recognised for the national R U OK? Day. This aims to to make the programme accessible to fourth year in a row for its focus on raise awareness of suicide prevention more employees, especially to those who equality and women’s empowerment. and the importance of supportive are not office based. People can participate conversations. People from 54 of our in a range of activities, calculate their sites across Bupa Australia participated Health Score and receive advice from health in activities designed to build visibility. advisers in a range of initiatives related Above: R U OK? Day at Bupa to healthy bodies, minds and families. Australia

In 2018, we invested We also invest in other ways including: –– volunteering; –– in-kind contributions such as donation of products and services; and £6m –– advocating on public health issues and other topics in our communities through direct financial such as the environment and diversity and inclusion. donations including community grants, fund matching and donations through the Bupa Foundations Above: Bupa team volunteering with East Business Alliance

Prioritising energy from Renewable energy certificate for Bupa Chile renewable sources We are the first healthcare company in Chile to receive the ERNC % of electricity from renewable sources (Alternative Renewable Energy Sources) certificate from Enel.

2018 65% Sustainable buildings In Australia, our corporate offices are rated four stars or higher based on the national 2017 50% Australian built environment rating system. In the UK, Bupa Place and Angel Court, 2016 33% and our headquarters in Spain are rated BREEAM (Building Research Establishment Environmental Assessment Method) excellent. In Spain, all of our hospitals are ISO 14001 and 14064 certified. Above: Our new office in Manchester, Bupa Place

17 Bupa Annual Report 2018

Performance Playing an active role in our community

Engaging, supporting and serving We concentrate on the needs of the communities We have Foundations in our three major the communities we work in is a key we serve and invest in three focus areas: geographies, Australia, Spain and the UK, health and wellbeing, particularly wellbeing in as a way of channelling some of our part of our approach to corporate workplaces; diversity and inclusion; and healthy community investment. responsibility and sustainability. In 2018, environments. We involve partners, employees Our activities range from employee-led and customers and invest both financially we developed a new community programmes, enabling our people to and in other ways. For example, supporting framework to help Market Units shape support causes they care about, to managed our employees to use their skills through programmes and flagship initiatives. their community programmes and volunteering and arranging fundraising maximise their impact. opportunities for our community partners.

Playing an Focus Our How active role in our communities areas approach we invest

We have three focus areas: We apply the following We know that investment is principles to our community more than direct donations. investments: We invest through:

1 Health and –– Locally-led, globally –– Bupa Foundations wellbeing guided –– Community grants –– Mental health –– Orientated around the and fund matching needs of the communities –– Physical health –– Skilled volunteering we serve –– Healthy –– In-kind contributions workplaces –– Focus on where and how we can add most value –– Advocating on public health issues and other Diversity –– Connect with our topics such as the and inclusion customers environment and diversity –– Engage our people and inclusion Healthy and partners environment

2

1. Spanish School Age Championships, Murcia. 3 5 2. Bupa UK Foundation supports charity Groundswell help people who are experiencing homelessness. 3. Bupa Health Foundation in Australia supports Aboriginal and Torres Strait Islander communities to end rheumatic heart disease. 4. Employees in our Miami office wear pink to support Breast Cancer Awareness. 5. Community grant from Bupa UK helps Little Village Wandsworth 4 support local families.

18 Strategic Report Governance Financial Statements

Here are some of the community activities from 2018

Leading the conversation about Promoting the inclusion of people First Aid app in Poland supporting good mental health with disabilities through sport LUX MED maintained its partnership We want to be at the forefront of discussions about In 2018, the Sanitas Foundation organised the first with the Orange Foundation, promoting the health of the UK workforce, especially around World Cycling Virtual Cup for Inclusion as part of a First Aid app that is totally free in how to support good mental health both in and their ninth Inclusive Sports Week. Several local schools Poland. It also carried out numerous outside the workplace. We sponsored the Confederation took part alongside Spain’s Olympic and Paralympic workshops in schools to help teenagers of British Industries’ (CBI) ‘Front of Mind’ report on Teams as well as Sanitas employees, corporate customers learn First Aid techniques and to health and wellbeing. and sports celebrities. empower them to help others.

Mental health guide for parents Providing free health insurance In the UK, we launched a Mental Health Guide for to orphans in Saudi Arabia Parents for World Mental Health Day, which focused Since 2011, Bupa Arabia has provided health insurance on helping parents recognise and deal with common to orphans who would otherwise not have access. In issues among children such as anxiety disorders 2018, we provided health insurance to 2,300 children and depression. to help improve their health and wellbeing.

Kids Helpline Combatting social isolation in Hong Kong In Australia, we teamed up with Our employees in Hong Kong volunteered in a series Kids Helpline to expand its of elderly care activities in partnership with the Senior education programme. Kids Citizen Home Safety Association to combat social Helpline @ School Wellbeing Reconciliation Action Plan isolation. They volunteered at a workshop with senior citizens for World Environment Day hosted by Hong is delivered in primary schools, In 2018, Bupa Australia won the CareerTrackers Kong Young Women’s Christian Association. using video technology to help Corporate Plus Award in recognition of the in areas such as reducing opportunities we provide through internships to bullying, and managing young Aboriginal and Torres Strait Islander students. Dementia-friendly community in Rotorua, emotions in difficult times. We have since launched our second Reconciliation New Zealand Action Plan which includes a commitment to For the third year, Bupa employees from care homes Investing in better mental health help end rheumatic heart disease, creating career and retirement villages in the city of Rotorua share In 2018, the Bupa Health Foundation in Australia pathways and publicly supporting the Uluru their time and expertise to help with a city-wide announced £1 million in funding to support Statement from the Heart. initiative to create New Zealand’s first dementia- practical research into innovative ways of improving friendly community. mental in the country. 6 Offsetting our carbon footprint in Spain Supporting people experiencing We invested in a reforestation project in the Sierra homelessness to address mental de Gredos, Madrid. Two of our hospitals committed to health issues replant 2,701 trees, corresponding to the number The Bupa UK Foundation provided funds to of births in these hospitals. Groundswell Homeless Health Peer Advocacy Service to incorporate mental health as part of the services they provide to people experiencing homelessness. 1

6. Natasha Ward, CareerTrackers’ ‘Intern of the Year’ with Former Prime Minister Kevin Rudd at Parliament House, Australia.

Bupa’s Bupa Health Foundation Sanitas Foundation in Spain Bupa UK Foundation Foundations in Australia Since it was established in 1996, the Sanitas The Bupa UK Foundation funds practical We have three This is one of the leading charitable Foundation has invested c.€12m (£10m) in projects that make a positive impact on programmes to promote health and people’s health and wellbeing. It focuses on Foundations foundations dedicated to health in Australia. Since 2005, it has invested more than wellbeing. Its flagship programme, Inclusive the factors that underpin good health, such in our major AUD30m (c. £16.2m) to improve health Sport, encourages both children and adults as mental health, ageing well; preventing geographies of outcomes for the Australian community. with and without disabilities to play sports long term conditions, healthy living, and Australia, Spain together. It funds a dedicated Chair in behaviour change – to improve health and and the UK. Inclusive Sports Studies at the Polytechnic wellbeing. Since it was established in 2015, University of Madrid. the Bupa UK Foundation has invested £2m.

> Visit bupa.com.au > Visit corporativo.sanitas.es > Visit bupaukfoundation.org

19 Bupa Annual Report 2018

Market context but were perceived by some providers and –– While the Australian and New Zealand customers as detrimental. We responded and Australia and economies are expected to show modest made revisions, which stabilised the impact. improvement in coming years, both In response to continued pressure on New Zealand remained subdued in 2018. household budgets, we introduced our lowest –– Cost of living pressures continue to affect annual health insurance premium increase in Stable revenue and underlying 17 years. We offered additional value for money consumer confidence, with low real wage 1 profit down, driven by growth in both countries. through initiatives such as a gap-free dental offering for customers with our extra cover and challenges in our aged care –– There was continued strong government gap-free dental, physio and optometry services and health insurance businesses interest in the sector with an expert committee for children. Our health insurance transformation looking at health insurance out-of-pocket programme focused on delivering benefits for costs and a Senate Committee inquiry into customers, including real-time claims payment Revenue aged care and financial practices. and online benefit statements. We introduced –– Australia will hold a Federal election in the initiatives to reduce indirect operating costs, £4,656m first half of 2019 and healthcare remains a hot while also working with government to topic, with the Opposition proposing a cap of continue to support health reform to address 0% CER (2017: £4,635m) two per cent on health insurance premiums. affordability challenges. Bupa Medical Visa Services achieved solid Underlying profit –– In October, the Australian Government announced a Royal Commission into performance and the contract to provide these Aged Care Quality and Safety with hearings services was renewed for two years. In January £313m beginning in early 2019. 2019, we were selected as the health services provider for the Australian Defence Force to -9% CER (2017: £344m) provide end-to-end healthcare to over 80,000 Operational highlights personnel from July 2019. Introducing more Customers In a challenging trading year, we delivered efficient operating models across our dental, stable revenue, while underlying profit decreased optical and audiology businesses also helps us 4m Insurance by 9%, mainly driven by the performance in to build a strong foundation for future growth. our Australian aged care and health insurance 1.7m Provision Underlying profit in our Australian aged care businesses. 10,200 Aged care business fell due to funding pressures, lower In Australia, affordability pressures have occupancy and higher costs. We are managing compliance issues in some care homes and Revenue by business impacted the take-up of health insurance in recent years. In response, the Government taking steps to address these. The Australian 1. Bupa Health Insurance 82% 3 aged care sector is facing significant challenges, 2. Bupa Health Services 7% has been restricting price increases at a lower 2 3. Bupa Villages and rate than claims inflation. This impacted the which have led to the establishment of the Aged Care Australia profitability of our health insurance business in Royal Commission into Aged Care Quality and and New Zealand 11% 2018 and will continue in 2019. Our customer Safety. New Zealand profits were up versus numbers fell by 1.6% in a market which is last year. Our business footprint is now more contracting due to cost of living and focused following the sale of 12 care homes and 1 affordability pressures. Our market share also four retirement villages along with the medical fell 0.8% to 26.7%, as a consequence of product alarms business. Our Riverstone retirement changes in the first half of 2018. These changes village welcomed its first residents. were aimed at improving transparency and reducing out-of-pocket costs for customers 1. No out-of-pocket medical expenses.

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Market context Activity in our Sanitas Dental centres was –– The Spanish economy is recovering from higher than 2017, and we added over 92,000 years of recession and grew at 2.6% in 2018 dental insurance customers to our existing 1.4m Europe and 2 with stable inflation. Favourable financial customers , with further expansion in dental conditions and strong job creation will continue centres planned. We ended the year with Latin America to support private domestic demand. 179 dental centres across Spain. Steady growth driven by our –– Political uncertainty continues in Spain, Sanitas Hospitales treated 65,000 patients with General Elections announced for April during the year, a 2% increase from the previous Spanish health insurance and year. We maintained our high standards of care 2019, following parliamentary rejection of 3 dental businesses the Government’s 2019 national budget. as demonstrated by the EFQM and Joint Commission International certification achieved –– The Polish market grew strongly, and private in our hospitals. In December, we acquired Revenue consumption increased due to a buoyant Ginemed, a leading Spanish provider of in-vitro labour market. fertilisation and wider fertility services, with £3,041m –– The Chilean economy grew at 4% in 2018 18 centres and 140 employees in Spain and supported by stronger external macro- . In December, we completed the sale +6% CER (2017: £2,865m) economic conditions. The Chilean Government of our stake in Torrejón Salud, a public hospital is leading the Isapre reform project engaging that we ran under the Public-Private Underlying profit with all players in the sector. Partnership model. Sanitas Mayores, our aged care business, £182m Operational highlights delivered strong performance. We maintained a high average occupancy rate of 95%. Our Europe and Latin America Market Unit +2% CER (2017: £179m) We launched Sanitas en Casa Contigo, which delivered steady performance. Revenue grew by provides home care to the elderly and training 6% and underlying profit increased by 2%, mainly Customers for informal carers at home, supported by a driven by good growth in our health insurance strong digital platform. 2.8m Insurance and dental businesses in Spain. This was partially 9.0m Provision offset by the impact of reserve strengthening In Poland, our LUX MED business grew in Bupa Chile, as previously reported, and by organically and through acquisitions. 6,000 Aged care restructuring costs incurred in that business. Subscription activity increased, together with improved inpatient performance. We acquired In Spain, where we operate under the Sanitas four ambulatory clinics, one image diagnostic Revenue by business brand, performance was good. This was driven centre, and three dental centres. 1. Sanitas Seguros 37% by our successful partnerships with BBVA and 2. Sanitas Hospitales Santa Lucía, along with Clínica Universitaria de In Chile, our Isapre and Integramédica businesses and New Services 10% 6 3. Sanitas Dental 4% Navarra, a leading hospital provider. We reinforced grew in customer numbers. We opened the first 4. Sanitas Mayores 5% 1 our number two position in the health insurance phase of the Clínica Bupa Santiago hospital, 5. LUX MED, Poland 11% market, with a stable market share of 20.4%1. a £140m investment and, with 460 beds, the 6. Bupa Chile 33% The acquisition of Néctar Seguros, a digital largest Bupa hospital. health insurance player, added 34,000 customers 5 2 4 3 to our portfolio of 1.7m customers. Our Blua digital proposition continues to drive growth. By the end of 2018, over 93% of insurance claims 1. 2018 Q3 Data, ICEA (Investigación Cooperativa entre Entidades Aseguradoras y Fondos de Pensiones). were managed digitally, and almost 450,000 2. Includes customers with health insurance and dental customers had access to video consultations cover, and dental cover only. with more than 1,200 doctors of all specialties. 3. European Foundation for Quality Management.

21 Bupa Annual Report 2018

Market context We acquired 24 dental practices in 2018, –– Uncertainty remains around the full strengthening our market position to a total of United implications of Brexit, and the terms on 477 centres serving around 2.4m customers. which the UK will leave the EU, with low We purchased high-performing practices economic growth. providing quality patient care. We also Kingdom enhanced our dental insurance plans for –– Continuing pressure on NHS with business customers, including market-leading Reshaping and investing government commitment to increase cover for preventative care. future funding. to focus on changing We reshaped our aged care business, with customer needs –– The dental market remains competitive the divestment of 132 care homes between with a UK-wide review of NHS orthodontics December 2017 and February 2018. We opened contracts that will continue into 2019, and four new-build care homes over the year, Revenue a shortage of dentists across the market. closing 2018 with 138 homes and seven –– In aged care, demand for local authority- retirement villages. Around 80% of our care £2,537m funded beds continues to increase but services are rated as ‘Good’ or ‘Outstanding’ public funding remains constrained and by the Care Quality Commission. Our average -10% CER (2017: £2,807m) the requirements of older customers occupancy rate was relatively stable compared continue to evolve. to 2017 at 84.5%.

Underlying profit Investment in our health services business Operational highlights continues. We partnered with food retailer, Waitrose & Partners, offering more than 10,000 £156m In the UK, as previously reported, we sold a shoppers health checks in-store. In September, (2017: £199m) significant part of our aged care business in -22% CER we launched our 30-minute Male Health Check, December 2017 and February 2018. In our offering a quick assessment and advice for continuing businesses, revenue was up 3% Customers prostate and testicular cancer. At our Cromwell and underlying profit increased 2%, mainly Hospital, we upgraded our outpatient reception driven by health insurance. 2.2m Insurance and consulting suites. Our UK health insurance business closed the 3.3m Provision In September, we opened our new Salford Quays year with 2.2m customers. It remains the 6,800 Aged care office, Bupa Place. It’s our largest office in the market leading health insurer in the country, 1 UK, with over 2,000 employees and has been with a market share of 37.5% . We launched 2 rated BREEAM Excellent, putting it among the Revenue by business Business Mental Health Advantage, offering top 10% of new UK non-domestic buildings 1. Bupa UK Insurance 61% 4 our corporate customers the most extensive for its sustainability performance. To mark the 2. Bupa Dental Care 17% 3 mental health coverage in the market. We also 3. Bupa Care Services 16% move, we launched our ‘Everyone’s welcome’ partnered with digital healthcare provider, 4. Bupa Health Services 6% pledge, creating a positive working environment Babylon, giving business customers access where our employees feel comfortable to bring to face-to-face GP care around the clock. their whole selves to work. 2 In October, we announced the opening of 1 specialist centres for breast cancer in London and Manchester with the independent hospital provider, HCA Healthcare UK. These centres build on our Cancer Direct Access service 1. LangBuisson Health Cover, October 2018. Data from 2017. and Cancer Promise, giving our customers 2. BREEAM (Building Research Establishment Environmental Assessment Method), is a method of speed of access to comprehensive diagnostics assessing, rating, and certifying the sustainability and, if needed, treatment. of buildings.

22 Strategic Report Governance Financial Statements

Market context Seguros Bolivar. In Brazil, the integration of –– The international private medical insurance Care Plus continues to progress well. International market remained competitive. Digitally- We announced the acquisition of Acıbadem enabled service capability is becoming an Sigorta, Turkey’s second largest health insurer, Markets increasingly important differentiator. in August, completing the transaction in –– The Saudi Arabia economy began to recover, January 2019. Acıbadem Sigorta is a specialist Strategic investment in although the operating environment remained health insurance provider with both corporate and individual customers. Headquartered rapidly-developing and challenging with increasing regulation and intense competition. Private sector growth is in Istanbul, it covers over 550,000 health growing markets expected to remain muted until 2020. insurance customers and has over 500 employees. –– Hong Kong’s economy expanded moderately. Revenue1 Risks are increasing due to the US-China Bupa Hong Kong continues to focus on trade dispute and Hong Kong’s close customer proposition and service capabilities. dependency on the maturing Chinese The health insurance business has over £1,626m economy. 400,000 customers and signed a new +3% CER (2017: £1,581m) distribution partnership agreement with Tokio –– India remained one of the world’s fastest Marine Hong Kong in December. Our clinics growing economies. The health insurance business, which operates under the Quality Underlying profit sector is becoming increasingly competitive, HealthCare brand, opened four new centres although healthcare expenditure remains low. during the year. We also opened the first £36m –– Turkey was among the world’s fastest- Bupa-branded dental centre in Hong Kong. +1% CER (2017: £36m) growing economies in 2018, but growth In August, we increased our stake in our slowed due to geopolitical tensions and Bupa Arabia associate business to 39.25%. exchange rate volatility. It is an attractive Customers In January 2018, Bupa Arabia signed a market for health insurance in the long third-party administration services agreement 6.7m Insurance term due to its fast-growing population to provide services to Saudi Aramco employees. and high-quality private healthcare. 1.0m Provision In India, we are making progress. Our associate business, Max Bupa3, launched its first digital Revenue by business2 Operational highlights product – GoActive – which includes an

1. Bupa Global 55% 4 Revenue in International Markets grew by 3% integrated health and wellness platform 2. Bupa Arabia 25% 3 and underlying profit was up 1% year-on-year. aimed at younger customers. 3. Bupa Hong Kong 18% We made investments in both organic growth 4. (India) 2% and acquisitions during the year. 1 In Bupa Global, our focus on stabilising the 2 business began to show results. We made progress in improving customer retention and customer satisfaction. We established 1. Revenues from our associates and joint an authorised insurer in Ireland, in order to ventures are excluded from our reported figures. continue to serve customers living in the EU Customer numbers and the appropriate share of (but outside the UK and Ireland), after Brexit. profit from these businesses are included in our reported figures. In Colombia, we launched our first International 3. On 26 February 2019, private equity firm True North 2. Chart includes our share of revenues from associates Private Medical Insurance (IPMI) products in acquired a controlling stake in Max Bupa health Insurance to give a sense of scale. partnership with the country’s leading insurer, from Max India, subject to regulatory approval.

23 Bupa Annual Report 2018

Financial Review

The Group’s results reflect the Revenue was £11.9bn, flat on prior year Following an in-principle agreement reached decision to divest part of our (2017: £11.9bn CER) while statutory profit with the Australian Taxation Office (ATO) to decreased by 19% to £502m (2017: £620m settle a number of disputed matters, including UK aged care business at the AER). Underlying profit of £613m was down a transfer pricing issue relating to the funding end of 2017 and early 2018 and 12% (2017: £698m CER). When excluding the of our Australian acquisitions in the 2007 and the challenges in our Australian divestment of UK care homes, revenue grew 2008 years, we will pay a total of £88m to the aged care and health insurance 3% and underlying profit fell on prior year ATO. The settlement will provide certainty for by 6%. Bupa and the ATO in relation to the taxation businesses. In 2018, our insurance treatment of Bupa Australia’s future cross We generated cash from operating activities businesses in the UK and Spain border funding costs, which will be within the of £808m, down £121m on prior year. ‘low risk’ or ‘green zone’ rating in accordance continued to perform well. We strengthened our capital position, to 191% with the risk framework set out in the ATO’s from 180% at December 2017 through profits Practice Compliance Guideline PCG 2017/4. generated during the year. On a pro-forma basis, the impact of IFRS 16 Leases, and the acquisition of Acıbadem Sigorta reduces our estimated solvency position to 169% and remains well within capital risk appetite. Bupa Finance plc’s senior debt rating was upgraded by Moody’s to A3 from Baa1 in May 2018.

“In 2018, we continued to invest to deliver sustainable performance for the long term.”

Joy Linton Chief Financial Officer

24 Strategic Report Governance Financial Statements

Revenue by Market Unit (CER) Revenue We achieved insurance revenue growth of 2% 4 across the Group. Our Spanish health insurance business grew by 2% through increased 2018 2017 membership on 2017, including the acquisition % % of Néctar Seguros, a book of around 34,000 1. Australia and New Zealand 39 1 39 customers. The revenue in our Australian and 3 2.  Europe and Latin America 26 24 UK health insurance businesses remained stable 3. 21 24 versus last year. International Markets insurance 4. International Markets 14 13 increased revenue by 4% largely due to Bupa Global and Bupa Hong Kong. Our healthcare provision businesses grew 2 revenue by 9%, reflecting an additional two months’ trading following the acquisition of Oasis Dental Care in February 2017, strong Revenue performance in LUX MED’s corporate 2018 2017 2017 AER % Change % Change subscription business, and the opening of £m AER CER the Clínica Bupa Santiago hospital in Chile. Market Unit In our aged care businesses, revenue declined Australia and New Zealand 4,656 -5 0 by 1% on 2017, excluding the impact of the sale Europe and Latin America 3,041 +6 +6 of a number of UK care homes in December United Kingdom 2,537 -10 -10 2017 and February 2018. In Australia, revenue International Markets 1,626 -1 +3 fell following the effect of funding pressures along with lower average occupancy rate of 94%, (2017: 96%) and one-off provisions associated with refunds related to service discrepancies. Our average occupancy rate in New Zealand remained relatively stable at 91%. Good performance in our aged care business Revenue Statutory profit before Underlying profit1 in Spain partially offset this as it maintained its taxation high average occupancy rate of 95%. In the UK, our average occupancy rate remained relatively £11.9bn £502m £613m stable versus last year at 84.5%. -3% AER 2017: £12.2bn -19% AER 2017: £620m -15% AER 2017: £719m Underlying profit 0% CER 2017: £11.9bn -12% CER 2017: £698m The methodology for calculating underlying profit was refined from the half year to provide a better representation of underlying performance while reducing the number of items excluded from underlying profit. Details Net cash generated from Solvency II capital Leverage ratio can be found on page 89. Comparators operating activities coverage ratio2 have been restated to reflect this updated methodology. £808m 191% 23.5% Group underlying profit decreased by 12% to £613m (2017: £698m at CER) as growth in our -13% AER 2017: £929m 2017: 180% 2017: 25.3% Market Units of Europe and Latin America and International Markets was more than offset by the decline in the aged care business in the UK following the divestments, and our Australian aged care and health insurance businesses. Excluding the impact of the UK care home 1. Underlying profit is a non-GAAP financial measure which means it is not comparable to otherompanies. c A reconciliation to divestments, underlying profit decreased statutory profit before taxation can be found in Note 2.0 (page 89). Underlying profit reflects our trading performance and by 6%. excludes a number of items otherwise included in statutory profit, to facilitate year-on-year comparison. These items include the impairment of intangible assets and goodwill arising on business combinations, as well as market movements such as gains or losses on foreign exchange, on return-seeking assets, on property revaluations and other material items not considered part of trading performance. 2. The 2018 Solvency II capital position, SCR and coverage ratio are estimates, and unaudited.

25 Bupa Annual Report 2018

Financial Review continued

Health insurance, our largest line of business, The Combined Operating Ratio1 (COR) In our aged care businesses, underlying profit contributed around 80% of underlying profit for for the Group remained constant at 93%. declined by around 20%, when adjusting for reportable segments; and year-on-year profit The Australian health insurance entity’s COR the sale of UK care homes as mentioned above. growth was broadly flat for the Group as a remained unchanged to last year at 92%. This is largely due to funding pressures, lower whole. Underlying profit in our Spanish and Our Spanish health insurance business, Sanitas occupancy and a number of compliance issues UK insurance businesses grew by 5% and Seguros, maintained a COR of 88% (2017: 88%). in Australia, which included one-off provisions 8%, respectively, with the former driven by Bupa Insurance Limited, our UK insurance associated with refunds related to service customer growth and the latter through entity, underwrites both domestic and discrepancies. The aged care business in Spain improved claims performance. Our insurance international private medical insurance, covering showed year-on-year growth, partly reflecting business in Chile was marginally up on last the business written by both the UK and the opening of the Cornellà care home in year, which included reserve strengthening parts of Bupa Global. The COR improved Barcelona in December 2017. of £8m in 2018. on prior year to 93% (2017: 94%) as a result Central expenses and net interest margin of the UK claims performance. Bupa Global Our health insurance profit in Australia declined increased on prior year by £13m which includes stabilised after the repositioning activity of prior by 3% on 2017 as the government limited the a one-off interest charge of £7m relating to periods, whilst there has been a significant annual premium rate increase to a level lower the in-principle agreement with the Australian focus on preparing for post-Brexit trading. than claims inflation. International Markets Taxation Office. This compares to a one-off insurance profit declined 4% on last year Underlying profit in our healthcare provision interest income benefit arising from the reflecting the divestment of Bupa Thailand in businesses fell by around 20%. In the UK, agreement reached with the Danish tax 2017, as well as an increase in central costs despite twelve months of trading from the authorities in 2017 of £14m. In addition, in support of future growth. We have seen former Oasis Dental Care business, now Bupa following our review of our Group consolidated underlying growth in Bupa Hong Kong and Dental Care (2017: ten months), performance insurance reserves methodology, a release of stabilisation of our Bupa Global portfolio. declined predominantly due to our health £12m has been recognised in the year. In August 2018, we increased our stake in services business unit. In our Europe and Latin Bupa Arabia by 5% to 39.25%, thus increasing America Market Unit, growth was achieved in all our share of Bupa Arabia’s profit. our provision businesses other than Bupa Chile.

Underlying profit by Market Unit (CER)

4

3 2018 2017 % % 1. Australia and New Zealand 46 45 1 2. Europe and Latin America 26 24 3. United Kingdom 23 26 4. International Markets 5 5

2 1. Combined Operating Ratio is an alternative performance measures for insurance businesses. It is calculated based on incurred claims and operating expenses divided by net Underlying profit earned premiums. Combined operating ratios are calculated 2018 2017 2017 based on local reporting requirements: AER % Change % Change – Group: S.05.01 Prudential Regulation Authority (SII) £m AER CER form (unaudited). Market Unit – BUPA HI Pty Ltd (Australia): HRF 602 Australian Australia and New Zealand 313 -15 -9 Prudential Regulation Authority quarterly returns Europe and Latin America 182 +2 +2 (unaudited). United Kingdom 156 -22 -22 – Sanitas S.A. de Seguros (Spain): Annual Report and Accounts. International Markets 36 -7 +1 – Bupa Insurance Limited (UK): Annual Report and Accounts.

26 Strategic Report Governance Financial Statements

Statutory profit Taxation Funding Statutory profit before taxation was £502m Bupa’s effective tax rate for the period We manage our funding prudently to ensure (2017: £620m) representing a decline of was 38% (2017: 22%), which is higher than a sustainable platform for continued growth. 19% at AER. This reflects the reduced trading the UK corporation tax rate of 19%. This is A key element of our funding policy is to target profitability on prior year, with the quantum mainly due to profits arising in jurisdictions an A-/A3 senior credit rating for Bupa Finance of non-underlying items comparable, but with a higher rate of corporate income tax plc, the main issuer of Bupa’s debt. slightly higher than 2017. and the in-principle agreement with the Australian Taxation Office for matters relating Impairment of intangibles and goodwill of to prior years. £36m (2017: £16m) was higher than prior year Funding Bupa Finance plc senior debt rating mainly due to an impairment in our aged care business in New Zealand. We incurred losses on Cash flow disposals, net of transaction costs, of £36m, Net cash generated from operating activities Fitch A- primarily relating to the sale of the UK care fell by £121m (13%) to £808m (2017: £929m) (Stable outlook) homes in December 2017 and February 2018, and is broadly in line with the reduction in as well as a loss arising from the sale of our operating profit. In addition, net cash flows Moody’s A3 interest in Torrejón Salud, a public hospital that from refundable accommodation bonds in (Upgraded in May 2018) we ran under the Public-Private Partnership our Australian aged care business are lower model in Spain. This compares to £34m of than last year. gains in 2017, primarily associated with the divestment of Bupa Thailand, partly offset by Net cash used in investing activities reduced by the Oasis Dental Care acquisition costs. £452m to £543m in 2018 (2017: £995m). In 2018, we acquired Néctar Seguros and Our Bupa Finance plc senior debt rating was There were no material property revaluations Ginemed in Spain and purchased an additional upgraded by Moody’s to A3 from Baa1 in May this year compared to £111m of losses in 2017. 5% shareholding in Bupa Arabia. We continued 2018. The upgrade follows Moody’s new cross The period saw lower realised and unrealised to invest in growth and development, finalising sector methodology for assigning instrument foreign exchange losses of £8m (2017: loss of the construction of the Clínica Bupa Santiago ratings for insurers. Moody’s modified its £24m). Other Market Unit non-underlying items hospital, opening our new UK office in Salford guidance for rating certain insurance holding reflect provisions for penalties and associated Quays, constructing seven new care villages in company instruments, and now applies costs of £21m relating to the in-principle New Zealand, along with maintaining our care narrower notching where there is enhanced agreement with the Australian Taxation Office home portfolios. We increased our holdings in regulatory supervision at a group-wide level. and £9m of costs in Bupa Global to set up a financial investments and long term deposits Solvency II is one of the regulatory regimes new Irish insurance entity in preparation for following a number of divestments, including that Moody’s considers as providing enhanced post-Brexit trading. 22 care homes in the UK in February 2018, group supervision. The Fitch rating was 12 care homes and four villages in New Zealand The return-seeking asset portfolio showed unchanged at A- (stable). marginal losses in 2018 of £1m, a reversal of in the second quarter of 2018 and our interest £19m on the £18m gain shown in the prior in Torrejón Salud, in December 2018. year period. Cash flows from financing activities fell by £350m compared to last year. In the prior year, we engaged in significant financing activity, including entering a £650m facility and issuing a £300m senior unsecured bond, to fund the acquisition of Oasis Dental Care and the additional stake in Bupa Arabia in 2017.

At AER 2018 2017 Non-underlying items: £m £m Impairment of intangible assets and goodwill arising on business combinations -36 -16 Net (losses)/gains on disposal of businesses and transaction costs on business combinations -36 +34 Net property revaluation gains/(losses) – -111 Realised and unrealised foreign exchange losses -8 -24 Other material non-underlying items -30 – (Losses)/gains on return-seeking assets, net of hedging -1 +18 Total non-underlying items -111 -99

27 Bupa Annual Report 2018

Financial Review continued

At 31 December 2018, we had drawn £170m lease assets and liabilities to be capitalised Our capital position is resilient in the face of the under our £800m revolving credit facility, which on the IFRS and Solvency II balance sheet. individual risks, illustrating the strength of our is due to mature in August 2022. We focus on The estimated value of both lease assets and balance sheet. managing our leverage in line with our credit liabilities at 1 January 2019 on the Solvency II rating targets. Leverage at 31 December 2018 balance sheet is £1.0bn. The lease assets attract Forthcoming changes to accounting was 23.5% (2017: 25.3%). Coverage of financial a property risk charge under the Solvency II covenants remains well within the levels Standard Formula. This, together with interest standards required in our bank facilities. rate risk on the liability, is estimated to increase On transition to IFRS 16 Leases, the Group the SCR charge by £0.2bn. The impact on the expects to recognise lease liabilities and solvency coverage ratio on transition is corresponding right-of-use assets on the IFRS Solvency estimated to have reduced our coverage ratio balance sheet of c. £1.1bn mainly within our The Group holds capital to cover its Solvency by 16 percentage points. provision and aged care businesses. Compared Capital Requirement (SCR), calculated on a to the existing IAS 17 approach of recognising Standard Formula Basis, considering all our On 18 January 2019, we completed the acquisition operating lease costs on a smoothed basis risks, including those related to non-insurance of Acıbadem Sigorta. This transaction is through operating expenses, the IFRS 16 businesses. The estimated SCR as at estimated to reduce our coverage ratio by approach results in lower operating expenses 31 December 2018 was stable compared 6 percentage points. After the inclusion of and higher finance costs. Overall profit is also to 31 December 2017 at £2.1bn and Own lease assets and liabilities and this acquisition, lower in the early years of the lease and higher Funds were £3.9bn, £0.2bn higher than at our solvency coverage ratio is estimated to be in the later years of the lease, compared to the 31 December 2017. 169%, which is well within capital risk appetite. existing approach, due to the timing of the Our surplus capital was estimated to be £1.8bn, We perform an analysis of the relative recognition of the implicit finance costs on the compared to £1.6bn at 31 December 2017, sensitivity of our estimated solvency coverage outstanding liability. representing a solvency coverage ratio of 191% ratio to changes in market conditions and IFRS 17 Insurance Contracts will apply from (2017: 180%). underwriting performance. Each sensitivity 1 January 2022. The impact on the financial is an independent stress of a single risk and statements is currently being evaluated by the Our business is strongly capital generative before any management actions. The selected due to our profitability. This underlying capital Group, but it is anticipated that the simplified sensitivities do not represent our expectations premium allocation approach option will be generation was partly offset by investment for future market and business conditions. both through acquisitions and capital available for the majority of the Group’s A movement in values of properties that we insurance contracts. expenditure. own continues to be the most sensitive item, IFRS 16 Leases will apply from 1 January 2019. with a 10% decrease having an 11 percentage While this accounting change does not change point reduction to the solvency coverage ratio. our risk profile, it requires all our operating

Risk Sensitivities

Group – Risk Sensitivities SII Coverage Ratio

Solvency Coverage Ratio 191%

Interest rate +100bps 190%

Credit spreads +100bps* 190%

Equity markets -20% 191%

Property value -10% 180%

GBP appreciates by 10% 187%

Pension risk +10% 190%

GSP† +0.2% 188%

Loss ratio worsening by 2% 182%

* Assuming no credit transition. † Group Specific Parameter (GSP) is substituted for the insurance premium risk parameter in the standard formula, reflecting the Group’s own loss experience.

28 Strategic Report Governance Financial Statements

Longer term viability statement

Our Directors have examined the outlook for As part of their assessment of our viability, the the Company and the Group as required by Directors looked at our financial performance, provision C2.2 of the 2014 UK Corporate capital management, cash flow, solvency and Governance code, assessing our ability to future outlook. Bupa is well capitalised and is operate and meet our liabilities as they fall expected to remain so over the plan period. due over a three-year period. The insurance businesses generate cash and are therefore expected to be able to settle The strategic framework continues to be the liabilities as they fall due. force behind our planning process. We chose a three-year assessment period because it ties Although Bupa pays interest on its borrowings, in with our internal strategic planning process. it has no shareholders and there are therefore Our planning considers all important financial no dividends to pay. Instead, we can rebuild and regulatory measures over the period and capital and invest in growing organically and stresses the key risks facing individual business through acquisition. units, as well as global risks that could impact Following a review of the key risks and Bupa as a whole. This process shows the uncertainties set out in the Risks section on current three-year plan remains robust, even page 30, Bupa’s Directors are satisfied that under the stressed scenarios examined. we have appropriate risk management and We also conduct ‘reverse stress testing’ at the governance procedures in place to manage and Group level, which aims to identify hypothetical mitigate these risks over the three-year period. circumstances that might result in our business Our governance structure and the regular model failing and helps our Directors to better reviews we undertake through the Internal understand the Group’s risks. Control Risk Management Assessment (ICRMA) process provide reassurance in The existing ‘Solvency II’ directive has led this regard. We also identify and report on to a greater focus on risk management and emerging risks to ensure they are properly monitoring of regulatory capital. Our most understood and are considered in our future recent Own Risk Solvency Assessment (ORSA) strategic decisions. considers the level of regulatory capital we require to remain financially stable over the Based on this analysis and our regular risk and planning period given the nature of the risks capital reporting processes, the Directors have we currently face, our strategy and our risk a reasonable expectation that Bupa will be able appetite. It takes into account the quantification to continue in operation and meet its liabilities of the Group’s current risks as defined by the as they fall due throughout the three-year Solvency II directive, including the impact of planning period up to 31 December 2021. IFRS 16 Leases, and considers the impact The ‘going concern assessment’ (see Basis of of potential stressed scenarios, including a Preparation in the financial statements section) no-deal Brexit. This assessment concluded includes information on the Directors’ detailed that we expect to have sufficient capital and assessment of the Group’s status as a going liquid assets to continue to meet regulatory concern based on its current position and requirements and to comply with our risk forecast results. appetite over a three-year period.

29 Bupa Annual Report 2018

Risks

Any successful business needs It’s what our customers, regulators and other The risk profiles within our health insurance, to manage risk just as it embraces stakeholders expect of us, and it’s the provision and aged care activities are different. right thing to do for them. Effective risk Our broad geographical reach means that our opportunity, and at Bupa we management is a critical component in our local businesses are exposed to a wide range are committed to making risk future success. of political, regulatory, legal and economic risks. We manage these by making sure we management an integral part We are also seeing significant changes in how understand the factors behind the risk to each of our culture. regulators, in both insurance and healthcare individual business and to our balance sheet, provision, oversee companies and boards to and by assessing how these risks interact. ensure appropriate outcomes for markets By understanding the risks we face – including and customers. Standards and expectations emerging and strategic risks – we can make are rising globally and we must foresee and sure we are best placed to manage and mitigate the potential risks of any future diversify them and ensure we hold sufficient changes that could affect our customers capital. and our business. We have a comprehensive risk management Progress in 2018 programme to ensure risk management comes as second nature to our people and they are We further strengthened our risk management equipped to manage risk. The Bupa Code, approach and capability in response to growth risk appetites, the Enterprise Policies and our in our business and the evolving focus of ‘Speak Up’ whistleblowing process are critical regulators around the world on insurance tools to achieve this. and healthcare provision. We’re continuing to embed all aspects of our Risk Management Framework into our business: –– enhancing our Enterprise Policy suite to “In 2018, we made further ensure there is a clear link between risk progress in embedding risk appetite and key controls; management into our culture. Managing risks well is absolutely –– conducting in-depth reviews of specific key to ensuring that we achieve aspects of risk as they arise in the external environment and focusing on specific areas our strategic objectives in of risk for our insurance and healthcare the long term and that we provision businesses; deliver the high standards our customers, our people, our –– improving our regular risk reporting to partners and regulators expect the Risk Committee to assist in its effective oversight; from us now and in the future.” –– reviewing the risks to Bupa associated with David Fletcher the UK leaving the EU; Chief Risk Officer –– reviewing the risks associated with changing regulatory environments in Australia; –– undertaking a stress and scenario testing programme to improve our understanding of severe risks and how they may affect the business plan in both our insurance and healthcare provision businesses; –– improving the way we consider emerging risks by strengthening the link to our strategy; –– continuing to improve our information security controls to respond to the ever-evolving external environment;

30 Strategic Report Governance Financial Statements

–– monitoring activities to ensure effective This ensures that: Risk appetite privacy risk management (including General –– current and emerging risks to the businesses Data Protection Regulation (GDPR) and strategy are identified and potential Our Board risk appetite is a measure of the readiness preparation compliance); and consequences are understood; degree of risk we are prepared to accept in our work to deliver on our strategy. Our core risk –– assessing the risks associated with proposed –– we have clear and established risk appetites appetite statements focus on: acquisitions. within which we operate (these are discussed –– the treatment of customers and employees; We’re also working to ensure that our Risk further below); –– management of our financial strength; Management Framework is fully understood –– we take appropriate and effective steps to and properly utilised across Bupa. This includes –– the sustainability of our business; and mitigate and manage identified risks; making sure that processes and controls are –– operational risk, including information designed, documented and implemented –– we use risk management information to security and privacy. effectively across our businesses in line with help inform risk-based decisions across the The risk appetite statements are reviewed our Enterprise Policies. We continue to ensure business; and annually, with the Risk Committee recommending that our people are appropriately trained. –– there is clear ownership of, and accountability any changes to the statements to the Board for approval. for, risk; Our approach to risk management We have a culture in which: We have non-executive governance processes Risk management life cycle at subsidiary board level for our main insurance –– appropriate risk behaviours are encouraged subsidiaries as well as at Group Board level and rewarded; (more on our System of Governance on –– inappropriate behaviours are challenged page 39). with appropriate consequences; and Monitor Each of our large insurance entities is overseen –– risk events are communicated quickly by a local Risk Committee, consisting mainly of without fear of blame. Report independent Non-Executive Directors (NEDs) who oversee the Risk Management Framework. We have well-established reporting systems The subsidiary boards receive regular reports in place to make sure that major risks to our Identify from local management and Chief Risk Officers. businesses are identified, escalated, managed and mitigated. This includes a stress and The Risk Committee receives reports from the scenario testing programme. We also carry Chief Risk Officer, Chief Medical Officer and out detailed reviews and in-depth analyses Assess other Bupa executives as appropriate, and sees on particular risks where needed. minutes from the major insurance subsidiary boards’ risk committees and the Group level Our Enterprise Policies define the way we do Manage executive committee Bupa Enterprise Risk business. They cover all key areas of risk for Committee (BERC). The BERC is responsible our health insurance, provision and aged for the leadership and oversight of risk across care businesses and are implemented by our Market Units and in the Centre, which the Group and recommends risk appetite to the Risk profile Risk Committee. The BERC is chaired by the check our compliance with the requirements. Bupa Group CEO, and provides Group-level These policies are reviewed annually and executive risk oversight. have designated owners with defined roles We accept risk as part of our business. Some and responsibilities at both enterprise and risks are avoidable while others are part and parcel of our business model. We have an We use a ‘three lines of defence’ approach to local levels. risk management. effective risk management system and internal We test how effectively we put the Risk controls in place to mitigate these risks. We manage risk across our health insurance, Management Framework into practice through We maintain significant economic capital provision and aged care businesses in line our Internal Control and Risk Management as a means of mitigating certain inherent risks. with our Board-approved Risk Management Assessment. This assesses how well internal This reflects the nature of our operations Framework, which sets out the principles control and risk management practices and and the level of risk associated with them. behind a robust and continuous risk policy compliance are working across Bupa. management system in our first line of defence. It’s a self-assessment conducted by the first line of defence and reviewed and challenged by the second and third lines. We run this assessment annually and the results are presented to the Risk Committee.

31 Bupa Annual Report 2018

Risks continued

These risks are set out in the table below in order of the solvency capital required to mitigate them.

Risk Description Comment and outlook Mitigating actions Property The risk of the volatility in values or –– We generally own rather than rent –– By maintaining a geographic spread the devaluation of properties held property. This could leave us exposed of businesses across a number of for own use (including owned to falls in property values. countries, we are able to diversify care provision properties), or for exposure to national or regional investment purposes, resulting –– Care home valuations are based on the property markets. in adverse impacts. underlying profitability of the individual homes. –– The implementation of IFRS 16 Leases in 2019 will increase the amount of capital we are required to hold.

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

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

Credit Risk of a loss in value of bond –– Our health insurance businesses have –– Our bond portfolio is small in relation assets and/or that a counterparty modest holdings of corporate and other to our other financial assets and the spread and fails to meet its obligations in bonds. majority is investment grade. the face of adverse economic These are exposed to the risk of counterparty –– Counterparty exposure is managed by conditions. This also includes widening spreads and defaults. dealing with highly-rated counterparties default the risk of a loss in value of the –– There is banking counterparty default with exposure limits defined by Group bond assets held within the risk in respect of deposits. Treasury Policy. pension schemes.

Operational Risk of loss arising from inadequate –– We are committed to managing –– Maintaining internal control processes or failed internal processes, or from operational risk effectively. This includes and governance frameworks, approving (including personnel, systems or external continued close attention to risk policies and assessing compliance conduct risk events. This risk also includes management of regulatory risk and help to mitigate this risk. conduct risk (the risk that our proactive engagement with regulators. –– All our Market Units have a Medical and clinical risk) behaviours, actions or controls –– If we expand our provision and aged Director responsible for ensuring result in detriment or unfair care businesses, there will be an increase clinical quality and governance within outcomes for our customers), and in inherent exposure to clinical risk. This the business. They are accountable clinical risk (the risk of injury, loss is actively managed through continued to the Chief Medical Officer for or harm to customers in receipt refinement of our approach to clinical clinical governance. of healthcare). risk governance.

32 Strategic Report Governance Financial Statements

Other significant risks to Bupa cannot be effectively mitigated through holding capital alone, although we do hold significant capital for operational risks. Our Market Unit Executive Risk Committees regularly review these residual risks and the mitigating actions taken to reduce them. They also inform the Risk Committee and BERC about key areas of specific concern. This provides management with a view of the priority areas in which resources should be focused. The table below reflects the themes of the most significant risks currently facing Bupa. This list and the residual risks for each remained relatively stable throughout 2018.

Risk Description Comment and outlook Mitigating actions Information The risk of significant financial and –– Businesses are increasingly being –– We have a detailed programme of reputational impacts due to a failure targeted by cyberattacks. activities across Bupa to appropriately security including to appropriately secure information mitigate this risk. (including personal information). cyber-resilience –– We have also set up Bupa’s Enterprise Information Security and Privacy Committee, a subcommittee of the BERC, to specifically focus on both information security and privacy risks while delivering continual service improvements through our digital transformation.

Privacy The risk of adverse impacts due –– Regulatory requirements and –– We continually review and improve our to failure to handle personal expectations in relation to privacy controls over the management and information fairly, lawfully are increasing globally. security of personal information. and securely. –– This is also true of customer expectations –– We have appointed Data Protection as people become increasingly more Officers and other privacy experts as aware of the value and risks associated part of our enterprise-wide privacy Risk with their personal information. Management Framework activities to help manage this risk.

People – The risk that we do not have –– As a business with an international –– This is an area of significant focus for appropriate levels of capacity and footprint, it’s critical to our strategy the Bupa Executive Team. impacting our capability of people to deliver our that our people have the appropriate –– We are focusing on ensuring that we have growth agenda strategic objectives. knowledge, skills and experience to identify and manage risk and to deliver the right experience and succession plans on objectives. to run our businesses and manage change, supported by a simple operating model and improved ways of delivering training. –– Where we acquire businesses these bring additional resources to the Company.

Changes in The risk of failure to anticipate, –– Our health insurance, provision and aged –– All our markets have defined key respond to, or influence changes in care businesses are subject to government activities to make sure we can continue government and the government and regulatory and regulatory policy, including minimum to monitor and assess the strategic regulatory policy environment which may impact wage requirements, prudential implications on our businesses of any our customers and the viability or requirements, changes to tax regimes and future changes in policy or regulation, profitability of the business. the interpretation of existing tax practices, and advocate for appropriate change pricing controls in some of our health in these areas. insurance businesses, and clinical care –– We continue to work with the Australian requirements for our provision and aged Government to support a broader care businesses. health reform to help address the –– In Australia, the government-approved sector challenges. premium increase for our customers was lower than claims inflation. –– The Australian aged care and health insurance sectors are experiencing significant challenges.

External market The risk of geopolitical volatility, –– This includes structural market changes –– We review our strategy and processes to changing consumer dynamics and (e.g. political change or medical inflation) ensure that they are flexible enough to conditions competitor activity having an and economic volatility. cope with changing external conditions. adverse impact on our customers and our business model.

33 Bupa Annual Report 2018

Risks continued

Risk Description Comment and outlook Mitigating actions UK exit The UK’s decision to leave the EU has –– Bupa’s key financial metrics remain strong, –– We have established a new entity in led to uncertainty for our business. with a Solvency II capital coverage ratio of Ireland to provide continuity for our from the EU 191%. While uncertainty around Brexit may Bupa Global customers within the negatively impact sterling, as a Group with European Economic Area. significant operations outside of the UK this –– We have monitoring and risk management would lead to higher reported profits. plans in place to protect Bupa’s position Operationally, currency risk is actively from a customer, people and performance managed as described on page 32 above. perspective, whilst recognising that the –– Liquidity is robust and the investment impacts of Brexit are likely to crystallise portfolio is largely low risk, focused in over time at an operational level and will bonds and cash. be dependent on a range of political and economic factors.

There are further risks that capital cannot appropriately mitigate and which always remain a priority for management even though they are not highlighted in the table above. These are detailed in the table below.

Risk Description Comment and outlook Mitigating actions Liquidity risk The risk that we hold insufficient –– Liquidity risk is addressed not through –– This is mitigated by the Treasury function financial resources to enable us to capital but by holding liquid assets and actively managing borrowings, for which meet our obligations as they fall due maintaining appropriate controls. the amount and timing of outflows are or to take advantage of potential known, and by maintaining a portion of –– Policyholder liabilities are predominantly opportunities, or of being able to the bank facility undrawn. backed by liquid assets, so our liquidity risk secure such resources only at exposure primarily relates to the funding excessive cost, resulting in risk associated with borrowings. adverse impacts.

Strategic risks The risk that we are unable to design –– Global trends and key areas influencing –– Our purpose – helping people live longer, or implement appropriate business our markets are set out on page 6. healthier, happier lives – and our values plans and strategies, to make shape how we act and deliver for our –– The prevalence of social media has decisions, to allocate resources, customers and our people. increased the contagion risk to our brand or to adapt to changes in the and reputation from events in one part of –– Through the identification and assessment business environment. the Group impacting the whole Group. of emerging risks, we can react to issues This includes the risks associated in a timely and appropriate manner. with acquisition and disposal decisions and their implementation.

Environmental The risk that our activities cause –– Climate change is a health concern as –– We have a corporate responsibility harm to the environment, and the well as an environmental risk. We play and sustainability policy which includes risks risks that climate change could an active part in promoting positive environmental considerations and is mean for our business. environmental practices and we look reviewed on an annual basis. Each of for opportunities to reduce waste and our Market Units has developed a plan conserve energy where possible. outlining actions to manage our social and environmental responsibilities. –– We are evaluating the business impacts and assessing the materiality of climate –– This is reinforced by the Bupa Code risk across the Group to identify potential principle that “we take care of the planet”. responses to manage the risks and opportunities.

We also recognise that our operations could Our commitment to integrity and transparency diligence procedures keep our own people expose us to risks relating to the potential begins with our own people. Our employees and the third parties we deal with fully violation of human rights in areas including adhere to the ethical standards set out in the informed about our commitment to ethical modern slavery and human trafficking. We are Bupa Code and its related policies, including business practice. conscious that such risks can arise in certain Conflicts of Interest, Financial Crime Risk and Our values are fundamental in shaping the way industries connected to the healthcare sector, in ‘Speak Up’. We have mandatory training we behave towards our customers and one particular nursing, home nursing and personal in place to make sure all our employees another, and the Bupa Code has been designed care provision, as well as in the manufacturing understand their responsibilities under these to help our people make the right choices in of healthcare equipment. policies and others. living our values. We are committed to monitoring such risks in We do not tolerate bribery or corruption. See pages 16-19 for more about corporate our business and in our wider supply chain and Our training and awareness initiatives, clear responsibility and sustainability. are committed to mitigating them. operational standards and risk-based due

34 Strategic Report Governance Financial Statements

Chairman’s introduction

Strong corporate governance Board composition, succession We have maintained female representation on is crucial to the success of any planning and diversity the Board above the minimum 33% set by the Women on Boards Davies Review. Following We believe that a diverse and inclusive Board organisation. At Bupa, our Board the publication of the Parker Report into the brings a range of perspectives and insights plays a vital part in ensuring that Ethnic Diversity of UK Boards, the Board has to challenge management and support good reviewed and refreshed our Board Diversity this is in place throughout the decision-making. By reflecting our customer Policy, which is available on our website. Group, setting the cultural tone base, it helps us to understand and meet This policy requires all Board appointments customer and wider stakeholder needs. to do the right thing and put to be made on merit, using objective criteria customers first. The Board spent a significant amount of time reflecting the skills, knowledge and experience in 2018 on succession planning to ensure that needed to ensure a rounded and effective it retained a good mix of skills, knowledge Board. We remain focused on increasing Our Governance Framework ensures that key and experience as it underwent a refresh of diversity and aspire to having an appropriate risks and issues are escalated appropriately membership. These included the appointment proportion of directors reflecting different and that we can effectively oversee how our of Nicholas Lyons, Paul Evans and Matías ethnic or social backgrounds together with strategy is put into practice. As we have no Rodríguez Inciarte as Non-Executive Directors direct experience of some of Bupa’s key shareholders, we can take a long term view (NEDs) to replace the markets. During the year, we signed up to the and manage the Group in a sustainable way experience lost through Lawrence Churchill, HM Treasury’s Women in Finance Charter and for our customers. Lord Leitch and Simon Blair’s retirements, and have committed to exceeding 35% female Although we are a private company without my own appointment as Chairman to succeed representation on both the Board and the shareholders, we choose, as far as possible, Lord Leitch at the end of his tenure. Matías Bupa Executive Team on a continuing basis. to comply with the UK Corporate Governance also brings knowledge of the Spanish market as he is already a non-executive director of Code 2016 (the Code), and this report sets Governing key decisions out how we apply its relevant principles Sanitas S.A. de Seguros, our Spanish health The acquisition of Acıbadem Saglik ve Hayat and provisions. insurance business. Professor Sir John Tooke will also be retiring from the Board in May 2019. Sigorta A.S. (Acıbadem Sigorta), a specialist Recruitment of a NED with medical expertise health insurance provider based in Turkey, was a is ongoing to replace Sir John’s experience in significant decision for the Board during the this area. year. The risks associated with entering this territory were also considered by the Risk Finally, Michael Hawker will join both the Board Committee to help inform the Board’s decision. and the boards of our main subsidiaries in The acquisition was completed in January 2019, Australia with effect from 1 April 2019, replacing and we will be monitoring its integration into “Strong corporate Simon Blair’s experience of the Australian Bupa. See page 44 for further information on financial services market. our governance process around major governance is crucial acquisitions. to the success of any organisation.”

Roger Davis Chairman Roger Davis Chairman

35 Bupa Annual Report 2018

Re N Board of Directors N

Based on Board composition at date of Roger Davis Evelyn Bourke approval of accounts. Chairman Group CEO Nationality Skills Skills E Roger has extensive business Evelyn has a strong track record and A. British (6) D experience and an international extensive experience in financial B. Irish (2) C. Australian (1) mindset acquired during a wide- services, risk and capital management, C ranging career in financial services. and mergers and acquisitions. D. Swiss/American (1) E. Spanish (1) External appointments A qualified actuary, she also holds an MBA from London Business School. A Roger is Chairman of Sainsbury’s Bank, B Global RadioData Communications External appointments (GRC), Experian Limited and Future Evelyn is currently a Non-Executive for Heroes. Director of the Bank of Ireland Group plc. Experience Experience Gender Diversity Roger has extensive experience in the UK and Asia with previous positions Evelyn was previously a Non-Executive A. Women (5) including Managing Director of India Director of the IFG Group in Ireland. B. Men (6) She joined Bupa from Friends Life, A for Jardine Fleming, Chief Executive Officer of BZW Asia Pacific, and where she was Chief Executive Officer Chairman and Chief Executive of of its Heritage division. Prior to that B Barclays Capital Asia Pacific. He left she was at Friends Provident as Barclays as Executive Director and Executive Director responsible for Head of the UK Bank in 2005. strategy, capital and risk and, before that, Chief Financial Officer.

Non-Executive Directors’ Skills A Ri and Experience Re

Financial Services & Regulations 4 Audit & Financial 5 Risk Management 5 Remuneration 5 Nicholas Lyons Matías Rodríguez Inciarte Non-Executive Director Non-Executive Director Health 2 Strategy & Development 6 Skills Skills Nicholas brings extensive experience Matías brings wide experience of International 5 from his executive career in financial Spanish financial services, risk General Business 4 services and non-executive roles management and government to Digital 1 at financial services and insurance the Board. companies. Consumer 8 External appointments External appointments Matías is Chairman of Unión de Nicholas is currently Chairman Créditos Inmobiliarios, S.A., E.F.C., a of Holdings and Non-Executive Director of Financiera Committee key Clipstone Logistics REIT plc. El Corte Inglés E.F.C., S.A, both credit Experience institutions, and an Independent Committee Chairman Director of Financiera Ponferrada SA In his executive career, Nicholas spent Sicav, a Spanish investment fund. 12 years at JP Morgan working in Debt Audit A He is also Head of Santander Universities, and Equity Capital Markets and Mergers the arm of Banco Santander that and Acquisitions, and eight years at Risk Ri operates Santander’s university Lehman Brothers as a Managing engagement programme. Nomination & Governance N Director in its European Financial Institutions Group, finishing his term Experience Remuneration Re at the bank as Global Co-Head of Matías is a Non-Executive Director of Recruitment with a focus on corporate Sanitas, S.A. de Seguros, Bupa’s Spanish culture, diversity and inclusion. health insurance business. Matías’ early Roles prior to that include Chairman career included roles in the Spanish civil of Miller Insurance Services LLP, Senior service and as a Minister in the Spanish Independent Director of Pension Government. He then held a number of executive roles at Banco Santander > Full details of each Director are available on Insurance Corporation plc, Senior SA including Executive Vice President bupa.com/boardofdirectors Independent Director of Catlin Group Limited, and a Non-Executive Director and Chief Financial Officer, and Vice of Temple Bar Investment Trust, Chairman and Head of Risk > See Board and Committee performance page 45 Management. > See Engagement with stakeholders page 46 Friends Life Group Limited and Friends Life Holdings plc.

36 Strategic Report Governance Financial Statements

A A Re Ri Ri N N

Joy Linton Clare Thompson Paul Evans Martin Houston Chief Financial Officer Senior Independent Director Non-Executive Director Non-Executive Director Skills Skills Skills Skills Joy brings over 30 years’ experience Clare brings a wealth of experience, Paul brings 30 years of experience Martin brings extensive international in financial and strategic roles in particularly in the areas of finance in the financial services industry. business experience to the Board and Australia and the UK. and insurance. She is the Senior Experience is a Non-Executive Director of Bupa Independent Director and is a Arabia for Cooperative Insurance Experience A qualified Chartered Accountant, Non-Executive Director of Bupa Company, Bupa’s listed joint venture Joy joined Bupa in March 2011 as Paul spent 13 years with Insurance Limited, Bupa’s UK insurance company with the Nazer Finance Director of Bupa’s Australian PricewaterhouseCoopers before regulated insurance subsidiary, Group Holding Company Limited in health insurance business, later joining where he held a number and chairs its Audit Committee. Saudi Arabia. becoming Finance and Commercial of senior roles, over 17 years, including Director of Bupa Australia and New External appointments Chief Financial Officer of AXA UK, External appointments Zealand. She became Bupa’s Chief Clare is a Non-Executive Director CEO of AXA Life, Group CEO AXA Martin is Chairman of Moelis & Company’s People Officer on an interim basis in of Direct Line Insurance Group plc and UK and Group CEO of AXA’s global Global Energy Group and Vice Chairman 2015, prior to becoming General formerly a Non-Executive Director of life, savings and health businesses. of Tellurian Inc. He is also a Non-Executive Manager, Health Services for Bupa UK. Retail Charity Bonds plc, Non- Paul is a former Chairman of the Director of CC Energy and Vice Previously, she was CFO of National Executive Member of the Partnership Association of British Insurers. Chairman of Hakluyt North America. Foods, one of Australia’s largest food Board of Miller Insurance Services LLP, Experience and beverage companies. She was also and Trustee and Treasurer of the Martin was previously Chief Operating a Non-Executive Director of Bega Disasters Emergency Committee. Officer and Executive Director of BG Cheese Ltd, an ASX-200 listed Experience Group plc where he spent 32 years. He is company, serving as Chair of the Clare was a Partner at a former Chairman of TPH International, Audit and Risk Committee. PricewaterhouseCoopers (PwC) and former Non-Executive Director of between 1988 and 2011. While she Severn Trent plc. Martin is a Fellow of was at PwC, she held several senior, the Geological Society of London, sits high-profile roles, particularly within on the advisory board of the Royal Opera the insurance sector. Clare is a House of London, and is a member of Fellow of the Institute of Chartered the advisory board of the Center on Accountants in England and Wales. Global Energy Policy at Columbia University’s School of International and Public Affairs in New York.

A Ri Re Ri N N Re

Caroline Silver Professor Sir John Tooke Janet Voûte Julian Sanders Non-Executive Director Non-Executive Director Non-Executive Director Company Secretary Skills Skills Skills Skills Caroline brings over 30 years of Sir John brings 40 years of medical Janet brings an international perspective Julian was formerly Deputy Company experience in international investment expertise to advise the Board on and experience gained in corporate Secretary, having joined Bupa in 1988. banking as well as extensive clinical governance and advances in strategy, the health and care sector, Experience experience in advising clients and healthcare practices and treatments. and consumer-facing businesses. Prior to joining Bupa, Julian was a of regulators across Europe. External appointments External appointments Supervisor in the Business Services External appointments A consultant physician, Sir John is a Janet is Chairman of the Creating Group at Coopers & Lybrand Caroline is a Managing Director at past President of the Academy of Shared Value Council at Nestlé SA, (now PwC). Moelis & Company, Non-Executive Medical Sciences. He chairs the Centre Council Member at SustainAbility, an Chairman of FMCG Group PZ Cussons for the Advancement of Sustainable ERM Group company and serves as plc, and a Trustee of the Victoria & Medical Innovation, UCL, and is an Ambassador of the International Albert Museum. Executive Chairman of Academic Integrated Reporting Initiative. Experience Health Solutions Ltd. Experience A qualified Chartered Accountant, Experience Janet previously served as Global Caroline was previously Vice Chairman Sir John was formerly Vice Provost Head of Public Affairs at Nestlé SA of EMEA Investment Banking at Bank (Health) and Head of the Medical and was a member of the board of of America Merrill Lynch and spent School at UCL, and Academic Bamboo Finance SA. She also served 14 years at Morgan Stanley where she Director of UCL’s Academic Health as Partnership Advisor at the World held a number of senior positions Science Centre, UCL Partners. Health Organization in the area of including Global Vice Chairman of non-communicable diseases and Investment Banking and European mental health and as CEO of the Head of Financial Institutions. World Heart Federation. Janet was formerly Vice President and Managing Partner at Bain & Company Switzerland. 37 Bupa Annual Report 2018

Bupa Executive Team

The Bupa Executive Team (BET) comprises the Group CEO, CFO, 1 7 the CEOs of the four Market Units and Global Function Leaders. The BET meets regularly throughout the year focusing on performance, risks, talent and the delivery of the strategic agenda. In particular, the BET focuses on: –– Bupa’s strategic framework; –– calibrating performance and generating opportunities; –– aligning on priorities, including business development and 2 8 mergers and acquisitions; –– high-level resource and capital allocation; –– culture and talent management in the organisation; and –– key global strategic initiatives such as driving innovation and leadership development.

3 9

1 Evelyn Bourke 7 Simeon Preston Group CEO CEO, International Markets (IM) 2 Joy Linton Chief Financial Officer 8 Paul Zollinger-Read Chief Medical Officer 4 10 3 Richard Bowden CEO, Australia and New 9 Alex Cole Zealand (ANZ) Chief Customer and (Richard will be retiring in Corporate Affairs Officer April 2019) 10 Nigel Sullivan 4 Hisham El-Ansary Chief People Officer CEO, Australia and New and Interim Chief Zealand (ANZ) Information Officer 5 11 (From April 2019) 11 Penny Dudley 5 Iñaki Ereño Chief Legal Officer CEO, Europe and Latin America (ELA) 12 David Fletcher Chief Risk Officer 6 David Hynam CEO, United Kingdom (UK) 6 12

> The biographies of BET members are available on bupa.com/bet

38 Strategic Report Governance Financial Statements

Bupa’s System of Governance

Our Board governance structure

Association Members (AMs) External oversight Hold Board to account

Board Group oversight Set strategy and risk appetite Take major decisions

Governance Governance Risk Management Framework Policies, standards, internal controls

Group CEO Risk Committee Audit Committee Remuneration Nomination Has day-to-day Oversees risk Oversees the integrity authority to lead and Committee & Governance management of the financial statements manage the business Rewards delivery Committee Auditor performance of customer outcomes Recommends Directors and strategy Internal controls and Association Members Reviews governance Bupa Executive structures > See page 51 > See page 47 Team > See page 57 > See page 54 Supports the Group CEO in leading the business and managing risk

Risk, Compliance Global Internal and Clinical Audit Market Units Governance Independent assurance Identify, manage, Test, monitor and of governance, risk monitor and report challenge management and internal on risks risk governance controls

Second line of defence Third line of defence First line of defence

39 Bupa Annual Report 2018

Bupa’s System of Governance continued

System of Governance Whistleblowing An Internal Audit Charter is in place setting out Bupa’s governance structure is designed to We foster an open and honest culture which the function’s role, authority and independence. enable the Board to lead within a governance includes encouraging and enabling our The function operates in accordance with framework of prudent and effective controls people to raise concerns of any malpractice the Global Institute of Internal Auditors’ which enables risk to be assessed and managed. or wrongdoing at Bupa in a secure and international standards. Following an annual As already stated in the Risk section, our anonymous way in cases where reporting review of the Internal Audit Charter by the System of Governance includes a ‘three lines of directly to a manager is not appropriate or the Audit Committee in December 2018, the Board defence’ approach to risk management, being: concern has not been fully addressed. We run approved the revised Internal Audit Charter in regular internal campaigns to raise awareness February 2019 and this is available on –– First line – management – responsible for of ‘Speak Up’, Bupa’s internal whistleblowing bupa.com. identifying and reporting risks and managing process, in addition to mandatory annual risks within the risk appetite set by the Board, training. The Audit Committee annually reviews through documented policies, processes and External Auditor the policy to ensure its adequacy and security controls; Independence and objectivity and recommends it to the Board for approval. The Audit Committee provides clear guidance –– Second line – Risk function – provides The Board receives regular updates on issues to KPMG LLP (KPMG) on the Committee’s assurance over first line activity, provides reported through ‘Speak Up’ during the year expectations of KPMG as External Auditor and oversight, challenge and support to the and on investigations and actions taken. held two meetings with KPMG during the year first line; and without management present to ensure that –– Third line – Global Internal Audit – provides Global Internal Audit the audit personnel were given the opportunity independent assurance. Purpose and independence to raise any concerns they may have and to ensure that they remain independent and The diagram on the preceding page shows Global Internal Audit (GIA) provides objective. how each of the ‘three lines’ reports to the independent and objective assurance to the Board or its Committees. Audit Committee over the effectiveness Philip Smart became the audit partner in 2017 of governance, risk and internal controls and it is intended that he will remain in this role In addition, the External Auditor provides throughout the Group. It reviews the until Bupa rotates audit firms to ensure a further assurance to the Audit Committee and effectiveness of controls by undertaking an smooth handover. This is in accordance with the Board in relation to the Group’s financial agreed schedule of internal audits each year. Financial Reporting Council (FRC) standards statements. GIA is the third line of defence and supports on lead audit partner rotation. As part of the The roles of Global Internal Audit and the Bupa in accomplishing its purpose by helping evaluation of the External Auditor, the Directors External Auditor are set out below together the Board to protect the assets, reputation confirmed that they were satisfied that with a description of our ‘Speak Up’ and sustainability of the Group, and to ensure the External Auditor had maintained its programme which is an important tool to risks to our customers and businesses are independence during the year and to the encourage our people to report incidents. appropriately managed in accordance with date of this report. The role and activities of the Board and the risk appetite set by the Board. It reports KPMG has internal procedures and controls and Committees in our system of governance its findings to the Audit Committee and follows the FRC’s Ethical Standard for auditors are described in the subsequent sections of assists both the Board and management in to ensure it remains independent. There are this report. improving the effectiveness of governance, no contractual obligations restricting the Further information on how the first line risk management and internal controls. Company’s choice of External Auditor and manage risk and how the second line provide To maintain the function’s independence and there is no limitation of liability in the terms risk assurance is on pages 30 to 34. objectivity, the primary reporting line for the of KPMG’s appointment as External Auditor Chief Internal Auditor (CIA) is to the Chair of of the Company. The Company prohibits the the Audit Committee, liaising with the Group recruitment of any person that has been CEO in day-to-day operations. GIA has no involved in the Group’s audit for the current or direct operational responsibility or authority previous financial year without prior approval over any of the activities audited. Where from the CFO and the Audit Committee specific skills are not available in-house, the CIA Chairman or any person that has been and the Chairman of the Committee may otherwise employed by the External Auditor in procure the services of expert external advisers the preceding 12 months without prior approval to deploy additional expertise and insights in from the CFO. delivering the annual GIA Plan.

40 Strategic Report Governance Financial Statements

Leadership

Bupa’s governance framework The Group CEO is responsible for the Lord Leitch was independent on appointment and the role of the Board day-to-day leadership and management as Chairman and retired from the Board on of the business, in line with the strategic 31 December 2018. During the year he held a The Board is responsible for the long term framework, risk appetite and annual and small number of external appointments, none success and sustainability of Bupa for the long term objectives approved by the Board. of which were considered to impede his role benefit of its customers now and in the future. The Group CEO may make decisions in all at Bupa. It does this by providing clear leadership in matters affecting the operations, performance setting strategy and risk appetite and by Roger Davis was appointed as Chairman from and implementation of strategy of Bupa’s overseeing management’s implementation 1 January 2019, having been an independent businesses, except for those matters reserved of strategy within a prudent and effective Non-Executive Director since July 2015. for the Board or specifically delegated by the governance structure. The diagram on page 39 The Board was satisfied that Roger met Board to its Committees, executive committees shows how the Board and its Committees the independence criteria in the Code at or subsidiary company boards. oversee the business through the ‘three lines appointment. Roger has a number of external of defence’ model. The Board delegates certain The Group CEO leads the BET in driving the appointments which the Board considers activities to its Committees to ensure that performance of the business and setting the do not prevent him from providing sufficient there is sufficient time to discuss and provide overall strategic agenda. time to his duties at Bupa. Details of his other challenge in these areas, and to allow the Board appointments are set out in his biography to focus on key strategic decisions. In turn, the on page 36. Board is held to account by the Association Members (AMs) as set out in more detail in the Engagement with stakeholders section. Board changes The following table shows how the balance of skills, knowledge and experience required There is a schedule of matters reserved on the Board is being maintained and developed through the recent changes in its composition: for the Board which includes strategy and management; structure and capital; financial Outgoing Incoming reporting and controls; internal control and risk management; M&A; and material contracts Lord Leitch – Chairman Roger Davis – Chairman and various corporate governance matters. – financial services and regulation; – financial services and regulation; The schedule is reviewed annually and is – strategy and development; – remuneration; available on bupa.com. All other matters are – international and general business experience; – strategy and development; delegated to the Group CEO, who has put – IT; and – international and general business experience; and in place a Delegated Authority Framework – brand, marketing and consumer. – consumer business experience. to cascade levels of authority through the business. This is regularly reviewed Lawrence Churchill Paul Evans and updated. – financial services and regulation; – financial services and regulation; – risk management; – audit and financial; – strategy and development; – risk management; The Chairman and the Group CEO – international business experience; and – strategy and development; and The roles of the Chairman and the Group CEO – consumer business experience. – international and consumer business experience. are separate with distinct accountabilities. Simon Blair Nicholas Lyons The Chairman is responsible for leading the – financial services and regulation; – financial services and regulation; Board and focusing it on strategic matters, – risk management; – audit and financial; overseeing the Group’s business and setting – healthcare; – remuneration; high governance standards. He plays a pivotal – strategy and development; – strategy and development; and role in fostering the effectiveness of the Board – international business experience, including – consumer business experience. and individual Directors, both inside and Australia and New Zealand; and outside the board room. The Chairman is also – consumer business experience. responsible for ensuring that there is effective communication with the AMs, acting as a Matías Rodríguez Inciarte sounding board for the Group CEO and – financial services and regulation; representing the Group externally. With the – audit and financial; support of the Company Secretary, he ensures – risk management; that the Board receives accurate, timely and – international and general business experience; and clear information. – consumer business experience.

41 Bupa Annual Report 2018

Leadership continued

The role of the Senior Board diversity and committed to maintaining a target of at least Independent Director succession planning 35% female representation on both the Board and the BET. To further enhance diversity at Clare Thompson was appointed as Senior Succession plans are regularly reviewed by employee level, Bupa has also joined INvolve, Independent Director (SID) in May 2018 the Board and the Nomination & Governance the leading inclusion network, which has following Lawrence Churchill’s retirement. Committee, and we plan a phased replacement initiatives to improve inclusion in the workplace Her role is to serve as a conduit for AMs and of NEDs coming to the end of their tenure. This for ethnic minorities and LGBT+ people and Directors who may have concerns that have approach is designed to ensure continuity on to drive gender equality in business. Further not been resolved through other channels, to the Board, to maintain an appropriate balance information on INvolve can be found on their act as a sounding board for the Chairman and of skills and experience on the Board and its website at involvepeople.org. Group CEO on Board and AM matters and Committees and to ensure we have a strong to lead the annual review of the Chairman’s pipeline of executive talent within the business. performance. The Nomination & Governance Committee Conflicts of interest Report on page 54 sets out in more detail the Each Director is required to notify the Company process adopted for changes to the Board The role of the Non-Executive as soon as possible of any actual or potential during the year. Directors and independence conflicts of interest, and this requirement has been adhered to during the year. In addition, Our NEDs provide an external and independent Bupa has had a Board Diversity Policy in place the Company Secretary carries out an annual view on the running of our business, since 2012. Following publication of the Parker review of all Directors’ actual or potential governance and boardroom best practice. Report into the Ethnic Diversity of UK Boards, conflicts of interest and any such potential They oversee and constructively challenge the Board has reviewed and refreshed the conflicts were recorded and authorised. Should management in its implementation of strategy Board Diversity Policy, which is available on a conflict arise, the relevant Director agrees within the Group’s system of governance and bupa.com. The Policy requires all Board to abstain from discussions on any matter in the risk appetite set by the Board. The Board appointments to be made on merit, employing which they may be conflicted. Many of our considers each of the current NEDs to be objective criteria reflecting the skills, knowledge NEDs hold appointments externally, but each independent of character and judgement and and experience required to ensure a rounded has confirmed that they are able to devote that there are no relationships or circumstances and effective Board. The Board is focused on sufficient time to perform their role effectively. which are likely to affect, or could appear to increasing diversity and aspires to achieving an affect, each of their judgement. The Board is appropriate proportion of Directors reflecting The Nomination & Governance Committee has clear in its view that Professor Sir John Tooke different ethnic or social backgrounds who examined the link between Martin Houston and remains independent of character and have direct experience of some of Bupa’s key Caroline Silver at Moelis & Company, at which judgement despite having served on the markets. At Bupa, the concept of diversity Caroline is a Managing Director and Martin Board for over nine years, and that he makes includes race, social, educational and chairs the Global Energy Group. This potential an important contribution to the Board on professional background, disability, gender, conflict has been cleared by the Committee. medical matters. John has confirmed that sexual orientation, religion, belief and age, as he will retire from the Board in May 2019. well as culture, personality, work style and cognitive and personal strengths. Diversity also Board training and development The Board comprises a majority of independent includes a diversity of perspectives on what Each of the Directors is required to keep up NEDs, and all Directors offer themselves for motivates and interests Bupa’s existing and to date on matters potentially affecting the annual re-election by the AMs. NEDs are potential customers. We do not believe that business, and we arrange regular briefings for appointed for an initial three-year term, and any setting explicit targets to improve diversity in a them over and above any training they may term beyond six years is subject to particularly particular area would be the right approach for receive outside of Bupa. During the year, rigorous review. A copy of the standard NED Bupa. Instead, we aim to ensure that candidates Directors attended sessions on the EU General Terms of Appointment, setting out their for the Board and senior management are Data Protection Regulation, public policy, the expected time commitment, is available on taken from as wide a pool as possible and the UK Senior Manager & Certification Regime and bupa.com and at Bupa’s registered office, firms that assist us in our recruitment are all cybersecurity. and is also available for inspection before and signatories to the Voluntary Code of Conduct Committee members also receive training during the AGM. During the year, four meetings for Executive Search Firms. of the NEDs were held without management as necessary on specific technical topics. present, one of which was led by the Senior We maintained female representation on the For example, in 2018, the Audit Committee Independent Director in the absence of the Board above the minimum 33% set by the received awareness training on new IFRS Chairman and Chairman Designate. Women on Boards Davies Review, and we requirements and actuarial reserving. The 2018 currently have 36% female representation on Board evaluation has identified a number of the BET. During the year, we signed up to the potential areas for Board development during HM Treasury’s Women in Finance Charter, a UK 2019, and training will be considered and initiative to increase female representation in scheduled as appropriate. senior finance roles. The Board is taking a global approach to the Charter and has

42 Strategic Report Governance Financial Statements

How the Board spends its time Regulatory engagement There were 11 scheduled Board meetings during the year and four ad hoc meetings to discuss During the year, the Group received its regular specific matters, for example: Chairman succession, Solvency II reporting, regulatory matters Periodic Summary Review from the Prudential and the acquisition of Acıbadem Sigorta. Regulatory Authority (PRA) and Firm Evaluation Letter from the Financial Conduct The table below shows some of the matters considered by the Board during the year. Authority (FCA) in relation to the UK insurance Key issues are discussed in more detail below. subsidiary. These are regular assessments by the regulators setting out any matters of Topic Key issues interest to them generally in the sector or specifically to Bupa in relation to our insurance Governance, –– half-yearly Chief Risk Officer (CRO) reports business, governance and capital management risk and regulatory –– annual Medical Advisory Council report or their expectations in these areas. The Board –– approval of Risk Management Framework and risk invited members of the FCA and PRA to the appetite statements meetings at which these letters were discussed and is closely monitoring the actions being –– ‘Speak Up’ reporting update taken to address the issues raised. –– PRA and FCA letters and presentations Strategy –– Committee minutes and verbal updates Our annual strategy meeting was held in June –– Solvency II returns and considered a number of presentations on topics including the future of healthcare Performance –– Full and Half Year Results and health insurance; how Bupa is responding and business –– Group CEO reports to disruptors in health insurance; strategic and emerging risks; and areas for growth. updates –– CFO reports The objectives we set to achieve our strategy –– quarterly reports on business performance (including the are constantly evolving, and further detail on Customer dashboard) our strategy and business model can be found –– MU updates in our Strategic Report on pages 1 to 34. Updates on progress against our strategy M&A –– acquisition of Acıbadem Sigorta (Turkey) are received throughout the year. –– increase of stake in Bupa Arabia Information security and privacy –– disposal of stake in Torrejón Salud (Spain) We take the security of our customers’ –– acquisition of Ginemed, fertility provider (Spain) data very seriously. During the year, we commissioned an independent assessment Strategy –– ongoing strategy of the maturity of the Group’s controls on –– approval of three-year plan information security against a global standard. The Board and the Risk Committee considered –– MU strategy updates the results of this assessment and set a target People –– Chairman succession maturity level to raise the maturity of the Group’s systems and controls on information –– NED recruitment and Committee membership security through a specific programme over –– People Pulse results the next two years. In addition, action has been –– senior executive succession planning and talent management undertaken during the year to ensure we comply with the EU General Data Protection Other –– information security programme Regulation. In particular, a new risk appetite –– GDPR and privacy statement on information security risk was approved by the Board. The Risk Committee –– Brexit planning report on pages 51 to 53 includes more detail –– site visits to businesses in Hong Kong, Australia and Poland on information security and privacy risk. –– corporate responsibility and sustainability updates

43 Bupa Annual Report 2018

Leadership continued

Board succession Governance in action: acquisition process In 2018, we appointed three new NEDs and the successor to Lord Leitch as Chairman. In addition, Michael Hawker will join the Board as a NED on 1 April 2019. The Board and Target identified Nomination & Governance Committee’s work Negotiations and due diligence carried out in these areas is set out in that Committee’s report on page 54. Brexit planning To enable us to continue to serve international health insurance customers living in the EU, Board but outside the UK and Ireland, once the Approves non-binding indicative offer UK leaves the EU, the Board approved the establishment of a new regulated subsidiary in Ireland to renew business into post-Brexit. This company received Irish regulatory approval in December 2018. In addition, the Board has Risk Committee considered the potential impact of a no-deal Reviews: key risks and mitigation; fit with risk appetite; integration plan Brexit both on our businesses in the UK and Depending on value of transaction and entry into new geographic elsewhere in the EU, and this has been factored or product market into the Group’s 2019-2021 Plan. Australian transfer pricing dispute In March 2019, Bupa Australia announced that Board it had reached an in-principle agreement with Considers: strategic rationale and value creation; due diligence; risks and the Australian Taxation Office (ATO) to settle mitigation; financing; integration plan Lessons learned Lessons a number of disputed matters, including a Approves binding offer transfer pricing issue relating to the funding of its Australian acquisitions in 2007 and 2008. Throughout 2018, the Board monitored progress on this matter and approved Completion management’s proposed approach.

Acquisition of Acıbadem Sigorta During the year, the Board approved the Integration acquisition of Acıbadem Sigorta, a specialist health insurance provider which had gross Approves integration plan written premiums of TRY913m (c£132m) in 2017 and represents a long term strategic investment for Bupa. The acquisition was agreed in August 2018 and completed in Post-acquisition review January 2019, and the Board will oversee Reviews process; assesses performance delivery; lessons learned its integration into the Group. The diagram opposite shows the governance process followed for material acquisitions in accordance with the requirements of the M&A, Joint Ventures and Strategic Partnerships Policy, one of the Enterprise Policies approved by the Board to manage risk within the risk appetite set by the Board from time to time.

44 Strategic Report Governance Financial Statements

Board and Committee performance Agreed actions from 2018 Board evaluation This year, we carried out an internal Topic Agreed action Linkage to strategy questionnaire-based evaluation of the Board and its Committees. The questionnaire was Considering Enhancing the content of Board Putting our customers undertaken using an online tool provided papers to include future trends in front and centre. by Independent Audit Limited, who carried the big trends more detail. out our last externally facilitated evaluation Inviting contributions from external in 2016. An external evaluation will be experts to challenge the Board’s thinking. commissioned in 2019. The questionnaires were completed by all Directors on the Board at 31 December 2018 except Paul Evans Closely monitor the information Digital transformation and and Nicholas Lyons (exempted since they Information security programme. continuous improvement. only joined the Board on 1 November 2018). security In addition, a number of standing attendees were asked to complete the appropriate Committee questionnaires. The Board and each Committee analysed the results of the questionnaires and agreed appropriate actions to further enhance effectiveness during 2019. The Board concluded that, overall, the Board Progress against actions from the 2017 Board evaluation and Committees had operated effectively The Board reviewed progress against the 2017 evaluation actions during the year and during the year. In particular, it was found that a summary of progress made is set out in the table below. Board members work well together with an open and trusting atmosphere and have a Topic Agreed action Progress made good mix of skills, knowledge and experience. The Board clearly sets and contributes to the Clarity on Keep Bupa’s long term ambitions The Board held a two-day execution of strategy, focusing on people as and strategy under review. strategy session in June 2018 and a lever to delivery. The Board also has a clear long term additional strategic matters have been considered by the Board picture of the key risks and uncertainties strategy throughout the year. facing the business. Lord Leitch led the evaluation of each Director’s performance in 2018 and concluded that each Director had carried out their duties effectively Focus on Finalise appointment of new Roger Davis was appointed as during the year and contributed to the Board’s Chairman. Commence process Chairman from 1 January 2019. Non-Executive to recruit NEDs with international performance, devoting sufficient time to Four NEDs with financial services financial services and medical the Company’s business and constructively Director experience have been recruited, expertise respectively. one with existing experience of challenging management. succession our Spanish business, and one planning Lord Leitch’s performance during the year with experience of the Australian was also assessed and the Board agreed financial services market. that he was an excellent Chairman who led Recruitment of a NED with medical inclusive discussions. expertise is ongoing. The agreed actions from the 2018 Board BET leadership Significant focus on further An executive talent session was evaluation are set out in the adjacent table strengthening of succession held by the Board in September succession planning in a number of specific 2018. In particular, the Board and progress against these will be reported areas agreed by the Board in endorsed the appointment of on in the 2019 Annual Report and Accounts. December 2017. Hisham El-Ansary as CEO, Australia The results of each Committee’s evaluation and New Zealand to succeed are set out in the respective Committee Richard Bowden who will be reports within this Governance Report. retiring later this year.

45 Bupa Annual Report 2018

Engagement with stakeholders

Association Members asked at the Annual General Meeting and other Customers Bupa maintains a register of around 100 AMs, forums are circulated to all AMs, the Board and We have a customer centric culture and the including all Board Directors, who perform the BET, a practice that ensures that the views Board endeavours to understand the views the kind of key governance role ordinarily of AMs are well communicated and understood of our customers through visits to operational undertaken by shareholders. AMs normally within the business. sites, including call centres, care homes and serve for an initial term of ten years which can Briefing calls are held with the AMs following hospitals as well as reviewing regular customer be extended for further terms of five years. the publication of the Group’s annual and updates and metrics. Customers are at the AMs have no equity holding in Bupa and, half-year financial results each year, together heart of our decision-making at all levels of consequently, no right to dividends, only with briefing sessions later in the year. In 2018, the organisation, facilitated by our Customer receiving reasonable expenses for travelling these sessions focused on strategy, 2018 Excellence Framework and human-centred to meetings or events. They are eminent developments, top risks, digital innovation, design. See ‘Our customers’ on page 8 for individuals in their own field, coming from a privacy and information security and our entry further information on how we are planning diverse range of sectors, including health and into the Turkish market. In addition, the AMs to meet our customers’ future needs and social care, business, regulatory, academia, receive regular communications on key changes how we measure our performance based charities and the public sector. Their expertise and developments within Bupa, such as major on customer feedback. enables them to challenge the Board on matters acquisitions and changes to the Board and BET. of performance and strategy. The Board can The Group CEO, Chairman, Senior Independent People also draw upon their skills, knowledge and Director and Company Secretary are available Our people are the backbone of our experience to help inform future strategy and to the AMs throughout the year. To help the organisation and one of our strategic pillars development. Fundamentally, the role of AMs is AMs keep fully informed, they also have access is for our people to love working at Bupa to hold the Board to account in delivering on to a secure website containing useful information and making a difference for our customers. Bupa’s purpose of helping people live longer, and updates, along with regular media briefings During the year, the Board oversaw the healthier, happier lives. AMs are selected using and a calendar of forthcoming events. criteria including recent and relevant experience development of a new People strategy and in their field, independence from Bupa, the capacity considered the results of our new People Pulse to make a contribution and experience in the Bondholders survey. The Board also receives reports on key overseas markets in which Bupa operates. Bupa has a number of debt securities in issue issues raised through the ‘Speak Up’ process through its subsidiary company, Bupa Finance and engages with our people during site visits. As set out in the Nomination & Governance plc, and is therefore required to operate in The Board sets an open and inclusive culture Committee Report on page 54, we are in the accordance with the relevant UK Listing Rules, that empowers our people to deliver and to process of recruiting additional AMs with the Disclosure and Transparency Rules and the be themselves at work and welcomes Bupa’s aim of increasing the number of those with EU Market Abuse Regulation in respect of work with the organisation INvolve and other knowledge of the key markets within which its announcements of financial results activities to increase diversity at all levels of Bupa operates. and operations. our workforce. More information can be Bupa’s AMs have various opportunities to found under ‘Our people’ on page 12. We are Briefing calls are held for bondholders to considering our approach to the new Code engage with the entire Board. The key event discuss the Annual and Half Year results. This each year is the Annual General Meeting requirements regarding engagement provides an opportunity for them to question with employees. (AGM), which is well-attended and is combined management on the financial performance and with a seminar to provide an in-depth view of a strategy of Bupa. Our CFO and Group Treasurer particular aspect of the business and a further hold roadshows for bondholders at least Other stakeholders opportunity to ask relevant questions. In 2018, annually and bondholders are kept up to date Across our markets, we engage regularly with the topic of the seminar was the future of on significant developments at Bupa by email. policymakers and regulators, health and social health insurance. A summary of the questions care professionals, consumer groups and other stakeholders. This enables us to champion issues that matter to our customers and Governance in action: contribute to policy debates. Beyond that, In 2018, our Board visited our businesses as part of our corporate responsibility and in Australia, Hong Kong and Poland. sustainability strategy, we play an active role in These visits are an opportunity for our the communities we work in, connecting with Directors to meet with local executives, other commercial and non-profit organisations to strengthen knowledge of Bupa’s to make a positive contribution to wider society, global operations and how they are enabled locally. particularly in health. Our business model on page 4 shows how we create value for customers, employees and other stakeholders. Our approach to the role we play in our communities is available on page 18.

46 Strategic Report Governance Financial Statements

Audit Committee Report

The Committee’s role and governance In 2018, the Committee monitored management’s The principal function of the Committee is progress on improving IT access controls and to monitor the integrity of Bupa’s financial the External Auditor has also carried out testing statements, the effectiveness of our internal in this area, noting improvements made during control systems, and to monitor the effectiveness, the year compared to 2017. In addition, performance, objectivity and independence of management commissioned an independent the internal and External Auditors. The Committee assessment of the maturity of our current also reviews regulatory reporting and disclosure information security controls across the Group. requirements. During the year, the Company has continued A full description of the Committee’s role is with its Finance Development Programme and extended the scope of this project to include set out in its Terms of Reference on bupa.com. The remit of the Committee extends The Group CEO, CFO, Corporate Controller, creating an improved Solvency II reporting beyond examining the integrity of the Chief Internal Auditor, Chief Risk Officer and process, and delivery of IFRS 16 and IFRS 17 financial statements and, with regulators External Auditor are routinely invited to attend reporting. The Committee received regular raising the bar in the UK and elsewhere, meetings. The Committee meets at least reports on the progress of the Programme and the Committee has an increasingly annually with each of the External Auditor, supported management’s decision to go live important task in overseeing Chief Internal Auditor and Chief Actuary in the with a new consolidation system for the 2018 management’s actions in relation to absence of management. All of the Committee year end. Both the Risk function and GIA the Committee’s areas of responsibility. members have recent and relevant financial provided assurance over the design and During the year, the Committee closely experience. implementation of the new system and the monitored the management programme controls put in place. to improve IT access controls in line with Key activities in 2018 The Committee received training during the the increasing importance of information year on IFRIC 23 – Uncertainty Over Income The Committee examined the key issues and security across the Group. It also focused Tax Treatments, as issued by the International judgements relating to the Group’s Half and on the Finance Development Programme Accounting Standards Board, and on actuarial Full Year Results 2018, Solvency Financial that included moving to a new IFRS reporting within Bupa. consolidation platform in time for the Condition Report and Regular Supervisory production of the 2018 financial results. Report. In particular, the Committee asked Ahead of the Half and Full Year 2018 results, management to clarify, simplify and improve the Committee considered various accounting I would like to thank Simon Blair for his the alignment and comparability of the issues where a high degree of judgement was contribution to the Committee during Alternative Performance Measures (APM) used required to determine their treatment under his tenure and also welcome Paul Evans in external reporting. The Committee accepted relevant accounting policies. These included and Nicholas Lyons to the Committee. management’s proposed approach to reviewing management’s assessment of Under EU Regulations, Bupa is required implementing IFRS 16 Leases and IFRS 17 goodwill and intangible assets, outstanding to rotate its audit firm at the next (Insurance Contracts), and particularly its view claims provisions and pension scheme appointment on or after 17 June 2020. of the potential impact of IFRS 16 on Solvency II assumptions including the Guaranteed The Committee has decided to hold a capital requirements. Minimum Pension. tender to appoint a new audit firm for In March 2019, Bupa Australia announced that it the audit of the 2021 financial year. It is had reached an in-principle agreement with the anticipated that the new External Auditor “In 2018, the Audit ATO to settle a number of disputed matters, will be selected by mid-2019. including a transfer pricing issue relating to the Committee funding of its Australian acquisitions in 2007 intensified its work and 2008. The Committee received regular reports from management on the progress of in overseeing the the matter during the year and liaised with the quality and integrity External Auditor, the audit committee of the Australian business and external counsel to of our internal consider the accounting impact of the matter. financial statements Significant issues and areas of judgement in and internal financial respect of the 2018 reporting period and the way these were addressed are detailed in the controls.” table on pages 48 to 49.

Clare Thompson Committee Chair

47 Bupa Annual Report 2018

Audit Committee Report continued

Financial reporting –– The key judgements referred to in the consistent wording throughout the Annual The Committee reviewed the appropriateness narrative reporting and the significant issues Report; and reported in this Audit Committee report of the Half and Full Year 2018 financial –– The layout and presentation are clear with are consistent with the financial statements; statements, with both management and the appropriate language used throughout. External Auditor. This review considered the –– Statutory and adjusted measures, such as Going concern and longer-term viability following areas: underlying profit, have been given equal prominence and are clearly explained; The Committee also reviewed the going Fair, balanced and understandable concern assumptions and underlying principles In assessing whether the Annual Report –– Key Performance Indicators reflect those in the longer-term viability statement on was fair, balanced and understandable, the used to measure business performance page 29. Overall, the Committee is satisfied that Committee found as follows: and management is able to explain their the assumptions and principles on which these relevance in assessing the results; –– The narrative reporting in the Strategic are based are appropriate and reasonable. Report is consistent with the financial –– Clear, simple explanations are given of The Committee also made an assessment statements, providing challenge and the business model, Bupa’s strategy and as to whether the requirements of the risk feedback throughout the compilation accounting policies; management and internal control section of of the Annual Report and Accounts; –– Key messages are clearly highlighted with the Code were satisfied.

Significant issues and areas of judgement

Key issue Committee response

Goodwill and intangible asset valuations The Committee critically reviewed and discussed management reports outlining the basis of the assumptions used for our most sensitive Cash Generating Units (CGUs) and challenged the Significant levels of goodwill and intangibles are held results in the light of business performance and the external environment, in particular noting in respect of prior acquisitions. Impairment reviews the impairment in respect of Bupa New Zealand which has been recognised in the consolidated are inherently complex and require a high level of income statement. The Committee challenged management on the elements included in the judgement to be applied due to the uncertainty involved Weighted Average Cost of Capital methodology and the terminal growth rates for the CGUs. in forecasting future cash flows, the appropriateness The Committee also received from KPMG a report of their views on the assessments performed of discount rates used and future growth rates of the by management. The Committee is satisfied that the assumptions applied were reasonable and respective business. the carrying value of goodwill and other intangible assets is appropriate.

Claims provisioning The Committee received a report from the Chief Actuary setting out estimates of the technical provisions, including the margin of prudence held by each insurance entity, as well as the result Calculation of the outstanding claims provision is based of the annual review of compliance with Bupa’s Claims Reserving and Liability Adequacy on assumptions including claims development, margin Standards. The Committee sought justification for the appropriateness of the overall level of of prudence, claims costs inflation, medical trends and insurance technical provisions proposed, including the level of prudential margin, in view of seasonality, which require a high level of judgement and historic reserve development patterns and the reserve strengthening undertaken during the actuarial expertise. year in some businesses. The Committee considered the appropriateness of the overall level of insurance technical provisions, including the level of prudential margin. In reviewing and approving the insurance technical provisions, the Committee also took into consideration the auditor’s report to the Committee.

Property valuations The Committee received the results from the external valuations in Spain and Chile, undertaken as part of the triennial property review, and Directors’ valuations performed in other Market Bupa has a significant portfolio of care homes, villages and Units. The Committee also reviewed reporting from the External Auditor addressing the hospital properties which are revalued to fair value on a valuations to assess their reasonableness and considered the appropriateness of disclosures periodic basis, with external valuations undertaken at least made. The Committee is satisfied that property values and disclosures for all properties, triennially. including those held for sale, are in compliance with financial reporting requirements and are The underlying assumptions involved in the valuations, appropriate. including earnings, profitability, occupancy levels and future trends are subject to a high level of judgement.

Pension assets and liabilities The Committee considered the appropriateness of the assumptions used in the valuation of the related pension assets and liabilities performed by the independent scheme actuary and is Bupa’s principal defined benefit scheme in the UK is The satisfied that the assumptions used in the valuation are appropriate. The Committee also noted Bupa Pension Scheme. Significant judgement is exercised the equalisation allowance in the consolidated income statement in respect of Guaranteed in determining the actuarial assumptions used in valuing Minimum Pensions following the recent High Court judgement. The Committee received the pension asset/liability. information from KPMG benchmarking the assumptions used in the valuation of pensions liabilities. The Committee concluded that the pension assumptions were appropriate.

48 Strategic Report Governance Financial Statements

Significant issues and areas of judgement continued

Key issue Committee response

Acquisitions and disposals The Committee considered the proposed accounting for the respective acquisition balance sheets, including the valuation of acquired customer relationship intangible assets, and During 2018, Bupa completed the acquisition and disposal the disposal. The Committee challenged management and concluded that the approach accounting for an increase in its holding of Bupa Arabia, and assumptions used were appropriate. Proposed disclosures were also presented to the the disposal of Torrejón Salud in Spain and the acquisition Committee. of Ginemed, a Spanish health group.

Provisions and contingent liabilities During the year, the Committee received reports from management setting out the rationale applied to the consideration of the recognition and disclosure of provisions and The Group has contingent liabilities arising in the ordinary contingent liabilities, including those in relation to a number of disputed matters with the ATO. course of business, including losses which might arise from The Committee challenged the assumptions made and the conclusions reached requesting litigation, disputes, and interpretation of tax law. further details where they felt necessary. After due consideration and discussion, the Committee concluded that management’s assumptions were appropriate regarding the need or otherwise for accounting provisions and that the proposed disclosure in the financial statements was appropriate.

Alternative Performance Measures The Committee reviewed several proposed adjustments to the definition of underlying profit, based on FRC guidance, with the objective of including recurring items and reducing the number The Group uses an APM, underlying profit, for its of differences between this measure and statutory profit. The key change was the decision to segmental reporting to explain trading performance include amortisation of acquired intangible assets within underlying profit. externally. This was refined in 2018 with 2017 comparators More detail can be found in Note 2. restated.

IFRS 16 Leases The Committee considered the key policy recommendations for IFRS 16 in respect of lease term, discount rate, transition options and valuation under Solvency II. The Committee The requirements of the standard have been assessed in challenged management and concluded that key policy recommendations made by advance of application on 1 January 2019. management were appropriate.

External Auditor The Committee reviews non-audit services The assessment carried out during 2018 provided by KPMG and other audit firms considered areas such as the overall quality of Fees and non-audit services quarterly to assess any potential independence service, timeliness of the resolution of issues, To further safeguard the External Auditor’s issues. The External Auditor’s remuneration for the quality of the audit resource and whether objectivity and independence, Bupa has an the year ended 31 December 2018 is shown in the audit plan was followed. The Committee Audit and Non-Audit Services Policy setting Note 2.3.3. requested and reviewed the external audit plan, out the services which the External Auditor is ahead of its approval to provide an opportunity prohibited from providing and the approval Effectiveness to challenge the plan and ensure that the process for those non-audit or audit-related In liaison with executive management, the External Auditor allocated sufficient resources services that may be provided. The policy is Committee annually assesses the scope, fee, in order to meet the plan. The Committee is reviewed and approved by the Committee objectivity, independence and effectiveness of satisfied that KPMG continues to provide an annually. In 2018, the policy was updated to the external audit process and the performance effective audit service and recommends its revise the absolute cap on the total value of the External Auditor against agreed criteria re-appointment at the 2019 AGM. of non-audit engagements that may be at the outset of that year’s audit. This includes contracted with the External Auditor prior to considering the results of the auditor any approval by the Committee for subsequent satisfaction survey sent to senior finance non-audit engagements. This starts at a fixed management across the Group and the auditor financial amount and is capped at 50% of the evaluation survey sent to the Committee average Group statutory audit fees paid in the members along with the Group CEO, CFO, last three years. Chief Internal Auditor and the Corporate Controller.

49 Bupa Annual Report 2018

Audit Committee Report continued

The FRC’s Audit Quality Review team (AQR) access controls over data and quality of Internal Control and Risk monitors the quality of the audit work of the management information and documentation. Management Assessment major UK audit firms by inspecting a sample Several thematic audits were also carried out As noted in the Risk section on pages 30-34, of their audit files and procedures each year. covering risk culture, user access management Bupa has an ongoing process for the In 2018, the AQR reviewed KPMG’s audit and the quality of management information identification and management of its principal of the Group’s 2017 financial statements. and documentation. The Committee approved risks and conducts an Internal Controls and The Committee discussed the report with a half year refresh of the 2018 Plan, based on a Risk Management Assessment (ICRMA) KPMG and noted that no significant areas for renewed risk assessment in line with the GIA annually to ensure that the internal controls improvement had been identified and were methodology, in June 2018. and risk management processes are satisfied with KPMG’s planned approach for The CIA regularly reports to the Committee on operating effectively. the 2018 audit. GIA activity as well as management’s progress The latest ICRMA process was conducted External Audit tender in addressing audit findings and all GIA reports in late 2018 and the results reported to the are made available to the Committee members. KPMG has been Bupa’s External Auditor since Committee and the Risk Committee in 1985, during which time Bupa has not put the External quality assessment early 2019. audit out to tender. Under new EU Audit Internal Audit maintains a quality assurance and Regulation transitional arrangements, Bupa is improvement programme that includes an required to rotate its audit firm at the next Subsidiary governance annual evaluation of the function’s adherence to appointment on or after 17 June 2020. As The Committee has maintained its links with the relevant standards. In 2018, the Committee stated in the 2017 Report, the Committee has the audit committees of Bupa’s major insurance commissioned an external quality assessment decided to hold a tender to appoint a new audit subsidiaries. The Committee Chairman also of GIA to assess its effectiveness relative to firm for the audit of the financial year ending chairs the audit committee of the UK major international standards. The assessment 31 December 2021. The Committee has now insurance subsidiary. During the year she concluded that GIA generally conforms agreed a process and timescale for the tender attended a meeting of the Spanish audit to the Global Institute of Internal Auditors’ which will be led by a sub-Committee. EY, PwC committee and has held calls or meetings with international standards. The assessment and Deloitte have each confirmed that they the chairs of the Australian and Miami audit also highlighted further work required to could reach a position of independence at commitees. enhance the function’s effectiveness into appointment and will be asked to take part in the future, including to meet the best In addition, the minutes of the meetings of the tender which we expect to launch shortly. practices recommended in the UK FS Code. the audit committees of the major insurance Medium-tier audit firms were also considered The Committee has reviewed the plans subsidiaries are received to gain an insight but they agreed that they would not be able to proposed by GIA to implement these into concerns at a local level. provide the service that an organisation of recommendations. Bupa’s scale and geographic diversity requires. It is anticipated that the new External Auditor Chief Internal Auditor Committee effectiveness review will be selected by mid-2019. The new firm will The Committee is responsible for the The Committee considered the results of the shadow KPMG during their audit of Bupa’s appointment and removal of the CIA, setting 2018 review of its effectiveness and concluded 2020 year-end, taking over as auditor from the the CIA’s objectives and reviewing their that it had operated effectively throughout the beginning of 2021. performance, taking into account the views year. The Committee members were found to The Company intends to tender the External of the Group CEO. The CIA has access to the work well together in questioning management Auditor appointment at least every 10 years. Committee Chairman and Board Chairman as assumptions in relation to external reporting, required and is directly accountable to the were focused, held good discussions on issues Committee. During the year, the Committee and had a good relationship with both the Global Internal Audit held one private meeting with the CIA in the internal and External Auditor. Annual Plan absence of management. In 2019, the Committee has agreed to further The assurance provided by GIA was a crucial Following the issuance of their annual strengthen its linkage with the Remuneration part of the Committee’s consideration of Bupa’s assessment of Bupa’s governance, risk Committee and requested further improvements overall control environment during the year. management and controls in January 2019, the to papers submitted to the Committee to aid it GIA’s Annual Plan is developed using a CIA has moved into a new role within Bupa. The in making informed decisions. risk-based methodology that includes input Committee is satisfied that the CIA maintained from senior management and the Board. their independence and objectivity throughout The 2018 GIA Annual Plan and budget were their tenure. An external successor to the CIA approved by the Committee in December 2017 has been found and will join the business during and were driven by the output of a detailed risk the second half of 2019. Additional third-party assessment and discussion with the second line resource has been engaged to support the Risk function. The Plan included a focus on Committee Chairman and GIA in the interim.

50 Strategic Report Governance Financial Statements

Risk Committee Report

The Committee’s role and governance 2018 activities The principal role of the Committee is to The Committee’s focus in 2018 was to continue assist the Board in its leadership and oversight to monitor Bupa’s risk profile; creating a of risk across Bupa. This includes understanding stronger link between the Group’s risk appetite current and future risk exposures, recommending and strategy by refreshing the emerging and overall risk appetite and tolerance to the Board, strategic risk analysis; reviewing the Risk reviewing the consistency of corporate strategy Appetite Framework and statements; gaining with the Company’s risk appetite, reviewing insights into a number of areas of the business the Risk Management Framework, considering through presentations from management; and the risk aspects of major transactions, and overseeing management’s actions to mitigate promoting a risk awareness culture throughout key risks such as information security and I would like to start by thanking Simon Blair Bupa. A full description of the Committee’s privacy risk. role is set out in its Terms of Reference on for his inclusive and clear chairmanship Monitoring Bupa’s risk profile bupa.com and a detailed description of Bupa’s of the Committee over the last year The Committee receives regular reports from and to welcome Paul Evans and Matías risks are set out on pages 30 to 34 in the Strategic Report. the CRO on the Group’s risk profile and Rodríguez Inciarte to the Committee. from the Chief Medical Officer on clinical risk During the year, the ongoing role of the The Committee comprises independent governance. The Committee also engages with Committee has been to assess the Group’s Non-Executive Directors (NEDs). The Group the risk committees of Bupa’s major insurance compliance with the Board’s risk appetite. CEO, CFO, Chief Risk Officer (CRO), Chief subsidiaries. The UK’s decision to leave the EU We have recommended new risk appetite Medical Officer, CIA and the External Auditor continues to lead to uncertainty for Bupa. statements on information security and are invited to attend all meetings. The CRO We have put contingency plans in place to privacy risk, strengthened our enterprise has unrestricted access to all members of the address a range of Brexit scenarios, including risk policies, considered the key risks Committee and regular private meetings of establishing a regulated entity in Ireland to allow of major transactions and received a the Committee with the CRO, in the absence us to continue to provide for our customers series of ‘deep-dive’ presentations into of management, are held during the year to following changes to cross-border financial specific risks. ensure an opportunity for the CRO to raise services regulation. In summary, our risk As a provider of both health services any concerns he may have. The Committee profile ends the year somewhat raised as and health insurance, we hold sensitive Chairman has recently been appointed as a improvements in internal capability are continually personal data on our customers and take member of the Remuneration Committee to challenged by growing external threats. ensure that risk management and culture are their privacy and the security of their data Information security and privacy risk extremely seriously. Key areas of focus for taken into account in remuneration decisions. The risk posed to our customers’ information the Committee have been overseeing an Each year, the Committee provides a letter has continued to be a key focus for the independent assessment of the maturity to the Remuneration Committee stating Committee throughout 2018. As we deliver of our current information security whether the Committee believes that variable on our digital aspirations, it is essential that infrastructure, and preparations to comply remuneration should be reduced to reflect we can protect the data we are given by our with the EU General Data Protection risk or control concerns. customers, partners, employees and providers. Regulation (GDPR), which came into force The Committee has continued to work to during the year. We will continue to focus improve its understanding of information on these areas in 2019. security risk, and to develop suitable controls The Committee has also monitored the to mitigate this risk. Bupa operates in a variety key risks associated with the acquisition of of geographies, but the cyber domain is global. Acıbadem Sigorta in Turkey, the potential “Effective risk During the year, the Committee has overseen impact of various Brexit scenarios on the management is a detailed global review of our information Group and enhanced regulatory scrutiny security systems and controls. over our Australian Aged Care business key to running a With the implementation of GDPR in May 2018, and assessed the effectiveness of the sustainable business.” privacy risk has been another key area of focus Risk function. during the year. The Committee has closely Caroline Silver monitored management’s ongoing actions to Committee Chair meet GDPR requirements. A number of these are reliant on information security systems and required changes have been built into the information security actions. See overleaf for more information on how we protect information.

51 Bupa Annual Report 2018

Risk Committee Report continued

Solvency capital implications Emerging and strategic risks Information security and privacy of IFRS 16 Leases The Committee regularly considers emerging Why information security and privacy IFRS 16 Leases applies to Bupa from 1 January and strategic risks, both internal and external, are important to Bupa 2019. The change in accounting will bring in the context of the current business and As a health insurance and healthcare approximately £1.0bn of both lease assets and market environments in which we are provider, we hold data on our customers liabilities onto the Group Solvency II balance operating. These inform future strategy and they expect us to respect the privacy sheet. The associated property and interest rate discussions and they can present strategic of their information and deal with it risk charges will impact our solvency coverage opportunities as well as threats to be mitigated. appropriately. Any data loss could by 16 percentage points. Our view is that the The risks considered include the impact of erode customers’ trust in us and have a additional Solvency Capital Requirement is significant governmental or regulatory significant impact on Bupa’s reputation. not reflective of the economic risks to which changes, changes in customer behaviours and We therefore aim to ensure that we the Group is exposed through its leasing expectations, significant changes in medical have systems and controls in place and arrangements. The Committee has discussed treatment or the way care is provided, and operating effectively to mitigate the risk of several potential options for mitigating the digital disruption. There is significant linkage loss or misuse of our customers’, partners’, capital impact. Further information can be between these risks and it is unlikely that one employees’ or providers’ information and found in Note 1. risk would emerge in isolation. to ensure compliance with relevant data Australia Care Homes Brexit protection legislation. Our Australian aged care business is operating The Committee has monitored the potential How we protect the information in a challenging market, with a Royal impact of Brexit, including a no-deal Brexit on we hold Commission into Aged Care Quality and our businesses in the UK and the rest of the EU. –– we help our people understand the role Safety being called in September 2018. Tough While this scenario would be disruptive and they play in protecting information and commercial and regulatory conditions are expose Bupa to heightened risk in some areas, handling it appropriately through impacting the business. Nine Australian care we do not anticipate an immediate material mandatory training and regular internal homes have received sanctions notices from negative impact on the Group’s risk profile. the Australian Aged Care Quality Agency. An communications to raise awareness; Management are examining an extensive list of improvement programme has commenced to issues and working through steps to protect –– we have processes and controls in place identify and implement enhancements across Bupa’s position in these areas. In particular, to prevent information being accessed all care homes and specific remediation work the Committee is closely monitoring: by unauthorised persons and that we is being undertaken at sanctioned care homes. only use information in appropriate The Committee challenged management’s –– financial market volatility in the short term; ways; and operating model for this business and will –– the approach to regulation of cross-border monitor the improvements being implemented –– we regularly review our processes and financial services; controls to ensure that they remain fit to ensure that our residents continue to be for purpose and strengthen them cared for in a responsive, compassionate –– the UK’s future EU immigration system, as needed to keep pace with new way, to a consistently high standard and to including the impact of Brexit on our ability developments in technology, legislation ensure that lessons learnt are applied across to attract and retain clinical staff; all markets. or threats to information security. –– the impact of Brexit on the clinical supply Risk Management Framework chain in the UK, and; and risk appetite –– the impact of Brexit on the UK economy. Due to their importance to the Group, information security risk and privacy risk have See the box opposite for further information been separated from operational risk into on how Bupa is preparing for Brexit. separate Risk Appetite Statements. Also, the Enterprise Risk Policies have been redesigned to include minimum controls that all parts of the Group must comply with and to embed risk limits to make them more tangible to the business. The annual ICRMA process was carried out in late 2018 by the first line and was subject to challenge from the second and third line and the results considered by the Committee.

52 Strategic Report Governance Financial Statements

Stress and scenario testing Other Brexit preparations Management carries out stress and scenario In addition, the Committee has carried out The political uncertainty relating to Brexit tests annually to test the impact of various other business as required under its terms of and related uncertainty on market access, scenarios on the Group’s capital strength, reference including: recommending the Group’s trade, free movement of people and the liquidity and profitability. The Committee ORSA to the Board for approval; reviewing the UK’s economic outlook could affect agreed the scenarios to be tested during the annual insurance compliance plan; reviewing financial and operating results. year and reviewed the results of the tests. the results of reverse stress testing of Bupa’s The scenarios are designed to test the strength business model; reviewing the modelling of We have hedging programmes in place to of our three-year operating plan and also economic capital as part of our annual ORSA mitigate the risk of potential FX volatility form part of the Group’s Own Risk Solvency process; and approving, or recommending to and liquidity risk. As already disclosed, we Assessment (ORSA). the Board, refreshed enterprise risk policies. have established a new entity in Ireland to provide continuity for our Bupa Global Acquisition risks customers within the European Economic Prior to the Board’s decision in July 2018 to Committee effectiveness review Area. We are closely monitoring the acquire Acıbadem Sigorta the Committee As part of the last Committee effectiveness approach to regulation of financial considered the key risks relating to this project review, the Committee agreed to take a more services, the UK’s future EU immigration with a particular focus on those associated with strategic approach to defining the type of risk system and the impact of Brexit on the entering the Turkish market and the impact the Group is willing to take, to develop a clearer UK economy. on the Group’s risk profile. Carrying out risk picture of the controls and risk management at reviews such as these is crucial to the long term We do not expect immediate interruption Bupa and manage the bandwidth across the sustainability of our business, ensuring that the in workforce supply but do expect an Group. As set out above, the Group’s Risk full range of risks is appropriately considered impact in the medium-term, particularly Appetite Framework and statements have and proposals which would potentially on availability of clinical staff. been refreshed and new risk thresholds introduce excessive or inappropriate risks are introduced to clearly set out the level of risk Our UK provision businesses have either rejected or fully understood and that the Board is prepared to take. The ICRMA strategies for the attraction and retention mitigated to bring them within the Group’s process has become more robust and the of key clinical skills. There is a lack of clarity agreed risk appetite to the extent possible. reporting of risk and control information to the on how clinical supply chains might be See the diagram on page 44 for more Committee has continued to evolve. impacted and we continue to monitor information on how the Company governs The 2018 review of the Committee’s government guidance whilst identifying decisions on major acquisitions. the key risks within our own supply chain, effectiveness concluded that, overall, the such as access to isotopes and Subsidiary governance Committee works effectively and is particularly pharmaceuticals with short shelf lives. The Committee has maintained its links with strong at involving the Board as appropriate the risk committees of Bupa’s major insurance and setting the right tone with management. The impact of Brexit on the UK economy, subsidiaries. The chairmen of the Australian and The mix of skills and personalities on the and in turn our UK-based business, has UK board risk committees each attended a Committee provides a good balance and allows been considered as part of our planning meeting of the Committee in 2018 to provide meetings to be focused with a good level of and forecasting activities and stress their view of the key risks in their markets and debate and challenge. testing. For all other issues under review, management’s actions to mitigate key risks. The Committee agreed a number of areas to we have monitoring and risk management The current Committee Chairman also focus on in 2019, including: plans in place to protect Bupa’s position attended a meeting of the Spanish insurance from a customer, people and performance subsidiary’s risk committee and meetings –– monitoring the progress of the information perspective, whilst recognising that the were held with Chairman of the Australian security programme and wider IT risk impacts of Brexit are likely to crystallise risk committee. management; over time at an operational level and will be dependent on a range of political and In addition, the minutes of the meetings of –– monitoring the continued maturity of privacy economic factors. the risk committees of the major insurance risk management; subsidiaries are received to gain an insight into –– further developing the Group’s risk and the risks and concerns at a local level. control culture, embedding risk management in the first line of defence; and –– continuing to strengthen the links between risk and strategy.

53 Bupa Annual Report 2018

Nomination & Governance Committee Report

The Committee’s role and governance Chairman succession The Committee reviews the balance, structure At our 2017 AGM, Lord Leitch announced his and composition of the Board and its intention to retire at the end of 2018. As Committees and leads the Board appointments previously disclosed, Lawrence Churchill, as process, making recommendations to the Senior Independent Director, led the process of Board. It regularly considers succession identifying a suitable successor to the role of planning to ensure that the Board has the skills Chairman. The Board agreed the key attributes and expertise it needs to lead and manage the required, taking into account the views of the Company in the future. The Committee also Prudential Regulatory Authority and Financial takes the Board Diversity Policy into account Conduct Authority. Following pitches from two in both succession planning and recruitment. executive search firms, Russell Reynolds was 2018 was a busy year for the Committee. It leads the selection and appointment of appointed to carry out an initial desktop search Activity included the Chairman succession AMs and approves the appointment of for potential candidates and to benchmark process that concluded with my non-executive directors and non-executive internal candidates against the key attributes. chairmen of major subsidiaries in the Group. appointment and the successful A detailed role specification was drawn up Further information on the Board Diversity recruitment of three new NEDs. Michael and potential candidates were considered by Policy can be found on page 42 and the Policy Hawker’s appointment as a NED was the Committee. Of the initial list of external is available in full on bupa.com. announced in January and he will join the candidates considered, 50% were women. Board on 1 April 2019. He brings significant The Committee keeps Bupa’s corporate Four external candidates and one internal international insurance expertise, including governance arrangements under review candidate were shortlisted for interview by in Australia. and makes appropriate recommendations all non-conflicted Committee members. The Committee also oversaw changes to ensure that, where appropriate, Bupa’s Feedback was considered by the Committee in corporate governance both internally arrangements are consistent with best practice. and, following discussion, a recommendation and externally, and will continue the A full description of the Committee’s role is set was made to the Board that Roger Davis was process to add international experience to out in its Terms of Reference on bupa.com. the most suitable candidate; he’s had a clear vision for Bupa, and that his skillset would our body of AMs. The Committee comprises the Chairman, complement that of the Group CEO. The Board CEO and four independent NEDs. The CFO The Committee plays a vital role in considered and approved Roger’s appointment and Chief People Officer regularly attend ensuring that the right candidates are as Chairman and agreed that a handover Committee meetings. proposed for appointment to the Board. process be set up to ensure a smooth transition This is not just about an individual’s skills, from Lord Leitch. Neither Roger nor Lord Leitch knowledge and experience but also about took part in Chairman succession discussions their mindset, how they would complement or decisions. the existing Board members’ skills and the potential dynamics between Board members. Corporate governance is a growing area of focus for the Group as a whole, and the Committee monitors corporate governance developments internationally and in the UK to ensure that we hold ourselves to the highest standards. “We have refreshed the Board to ensure continued balance of knowledge, skills and experience.”

Roger Davis Committee Chair

54 Strategic Report Governance Financial Statements

NED succession Ridgeway Partners to lead on the recruitment Association Member recruitment Lawrence Churchill retired from the Board of the insurance directors and Russell Reynolds Following the 2017 effectiveness review, the at the AGM on 16 May 2018 following the to lead on the recruitment of a director with Committee agreed to further internationalise successful conclusion of the Chairman healthcare and clinical expertise. The initial the pool of AMs. It was subsequently agreed succession process. Clare Thompson was focus was on the recruitment of directors with to identify additional potential AMs and Russell appointed as Senior Independent Director insurance experience given the experience that Reynolds was retained to identify suitable from that date following a recommendation would be lost from the Board when Lord Leitch candidates, with support from the Company from the Committee to the Board. To help with and Lawrence Churchill retired. The diagram Secretary. It was agreed that candidates continuity while the Chairmanship transitioned, below shows the process followed which should be: the Committee recommended to the Board resulted in the appointment of Paul Evans –– independent of Bupa; that Lawrence Churchill be retained on a and Nicholas Lyons as NEDs with insurance consultancy basis to provide ad hoc support experience from 1 November 2018 and the –– able to contribute; and advice to the Chairman and Group appointment of Matías Rodríguez Inciarte, –– supportive of Bupa’s aims and objectives; CEO until the end of 2018. In preparation for with international financial services experience, Simon Blair’s retirement from the Board on particularly in Spain, as a NED from 1 January –– able to act as an ambassador for Bupa; and 11 January 2019, Caroline Silver was appointed 2019. Matías is already a NED of Sanitas S.A. –– complementary to the existing AMs. as Chairman of the Risk Committee from de Seguros, Bupa’s Spanish insurance business 3 October 2018. Simon remained a member and was recruited through an expedited In addition, experience of Bupa’s key markets of the Risk Committee until his retirement process, given Bupa’s existing relationship was strongly desirable. This recruitment is with him. Michael Hawker’s appointment has from the Board. ongoing. also been agreed with effect from 1 April 2019. A key focus for 2018, identified in the 2017 He brings significant international insurance Committee effectiveness review, was to expertise, particularly in Australia and will commence succession planning for those also join the boards of Bupa’s key Australian NEDs due to retire within the following insurance subsidiaries. The process to recruit 18 months. The Committee considered the a new NED with medical expertise is well key skills, knowledge and experience required advanced. in new Board members as succession plans progressed. It was agreed to recruit at least Ridgeway Partners provide executive and two NEDs with insurance experience and non-executive search services to Bupa, and one with healthcare and clinical expertise. have an employee health insurance scheme Knowledge of, and expertise in, Bupa’s key provided by Bupa. Russell Reynolds provide markets was also important as the Board services to recruit NEDs and to identify agreed to ensure representation on the boards potential AMs. They also have employee health of Bupa’s key insurance subsidiaries by a insurance schemes provided by Bupa. They are current or recent Director. The Board appointed both signatories to the Enhanced Voluntary Code of Conduct for Executive Search Firms.

Non-Executive Director recruitment process

Succession planning Recruitment Selection Board approval Identified need to recruit to Executive search firms The Committee considered Shortlisted candidates initially maintain Board continuity appointed to target each area longlists taking into account interviewed by the Chairman, and agreed insurance and of expertise and internal each candidate’s executive and Chairman Designate and healthcare or clinical expertise candidates considered. Detailed non-executive experience, fit Group CEO. required as priorities. role specifications agreed. with the role specification and fit with the Board’s existing Preferred candidates met skills, knowledge and experience with the remaining members and Board dynamics. of the Committee and the Committee recommended their appointment to the Board.

55 Bupa Annual Report 2018

Nomination & Governance Committee Report continued

Subsidiary governance Corporate governance oversight Committee effectiveness review In the 2017 Annual Report we set out the The Committee receives regular updates on The annual Committee effectiveness review key recommendations from a subsidiary corporate governance developments across agreed that the Committee was working well governance review performed in that year. the Group’s key markets to ensure that it is and had operated effectively during the year. These recommendations have now been maintaining high standards of corporate In particular, the Committee felt that there implemented through updates to Bupa’s governance throughout the Group. Bupa had been strong improvement in oversight of Subsidiary Governance Enterprise Risk Policy, chooses to comply with the Code. This, and the subsidiary governance during the year, the level which is approved by the Committee annually. accompanying Board Effectiveness Guidance, of challenge and discussion in meetings was were updated and reissued by the Financial good and the balance of skills, knowledge and To enhance the relationship between the Reporting Council in July 2018, and came into experience on the Board had been maintained Group Board and the boards of our four major effect for Bupa on 1 January 2019. We intend through the recruitment of new Non-Executive insurance subsidiaries, we now require a to report in accordance with the revised Code Directors. The Committee agreed to focus on current or recent Group Board Director to be in the 2019 Annual Report and Accounts. the following areas in 2019: appointed to the boards of our major insurance We are also considering the impact of new subsidiaries. John Lorimer, a former NED, is a –– strengthening the Board’s knowledge of UK reporting regulations which will require NED of our Australian insurance subsidiary in information security and IT; enhanced disclosure in the 2019 Annual Report both the Healthcare and Health Insurance and Accounts of how the statutory directors’ –– continuing the programme to recruit new businesses and Michael Hawker will also be duty to promote the success of the company AMs; and joining this board on 1 April 2019. Simon Blair has been taken into account in decision-making. was appointed as chairman of our major –– enhancing the Committee’s oversight of The 2019 report will also provide details of the insurance company in Chile in January 2019. corporate governance. Board’s engagement with UK employees and Matías Rodríguez Inciarte also serves on the stakeholders. board of Sanitas S.A. de Seguros and Clare Thompson serves on the board of Bupa As set out in the Leadership section of this Insurance Limited, our major UK insurance report on page 42, the Board Diversity Policy subsidiary. Additionally, in October 2018, Martin was refreshed during the year to take account Houston was appointed as a non-executive of the recommendations of the Parker Report director of Bupa Arabia, Bupa’s associate into the Ethnic Diversity of UK Boards. The insurance company with the Nazer Group Committee considered the Parker Report’s in Saudi Arabia and the Committee also recommendations and endorsed the revised approved the appointment of a number of Board Diversity Policy for the Board’s approval. other non-executive directors to key subsidiary boards during the year. A further requirement is for the Group’s major insurance subsidiaries to carry out a board evaluation annually with an externally facilitated evaluation at least once every three years. To date, the Spanish, Australian and UK entities have carried out board evaluations, with the UK and Australian evaluations being externally facilitated. The results will be submitted to the Committee for review.

56 Strategic Report Governance Financial Statements

Remuneration Report Part 1: Committee Chairman’s letter

Dear Association Members On behalf of the Board and the Remuneration Other smaller policy changes include removing Committee, I am pleased to present the the entitlement to a company car and driver for Directors’ Remuneration Report for 2018. the Chairman and allowing reimbursement for spouse/partner travel expenses in exceptional circumstances for Executive Directors and Role of the Committee Non-Executive Directors. The Committee is responsible for ensuring that Bupa adheres to high standards of governance and best practice in remuneration matters. 2018 activities We have structured the remuneration policy In addition to the review of our remuneration policy, to promote the long term success of the we focused on a number of key areas in 2018. Key items covered Company and link reward to Bupa’s strategic Measurement of performance at scheduled meetings goals and purpose. A full description of the Committee’s role is set out in its Terms of We have taken a fresh look at our approach 8 February Reference on bupa.com. to measuring performance for the MBS in BET annual reward review, Committee 2019. To simplify and assist in the alignment, effectiveness review I am delighted to welcome Nicholas Lyons administration and communication of the MBS, who joined the Committee in November 2018, the Risk Adjusted Profit (RAP) measure will be 21 February and I would like to thank Lawrence Churchill removed, with its 10% weighting distributed 2015-17 LTIP outcome and approval of for his contribution as a Committee member equally to Customer and Group profit. 2018-20 LTIP targets, annual reward to May 2018. I would also like to recognise the The Long Term Incentive Plan was identified review for Designated Individuals, always invaluable, measured and thoughtful as a key area for review in 2019. terms of reference review contributions of Lord Leitch, who retired in Governance and developments 12 June December 2018. Following the establishment of our Irish HM Treasury’s Women in Finance Charter insurance entity regulated under Solvency II, the 18 July Directors’ remuneration policy Committee approved the extension of its remit Review of Committee advisor, In 2018, the Committee ensured all elements and the remit of Bupa’s Remuneration Standard remuneration governance including of remuneration complied with the Directors’ for Designated Individuals to this entity. remuneration policy, which was adopted at the requirements for insurance undertakings Executive appointments in the , 2018 incentive 2017 AGM. As you may recall, one of the key Following the departure of our Chief Information plan rules, review of approach to changes was the introduction of a balanced Officer (CIO) in April 2018, the Chief People subsidiary NED fees, BET remuneration scorecard for both the Management Bonus Officer assumed BET level CIO responsibility terms for CEO ANZ Scheme (MBS) and the Long Term Incentive Plan (LTIP), reflecting a unified approach to until a permanent appointment is made. 9 October how Bupa rewards future performance that Wider employee context Pay comparator groups, approach to places customers and risk management at Bupa is committed to ensuring that remuneration identifying UK Designated Individuals the heart of what we do. across the organisation is appropriate and fair and remuneration standard, revised for all employees. The Committee assessed the remuneration policy, approach to 2019 For 2019, we are proposing an updated UK Gender Pay Gap disclosure and in 2018, we incentives, regulatory update remuneration policy, to be voted on by Association Members at the 2019 AGM, which 13 December we believe better reflects Bupa’s strategic Committee effectiveness review, Gender goals as well as developments in our external Pay Gap disclosures, Remuneration environment. We propose to change the “This year the Policy Statement, 2019-21 LTIP targets, weighting of performance measures for the 2019 incentive plan rules, overview of MBS and LTIP, adjusting the minimum weighting Committee continued general workforce of financial measures in these incentive to ensure its schemes from 75% to 60%. The change provides additional scope for the Committee to governance of increase the emphasis on customer outcomes, remuneration across Part 1: Committee Chairman’s letter culture and behaviours, reinforcing placing Bupa was effective.” Part 2: Policy customers at the heart of what we do. A second change relates to executive pensions. Part 3: Implementation Martin Houston Employer pension contributions for newly Committee Chair appointed Executive Directors on or after 1 January 2019 will be reduced from 30% of base salary to 18% of base salary, recognising wider concerns over the level of executive pension contributions.

57 Bupa Annual Report 2018

Remuneration Report Part 1: Committee Chairman’s Letter continued

signed HM Treasury’s Women in Finance with Australian tax law and the settlement inflation. The Committee agreed this latter Charter as part of our ongoing efforts to will involve no admission of liability by Bupa adjustment should also apply to the current ensure that there is gender diversity across the Australia. On this basis, given the historic LTIPs. As per last year, the impact of some business, including within the senior leadership nature of the matters, and in line with the legacy strategic acquisitions were adjusted team. We reviewed the outcomes from a new Committee’s approach of applying discretion for as well. global employee engagement survey to obtain to previous plans, the impact of this settlement As with the MBS, the Committee also reviewed detailed insight into what our employees are was removed from the determination of risk management behaviours across Bupa and saying and we discussed with management MBS payments. determined that no adjustment was required. the insights from this survey. We also reviewed Customer performance continued to make which employee metrics the Committee Over the three year period, profit after tax good progress, reflecting the high level will use to assess workforce remuneration (PAT) performance was just above threshold, of operational focus on customer needs consistent with the requirements of the revenue performance was slightly above target across Bupa. revised UK Corporate Governance Code 2018. and customer was on target. Based on overall Alongside the measures that make up the MBS performance, the 2016-18 LTIP vested at 15.5% scorecard, the MBS outcome is subject to an of maximum. Performance and pay in 2018 overall adjustment relating to risk management Salary behaviours. Assisted by contributions from the Committee evaluation For 2019, the Committee has approved Risk Committee and the Risk Review Panel, increases to the Group CEO and CFO of 2.9% the Committee, after considerable discussion We undertook an internally-facilitated evaluation and 2.7% respectively, to reflect performance in and debate, determined this year that a to examine the Committee’s performance in the role and the general market. The increases number of individual bonuses should be 2018. The evaluation concluded that the are consistent with the budget applied for adjusted, including individuals within the Committee had performed satisfactorily, with average increases in the annual pay review scope of the Committee, to take account positive improvements in the understanding of for other Bupa employees in the UK. of underperformance for risk management risk culture and the collective strength of the behaviours. The Committee also determined Committee, although the report also provided a Management Bonus Scheme the Group had achieved the required number of areas for further development and Our business performance across the Group performance within risk appetite and no improvement, including: was mixed, reflecting challenging market business-wide risk adjustments would apply. conditions. Our results were impacted by –– Further work is needed to ensure that the the divestment of part of the UK aged care The individual performance multipliers for LTIP aligns to strategy, is easy to understand business and challenges in our Australian the Group CEO and CFO, based on their and acts both as an incentive and as a aged care and health insurance businesses. performance during the year, were 115% for retention tool for management; and Health insurance, our largest business line, both Directors. The Committee approved –– The link between risk and executive reward is delivered revenue growth and stable underlying bonuses of 45.3% of maximum bonus an area to be reviewed to ensure a clear and profit, with good performance in Spain opportunity for both the Group CEO and CFO. demonstrable impact on reward. and the UK. We continued to invest in our Long Term Incentive Plan services to customers especially in digital, new propositions and information technology In reviewing the 2016-2018 LTIP vesting in the Voting on remuneration infrastructure. In March 2019, Bupa Australia context of the overall business performance, The annual report on remuneration and the announced that it had reached an in-principle the Committee exercised discretion to remove Directors’ Remuneration Policy will be subject agreement with the Australian Taxation Office the impact of the in-principle agreement Bupa to an advisory vote at this year’s AGM. (ATO) to settle a number of disputed matters, Australia reached with the Australian Taxation We welcome the input of Association Members, including a transfer pricing issue relating to Office. The Committee also applied an and I am happy to discuss any aspect of Bupa the funding of its Australian acquisitions in adjustment for the impact of the Australian remuneration with them. 2007 and 2008. Bupa Australia considers Government’s Restriction of health insurance the positions it adopted were in accordance price increases at a lower rate than claims Martin Houston Committee Chairman

2018 single total figure of remuneration (£000) (Audited)

Total £000

838 251 53 770 166 Evelyn Bourke 2,078

561 168 17 384 68 Joy Linton 1,198

Base Salary Pension Other benefits Management Bonus Scheme Long Term Incentive Plan

> For more information please see page 63

58 Strategic Report Governance Financial Statements

Remuneration Report Part 2: Policy

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 level and mix of remuneration competitive with companies of a similar scale and complexity.

Remuneration Policy table – Executive Directors

Base Salary Management Long Term Pension Benefits Bonus Scheme Incentive Plan

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, healthcare security Directors by providing health and Executive Directors, reflecting priorities for the year. performance over the and family protection benefits. wellbeing benefits and providing their role and contribution. To motivate and incentivise long term aligned to Bupa’s 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 benefits which becoming effective in April. and weightings are reviewed participation, it provides a appointments, the Company may include private health cover Factors taken into account annually to ensure they Long Term Incentive Plan operates a defined contribution for themselves and their family, include: continue to support the (LTIP) in the form of a deferred pension scheme. an annual health assessment for business strategy. cash incentive that is broadly themselves and their partner, life ––level of skill, experience and Executive Directors have the Performance over the financial reflective of equity-based plans option to take any employer insurance, income protection, car scope of responsibilities of in comparable companies. allowance (or alternatively for the the individual; year is measured against contribution as a cash stretching financial and Awards are usually made allowance or a combination CEO, the use of a company car ––overall business non-financial performance on an annual basis and of pension contribution and and driver) and 30 days’ annual performance, scarcity of targets set at the start of the relate to performance over cash allowance. holiday. The benefits offered may talent, economic climate financial year. a three-year period. be changed from time to time to and market conditions; reflect changing circumstances. Typically, 50% of any bonus Vesting of awards is based ––general increases across awarded will be deferred for on the extent to which the Authorised travel expenses Bupa; and a period of up to three years, performance targets set and are reimbursed along with the additional tax and NIC incurred ––external market data. with the remaining 50% assessed by the Committee paid immediately in cash. are achieved. where these are treated as taxable income and, in exceptional To account for any loss in Any payments are made at value over time, a modest circumstances, where spouses the end of the performance or partners are required to uplift will be applied to the period and a portion may be deferred amount. travel for business purposes, deferred for up to two years. travel and subsistence expenses are reimbursed along with the additional tax and NIC.

Maximum opportunity

Salary increases are normally The maximum bonus The maximum award will not Current Executive Directors There is no specific maximum in line with those of the Bupa opportunity will not exceed exceed 275% of base salary. receive employer contributions benefit spend. employee population. Larger 200% of base salary. of up to 30% of base salary. increases may be given under Executive Directors newly certain circumstances, such as appointed on or after when a new recruit has been 1 January 2019 receive appointed on lower than market employer contributions of rate salary with the expectation up to 18% of base salary. 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 Management Bonus Scheme Vesting of awards is based None None (MBS) payments are based on performance against a on the achievement of combination of financial challenging financial and and non-financial measures. non-financial objectives. Threshold performance results No less than 60% of the in a payment of 15% of the annual bonus will be subject maximum. to the achievement of financial No less than 60% of the LTIP measures which will be aligned will be based on financial to the strategic priorities of measures, with the remainder the business. based on measures linked to the key strategic priorities of the business.

59 Bupa Annual Report 2018

Remuneration Report Part 2: Policy continued

Malus and clawback Circumstances in which the operation of these Performance measures and target Malus and clawback provisions may be 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 and –– an error in assessing any relevant and LTIP. Malus (under which awards may may include personal objectives that change performance metric or in the information be reduced, cancelled or made subject to 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 Committee, taking into account internal and (requiring a repayment of cash which has –– serious reputational damage to Bupa or external reference points which include historic been delivered) may be operated for up a relevant business unit; to three years following payment of the Bupa performance, internal forward-looking non-deferred element of the MBS and five –– a scenario in which significant risk has been plans and broader market trends. Targets are years from grant of the LTIP. taken which is outside of Bupa’s or a relevant set for vesting at threshold, on-target and business unit’s risk appetite; outperformance levels. –– gross misconduct or material breach of employment contract; and –– any other circumstance which the Committee in its discretion considers to be similar in nature or effect to the above.

Illustrations of the application of the Remuneration Policy Bupa aims to provide a balance of fixed and variable compensation that provides stability while also incentivising superior business performance. At target, over 50% of the Executive Directors’ remuneration is based on individual and Company performance. This graph illustrates the potential remuneration outcomes variation for different levels of performance using the incumbents’ salaries as at 1 April 2019 to calculate the MBS values.

Remuneration at various levels of performance (£000) Evelyn Bourke, Group CEO Total 53 £000 875 263 Fixed pay 1,191

875 263 875 1,169 On target1 3,235

875 263 1,750 2,338 Maximum2 5,279

Base Salary Pension Benefits Management Bonus Scheme Long Term Incentive Plan

Joy Linton, CFO

17 580 174 Fixed pay 771

580 174 435 706 On target1 1,912

580 174 870 1,413 Maximum2 3,054

Base Salary Pension Benefits Management Bonus Scheme Long Term Incentive Plan

1. On target figures have been calculated on the basis that Bupa achieves target financial and non-financial performance, and the individual performance multiplier is set at 100%. 2. Maximum figures have been calculated on the basis that Bupa achieves maximum financial and non-financial performance, and the individual performance multiplier is set at 160%.

60 Strategic Report Governance Financial Statements

Remuneration Committee discretion Approach to Remuneration Policy on In the case of internal promotions, any The Committee has ultimate discretion over recruitment of an Executive Director commitments made before appointment may be honoured unless an alternative approach, all incentive plans relating to the Executive Our approach to remuneration on recruitment more closely aligned to the prevailing policy, Directors and other individuals within its remit. is to pay no more than is necessary and is agreed by the Committee. This includes, but is not limited to: appropriate to attract the right talent to the role. Any special joining arrangements may include –– determining the size of the award/payment; The Remuneration Policy table on page 59 sets malus and/or clawback; for example, tied to out the various components which would be –– determining whether minimum levels of leaving within a pre-defined period. performance have been met or underlying considered for inclusion in the remuneration performance is satisfactory before package for the appointment of an Executive determining the vesting of any awards; Director. Typically, a new appointment will have Differences between the (or be transitioned onto) the framework that Remuneration Policies for Executive –– determining whether the management of applies to other Executive Directors as set out Directors and other employees risk has been acceptable, or whether any in the policy table. Salary would reflect 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 set at a level to allow future salary progression –– selecting or adjusting performance measures to the policy applicable to Bupa employees to reflect performance in the role. within the Remuneration Policy and the to ensure that they are both aligned to plan rules; It would be expected that the structure and delivering sustainable business performance. quantum of the variable pay elements would Although the size of the opportunity varies, –– determining whether individuals are ‘good re the underlying principles of the salary review leavers’ for incentive plan purposes, based flect those set out in the policy table. cycle, MBS and LTIP are the same for the senior on plan rules; and The Committee reserves the right to make any employee population. remuneration payments or payments for loss –– making one-off adjustments in exceptional of office where the terms of the payment were A small number of senior managers across circumstances. agreed (i) before the Remuneration Policy Bupa participate in the LTIP, based on the same came into effect, or (ii) at a time when the framework as the Executive Directors, with relevant individual was not a Director of the award levels calculated as a percentage of Company and, in the opinion of the Committee, salary based on their level of seniority and the payment was not in consideration for the accountability. Vesting of the awards is individual becoming a Director of the Company. dependent on performance against specific financial and non-financial measures over To facilitate recruitment, the Committee may a three-year performance period. Junior make compensatory payments and/or awards employees are not eligible for LTIP awards. for any remuneration arrangements subject to forfeit on leaving a previous employer. We will In some cases, additional flexibility has been seek to replicate, as far as practicable, the introduced for the Executive Directors and potential value and time horizon of such senior employees (e.g. providing the option to remuneration, as well as performance receive cash in lieu of pension contributions) conditions that may apply. to allow for personal circumstances. In some circumstances, it may also be necessary to set up additional or alternative arrangements including but not limited to: –– relocation-related expenses; and –– international assignment allowances and expenses.

61 Bupa Annual Report 2018

Remuneration Report Part 2: Policy continued

Policy on payments for loss of office Policy Committee response The table summarises the key elements of Notice period and ––12 months’ notice from the Company to the Executive Director. our policy on payment for loss of office in compensation for ––Up to 12 months’ base salary (in line with the notice period). Notice period compliance with the relevant plan rules and loss of office in payments will either be made as normal (if the Executive Director continues to local employment legislation. service contracts work during the notice period or is on ‘gardening leave’) or at the termination date for any unexpired notice period. Any payments made due to loss of office may take into account malus or clawback provisions Treatment of MBS ––The Committee may make an MBS payment for the year of cessation as set out on page 60. on loss of office depending on the reason for leaving. Typically, the Committee will take under plan rules into consideration the period served during the year and the individual’s performance up to cessation. Any such payment is at the discretion of Service contracts for Executive the Committee. Directors ––Any MBS will be paid at the normal time following the end of the performance year. Executive Directors have a 12-month rolling employment contract. The notice requirement Treatment of LTIP ––An Executive Director’s award will vest in accordance with the terms of the is 12 months from both the Company and the on loss of office plan and satisfaction of performance conditions measured at the normal individual, which may be payable in lieu. These under plan rules completion of the performance period if the reason for leaving is redundancy, contracts also include specific post-termination pre-agreed retirement, early retirement on the grounds of ill health, death or restrictions. Executive Directors are usually any other special circumstance agreed by the Committee. In these cases, final awards will be pro-rated based on completed months of service. The period permitted, subject to approval, to have one of active employment excludes any period of ‘gardening leave’ or other such external Non-Executive Director role and to period when the Executive Director was legally employed but not required to accept and retain the fee for this appointment. actively carry out their duties. For any other reason, they will not be eligible for This is on the condition that any external an LTIP payment. appointment does not give rise to a conflict ––Any LTIP payment will be paid at the normal time, e.g. in April following the of interest. end of the performance period, or two years later for any deferral.

Pension and ––Generally, pension and benefit provisions will continue to apply until the benefits termination date.

Remuneration Policy table – Non-Executive Directors

Service contracts for Non-Executive Purpose and link Directors Element to strategy Operation The terms of engagement for the Non-Executive Fees To attract and provide The Chairman receives an all-inclusive fee. Directors (NEDs) of Bupa set out the fees and stability, reflecting the NEDs receive a fixed basic fee. Additional fees are paid for complexity of the role benefits to which they are entitled as well as the chairing or membership of Board Committees and/or additional and time commitment expectation of the time commitment required work in relation to subsidiaries, and for the Senior Independent required Director role. to effectively perform their role. Copies of the standard terms of engagement are available Fees are reviewed annually by the Board with any changes implemented in July. Key factors taken into account include: on bupa.com. ––overall business performance; The table describes the Remuneration Policy as ––scope and responsibility of the role; it applies to the Chairman and NEDs. ––appropriate market data; and ––the fact that NEDs are not eligible for any form of variable pay.

Benefits To provide health and During their time in office, NEDs are entitled to private health wellbeing benefits cover for themselves and their family and an annual health aligned with Bupa’s assessment for themselves and their partner (subject to availability purpose of a Bupa domestic private health product). These benefits are taxable. Authorised travel expenses are reimbursed along with the additional tax and NIC incurred where these are treated as taxable income and, in exceptional circumstances, where spouses or partners are required to travel for business purposes, travel and subsistence expenses are reimbursed along with the additional tax and NIC.

62 Strategic Report Governance Financial Statements

Remuneration Report Part 3: Implementation

This section sets out the details of the Executive Directors’ and Non-Executive Directors’ remuneration, showing how the Remuneration Policy has been implemented in 2018 and how it will be applied for 2019. As well as disclosing remuneration figures for the Executive Directors, it includes details on how well performance targets have been met and the resulting level of MBS payout and vesting of LTIP. Certain disclosures of the detailed information about the Director’s remuneration set out below have been audited by the Group’s independent auditor, KPMG LLP. Set out below is a table showing a single total figure of remuneration (audited) for each Executive Director in 2018. Comparable figures for 2017 are also shown.

Salary Benefits MBS1 LTIP 1 Pension2 Total Director Year £000 £000 £000 £000 £000 £000 Evelyn Bourke3, Group CEO 2018 838 53 770 166 251 2,078 (appointed 25 July 2016) 2017 800 48 1,020 403 240 2,511 Joy Linton, CFO 2018 561 17 384 68 168 1,198 (appointed 25 July 2016) 2017 550 132 504 169 165 1,520

1. MBS refers to bonus payments earned during that year, and LTIP refers to payouts from the performance period which ended in that year including any deferred element. MBS is calculated for the full year on the 1 April 2018 salary. 2. Pension figures reflect a cash allowance paid to Executive Directors in lieu of company contributions into a pension scheme. 3. Evelyn Bourke’s benefits figure includes certain travel and subsistence expenses that are treated as taxable, grossed up to meet the costs of the additional tax. She is a Non-Executive Director of the Bank of Ireland and received fees of €49,076 in respect of her position, which are not disclosed in the table above.

2018 MBS measures and performance –– Cost efficiency (10% of award) – this is a including handling of risk matters during the For 2018, the Group CEO’s target bonus measure focused on ensuring we are year. Key achievements included delivering opportunity was 100% of salary, with a maximum running the business efficiently, calculated resilient financial performance despite ongoing of 200%. The CFO’s target bonus opportunity as overhead costs divided by revenue; and challenges, continuing to drive customer experience and digital innovation and was 75% of salary with a maximum of 150%. –– Customer (20% of award) – this measure improvement in relationships with regulators. includes both improving our customer The performance measures used to determine The Group CEO demonstrated her leadership delivery and our customer insights. the 2018 annual bonus for our Executive capability on strategic matters with the board. Directors were as follows: Alongside the measures that make up the MBS –– Group profit (50% of award) – similar ot scorecard, the MBS outcome is subject to an The Group CFO received an individual multiplier underlying profit before taxation, with the overall adjustment relating to risk management of 115% based on her 2018 performance, including most significant differences being the behaviours across Bupa, assisted by handling of risk matters during the year. Key inclusion of restructuring and transaction contributions from the Risk Committee, the achievements included moving forward with costs in acquisitions and disposals; Group CEO and the Risk Review Panel. acquisitions and divestments linked to strategy, delivering a material improvement in the control As detailed in the Committee Chairman’s letter, –– Risk adjusted profit (10% of award) – this is environment, driving the Finance Development the Committee removed the impact of an a measure which looks at the profits of the Programme to deliver fit for purpose reporting in-principle agreement Bupa Australia reached business less a risk adjusted capital charge; and continuing to strengthen the depth and with the Australian Taxation Office from quality of current and future finance and –– Group revenue (10% of award), including the MBS. Bupa’s proportionate share of revenue from control teams across Bupa. The Group CEO received an individual multiplier associates and joint ventures, which is not The financial targets for the 2018 MBS and actual of 115% based on her 2018 performance, included within reported revenue; performance are set out in the table below.

1 2 2018 MBS payout (audited) Threshold On-target Stretch Actual Evelyn Bourke Joy Linton performance performance performance performance level level level level Max bonus Actual payout Max bonus Actual payout £m or % if £m or % if £m or % if £m or % if % of % of % of % of indicated indicated indicated indicated salary salary salary salary Group profit 693.7 770.8 847.9 753.5 100% 44.6% 75% 33.5% Risk adjusted profit 43.9 48.8 53.7 (62.2) 20% 0% 15% 0% Group revenue 12,440.3 13,822.5 15,204.8 13,877.2 20% 11.5% 15% 8.6% Cost efficiency 14.5% 13.2% 11.9% 13.1% 20% 11.5% 15% 8.6% Customer 90% 100% 110% 101.5% 40% 23.0% 30% 17.3% Total 200% 90.6% 150% 68.0%

1. The actual payout figures include an adjustment to the whole bonus for personal performance. Evelyn Bourke‘s individual multiplier for 2018 was 115%. The multiplier is awarded on a range between 0% and 160% for individual performance. 2. The actual payout figures include an adjustment to the whole bonus for personal performance. Joy Linton’s individual multiplier for 2018 was 115%. The multiplier is awarded on a range between 0% and 160% for individual performance.

63 Bupa Annual Report 2018

Remuneration Report Part 3: Implementation continued

2016-18 LTIP vesting (audited) Interests awarded during 2018 Within the LTIP scorecard, profit after tax The 2016-18 LTIP vesting was based on (audited) growth is weighted 60% and Return on Capital Employed (ROCE) is weighted 20%. performance against profit after tax (PAT) During the year, LTIP awards for the 2018-20 The remaining 20% weighting for the LTIP is (75% weighting), revenue (10% weighting) and Plan were made to the Executive Directors. based on Customer. For any LTIP payout to Customer (10% weighting). The Plan covers the three-year performance be made, profit after tax growth must at least period to 31 December 2020. Subject to the As per policy, the Committee calculated vesting achieve threshold performance. of the 2016-18 LTIP using an equal balance of performance targets being met, up to 50% of actual and constant exchange rates. On an the award maybe paid in April 2021 with any The table below shows the 2018-20 LTIP metrics. excess being deferred for a further two years. actual exchange rate basis, profit after tax performance was above threshold but below target while revenue was above target. On a constant exchange rate basis financial Financial targets 2018-20 LTIP (80% weighting) performance did not meet threshold. 2018-20 targets As detailed in the Committee Chairman’s letter, Profit after tax ROCE the Committee removed the impact of an Weighted 60% Weighted 20% in-principle agreement Bupa Australia reached Below threshold performance 0% vesting < 4.5% p.a. < 6% with the Australian Taxation Office as well as Threshold performance 15% vesting 4.5% p.a. 6% the impact of the Australian Government’s On-target performance 50% vesting 7% p.a. 6.5% restriction of health insurance price increases at Out-performance 100% vesting 10% p.a. 7% a lower rate than claims inflation. The 2016-18 LTIP vested at 31.0% of target. Notes Profit after tax growth measures the compound annual growth rate. Customer performance over the performance ROCE measures average, annual ROCE over the three-year period. period was broadly on target, with the Straight-line vesting occurs between the discrete levels of achievement. increased focus on customer driving progress in line with expectations across Bupa, taking into account the 3-year performance of each Market Unit and its overall size and impact on Customer targets 2018-20 LTIP (20% weighting) the Group. Vesting determined by the Remuneration Committee based on three-year improvement in the Customer and Brand Dashboard. As with the MBS, the Committee also reviewed risk management across Bupa using contributions received from the Risk Committee and the Risk Review Panel, and The table below shows the detail of the LTIP awards made to the Executive Directors in the year. determined that no business-wide adjustment Long Term Incentive Plan was required this year. 2018-20 Long Term Incentive Plan Overall financial and non-financial performance Evelyn Bourke Joy Linton led to a calculated payout of 15.5% of the Basis of award 275% of base salary 250% of base salary maximum award. Face value of award (100% of award) £2,200,000 £1,375,000 Amount that would vest at on-target performance (50% of award) £1,100,000 £687,500 Amount that would vest at threshold performance (15% of award) £330,000 £206,250 Date performance period ends 31 December 2020 Payment due date April 2021, and April 2023 (for any deferred amounts)

64 Strategic Report Governance Financial Statements

Historical Single figure Management Bonus Long Term incentive of total Scheme payout against vesting rates against The table to the right shows levels of payout to remuneration maximum opportunity maximum opportunity the Group CEO against the maximum incentive Year Group CEO £000 % % opportunity for the last five years. 2018 Evelyn Bourke 2,078 45% 16% 2017 Evelyn Bourke 2,511 64% 41% 2016 Evelyn Bourke1 1,837 56% 44%2 2016 Stuart Fletcher3 1,315 46% 44%2 2015 Stuart Fletcher 2,081 62% 30% 2014 Stuart Fletcher 2,812 82% 71%

1. Evelyn Bourke was appointed Group CEO on 25 July 2016. 2. Figure corrected from 2016 Annual Report. 3. Stuart Fletcher left Bupa on 31 May 2016, his annual bonus payment reflects a pro-rated payment.

Percentage change in remuneration of the Group CEO (audited) The table on the right shows the change in Group CEO Employees1 salary, benefits and short term incentives Salary 6.3% 2.3% (annual bonus) for the Group CEO in 2018 Benefits (excluding pension) 10.4% no material change compared to 2017 alongside a corresponding Short term incentives -24.5% 22.3% average figure for the Bupa employee comparator group. The UK salaried population 1. Employees refers to the UK salaried population, being the UK-based permanent employees whose records are held on the HR database. 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 (audited)

The table to the right shows the relative Difference importance of spend on pay. Given that Bupa 2018 2017 2018-2017 does not have shareholders and therefore does £m £m £m not pay dividends, cash flow used in investing Remuneration paid to all employees 1,994 2,115 -121 activities has been shown as an alternative Cash flow used in investing activities 543 995 -452 measure.

Payments to former Directors (audited) There were no payments for loss of office agreed for Executive Directors in 2018. In accordance with the arrangements agreed in 2016 at the time of his leaving Bupa, Mr Fletcher received ‘good leaver’ treatment under Bupa’s Long Term Incentive Plan (LTIP), with pro rata vesting based on his employment ending on 31 May 2016 and awards remaining subject to the rules of the plans (including, for example, the satisfaction of any applicable performance conditions, and malus, clawback and deferral provisions). For the 2016-18 LTIP, Mr Fletcher received £36,986 in March 2019 for the period worked in the performance period.

65 Bupa Annual Report 2018

Remuneration Report Part 3: Implementation continued

Statement of Implementation of Remuneration Policy in 2019 The remuneration of the Group CEO and CFO for 2019 was reviewed by the Committee for 2019, in the context of the Remuneration Policy as described on pages 59-62. Having reviewed their salaries, the Committee approved salary increases for the Group CEO and CFO of 2.9% and 2.7% respectively, to reflect their performance in the role and position against external market practice.

Salary (effective from 1 April) Management Bonus Scheme Evelyn Bourke £875,000 (2.9% increase) ––Target opportunity – 100% salary Group CEO ––Maximum opportunity – 200% salary Joy Linton £580,000 (2.7% increase) ––Target opportunity – 75% salary CEO ––Maximum opportunity – 150% salary

For 2019, the Committee plans to undertake a redesign of the Long Term Incentive Plan, based within the parameters of the policy set out on page 59. Following this, awards will be made later in 2019 with the award values still in line with policy. Full details of the awards will be provided in the 2019 Directors Remuneration Report.

Strategic Pillar Measure MBS scorecard Strong and sustainable performance Profit Group profit – 55% Revenue 10% Cost efficiency 10% Loved as a true customer champion in health and care Customer 25%

In addition to these measures, the MBS is 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. This may also be adjusted for risk. As stated in the policy, the underlying principles for reward remain the same for the senior employee population. As a result, the Management Bonus Scheme is cascaded down through Bupa, the only change being the level of opportunity.

Chairman and Non-Executive Director fees (audited) 2018 Fee During 2018, the fee for the Chairman was Chairman fee £425,000 reviewed by the Committee and the fees for Non-Executive Director basic fee £68,500 the Non-Executive Directors were reviewed Senior Independent Director fee £17,000 by the Chairman and the Executive Directors. Committee chairmanship Audit Committee £25,000 The Chairman’s fee was increased by 3.7% and Remuneration Committee £25,000 the Non-Executive Director basic fee was Risk Committee £25,000 increased by 2.2%, both with effect from 1 July Committee membership Audit Committee £8,000 2018. No changes were made to the other fees. Remuneration Committee £8,000 The current fee levels are set out in the table Risk Committee £8,000 on the right. Nomination & Governance Committee £4,500

66 Strategic Report Governance Financial Statements

Non-Executive Directors: Single total figure of remuneration (audited) Fees Benefits1 Total £000 £000 £000 2018 2017 2018 2017 2018 2017 Lord Leitch (Chairman) 393 380 39 50 432 430 Roger Davis 97 82 6 5 103 87 Lawrence Churchill2 42 129 6 23 48 152 Clare Thompson3 189 174 2 0 191 174 Simon Blair 97 82 228 8 325 90 Paul Evans4 14 – 5 – 19 – Martin Houston 107 96 92 52 199 148 Nicholas Lyons5 14 – 0 – 14 – Caroline Silver 88 11 0 – 88 11 Prof Sir John Tooke 108 107 2 2 110 109 Janet Voûte 90 88 30 28 120 116 Total 1,239 1,149 410 168 1,649 1,317

1. Travel and subsistence expenses for attending meetings at Bupa’s head office 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 benefits figures reflect this approach. 2. Since stepping down as a Non-Executive Director with Bupa, Lawrence continued to provide services to Bupa under a consultancy arrangement. The single consolidated fee for consultancy services for the period 16 May 2018 to 31 December 2018 was £70,500. 3. The 2018 fees for Clare Thompson include £73,500 (2017: £70,437) in respect of her services as a Non-Executive Director of Bupa Insurance Limited and Bupa Insurance Services Limited. 4. Paul Evans was appointed as a Non-Executive Director on 1 November 2018. 5. Nicholas Lyons was appointed as a Non-Executive Director on 1 November 2018.

Committee governance remuneration in the UK. Mercer’s fees for Martin Houston has chaired the Committee services to the committee in 2018 was £127,500 since 11 June 2014. on a time and materials basis. During the year, Mercer advised on market practice, In addition to the Company Secretary, regular corporate governance and regulations, attendees at the Committee meetings who incentive target setting and performance provided comment and advice were the Group conditions, remuneration benchmarking CEO, the CFO, the Chief People Officer and and other matters that the Committee the Performance and Reward Director. were considering. Mercer was appointed by the Remuneration The Terms of Reference for the Committee Committee as its independent advisor in were reviewed in February 2018 and adopted 2015. Such an appointment is reviewed by the board in March 2018. A full description of every year and was confirmed in July 2018. the Committee’s role is set out in its Terms of The Committee is of the view that Mercer Reference on bupa.com. provides independent remuneration advice to the Committee and does not have any connections with Bupa that may impair its independence. Mercer is a member of the Remuneration Consultants’ Group and voluntarily operates under the Group’s code of conduct when providing advice on executive

67 Bupa Annual Report 2018

Other statutory information

Board attendance in 2018 Nomination & Scheduled Board Governance Remuneration Risk meetings Audit Committee Committee Committee Committee

Name

Lord Leitch1 10/11 – 6/6 7/8 – Evelyn Bourke 11/11 – 6/6 – – Joy Linton 11/11 – – – – Lawrence Churchill2 2/4 2/3 1/2 2/4 1/2 Simon Blair3 11/11 6/7 – – 6/6 Roger Davis4 10/11 5/7 4/5 5/8 – Paul Evans5 2/2 1/1 – – 1/1 Martin Houston6 11/11 – 5/6 8/8 – Nicholas Lyons7 2/2 1/1 – 1/1 – Caroline Silver8 10/11 7/ 7 – – 5/6 Clare Thompson 11/11 7/ 7 6/6 – 6/6 Professor Sir John Tooke9 11/11 – 5/6 – 5/6 Janet Voûte10 11/11 – – 7/8 6/6

1. Lord Leitch was unable to attend one Board meeting and one Remuneration Committee meeting due to ill health. As Senior Independent Director, Clare Thompson chaired the Board meeting on this occasion. 2. Lawrence Churchill retired from the Board and Committees on 16 May 2018. He was unable to attend several Board and Committee meetings in the run up to his retirement due to prior commitments. 3. Simon Blair was unable to attend one Audit Committee meeting due to a prior commitment. 4. Roger Davis was unable to attend several Board and Committee meetings due to prior commitments. 5. Paul Evans was appointed to the Board on 1 November 2018 and as a member of the Audit and Risk Committees on 15 November 2018. 6. Martin Houston was unable to attend a Nomination & Governance Committee meeting due to a prior commitment. 7. Nicholas Lyons was appointed to the Board on 1 November 2018 and as a member of the Audit and Remuneration Committees on 15 November 2018. 8. Caroline Silver was unable to attend one Board meeting and one Risk Committee meeting due to prior commitments. The Risk Committee absence was prior to her being appointed as Chairman of that Committee. 9. Professor Sir John Tooke was unable to attend one Nomination & Governance and one Risk Committee meeting due to prior commitments. 10. Janet Voûte was unable to attend one Remuneration Committee meeting due to a prior commitment.

Insurance and indemnities The following disclosures required to be contained in the Directors’ Report are set out on the pages Bupa has a directors’ and officers’ insurance referred to below and incorporated by reference into this Directors’ Report: policy in place together with indemnities for the Directors and certain senior managers, Disclosure Location to the extent permitted by English law and the Company’s Articles of Association, in respect of Financial instruments > Note 10 page 118 all losses arising out of, or in connection with, the execution of their powers, duties and responsibilities, as Directors of the Company Greenhouse gas emissions > Strategic Report pages 16-17 or any of its subsidiaries. There are no other third-party qualifying indemnity provisions or pension indemnity provisions in place. Risk management objectives > Note 24 page 134 and policies Disclosure compliance Likely future business developments > Strategic Report page 3 The Strategic Report and the audited financial statements are presented on pages 1-34 and from page 71 respectively. The Governance Acquisitions and disposals > Note 22 page 131 Report on pages 35-70 comprises the Directors’ Report. Financial results > Financial Performance Summary page 1

68 Strategic Report Governance Financial Statements

Going concern Post balance sheet events Statement of Directors’ The Directors confirm that they are satisfied The acquisition of Acıbadem Sigorta completed responsibilities that the Company and the Group have on 18 January 2019. Details can be found in In respect of the Annual Report and the adequate resources to continue in operation for Note 1.7. financial statements the Directors are the next 12 months. Accordingly, they continue responsible for preparing the Annual Report to adopt a going concern basis in preparing the Branches and the Group and Parent Company financial financial statements. statements, in accordance with applicable The Company has an inactive branch in Cyprus. law and regulations. Company law requires Political contributions the Directors to prepare Group and Parent Articles of Association Company financial statements for each No political donations were made, nor any financial year. Under that law they have elected political expenditure incurred. Bupa is a company limited by guarantee and as such has no share capital nor any traded to prepare the Group and the Parent Company securities. The AMs each have one vote on financial statements in accordance with IFRS Charitable donations business at general meetings. The Company’s as adopted by the EU and applicable law. During the year, the Group donated a total of Articles of Association require all Directors Under company law the Directors must not £6m to charitable causes with £1.3m being to be AMs. The Directors have the authority approve the financial statements unless they donated to charitable causes in the UK. Of the to exercise all the powers of the Company. are satisfied that they give a true and fair view UK donations, £868k was donated to the Bupa A Director may be appointed by ordinary of the state of affairs of the Group and Parent UK Foundation, £53k to match fundraising by resolution or by a decision of the Directors. Company and of their profit or loss for that our employees, £21.5k related to community A Director’s appointment ceases in a variety period. In preparing each of the Group and grants, £9k in relation to volunteering activities, of circumstances including resignation, Parent Company financial statements, the £4.5k to disaster relief and £346k to various becoming prohibited from being a director Directors are required to: charities. Further information on our charitable by law, bankruptcy, ceasing to be an AM, and community activities can be found in the incapacity or being removed from a medical –– select suitable accounting policies and then Corporate responsibility and sustainability register if a qualifed medical practitioner, apply them consistently; section on page 16. being requested to resign in writing by at least –– make judgements and estimates that are three-quarters of the other Directors, or by reasonable and prudent; ordinary resolution given on special notice. Employment policies –– state whether they have been prepared in Bupa considers clear communication with accordance with IFRS as adopted by the EU; employees about employment issues to Corporate governance statement and be essential. To ensure accessibility by all, As part of our commitment to excellence, we –– prepare the financial statements on the information is provided to employees through aim, where appropriate, to operate to the same going concern basis unless it is inappropriate a wide range of channels on employment governance standards as are required of UK to presume that the Group and the Parent matters and on the financial and economic FTSE 100 companies. We applied the main Company will continue in business. factors affecting the Company’s performance. principles and complied with all the provisions, relating to a company without shareholders, The Directors are responsible for: Bupa is committed to offering an inclusive in the Code throughout 2018. The Code is workplace for all our people in which we –– assessing the Group and Parent Company’s available at frc.org.uk/directors/corporate- recognise diversity by providing equal ability to continue as a going concern, governance-and-stewardship/uk-corporate- opportunities to all. The employment of disclosing, as applicable, matters related to governance-code. The Company’s assessment disabled persons is included in this commitment going concern; and of the Group’s internal control and risk and is reflected in our membership of Business management systems is set out on page 52. –– using the going concern basis of accounting Disability International. The recruitment, training, unless they either intend to liquidate the career development and promotion of disabled Group or the Parent Company, or to cease persons is based on the aptitudes and abilities operations, or have no realistic alternative but of the individual. Should employees become to do so. disabled during employment, every effort is made to continue their employment and, if necessary, appropriate training is provided. More details can be found in the People section on page 12.

69 Bupa Annual Report 2018

Other statutory information continued

The Directors are also responsible for keeping Disclosure of information to the adequate accounting records that are sufficient External Auditor to show and explain the Parent Company’s The Directors who held office at the date transactions and disclose with reasonable of approval of this Directors’ Report confirm accuracy at any time the financial position of that, so far as they are each aware, there is the Parent Company and to enable them to no relevant audit information of which the ensure that its financial statements comply with Company’s External Auditor are unaware; the Companies Act 2006. They are responsible and each Director has taken all the steps for such internal control as they determine which they ought to have taken as a Director is necessary to enable the preparation of to make themselves aware of any relevant financial statements that are free from material audit information, and to establish that the misstatement, whether due to fraud or error. Company’s External Auditor is aware of They also have a general responsibility for that information. taking such steps as are reasonably open to them to safeguard the assets of the Group External Auditor re-appointment and to prevent and detect fraud and other irregularities. A resolution to re-appoint KPMG LLP as External Auditor will be put to the forthcoming The Directors consider that the Annual Report Annual General Meeting of the Company. and financial statements taken as a whole are fair, balanced and understandable and provide By order of the Board. the information necessary for AMs to assess the Group’s position and performance, business model and strategy. Julian Sanders Company Secretary The Directors have decided to prepare, 13 March 2019 voluntarily, a Directors’ Remuneration Report in accordance with Schedule 8 to The Large Company number: 432511 and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008 made under the Companies Act 2006, as if those requirements were to apply to the Company. The Directors have also decided to prepare, voluntarily, a Corporate Governance Statement as if the Company was required to comply with the UK Listing Rules, Disclosure Guidance and Transparency Rules of the Financial Conduct Authority 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.

70 Strategic Report Governance Financial Statements

Financial Statements

Independent auditor’s report 72 Financial Statements of the Company 148 A. Intangible assets 151 B. Property, plant and equipment 152 Consolidated Group Financial Statements 79 C. Investment in subsidiaries 152 D. Post-employment benefits 153 Notes to the Consolidated E. Trade and other receivables 155 Financial Statements 84 F. Provisions for liabilities and charges 156 G. Deferred taxation assets and liabilities 156 1. Basis of preparation 84 H. Trade and other payables 157 2. Operating segments 89 I. Risk management 158 2.1 Revenues 91 J. Related party transactions 158 2.2 Insurance claims 93 K. Commitments and contingencies 159 2.3 Other operating expenses 94 2.4 Other income and charges 95 2.5 Financial income and expense 96 Related undertakings 160 2.6 Taxation expense 97 3. Goodwill and intangible assets 98 4. Property, plant and equipment 102 Five-year financial summary 167 5. Investment properties 106 6. Equity accounted investments 107 International Financial Reporting 7. Post-employment benefits 109 Standards relevant to Bupa 168 8. Restricted assets 113 9. Financial investments 114 10. Derivatives 118 11. Deferred taxation assets and liabilities 119 12. Assets arising from insurance business 121 13. Inventories 122 14. Trade and other receivables 122 15. Cash and cash equivalents 123 16. Assets and liabilities held for sale 123 17. Borrowings 124 18. Provisions and other liabilities under insurance contracts issued 126 19. Provisions for liabilities and charges 129 20. Trade and other payables 130 21. Non-controlling interests 131 22. Business combinations and disposals 131 23. Capital management 133 24. Risk management 134 25. Related party transactions 146 26. Commitments and contingencies 147

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

1. Our opinion is unmodified Overview

We have audited the financial statements of The British United Provident Materiality: £25.6m (2017: £26.1m) Association Limited (“the Company”) for the year ended 31 December Group financial statements 5.1% (2017: 4.2%) profit before tax 2018 which comprise the Consolidated Income Statement, Consolidated as a whole Statement of Comprehensive Income, Consolidated Statement of Financial Coverage 78% (2017: 89%) of Group profit before tax Position, Consolidated Statement of Cash Flows, Consolidated Statement of Changes in Equity, Company Statement of Financial Position, Key audit matters vs 2017 Company Statement of Cash Flows, Company Statement of Changes in Event driven The impact of uncertainties due to Equity, and the related notes, including the accounting policies. the UK exiting the European Union on our audit p In our opinion: Recurring risks Valuation of goodwill and intangible –– the financial statements give a true and fair view of the state of the assets tu Group’s and of the parent Company’s affairs as at 31 December 2018 Valuation of freehold, leasehold and and of the Group’s profit for the year then ended; investment properties tu

–– the Group financial statements have been properly prepared in Valuation of insurance contract liabilities tu accordance with International Financial Reporting Standards as Parent Company risk: Valuation of adopted by the European Union (IFRSs as adopted by the EU); post-employment benefits tu –– the parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies 2. Key audit matters: including our assessment of risks of Act 2006; and material misstatement Key audit matters are those matters that, in our professional judgement, –– the financial statements have been prepared in accordance with were of most significance in the audit of the financial statements and the requirements of the Companies Act 2006. include the most significant assessed risks of material misstatement Basis for opinion: (whether or not due to fraud) identified by us, including those which We conducted our audit in accordance with International Standards on had the greatest effect on: the overall audit strategy; the allocation of Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are resources in the audit; and directing the efforts of the engagement team. described below. We believe that the audit evidence we have obtained We summarise below the key audit matters, in arriving at our audit is a sufficient and appropriate basis for our opinion. Our audit opinion is opinion above, together with our key audit procedures to address those consistent with our report to the audit committee. matters and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on We were first appointed as auditor by the directors on 20 June 1985. procedures undertaken, in the context of, and solely for the purpose of, The period of total uninterrupted engagement is for the 34 financial our audit of the financial statements as a whole, and in forming our years ended 31 December 2018. We have fulfilled our ethical opinion thereon, and consequently are incidental to that opinion, responsibilities under, and we remain independent of the Group in and we do not provide a separate opinion on these matters. accordance with, UK ethical requirements including the FRC Ethical Standard as applied to public interest entities. No non-audit services prohibited by that standard were provided.

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The risk Our response

The impact of Unprecedented levels of uncertainty We developed a standardised firm-wide approach to the consideration of the uncertainties All audits assess and challenge the reasonableness of estimates, in uncertainties arising from Brexit in planning and performing our audits. due to the UK particular as described in the: valuation of goodwill and intangible Our procedures included: exiting the assets and valuation of investment properties below, and related disclosures and the appropriateness of the going concern basis –– Our Brexit knowledge: We considered the directors’ assessment of European Brexit-related sources of risk for the Group’s business and financial resources Union on our of preparation of the financial statements. All of these depend on assessments of the future economic environment and the Group’s compared with our own understanding of the risks. We considered the audit (“Brexit”) future prospects and performance. directors’ plans to take action to mitigate the risks; Refer to page 34 In addition, we are required to consider the other information –– Sensitivity analysis: When addressing: valuation of goodwill and intangible (Risks), page 52 presented in the Annual Report including the principal risks assets and valuation of investment properties below and other areas that (Risk Committee disclosure and the long term viability statement and to consider depend on forecasts, we compared the directors’ analysis to our assessment Report), and the directors’ statement that the annual report and financial of the full range of reasonably possible scenarios resulting from Brexit page 44 (Audit statements taken as a whole is fair, balanced and understandable uncertainty and, where forecast cash flows are required to be discounted, Committee and provides the information necessary for shareholders to considered adjustments to discount rates for the level of remaining Report). assess the Group’s position and performance, business model uncertainty; and and strategy. –– Assessing transparency: As well as assessing individual disclosures as part Brexit is one of the most significant economic events for the of our procedures on the: valuation of goodwill and intangible assets and UK and at the date of this report its effects are subject to valuation of investment properties below we considered all of the Brexit unprecedented levels of uncertainty of outcomes, with the full related disclosures together, including those in the strategic report, comparing range of possible effects unknown. the overall picture against our understanding of the risks. Our results –– As reported under valuation of goodwill and intangible assets and valuation of investment properties we found the resulting estimates and related disclosures of these matters and disclosures in relation to going concern to be acceptable. However, no audit should be expected to predict the unknowable factors or all possible future implications for a company and this is particularly the case in relation to Brexit.

Valuation of Forecast based valuation Our procedures included: goodwill and As described in note 3, impairment is assessed based on –– Control design: evaluating the management review control performed by intangible assets discounted cash flow projections. Estimating and discounting the cash flows requires significant judgement. The assumptions Bupa Group over the impairment assessments performed locally by management within each relevant business unit, which is designed to provide (£4,263 million; requiring the most significant judgement vary by asset or cash independent review and challenge of the assumptions used to estimate cash 2017: £4,288 million) generating unit (CGU), as a result of the differences in Bupa’s operations and market environments globally. flow forecast. Refer to page 48 –– Our valuation expertise: using valuation specialists to evaluate and challenge (Audit Committee Considering goodwill, the key assumptions are the forecast the methodology applied by the Group to determine the discount rates Report) and terminal growth rates and discount rates. against standard industry practices. Note 3 (for For intangible assets with indefinite useful lives, the most accounting policy significant judgements relate to the benefits that are expected to –– Historical comparisons: comparing cash flow forecasts used in the review and financial derive from the asset, and the period over which they are realised. to historical performance, and challenging where forecasts indicated disclosures). performance that deviated significantly from historical performance, in the For intangible assets held at cost and subject to amortisation there absence of significant changes in the business or market environment. is significant judgement required to determine whether changes in internal or external market factors indicate an impairment in the –– Key factors assessment: for intangible assets subject to amortisation, value of any intangible asset. evaluating indicators of impairment, focusing in particular on the extent to which assets are still being utilised and the levels of customer attrition, and the Estimation uncertainty current operating margin, in comparison to the assumptions applied when the The effect of these matters is that, as part of our risk assessment, assets were acquired. we determined that the valuation of the recoverable amount of goodwill and intangible assets has a high degree of estimation –– Benchmarking assumptions: comparing the key assumptions of the uncertainty, with a potential range of reasonable outcomes greater terminal growth rates and discount rates to externally derived data and our than our materiality for the financial statements as a whole, and knowledge of sector performance, to evaluate the reasonableness of the possibly many times that amount. The financial statements Group’s assessments. (note 3) disclose the sensitivity estimated by the Group. –– Sensitivity analysis: performing sensitivity analyses on the key assumptions such as forecast period, terminal growth rate and discount rate, to identify assumptions that the goodwill or intangible asset valuation was highly sensitive to.

–– Assessing transparency: assessing whether the disclosures in relation to the valuation of goodwill and intangible assets are compliant with the relevant financial reporting requirements.

Our results –– We found the resulting estimate of the recoverable amount of goodwill and intangible assets to be acceptable.

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

The risk Our response

Valuation of Subjective valuation Our procedures included: freehold, The Group revalues its freehold, leasehold and investment –– Assessing valuer’s credentials: for properties that were valued externally, leasehold and properties, including care homes, dental practices and hospitals, to fair value on a cyclical basis, with external valuations being principally in Spain and Chile, critically assessing the qualifications and investment experience of the external valuers to determine whether they have the properties performed on at least a triennial basis and retirement villages in New Zealand being subject to an external valuation annually. knowledge required to perform the valuations. (freehold property A full external valuation of freehold, leasehold and investment –– Historical accuracy: challenging the valuation models by comparing past cash £2,418 million properties in Spain and Chile was performed by chartered flow forecasts to actual performance, and using this in the evaluation of the (2017: 2,453 million); surveyors during 2018. Directors’ valuations were performed expected accuracy of current cash flow forecasts. leasehold property for other properties where there was an indication that the fair – challenging the key assumptions relating to £208 million value may have significantly differed from the prior valuation. – Assessing key assumptions: operating cash flows such as occupancy rates and discount rates, as well as (2017: 217 million); The principal assumptions underpinning the valuation of reviewing costs capitalised during the year, carrying values and useful lives of and investment properties – including operating cash flows, future profitability existing facilities. In critically assessing assumptions we have utilised our own property and competitor activity – require significant judgement, whether valuation specialists, considered external benchmarks and forecasts, and £454 million; developed by external valuation specialists or Bupa directors. reports from external chartered surveyors. (2017: £399 million)) A small change in the assumptions and estimates used to – assessing whether the disclosures in relation to the Refer to page 48 value the property could have a significant impact on the – Assessing transparency: valuation of freehold, leasehold and investment properties are compliant with (Audit Committee overall valuation. the relevant financial reporting requirements and appropriately present the Report) and Estimation uncertainty sensitivities of the valuation to alternative assumptions. Note 4 and 5 The effect of these matters is that, as part of our risk assessment, (for accounting we determined that the valuation of freehold, leasehold and Our results policy and financial investment properties has a high degree of estimation uncertainty, –– We found the resulting estimate of the valuation of freehold, leasehold and disclosures). with a potential range of reasonable outcomes greater than our investment properties to be acceptable. materiality for the financial statements as a whole, and possibly many times that amount. The financial statements (notes 4 and 5) disclose the sensitivity estimated by the Group.

Valuation of Subjective valuation Our procedures included: insurance The Group’s operations include a number of general insurance entities writing health insurance policies primarily in the UK, Spain, –– Control design and implementation: testing the design and implementation contract of key controls over the reserving process, including controls over the liabilities Australia, Chile and Brazil. The valuation of insurance contract liabilities requires significant judgement and actuarial expertise. completeness and accuracy of data supporting key calculations, such as the Calculation of the actuarial best estimate and the margin over data in respect of current and historical claims. Reviewing the effectiveness (Provisions for claims of group level oversight. (£875 million; best estimate uses historical data, which is sensitive to external 2017: £877 million) inputs including claims cost inflation and medical trends, and –– Assessing key assumptions: evaluating the assumptions used in the requires assumptions to be made in respect of current and future valuation of insurance contract liabilities for reasonableness, considering our Refer to page 48 experience. Small changes in the assumptions and estimates used understanding of the business, past history of claims settlements, wider (Audit Committee to value the insurance contract liabilities can have a significant market trends and changing legislation. Report), and impact on the overall liability valuation. Note 18 (for –– Our actuarial expertise: working closely with our actuarial specialists, accounting policy Estimation uncertainty sampling the premiums, claims and other data used in the actuarial models, and financial The effect of these matters is that, as part of our risk assessment, and reconciling it to the data audited through our testing of these account disclosures). we determined that the valuation of insurance contract liabilities balances; working with our IT specialists to test the data extraction processes has a high degree of estimation uncertainty, with a potential used in the actuarial modelling process in order to obtain evidence over the range of reasonable outcomes greater than our materiality for the entire population of input data; reviewing the mechanics of the statistical financial statements as a whole, and possibly many times that models and claims triangles, including the mathematical accuracy of formula amount. The financial statements (note 18) disclose the sensitivity and functioning of automated calculations. estimated by the Group. –– Sensitivity analysis: performing sensitivity analyses to assess the adequacy of liabilities in the event of severe but possible adverse deviations in key assumptions.

–– Independent re-performance: for a sample of portfolios, selected on the basis of assessed risk of material misstatement, calculating our own estimate of the liability using the Group’s data, and comparing to the liability calculated by the Group, and considering the impact of any significant differences.

–– Assessing transparency: assessing whether the disclosures in relation to the valuation of insurance contract liabilities are compliant with the relevant financial reporting requirements and appropriately present the sensitivities of the valuation to alternative assumptions.

Our results –– We found the resulting estimate of the valuation of insurance contract liabilities to be acceptable.

74 Strategic Report Governance Financial Statements

The risk Our response

Parent Subjective valuation Our procedures included: company The Company operates several defined benefit funded pension schemes. The estimate of the defined benefit pension obligations –– Tests of detail: agreeing the defined benefit pension asset holdingso t risk: Valuation independent custodian confirmations. of post- is inherently uncertain and requires significant judgement around employment assumptions relating to mortality improvements, inflation, and –– Assessing accounting treatment: critically assessing the basis for the benefits discount rates. Small changes in the assumptions and estimates recognition of the surplus against the requirements of accounting standards. can have a significant effect on the parent Company’s net –– Independent re-valuation: independently re-valuing the material defined (£540 million; pension surplus. benefit pension scheme assets, using external data and market inputs. 2017: £509 million) Whilst subject to less judgement, the valuation of the schemes’ –– Assessing external actuary’s credentials: critically assessing the qualifications Refer to page 48 assets is also an important factor in deriving the net surplus and experience of the external actuary to determine if they have the (Audit Committee recognised. knowledge and experience required to perform the valuation of the defined Report), and The net asset (surplus) is also impacted by actions to de-risk the benefit pension schemes. Note 7 (for schemes and the schemes’ investment strategies. accounting policy –– Benchmarking assumptions: benchmarking the assumptions applied in and financial Estimation uncertainty the valuation of the defined benefit pension obligations against market data disclosures). The effect of these matters is that, as part of our risk assessment, and peers. we determined that the valuation of post-employment benefits has a high degree of estimation uncertainty, with a potential range –– Our actuarial expertise: using our own actuarial specialists in evaluating and of reasonable outcomes greater than our materiality for the challenging the assumptions on mortality rates, forecast future inflation rates, financial statements as a whole, and possibly many times that and discount rates applied to estimate the present value of the future amount. The financial statements (note 7) disclose the sensitivity obligations of the defined benefit pension schemes, by the external actuary. estimated by the Group. –– Assessing transparency: assessing the Group’s disclosures for adequacy against the requirements of IAS 19.

Our results –– We found the resulting estimate of the valuation of post-employment benefits of the parent company to be acceptable.

3. Our application of materiality and an overview of the Group profit before tax Group materiality scope of our audit £502m £25.6m Materiality for the financial statements as a whole was set at £25.6 million (2017: £26.1 million), determined by reference to a benchmark of profit £25.6m before tax, of which it represents 5.1% (2017: 4.2%). Whole financial statements materiality Materiality for the parent company financial statements as a whole was set at £20.9 million (2017: £19.6 million), determined with reference to a benchmark of parent Company total assets, of which it represents £17.3m 1.9% (2017: 2.0%). Range of materiality at 38 components (£11.5m-£17.3m) We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £1.3 million £1.3m Misstatements reported to the (2017: £1.3 million), in addition to other identified misstatements that audit committee warranted reporting on qualitative grounds. Group profit before tax Group materiality As a result of a change in the consolidation process during the year the absolute number of individual reporting components has increased, but the coverage of businesses remains similar. Of the Group’s reporting components, we subjected 36 (2017: 10) to full scope audits for group purposes and 2 (2017: 3) to specified risk-focussed audit procedures. The latter were not individually financially significant enough to require a full scope audit for group purposes, but did present specific individual risks that needed to be addressed.

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

The components within the scope of our work accounted for the material uncertainty in this auditor’s report is not a guarantee that the percentages illustrated below. group or the company will continue in operation. In our evaluation of the Directors’ conclusions, we considered the inherent Group revenue Group profit before tax risks to the Group’s and Company’s business model and analysed how those risks might affect the Group’s and Company’s financial resources 2 or ability to continue operations over the going concern period. The risks that we considered most likely to adversely affect the Group’s and 2 1 2 Company’s available financial resources over this period were: 92% 80% (2017: 94%) (2017: 90%) –– Significant adverse deviation in insurance claims xperience;e and

89 89 –– a deterioration in the valuation of the Group’s investments arising from 90 78 a significant change in the economic environment. As these were risks that could potentially cast significant doubt on the Group total assets Group’s and the Company’s ability to continue as a going concern, we considered sensitivities over the level of available financial resources 3 Full scope for Group audit indicated by the Group’s financial forecasts taking account of reasonably purposes 2018 possible (but not unrealistic) adverse effects that could arise from these 10 Specified risk-focused audit risks individually and collectively and evaluated the achievability of the procedures 2018 93% Full scope for Group audit actions the Directors consider they would take to improve the position (2017: 92%) purposes 2017 should the risks materialise. We also considered less predictable but Specified risk-focused audit realistic second order impacts, such as the impact of Brexit and the 82 procedures 2017 erosion of customer confidence, which could result in a rapid reduction 90 Residual components of available financial resources. Based on this work, we are required to report to you if we have The Group team instructed component auditors as to the significant concluded that the use of the going concern basis of accounting is areas to be covered, including the relevant risks detailed above and inappropriate or there is an undisclosed material uncertainty that may the information to be reported back. The Group team approved the cast significant doubt over the use of that basis for a period of at least component materialities, which ranged from £11.5 million to £17.3 million, a year from the date of approval of the financial statements. having regard to the mix of size and risk profile of the Group across the components. The work on 31 of the 38 components was performed We have nothing to report in these respects, and we did not identify by component auditors and the rest, including the audit of the parent going concern as a key audit matter. company, was performed by the Group team. The Group team visited component locations in the United Kingdom, 5. We have nothing to report on the other information in Australia, Spain and Hong Kong to assess the audit risk and strategy. the Annual Report Telephone conference meetings were also held with these component The directors are responsible for the other information presented in auditors and others that were not physically visited. At these visits and the Annual Report together with the financial statements. Our opinion meetings, the findings reported to the Group team were discussed in on the financial statements does not cover the other information and, more detail, and any further work required by the Group team was then accordingly, we do not express an audit opinion or, except as explicitly performed by the component auditor. stated below, any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, 4. We have nothing to report on going concern consider whether, based on our financial statements audit work, the The Directors have prepared the financial statements on the going information therein is materially misstated or inconsistent with the concern basis as they do not intend to liquidate the Company or the financial statements or our audit knowledge. Based solely on that work Group or to cease their operations, and as they have concluded that the we have not identified material misstatements in the other information. Company’s and the Group’s financial position means that this is realistic. Strategic report and directors’ report They have also concluded that there are no material uncertainties that Based solely on our work on the other information: could have cast significant doubt over their ability to continue as a going concern for at least a year from the date of approval of the financial –– we have not identified material misstatements in the strategic report statements (“the going concern period”). and the directors’ report; Our responsibility is to conclude on the appropriateness of the Directors’ –– in our opinion the information given in those reports for the financial conclusions and, had there been a material uncertainty related to going year is consistent with the financial statements; and concern, to make reference to that in this audit report. However, as we –– in our opinion those reports have been prepared in accordance with cannot predict all future events or conditions and as subsequent events the Companies Act 2006. may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the absence of reference to a

76 Strategic Report Governance Financial Statements

Directors’ remuneration report In addition to our audit of the financial statements, the Directors have In addition to our audit of the financial statements, the Directors have engaged us to review their Governance Report as if the Company were engaged us to audit the information in the Directors’ Remuneration required to comply with the Listing Rules and the Disclosure Guidance Report that is described as having been audited, which the Directors and Transparency Rules of the Financial Conduct Authority in relation have decided to prepare as if the Company were required to comply to those matters. Under the terms of our engagement we are required with the requirements of Schedule 8 to The Large and Medium-sized to review: Companies and Groups (Accounts and Reports) Regulations 2008 –– the part of the Corporate Governance Statement on pages 35 to 70 (SI 2008 No. 410) made under the Companies Act 2006. relating to the Company’s compliance with the eleven provisions of In our opinion the part of the Directors’ Remuneration Report to be the UK Corporate Governance Codes specified for our review. audited has been properly prepared in accordance with the Companies We have nothing to report in these respects. Act 2006.

Disclosures of principal risks and longer-term viability 6. We have nothing to report on the other matters on Based on the knowledge we acquired during our financial statements which we are required to report by exception audit, we have nothing material to add or draw attention to in relation to: Under the Companies Act 2006, we are required to report to you if, –– the directors’ confirmation within the longer term viability tatements in our opinion: on page 29 that they have carried out a robust assessment of the –– adequate accounting records have not been kept by the parent principal risks facing the Group, including those that would threaten Company, or returns adequate for our audit have not been received its business model, future performance, solvency and liquidity; from branches not visited by us; or –– the disclosures describing these risks and explaining how they are –– the parent Company financial statements are not in agreement with being managed and mitigated; and the accounting records and returns; or –– the directors’ explanation in the longer term viability statement of –– certain disclosures of directors’ remuneration specified by law are not how they have assessed the prospects of the Group, over what made; or period they have done so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable –– we have not received all the information and explanations we require expectation that the Group will be able to continue in operation and for our audit. meet its liabilities as they fall due over the period of their assessment, We have nothing to report in these respects. including any related disclosures drawing attention to any necessary qualifications or assumptions. 7. Respective responsibilities Our work is limited to assessing these matters in the context of only the knowledge acquired during our financial statements audit. As we cannot Directors’ responsibilities predict all future events or conditions and as subsequent events may As explained more fully in their statement set out on page 69, the result in outcomes that are inconsistent with judgements that were Directors are responsible for: the preparation of the financial statements reasonable at the time they were made, the absence of anything to including being satisfied that they give a true and fair view; such internal report on these statements is not a guarantee as to the Group’s and control as they determine is necessary to enable the preparation of Company’s longer-term viability. financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and parent Company’s ability Corporate governance disclosures to continue as a going concern, disclosing, as applicable, matters related We are required to report to you if: to going concern; and using the going concern basis of accounting –– we have identified material inconsistencies between the knowledge unless they either intend to liquidate the Group or the parent Company we acquired during our financial statements audit and the directors’ or to cease operations, or have no realistic alternative but to do so. statement that they consider that the annual report and financial Auditor’s responsibilities statements taken as a whole is fair, balanced and understandable and Our objectives are to obtain reasonable assurance about whether the provides the information necessary for shareholders to assess the financial statements as a whole are free from material misstatement, Group’s position and performance, business model and strategy; or whether due to fraud or other irregularities (see below), or error, and to –– the section of the annual report describing the work of the Audit issue our opinion in an auditor’s report. Reasonable assurance is a high Committee does not appropriately address matters communicated level of assurance, but does not guarantee that an audit conducted in by us to the Audit Committee. accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities.

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

Irregularities – ability to detect 8. The purpose of our audit work and to whom we owe We identified areas of laws and regulations that could reasonably be our responsibilities expected to have a material effect on the financial statements from our This report is made solely to the Company’s members, as a body, in general commercial and sector experience, and through discussion with accordance with Chapter 3 of Part 16 of the Companies Act 2006. the directors and other management (as required by auditing standards), Our audit work has been undertaken so that we might state to the and from inspection of the Group’s regulatory and legal correspondence Company’s members those matters we are required to state to them and discussed with the directors and other management the policies in an auditor’s report and for no other purpose. To the fullest extent and procedures regarding compliance with laws and regulations. permitted by law, we do not accept or assume responsibility to anyone We communicated identified laws and regulations throughout our team other than the Company and the Company’s members, as a body, and remained alert to any indications of non-compliance throughout for our audit work, for this report, or for the opinions we have formed. the audit. The potential effect of these laws and regulations on the financial statements varies considerably. Philip Smart (Senior Statutory Auditor) Firstly, the Group is subject to laws and regulations that directly affect the for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants financial statements including financial reporting legislation (including 15 Canada Square related companies legislation), distributable profits legislation, taxation London legislation, and pension legislation and we assessed the extent of E14 5GL compliance with these laws and regulations as part of our procedures on the related financial statement items. 13 March 2019 Secondly, the Group is subject to many other laws and regulations where the consequences of non-compliance could have a material effect on amounts or disclosures in the financial statements, for instance through the imposition of fines or litigation or the loss of certain of the Group’s licences to operate. We identified the following area as most likely to have such an effect: regulatory capital and liquidity recognising the financial and regulated nature of the Group’s activities. Auditing standards limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry of the directors and other management and inspection of regulatory and legal correspondence, if any. These limited procedures did not identify actual or suspected non-compliance. Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements in the financial statements, even though we have properly planned and performed our audit in accordance with auditing standards. For example, the further removed non-compliance with laws and regulations (irregularities) is from the events and transactions reflected in the financial statements, the less likely the inherently limited procedures required by auditing standards would identify it. In addition, as with any audit, there remained a higher risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. We are not responsible for preventing non-compliance and cannot be expected to detect non-compliance with all laws and regulations.

78 Strategic Report Governance Financial Statements

Consolidated Income Statement for the year ended 31 December 2018

2018 2017 Note £m £m Revenues Gross insurance premiums 2.1 8,791 8,920 Premiums ceded to reinsurers 2.1 (63) (63) Net insurance premiums earned 8,728 8,857

Care, health and other customer contract revenue 2.1 3,117 3.370 Other revenue 2.1 14 22 Total revenues 11,859 12,249

Claims and expenses Insurance claims incurred 2.2 (6,912) (7,112) Reinsurers’ share of claims incurred 2.2 44 46 Net insurance claims incurred (6,868) (7,066)

Share of post-taxation results of equity accounted investments 33 29 Other operating expenses 2.3 (4,428) (4,485) Other income and charges 2.4 (53) (99) Total claims and expenses (11,316) (11,621)

Profit before financial income and expense 543 628

Financial income and expense Financial income 2.5 70 90 Financial expense 2.5 (103) (98) Net impairment loss on financial assets (8) – Net financial expense (41) (8)

Profit before taxation expense 502 620

Taxation expense 2.6 (190) (134)

Profit for the financial year 312 486

Attributable to: Bupa 306 482 Non-controlling interests 6 4 Profit for the financial year 312 486

Notes 1-26 form part of these financial statements.

79 Bupa Annual Report 2018

Consolidated Statement of Comprehensive Income for the year ended 31 December 2018

2018 2017 Note £m £m Profit for the financial year 312 486

Other comprehensive income/(expense)

Items that will not be reclassified to the Income Statement Remeasurement gains on pension schemes 7 21 94 Unrealised gains on revaluation of property 4 23 233 Taxation charge on income and expenses recognised directly in other comprehensive income 2.6 (12) (65)

Items that may be reclassified subsequently to the Income Statement Foreign exchange translation differences on goodwill 3 (73) (14) Other foreign exchange translation differences (11) (10) Net gain/(loss) on hedge of net investment in overseas subsidiary companies 1 (7) Change in fair value of underlying derivative of cash flow hedge – 5 Reclassification of foreign exchange translation differences to profit or loss on disposal of subsidiary – (4) Unrealised gains on available-for-sale assets – 1 Taxation charge on income and expenses recognised directly in other comprehensive income 2.6 (10) (3) Total other comprehensive income (61) 230 Comprehensive income for the year 251 716

Attributable to: Bupa 247 713 Non-controlling interests 4 3 Comprehensive income for the year 251 716

Notes 1-26 form part of these financial statements.

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Consolidated Statement of Financial Position as at 31 December 2018

2018 2017 Note £m £m Goodwill and intangible assets 3 4,263 4,288 Property, plant and equipment 4 3,200 3,203 Investment property 5 454 399 Equity accounted investments 6 690 553 Post-employment benefit net assets 7 602 577 Restricted assets 8 107 76 Financial investments 9 2,350 2,227 Derivative assets 10 28 47 Deferred taxation assets 11 52 6 Current taxation assets 9 – Assets arising from insurance business 12 1,348 1,230 Inventories 13 109 104 Trade and other receivables 14 577 738 Cash and cash equivalents 15 1,608 1,521 Assets held for sale 16 7 89 Total assets 15,404 15,058

Subordinated liabilities 17 (1,255) (1,303) Other interest bearing liabilities 17 (1,055) (1,170) Post-employment benefit net liabilities 7 (62) (68) Provisions under insurance contracts issued 18.1 (2,753) (2,637) Derivative liabilities 10 (47) (19) Provisions for liabilities and charges 19 (178) (132) Deferred taxation liabilities 11 (355) (310) Trade and other payables 20 (1,923) (1,930) Other liabilities under insurance contracts issued 18.2 (144) (117) Current taxation liabilities (122) (73) Liabilities associated with assets held for sale 16 – (11) Total liabilities (7,894) (7,770)

Net assets 7,510 7,288

Equity Property revaluation reserve 700 796 Income and expenditure reserve 6,306 5,882 Cash flow hedge reserve 20 22 Foreign exchange translation reserve 464 558 Equity attributable to Bupa 7,490 7,258 Equity attributable to non-controlling interests 20 30 Total equity 7,510 7,288

Approved by the Board of Directors and signed on its behalf on 13 March 2019 by

Roger Davis Joy Linton Chairman Chief Financial Officer

Notes 1-26 form part of these financial statements.

81 Bupa Annual Report 2018

Consolidated Statement of Cash Flows for the financial year ended 31 December 2018

2018 2017 Note £m £m Operating activities Profit before taxation expense 502 620

Adjustments for: Net financial expense 41 8 Depreciation, amortisation and impairment 367 432 Other non-cash items 20 (37)

Changes in working capital and provisions: Increase in provisions and other liabilities under insurance contracts issued 156 61 Increase in assets under insurance business (104) (57) Funded pension scheme employer contributions (9) (9) Increase in trade and other receivables, and other assets (14) (137) Increase in trade and other payables, and other liabilities 53 222 Cash generated from operations 1,012 1,103

Income taxation paid (173) (158) Increase in cash held in restricted assets 8 (31) (16) Net cash generated from operating activities 808 929

Cash flow from investing activities Acquisition of subsidiary companies, net of cash acquired 22 (146) (668) Increase in equity accounted investments 6 (81) (197) Dividends received from associates 12 6 Disposal of subsidiary companies and other businesses, net of cash disposed 57 23 Decrease in equity accounted investments 7 – Purchase of intangible assets 3 (100) (114) Purchase of property, plant and equipment (265) (356) Proceeds from sale of property, plant and equipment 84 374 Purchase of investment property 5 (27) (28) Disposal of investment property 19 2 Purchase of financial investments, excluding deposits with credit institutions (232) (252) Net withdrawal from deposits with credit institutions 61 155 Interest received 68 60 Net cash used in investing activities (543) (995)

Cash flow from financing activities Proceeds from issue of interest bearing liabilities and drawdowns on other borrowings 103 1,327 Repayment of interest bearing liabilities and other borrowings (190) (1,040) Interest paid 1 (87) (95) Receipts from/(payments for) hedging instruments 18 (3) Acquisition of non-controlling interests in subsidiary company 22 (8) – Dividends paid to non-controlling interests (1) (4) Net cash (used in)/generated from financing activities (165) 185

Net increase in cash and cash equivalents 100 119 Cash and cash equivalents at beginning of year 15 1,520 1,413 Effect of exchange rate changes (13) (12) Cash and cash equivalents at end of year 15 1,607 1,520

1. Includes other bank fees and charges of £3m (2017: £11m). Notes 1-26 form part of these financial statements.

82 Strategic Report Governance Financial Statements

Consolidated Statement of Changes in Equity for the financial year ended 31 December 2018

Foreign Equity Property Income and Cash flow exchange Equity attributable to revaluation expenditure hedge translation attributable non-controlling Total reserve reserve reserve reserve to Bupa interest equity Note £m £m £m £m £m £m £m 2018 At beginning of year 796 5,882 22 558 7,258 30 7,288 Opening balance adjustments 1.5 – (8) – – (8) – (8) Retained profit for the financial year – 306 – – 306 6 312

Other comprehensive income/(expense) Unrealised gain on revaluation of property 4 23 – – – 23 – 23 Realised revaluation profit on disposal of property (101) 101 – – – – – Remeasurement gain on pension schemes 7 – 21 – – 21 – 21 Foreign exchange translation differences on goodwill 3 – – – (73) (73) – (73) Other foreign exchange translation differences (9) 14 (2) (12) (9) (2) (11) Net gain on hedge of net investment in overseas subsidiary companies – – – 1 1 – 1 Taxation charge on income and expense recognised directly in other comprehensive income 2.6 (9) (3) – (10) (22) – (22) Other comprehensive income/(expense) for the year, net of taxation (96) 133 (2) (94) (59) (2) (61)

Total comprehensive income/(expense) for the year (96) 439 (2) (94) 247 4 251 Acquisition of subsidiary companies attributable to non-controlling interests – (7) – – (7) (4) (11) Elimination of non-controlling interest on disposal of subsidiary – – – – – (9) (9) Dividends paid to non-controlling interests – – – – – (1) (1) At end of year 700 6,306 20 464 7,490 20 7,510

2017 At beginning of year 706 5,230 15 595 6,546 31 6,577 Retained profit for the financial year – 482 – – 482 4 486

Other comprehensive income/(expense) Unrealised gain on revaluation of property 4 233 – – – 233 – 233 Realised revaluation profit on disposal of property (95) 95 – – – – – Remeasurement gain on pension schemes 7 – 94 – – 94 – 94 Unrealised gain on available-for-sale assets – 1 – – 1 – 1 Foreign exchange translation differences on goodwill 3 – – – (14) (14) – (14) Other foreign exchange translation differences 1 – 2 (12) (9) (1) (10) Net loss on hedge of net investment in overseas subsidiary companies – – – (7) (7) – (7) Change in fair value of underlying derivative of cash flow hedge 24.2 – – 5 – 5 – 5 Reclassification of foreign exchange translation differences to profit or loss on disposal of subsidiary – – – (4) (4) – (4) Taxation charge on income and expense recognised directly in other comprehensive income 2.6 (49) (19) – – (68) – (68) Other comprehensive income/(expense) for the year, net of taxation 90 171 7 (37) 231 (1) 230

Total comprehensive income/(expense) for the year 90 653 7 (37) 713 3 716 Acquisition of subsidiary companies attributable to non-controlling interests – (1) – – (1) – (1) Dividends paid to non-controlling interests – – – – – (4) (4) At end of year 796 5,882 22 558 7,258 30 7,288

Notes 1-26 form part of these financial statements.

83 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018

Note 1: Basis of preparation Basis of preparation in brief This section describes the Group’s significant accounting policies and 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 incorporated in England and Wales. The Company is limited by of subsidiaries are identified separately from the Group’s equity. guarantee. Bupa is an international healthcare business, providing Non- controlling interests consist of the amount of those interests at health insurance, treatment in clinics, dental centres and hospitals, the date of the original acquisition and the non-controlling shareholder’s and running care homes. share of changes in equity since this date. Intra-group related party transactions and outstanding balances are eliminated in the preparation Both the Company Financial Statements and the Group’s Consolidated of the Consolidated Financial Statements of the Group. Financial Statements have been prepared under International Financial Reporting Standards (IFRS) as adopted by the EU. The appropriate The Consolidated Financial Statements are presented in sterling, which is provisions of the Companies Act 2006 applicable to companies the Group’s presentational currency. Unless otherwise noted, the amounts reporting under IFRS have also been complied with. A summary of shown in these financial statements are in millions of pounds sterling IFRS that are relevant for the Group is included on page 168. (£m). The functional currency is identified at statutory entity level. These vary across the Group and include sterling, Australian dollar, The financial statements were approved by the Board of Directors on euro and US dollar. Each Group entity then translates its results and 13 March 2019. The Directors have reviewed and approved the Group’s financial position into the Group’s presentational currency, sterling, accounting policies which have been applied consistently to all the years for presentation in the Group Consolidated Financial Statements. presented, unless otherwise stated. For the purposes of consolidation, the accounting policies of subsidiary companies have been aligned with those of the parent company. 1.3 Accounting estimates and judgements The preparation of financial statements requires the use of certain The financial statements are prepared on a going concern basis and accounting estimates and assumptions that affect the reported assets, under the historical cost convention, modified by the revaluation of liabilities, income and expenses. It also requires management to exercise property, investment property, and financial investments at fair value. judgement in applying the Group’s accounting policies. The presentation of line items within the Consolidated Statement of The areas involving a higher degree of judgement or complexity, Financial Position are broadly in order of liquidity. or where assumptions are significant to the consolidated financial Current assets and liabilities disclosed in the notes to the accounts statements, are set out below and in more detail in the related notes. are those expected to be settled in less than one year. Claims, provisions, property valuations and pension assets and liabilities are the areas where there is more risk of a material adjustment to the carrying amounts within the next financial year. 1.2 Basis of consolidation The Consolidated Financial Statements for the year ended 31 December 2018 comprise those of the Company and its subsidiary companies (together referred to as the ‘Group’), and the share of results of equity accounted investments.

84 Strategic Report Governance Financial Statements

Area Estimates Note Claims provisioning Expected claims payments and expenses required to settle existing insurance contract obligations. The key assumptions 18 used in the calculation of the outstanding claims provision include claims development, margin of prudence, claims costs inflation, medical trends and seasonality. Property valuations The Group has a significant portfolio of care home, hospital and office properties and fluctuations in the value of this 4, 5 portfolio can have a significant impact on the Consolidated Statement of Financial Position, Consolidated Income Statement, Consolidated Statement of Comprehensive Income and solvency position of the Group. Significant assumptions for freehold and leasehold properties include average occupancy and capitalisation rates, whereas for investment property key assumptions include discount and capital growth rates. Goodwill and intangible Recognised on business combinations with the latter valued at the date of acquisition at fair value. Goodwill and intangible 3 assets 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 key assumptions within this process include the discount rate and the forecast cash flows. Pension assets and The principal defined benefit scheme in the UK is the Bupa Pension Scheme. The key assumptions used in the valuation of 7 liabilities the related pension liabilities include discount rate, and rates of inflation, salary increases and mortality.

1.4 Going concern 1.5 New financial reporting requirements Management has conducted a detailed assessment of the Group’s going The impact of adopting of IFRS 9 Financial Instruments and IFRS 15 concern status based on its current position and forecast results and has Revenue from Contracts with Customers, which are effective for the year concluded that the Group has adequate resources to operate for the next ended 31 December 2018, is described below. All other amendments to 12 months from the approval of these financial statements. In making this financial reporting standards applicable to the Group for the year ended assessment, management has considered the discussions with the 31 December 2018 do not have a material impact on the Consolidated relationship banks as well as forecasts which take account of reasonably Financial Statements. possible changes in trading performance, solvency capital and recently (a) IFRS 9 Financial Instruments announced acquisitions, if applicable. The Group has adopted IFRS 9 Financial Instruments with a date of initial Details of the Group’s business activities, together with the factors likely application of 1 January 2018. The Group did not early adopt any of to affect its future development, performance and position are set out in IFRS 9 in previous periods and is not eligible for the deferral approach the Strategic Report on pages 1 to 34. The financial position of the Group, (giving companies whose activities are predominantly connected with its cash flows, liquidity position and borrowing facilities are described in insurance an optional temporary exemption from applying IFRS 9). the Financial Review on pages 24 to 28. The Group has applied IFRS 9 retrospectively with the cumulative effect The Group has an £800m revolving credit facility (RCF) maturing in of initially applying IFRS 9 recognised as an adjustment to the opening August 2022, of which £170m was drawn at 31 December 2018. balance of retained earnings at the date of initial application of Refer to the longer term viability statement in the Strategic Report 1 January 2018. Therefore, the comparative information has not been which considers the Group’s ability to continue in operation and meet restated and continues to be reported under IAS 39. its liabilities as they fall due, over a period of three years. In making this IFRS 9 addresses the classification, measurement and de-recognition of assumption, management has considered the discussions with the financial assets and financial liabilities, introduces new rules for hedge relationship banks including the review of external ratings, forecasts accounting and a new impairment model for financial assets. that consider reasonably possible changes in trading performance, the solvency capital position and the Group’s financial and operational The Group’s investments in debt instruments that were previously risk framework. designated as available-for-sale under IAS 39 satisfy the conditions for classification as hold to collect under IFRS 9, and are measured at amortised cost.

85 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

The new impairment model requires the recognition of impairment The Group has elected to apply the new general hedge accounting provisions based on expected credit losses (ECL) rather than only model in IFRS 9. The new hedge accounting model requires the Group incurred credit losses, as is the case under IAS 39. Consequently, credit to ensure hedging relationships are aligned to the risk management losses are recognised earlier under IFRS 9. It applies to financial assets objectives and strategy and to apply a more qualitative and forward classified at amortised cost, debt instruments measured at fair value looking approach to assessing hedge effectiveness. The Group’s hedge through other comprehensive income and lease receivables. As the relationships continue to qualify as continuing hedges upon the adoption Group holds high quality financial investments the impact of IFRS 9 of IFRS 9. IFRS 9 has not had a significant effect on the Group’s on the measurement of these assets is limited, as set out below. accounting policies for financial liabilities.

Equity Foreign attributable Property Income and Cash flow exchange Equity to non- revaluation expenditure hedge translation attributable controlling Total reserve reserve reserve reserve to Bupa interest equity £m £m £m £m £m £m £m IFRS 9 impact on equity Impact of remeasurement of financial investments – (1) – – (1) – (1) Impact of ECL assessment – (6) – – (6) – (6) Total impact on opening equity from the adoption of IFRS 9 – (7) – – (7) – (7)

Equity attributable Equity to non- Financial Trade and attributable controlling Total investments receivables Deferred tax to Bupa interest equity £m £m £m £m £m £m IFRS 9 impact on statement of financial position Impact of remeasurement of financial investments (1) – – (1) – (1) Impact of ECL assessment (2) (6) 2 (6) – (6) Total impact on net assets from the adoption of IFRS 9 (3) (6) 2 (7) – (7)

(b) IFRS 15 Revenue from Contracts with Customers IFRS 15 establishes principles to be applied when reporting information The Group has adopted IFRS 15 Revenue from Contracts with Customers about the nature, amount, timing and uncertainty of revenue and cash with a date of initial application of 1 January 2018. flows arising from a contract with a customer and is based on the principle that revenue is recognised when control of a good or service The Group has applied IFRS 15 retrospectively with the cumulative transfers to a customer. It replaces IAS 11 Construction Contracts, IAS 18 effect of initially applying IFRS 15 recognised as an adjustment to the Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements opening balance of retained earnings at the date of initial application for the Construction of Real Estate and IFRIC 18 Transfers of Assets from of 1 January 2018. Therefore, the comparative information has not Customers. IFRS 15 does not apply to revenue related to insurance or been restated and continues to be reported under IAS 18 Revenue leasing contracts. and IAS 11 Construction Contracts. The application of IFRS 15 has not resulted in any significant changes in revenue recognition, as the majority of customer contract transaction prices tend to be fixed, rather than variable, with separate pricing for distinct performance obligations and settlement in the short term. Minor presentational changes arise from recognition of revenue as either an agent or a principal. The impacts are set out below.

86 Strategic Report Governance Financial Statements

Equity Foreign attributable Property Income and Cash flow exchange Equity to non- revaluation expenditure hedge translation attributable controlling Total reserve reserve reserve reserve to Bupa interests equity £m £m £m £m £m £m £m IFRS 15 impact on equity Change in the timing of revenue – (1) – – (1) – (1) Total impact on opening equity from the adoption of IFRS 15 – (1) – – (1) – (1)

Equity attributable Trade and Equity to non- other attributable controlling Total Inventories payables to Bupa interests equity £m £m £m £m £m IFRS 15 impact on statement of financial position Change in the timing of revenue 1 (2) (1) – (1) Total impact on net assets from the adoption of IFRS 15 1 (2) (1) – (1)

The adoption of IFRS 15 has not had a material impact on the Group’s The Group has assessed the impact of adopting the standard, as results for the period ending 31 December 2018. described below. The Group will apply IFRS 16 using the modified retrospective approach, 1.6 Forthcoming financial reporting requirements where right of use assets equals the lease liabilities adjusted for prepaid The following financial reporting standards, amendments and or accrued lease payments. The cumulative effect of adopting the interpretations have been issued but are not effective for the year standard is recognised as an adjustment to opening retained earnings ended 31 December 2018 and have not been early adopted by Group. at 1 January 2019 with no restatement of comparative information. The Group will also apply the exemption that allows short term and (a) IFRS 16 Leases low value leases to be excluded from the measurement model. The Group is required to adopt IFRS 16 Leases on 1 January 2019. The standard was endorsed by the EU on 31 October 2017. IFRS 16 sets On transition, the Group expects to recognise lease liabilities and out the principles for the recognition, measurement, presentation and corresponding right-of-use assets of c.£1.1bn. Compared to the existing disclosure of leases and supersedes IAS 17 Leases, IFRIC 4 Determining IAS 17 approach of recognising operating lease costs on a smoothed Whether an Arrangement Contains a Lease, SIC-15 Operating Leases— basis through operating expenses, the IFRS 16 approach results in lower Incentives, and SIC-27 Evaluating the Substance of Transactions Involving operating expenses and higher finance costs. Overall profit is also lower the Legal Form of a Lease. in the early years of the lease and higher in the later years of the lease compared to the existing approach, due to the timing of the recognition IFRS 16 will result in almost all leases being recognised on the balance of the implicit finance costs on the outstanding liability. The 2019 profit sheet for lessees, as the distinction between operating and finance leases after tax impact will be dependent on lease activity during the year, is removed. The Group, as a lessee, will recognise a lease liability reflecting but it is expected that profit before tax will be lower than it would have the discounted obligation to make lease payments and a right-of-use been under IAS 17. asset representing the right to use the underlying asset during the lease term. A depreciation charge for right-of-use assets and interest expense on lease liabilities will be recognised, whereas under IAS 17 an operating lease expense is recognised on a straight-line basis over the term of the lease and assets and liabilities are recognised only to the extent that there is a timing difference between actual lease payments and the expense recognition.

87 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

(b) IFRS 17 Insurance Contracts (e) IAS 28 Long term Interests in Associates and Joint Ventures IFRS 17 was issued in May 2017 as replacement for IFRS 4 Insurance The amendment clarifies any long term debt instruments that form Contracts. It requires a current measurement model where estimates are part of the net investment in an associate or joint venture are accounted remeasured each reporting period. Contracts are measured using the for in accordance with IFRS 9, including impairment requirements. building blocks of: discounted probability-weighted cash flows, an explicit The amendment, which has not been endorsed by the EU, is effective risk adjustment, and a contractual service margin (CSM) representing the from 1 January 2019. The amendment will have no impact on the Group. unearned profit of the contract which is recognised as revenue over the (f) IFRS 9 Prepayment features with the negative compensation coverage period. An optional, simplified premium allocation approach is permitted for the liability for the remaining coverage for short-duration The amendment enables companies to measure at amortised cost some contracts. The mandatory effective date for applying IFRS 17 is for annual prepayable financial assets with negative compensation (where the periods beginning on or after 1 January 2021. However, the International contractual terms permit the borrower to prepay the instrument before Accounting Standards Board (IASB) proposed in November 2018 to maturity, but the prepayment amount could be less than the unpaid defer the effective date by one year to 2022 and it is expected that this amounts of principal and interest) that otherwise would have been will become the mandatory effective date once the IASB has completed measured at fair value through profit or loss. The amendment, which was its due process. endorsed by the EU, is effective from 1 January 2019. The amendment will have no impact on the Group. The impact of IFRS 17 on the financial statements is currently being evaluated by the Group, but it is anticipated that the simplified premium (g) Annual improvements to IFRS Standards 2015-2017 Cycle allocation approach option, similar to the current application of IFRS, These improvements consist of minor amendments to four standards will be available for the majority of the Group’s insurance contracts. including IFRS 3 Business Combinations, IFRS 11 Joint Arrangements, IAS 12 and IAS 23 Borrowings Costs. The amendment, which has not (c) IFRIC 23 Uncertainty over Income Tax Treatments been endorsed by the EU, is effective from 1 January 2019. There is no IFRIC 23 has been developed by the IFRS Interpretation Committee immediate impact on the Group from these changes. The requirements to provide greater clarity on how uncertain tax treatments should be will be applied in future, if relevant. recognised and measured under IAS 12 Incomes . IFRIC 23 becomes effective from 1 January 2019 and will cover all income taxes within the (h) IFRS 3 Business Combinations amendment scope of IAS 12. Under IFRIC 23, a tax provision should be recognised if The IASB has issued ‘Definition of a Business (Amendments to IFRS 3)’ it is probable that a taxation authority will not accept the tax treatment to clarify whether an entity has acquired a business or a group of assets. adopted by an entity. When measuring the uncertainty, an entity can The amendments are effective for business combinations for which the select from either the ‘most likely amount’ or the ‘expected value’ acquisition date is on or after the beginning of the first annual reporting method, based on which approach better predicts the ultimate outcome. period beginning on or after 1 January 2020. This has not been endorsed The amendment will have no immediate impact on the Group on by the EU. The requirements will be applied in future, if relevant. transition. (i) IAS 1 and IAS 8 amendment (d) IAS 19 Plan amendment, curtailment or settlement IASB has issued ‘Definition of Material (Amendments to IAS 1 and IAS 8)’ The amendment clarifies that when a plan amendment, curtailment to clarify the definition of ‘material’. The amendment, which has not been or settlement occurs during the period, the entity determines revised endorsed by the EU, is effective from 1 January 2020. The impact of the current service costs and net interest for the remainder of the period amendments are currently being evaluated by the Group. based on the updated assumptions. The amendment, which has not yet been endorsed by the EU, is applied prospectively from 1 January 2019 1.7 Events occurring after the reporting period and will only impact the Group in the event of a plan amendment, The Group acquired the Turkish health insurer, Acıbadem Sigorta, for curtailment or settlement. £143m on 18 January 2019. The purchase price allocation exercise for the acquisition of Acıbadem is in progress. In February 2019, private equity firm True North acquired a controlling stake in Max Bupa Health Insurance from Max India, subject to regulatory approval.

88 Strategic Report Governance Financial Statements

Note 2: Operating segments Operating segments in brief The Group is managed through four Market Units based on 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 below are reported consistently with the way the business is managed and reported internally.

Reportable segments Services and products Australia and New Zealand Bupa Health Insurance: Health insurance, international health cover in Australia. Bupa Health Services: Health provision services relating to dental, optical, audiology and medical assessments and therapy. Bupa Villages and Aged Care Australia and New Zealand: Nursing, residential and respite care in Australia and New Zealand. Retirement villages in New Zealand. Europe and Latin America Sanitas Seguros (Sanitas PMI): Health insurance and related products in Spain. Sanitas Dental: Dental services through clinics and third-party networks in Spain. Sanitas Hospitales & New Services: Management and operation of hospitals and health clinics in Spain. Sanitas Mayores: Nursing, residential and respite care in care homes and day centres in Spain. LUX MED: Medical subscriptions, health insurance, and the management and operation of diagnostics, health clinics and hospitals in Poland. Bupa Chile: Health insurance and the management and operation of health clinics and hospitals in Chile. United Kingdom Bupa UK Insurance: Health insurance, and administration services for Bupa health trusts. Bupa Dental Care: Dental services and related products. Bupa Health Services: Clinical services, health assessment related products and management and operation of a private hospital. Bupa Care Services: Nursing, residential, respite care and care villages. International Markets Bupa Global: International health insurance to individuals, small businesses and corporate customers and health insurance in Latin America, mainly Brazil and Mexico. Bupa Hong Kong: Domestic health insurance, primary healthcare and day care clinics including diagnostics. Bupa China: Clinical services. Associates: Bupa Arabia (Kingdom of Saudi Arabia) and Max Bupa (India): Health insurance.

A key performance measure of operating segments utilised by the Group –– Net gains/losses on disposal of businesses and transaction costs on is underlying profit. This measurement basis distinguishes underlying profit business combinations – gains/losses on disposal of businesses that from other constituents of the IFRS reported profit before tax not directly are material and one-off in nature to the reportable segment or Group related to the underlying trading performance of the business. are not considered part of the continuing business; transaction costs incurred that relate to material acquisitions or disposals are not In 2018, in response to the FRC guidance on Alternative Performance considered as part of ongoing trading performance of the business. Measures, the definition of underlying profit has been refined with the objective of providing better transparency around the trading –– Net property revaluation gains/losses – short term fluctuations which performance of the Group. The total underlying profit of the reportable would distort underlying trading performance. Includes unrealised segments for 2017 has been restated. The key restatement item is gains or losses on investment properties, deficit on revaluations and the inclusion of amortisation of intangible assets arising on business property impairment losses. combinations as part of underlying profit (2017: £68m). Other –– Realised and unrealised foreign exchange gains/losses – short term refinements have been made to the definition but are not material fluctuations outside of management control, which would distort to the reportable segment or Group. underlying trading performance. The following items are excluded from underlying profit: –– Other Market Unit/Central non-underlying items – includes items that –– Impairment of intangible assets and goodwill arising on business are considered material to the reportable segment or Group and are combinations – impairment reviews are performed at least annually. not reflective of ongoing trading performance. Goodwill impairments are considered to be one-off and not reflective –– Gains/losses on return-seeking assets, net of hedging – fluctuations on of the ongoing trading performance of the business. investments that are not considered to be directly related to underlying trading performance.

89 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

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

(i) Revenues Australia and Europe and International New Zealand Latin America United Kingdom Markets Total 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 £m £m £m £m £m £m £m £m £m £m Gross insurance premiums 3,829 4,031 1,908 1,811 1,556 1,557 1,498 1,521 8,791 8,920 Premiums ceded to reinsurers – – (9) (8) (22) (22) (32) (33) (63) (63) Internal – – (3) (5) – – 3 5 – – Net insurance premiums earned 3,829 4,031 1,896 1,798 1,534 1,535 1,469 1,493 8,728 8,857

Care, health and other customer contract revenue 824 888 1,141 1,069 1,004 1,266 154 150 3,123 3,373 Other revenue 3 8 4 2 4 8 3 4 14 22 Intersegment revenues – – – – (5) (2) – – (5) (2)

Total revenues for reportable segments 4,656 4,927 3,041 2,869 2,537 2,807 1,626 1,647 11,860 12,250 Net reclassifications to other expenses or financial income and expense (1) (1) Consolidated total revenues 11,859 12,249

(ii) Segmental result Australia and Europe and International New Zealand Latin America United Kingdom Markets Total 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 £m £m £m £m £m £m £m £m £m £m Underlying profit for reportable segments1 313 368 182 177 156 199 36 39 687 783 Central expenses and net interest margin (74) (64) Consolidated underlying profit before taxation 613 719

Non-underlying items: Impairments of intangible assets and goodwill arising on business combinations (36) – – (16) – – – – (36) (16) Net (losses)/gains on disposal of businesses and transaction costs on business combinations2 – – (23) – (18) (2) 5 36 (36) 34 Net property revaluation gains/(losses)3 17 (18) (4) 3 (13) (96) – – – (111) Realised and unrealised foreign exchange losses4 – (1) (6) (5) – – (2) (18) (8) (24) Other material non-underlying items5 (21) – – – – – (9) – (30) – (Losses)/gains on return-seeking assets, net of hedging (1) 18 Total non-underlying items (111) (99) Consolidated profit before taxation expense 502 620

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 6. 2. Includes £22m loss on disposal of interest in Torrejón Salud and £18m mainly relating to the on going completion costs relating to the disposal of a number of UK care homes in December 2017 and February 2018. 2017 includes profit on disposal of Bupa Thailand in July 2017 and transaction costs in relation to the acquisition of Oasis Dental Care in February 2017. 3. 2017 includes £97m of write downs on items previously held for sale. 4. Includes the FX impact of treating unearned premiums and deferred acquisition costs as a monetary item. 5. 2018 includes penalties and associated consultancy costs relating to the in-principle agreement with the Australian Taxation Office (£21m) and costs associated with setting up the Irish insurance entity as part of our Brexit strategy (£9m).

90 Strategic Report Governance Financial Statements

(iii) Other information In addition to the items of income and expense separately identified in table (ii) Segmental result above, Market Unit results include the following material non-cash items: Australia and Europe and International New Zealand Latin America United Kingdom Markets Total 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 £m £m £m £m £m £m £m £m £m £m Amortisation and depreciation costs for reportable segments 85 82 104 92 92 82 44 47 325 303 Unrealised gains on investment property 21 21 – 1 – – – – 21 22 (Deficit)/surplus on revaluation of property (4) (39) (4) 1 (13) (95) – – (21) (133) Share of profits from associates and joint ventures – – – – – – 33 29 33 29

(iv) Geographical information Australasia UK Spain Rest of the World Total 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 £m £m £m £m £m £m £m £m £m £m Total revenues 4,656 4,927 3,073 3,386 1,682 1,609 2,448 2,327 11,859 12,249 Consolidated non-current assets (by geography)1 3,401 3,567 3,117 2,821 606 573 1,545 1,641 8,669 8,602

1. Consolidated non-current assets excludes financial investments, restricted assets, assets arising from insurance business, deferred taxation assets and post-employment benefit net assets.

Note 2.1: Revenues Revenues in brief The Group generates revenues from its underwriting activities (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 provision for unearned premiums for premiums written relating to period of risk in subsequent financial years. Premiums are shown gross of commission 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. 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. Care, health and other customer The Group generates income from fees receivable from the operation of its care homes, hospitals, dental centres and other healthcare and contract revenue wellbeing centres. In instances where Bupa is acting as an agent and another party is primarily responsible for fulfilling the contract, revenue is recognised on a net basis. When considering whether the Group is acting as an agent or as a principal, factors such as which party is primarily responsible for fulfilling the obligation, bears the inventory and credit risk and has discretion in establishing prices are considered. In the majority of cases, significant judgement is not required. The revenue streams typically relate to short term services that have fixed, rather than variable, transaction prices and there is generally no significant judgement required when considering the time pattern of revenue recognition. Payment terms vary from completion of the service, to payments made monthly in advance. Bupa has the right to bill and receive payment for services rendered to date. The Sanitas Hospitales and New Services revenue stream includes one public hospital in Spain that is operated under a separate service concession arrangement granted by the local government (the grantor). Revenue is recognised from the construction of infrastructure and for operation of the hospital. 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. The accounting policy for the service concession receivables is explained in Note 14. Other customer contract revenue includes contracts entered into by the Group’s insurance entities that do not result in the transfer of significant insurance risk to the Group and are accounted for as 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. Other Other revenue is earned mainly from rental income and amenities fees from Occupation Right Agreements. Revenue is recognised on a straight-line basis over the term of the arrangement.

91 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

Revenue for the year has been analysed at Business Unit level, reflecting the nature of services provided by geography that is reported internally to management.

Care, health and other Net customer insurance contract premiums Other Total revenue earned revenue revenues 2018 2018 2018 2018 £m £m £m £m Bupa Health Insurance 8 3,829 1 3,838 Bupa Health Services 306 – 1 307 Bupa Villages and Aged Care Australia and New Zealand 510 – 1 511 Australia and New Zealand 824 3,829 3 4,656

Sanitas Seguros 7 1,106 3 1,116 Sanitas Dental 74 59 – 133 Sanitas Hospitales and New Services 289 – – 289 Sanitas Mayores 140 – – 140 LUX MED 338 10 – 348 Bupa Chile 293 721 1 1,015 Europe and Latin America 1,141 1,896 4 3,041

Bupa UK Insurance 19 1,534 2 1,555 Bupa Dental Care 436 – 2 438 Bupa Health Services 137 – – 137 Bupa Care Services 407 – – 407 United Kingdom 999 1,534 4 2,537

Bupa Hong Kong 147 266 – 413 Bupa Global 3 1,203 3 1,209 Other 4 – – 4 International Markets 154 1,469 3 1,626

Net reclassifications to other expenses or financial income and expense (1) – – (1)

Consolidated total revenues 3,117 8,728 14 11,859

Analysis of net insurance premiums earned 2018 2017 £m £m Gross premiums written 8,913 8,991 Change in gross provisions for unearned premiums (122) (71) Gross insurance premiums 8,791 8,920

Gross premiums written ceded to reinsurers (66) (60) Reinsurers’ share of change in gross provisions for unearned premiums 3 (3) Premiums ceded to reinsurers (63) (63)

Net insurance premiums earned 8,728 8,857

Care, health and other customer contract revenue 3,117 3,370 Other revenue 14 22 Total revenues 11,859 12,249

92 Strategic Report Governance Financial Statements

Note 2.2: Insurance claims Insurance claims in brief Insurance claims relate to the Group’s insurance underwriting 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 reinsurers year together with related handling costs, the movement in the gross on claims paid, adjusted for the reinsurers’ share of the change in the provision for claims in the period and the Risk Equalisation Special gross provision for claims. Account levy for the Australian health insurance business. See Note 18 See ‘Assets arising from insurance business’ (Note 12) for the related for details of the claims provision. balance sheet item. In Australia, the Risk Equalisation Special Account charges a levy to all registered private health insurers and then allocates a proportion of the cost of eligible claims between all fund participants.

2018 2017 £m £m Insurance claims paid 6,985 7,182 Change in gross provisions for claims 10 5 6,995 7,187 Risk Equalisation Special Account levy (net of recoveries) (83) (75) Insurance claims incurred 6,912 7,112

Recoveries from reinsurers on claims paid (44) (46) Reinsurers’ share of claims incurred (44) (46)

Net insurance claims incurred 6,868 7,066

93 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

Note 2.3: Other operating expenses Other operating expenses in brief Other operating expenses include staff costs, overheads, 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.

2018 2017 Note £m £m Staff costs 2.3.1 2,049 2,199 Acquisition costs 2.3.2 299 280 Medical supplies and fees 908 814 Property costs 215 212 Operating lease rentals 182 177 Marketing costs 105 116 Catering and housekeeping costs 56 82 Consultancy fees 121 77 Net loss/(gain) on foreign exchange transactions 2 (4) Amortisation of intangible assets 3 141 130 Impairment of intangible assets 3 39 22 Depreciation expense 4 185 172 Other operating expenses (including auditors' remuneration) 2.3.3 126 208 Total other operating expenses 4,428 4,485

2.3.1 Staff cost and employee numbers Employee numbers Staff costs The average number of employees, including Executive Directors, The table below represents the total employee benefit expenses incurred employed by the Group during the year was: by the Group during the year. 2018 2017 2018 2017 Australia and New Zealand 18,389 19,007 £m £m Europe and Latin America 33,421 31,899 Wages and salaries 1,994 2,115 United Kingdom 21,816 32,280 Social security costs 135 142 International Markets 4,080 4,254 Contributions to defined contribution schemes 37 35 Centre 610 583 Other pension costs 3 6 Total employee numbers 78,316 88,023 Total staff costs 2,169 2,298 Staff costs relating to claims handling reported The total employee headcount as at 31 December 2018 was 78,973 in claims (99) (120) (2017: 81,988). Staff costs in operating expenses 2,049 2,199 The average number of full-time equivalent employees as at Directors’ Remuneration Report is described on pages 57-67 of 31 December 2018 was 61,170 (2017: 62,989). this report.

94 Strategic Report Governance Financial Statements

2.3.2 Acquisition costs 2.3.3 Auditor’s remuneration 2018 2017 2018 2017 £m £m £m £m Commission for direct insurance 297 280 Audit fees for audit of Company's annual accounts 0.9 0.9 Other acquisition costs paid 23 14 Fees payable to the Company's auditor and its associates for: Changes in deferred acquisition costs (21) (14) Audit fees for audit of Company's subsidiaries Total acquisition costs 299 280 pursuant to legislation 5.3 4.8 The movement in deferred acquisition costs is detailed in Note 12. Audit fees for audit-related assurance services 0.9 0.8 Audit fees to the Company's auditors, KPMG LLP and its associates 7.1 6.5 Fees payable to other auditors: Audit fees to other auditors for audit of overseas subsidiary companies – 0.2 Total audit fees 7.1 6.7 Fees payable to the Company's auditor and its associates for other services: Other assurance services – 0.1 All other non-audit services 0.6 0.1 Total non-audit fees 0.6 0.2 Total auditors’ remuneration 7.7 6.9

In addition, fees in respect of the audit of The Bupa Pension Scheme were £48,100 (2017: £46,000).

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

2018 2017 Note £m £m Net (losses)/gains on disposal of business1 22 (31) 36 Deficit on revaluation of property 4 (21) (34) Write down of property2 4 – (99) Net loss on disposal of property, plant and equipment – (2) Movement in provision for equity accounted investments3 (1) – Total other income and charges (53) (99)

1. 2018 loss on disposal of business includes a £22m loss on disposal of Torrejón Salud on 28 December 2018, £20m of losses relating to ongoing completion costs with respect of the disposal of UK care homes to HC-One and Advinia, profits of £8m on disposal of a 33.33% share of Forsikringens Datacentre A/S on 3 January 2018 and a net £3m profit on other disposals. 2017 includes a £36m profit on disposal of Bupa Thailand to on 25 July 2017. 2. 2017 includes £97m write down of property assets previously classified as held for sale. 3. Impairment of associate, Vigil Monitoring Ltd in New Zealand.

95 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

Note 2.5: Financial income and expense Financial income and expense in brief Financial income and expenses are earned/(incurred) from the Group’s financial assets and liabilities, and non-financial assets such as investment property.

Financial income Financial expense Interest income, except in relation to assets classified at fair value through Interest payable on borrowings is calculated using the effective interest profit or loss, is recognised in the Consolidated Income Statement as method. it accrues, using the effective interest method. Any mark to market 2018 2017 movements are split between realised or unrealised. £m £m Interest expense on financial liabilities at Changes in the value of financial assets at fair value through profit or loss amortised cost 100 94 are recognised within financial income as an unrealised gain or loss while Finance charges in respect of finance leases – 1 the asset is held. Upon realisation of these assets, the change in fair value Other financial expenses 3 since the last valuation is recognised within financial income as a realised 3 gain or loss. Total financial expense 103 98 The Group has applied IFRS 9 retrospectively with the cumulative effect of initially applying IFRS 9 recognised as an adjustment to the opening balance of retained earnings at the date of initial application of 1 January 2018. Therefore, the comparative information has not been restated and continues to be reported under IAS 39.

2018 2017 Note £m £m Interest income: Investments at fair value through profit or loss – IFRS 9 5 – Investments at amortised cost – IFRS 9 47 – Loans and receivables – 45 Investments designated as available for sale – IAS 39 – 4 Investments held to maturity – IAS 39 – 8 Net realised gains on financial investments at fair value through profit or loss 8 1 Net (decrease)/increase in fair value: Investments at fair value through profit or loss (8) 22 Investment property 5 21 22 Net foreign exchange translation losses (3) (12) Total financial income 70 90

Included within financial income is a net loss, after hedging, on the Group’s return-seeking asset portfolio of £1m (2017: net gain of £18m).

96 Strategic Report Governance Financial Statements

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

Income taxation is recognised in the Consolidated Income Statement (ii) Reconciliation of effective taxation rate except to the extent that it relates to items recognised directly in other comprehensive income, in which case it is recognised directly in the 2018 2017 £m £m Consolidated Statement of Comprehensive Income. Profit before taxation expense 502 620 UK corporation tax rate 19% 19.25% (i) Recognised in the Consolidated Income Statement Tax at the UK corporation tax rate 95 119

2018 2017 £m £m Effects of recurring tax reconciliation items: Current taxation expense Different tax rates in foreign jurisdictions 33 43 UK tax on income for the year 18 51 Deductions not allowable for tax purposes 36 15 UK tax adjustments in respect of prior periods (19) (16) Income not taxable or taxable at concessionary rates (29) (4) (1) 35 Property revaluation (4) 16 Double taxation relief (9) (12) Results of joint ventures and associates (7) (6) Changes in tax rates (1) (2) Foreign tax on income for the year 162 178 Deferred tax assets not recognised 1 (7) Foreign tax adjustments in respect of prior years 63 (24) Irrecoverable withholding taxes – 1 225 154 29 56

Total current taxation 215 177 Effects of non-recurring tax reconciliation items: Tax adjustments in respect of prior periods1 55 (43) Deferred taxation income Profit/(loss) on disposal of business 2 (7) Origination and reversal of temporary differences (35) (38) Profit on disposal of property, plant and equipment 1 9 Adjustments in respect of prior periods 11 (3) Other 8 – Changes in tax rates (1) (2) 66 (41) Total deferred taxation (25) (43) Taxation expense 190 134 Taxation expense at the effective rate of 38% (2017: 22%) 190 134 Current taxation is the expected taxation payable on the taxable profit 1. Adjustments in respect of prior periods: Relates primarily to an in-principle agreement with for the year, using taxation rates enacted or substantively enacted at the the Australian Taxation Office (see Note 26 (iii) Contingent assets and contingent liabilities) balance sheet date, and any adjustments to taxation payable in respect of previous years. (iii) Current and deferred taxation recognised directly in The Group is subject to taxation audits in the territories in which it other comprehensive income operates and considers each issue on its merits when deciding whether 2018 2017 to hold a provision against the potential taxation liability that may arise. £m £m However, the amount that is ultimately paid could differ from the amount Deferred taxation charge in respect of: initially recorded and this difference is recognised in the period in which Unrealised surplus on revaluation of property (9) (49) such a determination is made. Remeasurement gain on pension schemes (3) (16) Other foreign exchange translation differences (10) (3) Taxation charge on income and expenses recognised directly in other comprehensive income (22) (68)

97 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

Note 3: Goodwill and intangible assets Goodwill and intangible assets in brief Intangible assets and goodwill are non-physical assets used 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 a over the fair value of the Group’s share of identifiable assets, liabilities and business combination are capitalised at fair value which represents cost contingent liabilities of the acquired subsidiary company at the date of at acquisition and are subsequently held at cost less accumulated business combination. The carrying value of goodwill may be adjusted amortisation and impairment. Intangible assets acquired separately up to 12 months from the accounting date of acquisition, as the allocation are stated at cost less accumulated amortisation and impairment. of the purchase price to identifiable intangible assets is finalised within Costs relating to the development of intangible assets, including that period. Goodwill arising on business combinations is capitalised computer software, are capitalised once all the development phase and presented with intangible assets in the Consolidated Statement of recognition criteria are met. Financial Position. Where the fair value of net assets acquired is greater than the consideration paid, the excess is recognised immediately in the Amortisation is charged to the Consolidated Income Statement on Consolidated Income Statement. a straight-line basis as follows: Goodwill is stated at cost less accumulated impairment losses. –– Computer software 2-7 years Impairment reviews are performed annually or more frequently if there –– Brand and trademarks 3 years-indefinite is an indication that the carrying value may be impaired. Impairment reviews are performed at the level of the relevant cash generating unit –– Technology and databases 10 years (CGU). A CGU is the smallest identifiable group of assets that generates –– Distribution networks 10 years cash inflows that are largely independent of the cash inflows from other assets or groups of assets. –– Customer relationships 3-20 years –– Present value of acquired in-force business 20 years –– Customer contracts 4-6 years –– Licences to operate care homes term of licence –– Rental contracts 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 Consolidated Income Statement to reduce the carrying amount to the recoverable amount. Bed licences, with a carrying value of £114m (2017: £122m), 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.

98 Strategic Report Governance Financial Statements

Computer Brands/ Customer Goodwill software Trademarks relationships Other Total £m £m £m £m £m £m 2018 Cost At beginning of year 3,299 896 361 880 333 5,769 Assets arising on business combinations 104 – 12 43 – 159 Additions – 100 – – – 100 Disposal of subsidiary companies (1) – – – – (1) Other disposals (2) (97) (8) (21) (21) (149) Other – (4) – – – (4) Foreign exchange (72) (6) (11) (8) (4) (101) At end of year 3,328 889 354 894 308 5,773

Amortisation and impairment loss At beginning of year 336 607 128 264 146 1,481 Amortisation for year – 68 9 56 8 141 Impairment loss 35 2 5 – (3) 39 Disposal of subsidiary companies – – – – – – Other disposals – (95) (8) (21) (19) (143) Other – 1 – – – 1 Foreign exchange 1 (2) (4) (4) – (9) At end of year 372 581 130 295 132 1,510

Net book value at end of year 2,956 308 224 599 176 4,263 Net book value at beginning of year 2,963 289 233 616 187 4,288

2017 Cost At beginning of year 2,722 794 360 547 317 4,740 Assets arising on business combinations 596 2 3 343 16 960 Additions – 110 – – 4 114 Disposal of subsidiary companies – (3) – – – (3) Other disposals – (8) – – – (8) Other – – – – – – Foreign exchange (19) 1 (2) (10) (4) (34) At end of year 3,299 896 361 880 333 5,769

Amortisation and impairment loss At beginning of year 340 550 103 218 136 1,347 Amortisation for year – 62 9 51 8 130 Impairment loss 1 5 16 – – 22 Disposal of subsidiary companies – (2) – – – (2) Other disposals – (7) – – – (7) Other – (2) – – 2 – Foreign exchange (5) 1 – (5) – (9) At end of year 336 607 128 264 146 1,481

Net book value at end of year 2,963 289 233 616 187 4,288 Net book value at beginning of year 2,382 244 257 329 181 3,393

99 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

Intangible assets of £4,263m (2017: £4,288m) includes £999m The recoverable amount for Bupa New Zealand has been assessed based (2017: £1,036m) which is attributable to other intangible assets arising on FVLCD, with the valuation based on a period of ten years. on business combinations (included within customer relationships, Taxation has been applied to the pre-taxation management operating brands/trademarks and other) as follows: profits based on the statutory taxation rates in the country of operation. 2018 2017 £m £m Future post-taxation cash flows have been discounted at post-taxation Customer relationships 599 616 discount rates. Discount rates used for the value in use calculations for Bed licences (within Bupa Villages and each of the Group’s CGUs are based on considerations of the specific Aged Care Australia) 114 122 risks associated with the business plans of each CGU, as well as external Brands and trademarks 224 233 factors. These include the market assessment of the time value of money Licences to operate care homes 22 20 and the risks inherent in the relevant country where the cash flows are Customer contracts – 1 generated. Leases 23 26 Cash flow projections beyond the forecast periods have been extrapolated Distribution networks 15 16 by applying a terminal growth rate between 2.0% and 5.5% (2017: 2.0% Present valuation of acquired in-force business 1 1 and 5.3%) for all CGUs. The terminal growth rates represent an estimate Non-compete agreement 1 1 of the long term growth rate for each of the CGUs, taking into account Total 999 1,036 the future and past growth rates and external sources of data. The values assigned to the key assumptions are based on past experience of the CGUs and assessment of future trends in the relevant Impairment testing of goodwill and indefinite life industry. intangible assets Intangible assets with indefinite useful lives are tested at least annually The following table summarises the pre-taxation discount rates used for for impairment by comparing the net carrying value with the recoverable impairment testing for the main CGUs: amount, using value in use calculations or in some circumstances, fair 2018 2017 value less costs of disposal (FVLCD). % % Bupa Australia Health Insurance 9.8 12.2 In arriving at the value in use for each CGU, key assumptions have Bupa Health Services Australia 10.0 10.7 been made regarding future projected cash flows, discount rates and Bupa Villages and Aged Care – Australia 9.4 9.0 terminal growth rates. The main assumptions upon which the cash flow Bupa Villages and Aged Care – New Zealand 8.5 7.4 projections are based include premiums and claims costs for our health insurance businesses, fee rate, cost of care and occupancy for our care Bupa Chile 14.0 12.3 services businesses and revenue growth and gross margins for hospitals LUX MED 9.9 10.1 and clinics. Sanitas Seguros 11.2 10.4 Sanitas Mayores 8.2 9.0 Aside from those mentioned below, cash flow projections have been Bupa Care Services UK 7.0 8.2 based on management operating profit projections for a three-year UK Dental 10.5 period which have been approved by the Board. Cash flow projections 7.1 for Bupa Care Services UK, Bupa Chile, Care Plus, LUX MED, Quality Bupa Cromwell Hospital 9.0 7.0 HealthCare and UK Dental are based on five years, and Bupa Cromwell Quality HealthCare 10.2 9.2 Hospital is based on a period of ten years as the business model of these Bupa Global 11.3 9.9 CGUs requires investment beyond a three-year period to reach a steady Care Plus 17.9 17.2 state of operation. An impairment of £35m was recognised in respect of Bupa New Zealand during the year.

100 Strategic Report Governance Financial Statements

The testing undertaken determined the recoverable amount of all other It is possible that a change in key assumptions could cause the CGUs to be higher than their respective carrying value, resulting in no impairment of goodwill for Bupa Health Services Australia, Bupa Villages further impairments to goodwill. and Aged Care Australia, Bupa Chile, LUX MED, Bupa Care Services UK, UK Dental, Bupa Cromwell Hospital and Quality HealthCare. The table The following table summarises goodwill by CGU as at 31 December: below shows the decrease required in the terminal growth rate or increase required in discount rate for the recoverable amount of the 2018 2017 £m £m CGU to equal the carrying amount.

Australia and New Zealand Terminal Decrease Bupa Australia Health Insurance 876 916 growth in terminal Increase in Headroom rate growth rate discount rate Bupa Health Services Australia 295 308 £m % % % Bupa Villages and Aged Care – Australia 268 280 Bupa Health Services Bupa Villages and Aged Care – New Zealand – 35 Australia 242 3.0 4.7 4.0 Europe and Latin America Bupa Villages and Aged Care – Australia 147 3.0 1.3 1.1 Bupa Chile 168 178 Bupa Chile 7 3.2 0.1 0.0 LUX MED 252 247 LUX MED 51 3.6 0.6 0.5 Sanitas Seguros 103 42 Bupa Care Services UK 125 2.6 0.7 0.6 Sanitas Mayores 22 20 UK Dental 162 2.6 0.6 0.7 Other – 1 Bupa Cromwell Hospital 19 4.3 0.9 0.6 UK Quality Healthcare 27 3.5 0.7 0.5 Bupa Care Services UK 90 87 UK Dental 650 621 Bupa Cromwell Hospital 16 16 Impairment of other intangible assets Other 3 3 At 31 December 2018, other intangible assets with indefinite useful lives International Markets were tested for impairment, resulting in an impairment of £5m relating to Quality HealthCare 119 112 brands in Bupa Chile. In the prior year there were £20m of impairments Bupa Global 68 68 of intangible assets with indefinite lives. £16m was recognised in relation Care Plus 26 29 to impairment of brands in Bupa Chile and £4m in relation to the Total 2,956 2,963 impairment of computer software projects not yet completed in Bupa Global. A review of intangible assets that are subject to amortisation resulted in Sensitivity to changes in key assumptions an impairment of £2m relating to IT software in Bupa Australia Health A sensitivity analysis has been performed on the key assumptions used Insurance and £1m representing care home leases in Bupa New Zealand. to determine the value in use for each CGU as at 31 December 2018. Included in impairments of intangible assets is a £4m reversal of previous Other than as disclosed below, management believes that no reasonably impairments to licences to operate care homes in Sanitas Mayores. In the probable change in any of the key assumptions would cause the carrying prior year there was an impairment of £1m, relating to IT development in value of any goodwill or intangible asset with an indefinite useful life to Bupa Global. exceed its recoverable amount.

101 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

Note 4: Property, plant and equipment Property, plant and equipment in brief Property, plant and equipment are the physical assets utilised by 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 to the lower of its fair value and the present value of the minimum lease Freehold land and assets under construction, included within freehold or payments. Subsequent to initial recognition, the asset is accounted for in leasehold properties as appropriate, are not depreciated. Depreciation accordance with the accounting policy applicable to that asset. on other items of property, plant and equipment is calculated using the straight-line method to allocate cost or revalued amount less residual Finance lease liabilities, net of finance charges in respect of future value over estimated useful lives, as follows: periods, are included within other interest bearing liabilities (see Note 17). The interest element of the obligation is allocated over the lease term to –– Freehold buildings 50 years reflect a constant rate of interest on the outstanding obligation. –– Leasehold buildings shorter of useful life or lease term Leasehold land, where no option to obtain title exists, is treated as an –– Leasehold improvements shorter of useful life or lease term operating lease. Assets classified as being under operating leases are not capitalised and therefore not recognised within the Consolidated –– Equipment 3-10 years Statement of Financial Position (Note 26). Payments made under operating leases are recognised as prepayments within trade and other Impairment receivables (Note 14) and are recognised in the Consolidated Income Impairment reviews are undertaken where there are indications that the Statement on a straight-line basis over the term of the lease within other carrying value of an asset may not be recoverable. An impairment loss operating expenses (Note 2.3). on assets carried at cost is recognised in other income and charges to Included in leasehold property and improvements is £7m (2017: £7m) reduce the carrying value to the recoverable amount. An impairment loss of property held under fnance leases. The amount included in property, on assets carried at the revalued amount is recognised in the revaluation plant and equipment in respect of equipment held under finance leases reserve, except where an asset is revalued below historical cost, in which is £12m (2017: £15m). case the loss on historical cost is recognised in the Consolidated Income Statement within other income and charges.

102 Strategic Report Governance Financial Statements

Property, plant and equipment Leasehold Freehold property and property improvements Equipment Total £m £m £m £m 2018 Cost or valuation At beginning of year 2,510 304 1,106 3,920 Additions through business combinations 9 1 4 14 Additions 68 24 165 257 Transfer to assets held for sale (17) – – (17) Disposals (2) (5) (52) (59) Revaluations (53) (8) – (61) Other (12) 5 2 (5) Foreign exchange (52) (4) (7) (63) At end of year 2,451 317 1,218 3,986

Depreciation and impairment loss At beginning of year 57 87 573 717 Depreciation charge for year 39 26 120 185 Transfer to assets held for sale – – (1) (1) Disposals (3) (4) (41) (48) Revaluations (59) (4) – (63) Impairment loss – – 2 2 Other – 5 (7) (2) Foreign exchange (1) (1) (2) (4) At end of year 33 109 644 786 Net book value at end of year 2,418 208 574 3,200 Net book value at beginning of year 2,453 217 533 3,203 2017 Cost or valuation At beginning of year 2,261 270 999 3,530 Additions through business combinations 8 26 35 69 Additions 160 35 136 331 Transfer to assets held for sale (34) – (13) (47) Disposals (10) (6) (70) (86) Disposal of subsidiaries – (2) (2) (4) Revaluations 135 – – 135 Other 10 (15) 11 6 Foreign exchange (20) (4) 10 (14) At end of year 2,510 304 1,106 3,920

Depreciation and impairment loss At beginning of year 83 72 523 678 Depreciation charge for year 34 25 113 172 Transfer to assets held for sale – – (10) (10) Disposals (1) (5) (63) (69) Disposal of subsidiaries – (1) (1) (2) Revaluations (62) – – (62) Impairment loss 2 – 7 9 Other 1 (3) 1 (1) Foreign exchange – (1) 3 2 At end of year 57 87 573 717 Net book value at end of year 2,453 217 533 3,203 Net book value at beginning of year 2,178 198 476 2,852

103 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

Freehold and leasehold properties Level three Freehold and leasehold properties comprise care homes, care villages, Based on a review carried out during the year, it has been determined clinics, hospitals and offices and are initially measured at cost and that due to the level of judgement and adjustments required to the subsequently at revalued amount less accumulated depreciation and observable inputs used in the valuations, a level three classifcation is impairment losses. These properties are subject to periodic valuations deemed appropriate for all properties in the Group. performed by external independent valuers. Borrowing costs relating The valuations of care homes in the Group and hospitals in Spain, to the acquisition or construction of qualifying assets are capitalised as Chile and Poland are determined based on a capitalisation of earnings part of the cost of that asset. approach. A multiple is applied to each facility’s earnings to project Revaluation of properties the financial performance of the facility to determine its value in use. Valuations are performed with sufficient regularity to ensure that the The multiple applied for each facility is set based on qualitative and carrying value does not differ significantly from fair value at the balance quantitative indicators of the facility’s current and future performance sheet date. The external revaluation of properties in 2018 were performed and assumes normal prudent management of the facility. Unobservable independently by Alia Tasaciones S.A. in Spain and Phi Partners inputs for these properties include the average capitalisation rate which Consultores in Chile. is the average rate of return on a property based on the income that the property is expected to generate. It considers trends in earnings and land Revaluations were effective as of 31 December in the year in which they values. For all properties except those in Poland, the average occupancy were undertaken. Directors’ valuations were performed in the year where is also an unobservable input. it was identified that carrying value differed significantly from fair value. All other properties are valued by external valuers based on observable Care homes and hospitals are valued with regard to their trading market values of similar properties. potential based on discounted cash flow techniques, the principal assumptions are: quantifying a fair, maintainable level of trade and Sensitivity analysis profitability; levels of competition; and assumed ability to renew existing The signifcant assumptions used in the calculation of the fair values licences, consents, certificates or permits. of the material level three freehold and leasehold properties in the Group are: At each revaluation date, accumulated depreciation is eliminated against the gross carrying amount of the asset.

United Freehold and leasehold property Australia New Zealand Kingdom Spain Chile Poland Valuation assumptions: average occupancy rate 95.1% 91.9% 87.9% 94.6% N/A N/A Valuation assumptions: average capitalisation rate 13.8% 13.7% 11.2% 11.8% 26.3% 6.7%

104 Strategic Report Governance Financial Statements

The sensitivity analysis below considers the impact on the year end Gains and losses on revaluation are recognised in the property revaluation valuation of level three properties and is based on a change in reserve, except where an asset is revalued below historical cost, in which assumption while holding all other assumptions constant. In practice, case the deficit is recognised in the Consolidated Income Statement. this is unlikely to occur and changes in assumptions may be correlated. Where a revaluation reverses the losses taken to the Consolidated Income Statement in prior years, the credit is recognised in the 0.5% absolute 0.5% absolute Consolidated Income Statement. Australia increase decrease Average occupancy rate £5m increase £5m decrease A £23m net revaluation gain (2017: £233m) has been recognised in the Average capitalisation rate £18m increase £20m decrease property revaluation reserve. In the current year, a revaluation deficit of £21m (2017: deficit: £34m) were charged to the Consolidated Income

Statement (see Note 2.4). 0.5% absolute 0.5% absolute New Zealand increase decrease Recognised in the carrying amount of freehold property is £70m Average occupancy rate £1m increase £1m decrease (2017: £190m) in relation to freehold property in the course of construction. Average capitalisation rate £8m increase £9m decrease 2018 2017 £m £m 0.5% absolute 0.5% absolute Historical cost of revalued assets 2,303 United Kingdom increase decrease 2,483 Average occupancy rate £4m increase £4m decrease Accumulated depreciation based on historical cost (276) (226) Average capitalisation rate £44m increase £55m decrease Historical cost net book value 2,207 2,077 Depreciation charge for the year on historical cost 46 50 0.5% absolute 0.5% absolute The historical cost of all property, plant and equipment is £3,701m Spain increase decrease (2017: £3,160m). Average occupancy rate £1m increase £1m decrease Average capitalisation rate £9m increase £10m decrease

0.5% absolute 0.5% absolute Chile increase decrease Average occupancy rate N/A N/A Average capitalisation rate £1m increase £1m decrease

0.5% absolute 0.5% absolute Poland increase decrease Average occupancy rate N/A N/A Average capitalisation rate £3m increase £4m decrease

The table below shows the date at which properties were last subject to external valuation.

Leasehold Freehold property and property improvements £m £m Valuation – December 2018 328 15 Valuation – December 2017 1,222 8 Valuation – December 2016 585 20 Assets held at cost1 316 274 Cost or valuation 2,451 317

1. Primarily relates to assets under construction and initial fair value of additions.

105 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

Note 5: Investment property Investment property in brief Investment properties are physical assets that are not occupied by 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 individually, The historical cost of investment properties is £222m (2017: £195m). on a basis appropriate to the purpose for which the property is intended Significant assumptions used in the valuation include: and with regard to recent market transactions for similar properties in the same location. Australia and New Zealand In an active market, the portfolio is valued annually by an independent Discount rate 9.5% valuer, holding a recognised and relevant professional qualification, Capital growth rate 2.6% and with recent experience in the location and category of investment Provision for capital replacement 0.4% property being valued. Vacancy period 3 months In New Zealand, the retirement village market is fragmented as each Turnover in apartments and villas 4-6 years village is unique due to building configuration and location. Growth in The sensitivity analysis below considers the impact on the year end new developments is also restricted due to a lack of suitable sites and valuation of level three investment properties, and is based on a change transactions are not frequent given the relatively high value of each in assumption while holding all other assumptions constant. In practice, village. As a result, no active market exists for the retirement villages this is unlikely to occur and changes in assumptions may be correlated. from which values can be derived. These properties are valued using discounted cash flow projections based on reliable estimates of future 0.5% absolute 0.5% absolute cash flows. Australia and New Zealand increase decrease Discount rate £10m decrease £21m increase Any gain or loss arising from a change in the fair value is recognised in the Consolidated Income Statement within financial income and expense. Capital growth rate £52m increase £46m decrease

(i) Investment properties (ii) Leases as lessor 2018 2017 Non-cancellable leases Note £m £m Investment properties include commercial properties which are leased At beginning of year 399 391 to third parties. The leases contain an initial non-cancellable period of Additions 27 28 between one and three years. Subsequent renewals are negotiated with Disposals (2) (2) the lessee. Increase in fair value 2.5 21 22 The Group leases out its investment properties under operating leases. Transfer to/from assets held for sale 1 (13) The future lease receipts under non-cancellable leases of £1m (2017: £1m) Reclassifcations from property, plant and equipment 6 – are due between one and fve years. Foreign exchange 2 (27) Retirement villages At end of year 454 399 During the year ended 31 December 2018, the Group’s retirement village portfolio in New Zealand generated £19m (2017: £17m) of income which In the current year, a revaluation surplus of £21m (2017: £22m) was was recognised as revenue in the Consolidated Income Statement. credited to the Consolidated Income Statement. Total direct operating expenses of these retirement villages amounted The carrying value of investment properties of £454m (2017: £399m), to £10m (2017: £10m). primarily consisting of the Group’s portfolio of retirement villages in New Zealand, was valued by management using internally prepared discounted cash flow projections, supported by the terms of any existing lease and other contracts, and when possible, by external evidence such as current market rents for similar properties in the same location and condition. Discount rates are used to reflect current market assessments of the uncertainty in the amount or timing of the cash flows. The discounted cash flow projections are reviewed by an independent valuer, Deloitte. These properties are categorised as level three within the fair value hierarchy.

106 Strategic Report Governance Financial Statements

Note 6: Equity accounted investments Equity accounted investments in brief Equity accounted investments comprises associated companies and joint ventures in which the Group has significant influence, but not control.

Associated companies include those entities in which the Group has Associates and joint ventures significant influence, but no right to direct the activities which determine On 9 August 2018, Bupa increased its shareholding in the associate Bupa the variable returns it receives from the entity. Joint ventures include Arabia from 34.25% to 39.25% as a result of the acquisition of a portion of those entities over which the Group has joint control, established by the Nazer Group’s stake for £78m. This is in line with the Group’s strategy contractual agreement and requiring unanimous consent for strategic to strengthen market position in existing territories. During the year the financial and operating decisions. The Group also has the right to its Group received dividends of £10m (2017: £6m) from Bupa Arabia. share of the net assets. During 2018, Bupa Innovations (ANZ) Pty Ltd invested £1m in Whitecoat Associated companies and joint ventures are accounted for using Holdings Pty Ltd increasing its shareholding from 20% to 24%. Whitecoat the equity method and are initially recognised at cost. The cost of owns and operates a comprehensive online healthcare provider directory the investment includes transaction costs. The carrying value of the and customer review website. investment is adjusted for the Group’s share of any post acquisition profits or losses of the associated entity. During 2018, capital injections of £2m (2017: £nil) were made in Max Bupa Health Insurance Company Limited. Distributions to shareholders If the Group’s share of losses exceeds its interest in an equity accounted are currently restricted by local regulatory requirements which are investment, the carrying amount of that interest (including any long term re-assessed on a regular basis. interests that, in substance, form part of the Group’s net investment), is reduced to nil. In addition, the recognition of further losses is discontinued The Consolidated Financial Statements include the Group’s share except to the extent that the Group has an obligation to make payments of income and expenses, and other comprehensive income, after on behalf of the equity accounted investment. adjustments to align the accounting policies with those of the Group where materially different, from the date that significant influence or control commences until the date that significant influence or control ceases. The carrying amount of equity accounted investments is £690m (2017: £553m). 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 39.25% 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

107 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

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

Bupa Arabia Highway to Health Max Bupa 2018 2017 2018 2017 2018 2017 £m £m £m £m £m £m Revenue 1,626 1,513 177 177 71 67 Cash and cash equivalents 61 45 97 87 1 3 Other current assets 611 872 63 66 12 3 Current assets 672 917 160 153 13 6 Non-current assets 1,058 568 12 13 87 79 Current liabilities (1,191) (1,026) (92) (100) (34) (25) Non-current liabilities – (1) (3) (2) (39) (34) Net assets 539 458 77 64 27 26

Reconciliation to carrying amounts Bupa Arabia Highway to Health Max Bupa 2018 2017 2018 2017 2018 2017 £m £m £m £m £m £m Opening net assets 458 438 64 63 26 29 Proft/(loss) for the period 105 104 5 5 (2) (8) Other comprehensive expenses (6) – – – – – Dividends paid (32) (25) – – – – Other reserve movements 14 (59) 8 (4) 3 5 Closing net assets 539 458 77 64 27 26 % ownership 39.25% 34.25% 49.00% 49.00% 49.00% 49.00% Reporting entity’s share 212 157 38 31 13 13 FV and local accounting differences1 217 150 181 172 20 18 Carrying amount 429 307 219 203 33 31 Reporting entity's share of profit/(loss)2,3 31 27 3 3 (2) (1)

1. Primarily relates to goodwill and implicit intangible assets on acquisition. 2. 2018 share of profits in Bupa Arabia are based on a share in ownership of 34.25% up to 9 August. 2017 share of profts in Bupa Arabia are based on a share in ownership of 26.25% up to 14 June 2017. 3. Included in 2017 share of post-taxation results of equity accounted investments within the Consolidated Income Statement is a £3m correction to proft relating to historical errors in the recognition of share of profts of associates.

(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 £9m (2017: £12m). The reporting entity’s share of proft recognised during the year for these associates was £1m (2017: share of loss of £3m).

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Note 7: Post-employment benefits Post-employment benefits in brief The Group operates several funded defined benefit and defined contribution pension schemes for the benefit of employees and Directors, in addition to an unfunded scheme and a post-retirement medical benefit scheme. The main defined benefit scheme is The Bupa Pension Scheme which has been closed to new entrants since 1 October 2002. The principal defined contribution pension scheme is The Bupa Retirement Savings Plan.

Defined contribution pension schemes (i) Amount recognised in the Consolidated Income The defined contribution pension schemes provide employees with a Statement retirement fund accumulated through investment of contributions made The amounts charged/(credited) to other operating expenses for the by Bupa and the employees. Members of the scheme use their funds to year are: secure benefits at retirement. Benefits are not known in advance and 2018 2017 the investment and longevity risks are assumed solely by the members £m £m of the scheme. Contributions payable by the relevant sponsoring Current service cost 11 12 employers are defined in the scheme rules or plan specifications and Past service cost 1 – these contributions are recognised as an expense in the Consolidated Net interest on defned beneft liability/asset (13) (11) Income Statement as incurred. Administrative expenses 2 2 Total amount charged to the Consolidated Defined benefit post-employment schemes Income Statement 1 3 The defined benefit pension schemes provide benefits based on final The charge to operating expenses in respect of cash contributions to pensionable salary. The Group’s net obligation in respect of defined defined contribution schemes is £37m (2017: £35m). benefit pensions and the post-retirement medical scheme is calculated separately for each scheme and represents the present value of the defined benefit obligation less, for funded schemes, the fair value of (ii) Amount recognised directly in other comprehensive scheme assets. The discount rate used is the yield at the balance sheet income date on high-quality corporate bonds denominated in the currency in The amounts (credited)/charged directly to equity: which the benefit will be paid. When the calculation results in a benefit to the Group, the recognised asset is limited to the present value of any 2018 2017 future refunds from the scheme or reductions in future contributions £m £m to the scheme. Actual return less expected return on assets 96 (43) (Gain)/loss arising from changes to fnancial The charge to the Consolidated Income Statement for defined benefit assumptions (125) 38 schemes represents the following: current service cost calculated on the Loss/(gain) arising from changes to experience projected unit credit method, net interest cost, past service costs and assumptions 4 (27) administrative expenses. Loss/(gain) arising from changes to demographic assumptions 4 (62) All remeasurements are recognised in full in the Consolidated Statement of Comprehensive Income in the period in which they occur. Total remeasurement gains credited directly to equity (21) (94)

The cumulative amount of remeasurement gains recognised directly in equity is £90m (2017: £69m).

109 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

7.1 Group post-employment benefit schemes There are several other smaller defined benefit pension schemes operated by UK and overseas subsidiaries. The defined benefit pension Defined contribution pension schemes schemes are assessed by independent scheme actuaries in accordance The principal defined contribution pension scheme in the UK is The Bupa with UK or local practice and under IAS 19 as at 31 December 2018 for the Retirement Savings Plan. This scheme has been in effect since 1 October purposes of inclusion in the Group’s consolidated financial statements. 2002 and is available to permanent employees of The British United Complete disclosure of these other defined benefit pension schemes is Provident Association Limited and Bupa Insurance Services Limited to not practicable within this report but they are disclosed within the join on a voluntary basis. There are several other contract-based defined financial statements of the relevant sponsoring employer of each scheme. contribution arrangements available to employees of other employers within the Group to join on a voluntary basis. The Group automatically GMP Guaranteed Minimum Pension (GMP) enrols any eligible non-pensioned employees into the National A High Court judgement has confrmed that pension schemes are Employment Savings Trust (NEST). required to equalise male and female member’s benefts for the effects of guaranteed minimum pensions (GMPs). The increase in Scheme’s IAS 19 Defined benefit post-employment schemes liabilities due to GMP equalisation is £1m and has been recognised as a The principal defined benefit scheme in the UK is The Bupa Pension plan amendment and charged to past service cost in the Consolidated Scheme. Contributions by employees and by Group companies are paid Income Statement. into separate funds administered by a corporate trustee. The scheme has been closed to new entrants since 1 October 2002, but its existing members continue to accrue pension entitlements. Unfunded schemes The recognised surplus is limited to the present value of any future Unfunded defined benefit pension arrangements exist for certain refunds from the scheme or reductions in future contributions to the employees and former employees to provide benefits in addition to scheme. There are no minimum funding requirements in place and the funded pension arrangements provided by the Group. There are the Trustees do not have the unilateral power to trigger a wind up no separate funds or assets in the Consolidated Statement of Financial of the Scheme. Position to support the unfunded schemes; however, provisions included in the Consolidated Statement of Financial Position in respect of Contributions by Group companies to this scheme are made these liabilities and assets are ring-fenced to support these liabilities in accordance with the recommendations of the independent (see Note 8). scheme actuary. The latest valuation of these arrangements was performed as at The independent scheme actuary for The Bupa Pension Scheme 31 December 2018 under IAS 19 by the Group’s independent actuary. performs detailed triennial valuations together with annual interim The charge to the Consolidated Income Statement in respect of these reviews. Both triennial and interim valuations use the attained age arrangements and the assessment of the related pension liability as method, recognising the closure of the scheme to new entrants. at 31 December 2018 have been made in accordance with this latest At the most recent triennial valuation, as at 1 July 2017, the scheme’s valuation, which used the same principal assumptions as adopted at independent actuary recommended payment of employer contributions 31 December 2018 under IAS 19 for The Bupa Pension Scheme. at the rate of 33.8%. In addition to these employer contributions a Post-retirement medical benefit scheme payment equivalent to the employee contribution of 7% of pensionable The Group also provides unfunded post-retirement medical benefits salaries is paid as part of the Group’s salary sacrifice arrangement for certain former employees. These benefits were granted under an (known as PeopleChoice Pensions). There is a corresponding reduction agreement which closed to new entrants in 1992. The latest valuation in members’ wages and salaries as a result. of this scheme was carried out on 31 December 2018 by an actuary The expected contributions payable in 2019, with regards to the employed by the Group using the same key assumptions as adopted accumulation of future benefits, are £9m in respect of The Bupa at 31 December 2018 under IAS 19 for The Bupa Pension Scheme. Pension Scheme and £1m in respect of PeopleChoice Pensions for defned beneft schemes. The most recent triennial valuation of the Bupa Pension Scheme showed that the scheme was in surplus on its Technical Provisions basis. The scheme was also in surplus on the more prudent actuarial basis which the trustees use to set their long term funding target. As a result, no deficit reduction contributions are currently due. This position could change as a result of future valuations.

110 Strategic Report Governance Financial Statements

(iii) Assets and liabilities of schemes Post-retirement medical Pension schemes benefit scheme Total 2018 2017 2018 2017 2018 2017 £m £m £m £m £m £m Present value of funded obligations (1,574) (1,699) – – (1,574) (1,699) Fair value of scheme assets 2,166 2,263 – – 2,166 2,263 Net assets of funded schemes 592 564 – – 592 564 Present value of unfunded obligations (42) (45) (10) (10) (52) (55) Net recognised assets/(liabilities) 550 519 (10) (10) 540 509

Represented on the Consolidated Statement of Financial Position: Net liabilities (62) (68) Net assets 602 577 Net recognised assets 540 509

(iv) Present value of schemes’ obligations The movements in the present value of schemes’ obligations are: Post-retirement medical Pension schemes benefit scheme Total 2018 2017 2018 2017 2018 2017 £m £m £m £m £m £m At beginning of year 1,744 1,818 10 11 1,754 1,829 Current service costs 11 12 – – 11 12 Past service costs 1 – – – 1 – Interest on obligations 44 48 – – 44 48 (Gain)/loss arising from changes to fnancial assumptions (125) 38 – – (125) 38 Loss/(gain) arising from changes to experience assumptions 3 (27) 1 – 4 (27) Loss/(gain) arising from changes to demographic assumptions 4 (62) – – 4 (62) Benefts paid (66) (83) (1) (1) (67) (84) At end of year 1,616 1,744 10 10 1,626 1,754

(v) Fair value of funded schemes’ assets The movements in the fair value of the funded schemes’ assets are: 2018 2017 £m £m At beginning of year 2,263 2,225 Interest income 57 59 Return on assets excluding interest income (96) 43 Contributions by employer 9 9 Administration expenses (2) (2) Benefts paid (64) (71) Foreign exchange (1) – At end of year 2,166 2,263

111 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

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

2018 2018 2017 2017 £m % £m % Pooled investment funds 877 40 908 40 Corporate bonds 770 36 816 36 Government bonds 224 10 195 9 Loans 165 8 160 7 Cash/other assets 115 5 164 7 Equities 17 1 18 1 Property 1 – 1 – Derivatives (3) – 1 – Total market value of the assets of the funded schemes 2,166 100 2,263 100

All assets have a quoted market price. limits on credit quality of counterparties, collateral arrangements in the case of derivatives and repurchase agreements and regular monitoring of In recent years the Group has taken steps to de-risk The Bupa Pension investment managers. The specific risks associated with the derivatives Scheme’s investment strategy. The main return-seeking asset class in used in the hedging programme are managed via limits on leverage as the scheme is credit; there is minimal remaining market risk from equities well as stress testing of collateral arrangements. or property. The scheme’s liabilities will fluctuate in line with interest rates and inflation. However, the investment strategy aims to hedge the majority of the interest and inflation risk in the scheme, as measured on 7.2 Actuarial assumptions the long term funding basis agreed with the trustees. This hedging is The responsibility for setting the assumptions underlying the IAS 19 achieved via a liability-driven investment strategy utilising a combination valuations rests with the Directors, having first taken advice from an of gilts and swaps. As the scheme’s hedging assets will move in line with independent actuary. the scheme’s liabilities, the interest and inflation risk are substantially reduced. The key weighted average financial assumptions used when valuing the obligations of the post-employment benefit schemes under IAS 19 for Given the scheme’s asset holdings, the key remaining risk in The Bupa the schemes within the Group are as follows: Pension Scheme’s investment strategy is credit risk. This is managed via

Funded schemes Unfunded schemes 2018 2017 2018 2017 % % % % Infation rate 3.2 3.2 3.2 3.2 Rate of increase in salaries 3.7 3.7 3.7 3.7 Rate of increase to pensions in payment 3.1 3.0 3.1 3.1 Rate of increase to pensions in deferment 2.2 2.2 2.2 2.2 Discount rate for scheme assets and obligations 3.0 2.6 2.9 2.5 Medical cost trend – – 4.0 4.0

(a) Actuarial assumptions underlying the valuation of obligations (b) Sensitivity analysis of the principal assumptions used to measure The inflation assumption is set by reference to the difference between scheme liabilities the yield on long term fixed interest gilts and the real yield on index- linked The sensitivity analysis provided below is based on a change in an gilts, with a deduction of 0.2% to reflect an inflation risk premium. assumption while holding all other assumptions constant. In practice, this is unlikely to occur and experience variations for some of the The rate of increase of pensions in payment is the same as the inflation assumptions may be correlated. When calculating the sensitivity of rate, with the exception of benefits which receive fixed increases in the defined benefit obligation to significant actuarial assumptions the payment as defined under the respective scheme rules. same method (projected unit credit method) has been applied as when The rate of increase in salaries is equal to the long term expected annual calculating the pension liability recognised within the Consolidated average salary pay increase for the employees who are members of Statement of Financial Position. The methods and types of assumption the respective schemes. This assumption is set relative to the inflation does not change. rate assumption. The discount rate used to value scheme liabilities is the yield at the balance sheet date on high-quality corporate bonds of appropriate term.

112 Strategic Report Governance Financial Statements

Assumption Change in assumption Indicative impact on Scheme liabilities Discount rate Increase/decrease by 0.25% Decrease/increase by £68m Rate of infation Increase/decrease by 0.25% Increase/decrease by £60m Rate of increase in salaries Increase/decrease by 0.25% Increase/decrease by £7m Rate of mortality Increase by one year Increase by £43m

(c) Mortality assumptions long term rate of improvement of 1.5% pa adjusted by 97% (male The trustees of The Bupa Pension Scheme have undertaken a non-pensioners); 96% (female non-pensioners); 92% (male pensioners) scheme-specific mortality investigation as part of the 1 July 2017 and 94% (female pensioners). The average life expectancies at age 60 triennial valuation. based on these tables for a male currently aged 60 (45) is 27.5 years (28.4 years) and for a female currently aged 60 (45) is 29.4 years The trustees shared the conclusion drawn from this analysis with the (30.6 years). Directors, who have adopted assumptions in line with this analysis for the purposes of IAS 19 valuation as at 31 December 2018. (d) Assumptions over duration of liabilities The weighted average duration of the defined benefit obligation is The mortality tables adopted at 31 December 2018 are the S2PA year approximately 20 years. of birth mortality tables using the CMI 2017 projection model, with a

Note 8: Restricted assets Restricted assets in brief Restricted assets are amounts held in respect of specific obligations and potential liabilities and may be used only to discharge those obligations and potential liabilities if and when they crystallise.

2018 2017 £m £m Non-current restricted assets 42 43 Current restricted assets 65 33 Total restricted assets 107 76

The non-current restricted assets balance of £42m (2017: £43m) consists of cash deposits held to secure a charge over the non-registered pension arrangement maturing after 2022 (see Note 25). Included in current restricted assets is £63m (2017: £32m) in respect of claims funds held on behalf of corporate customers.

113 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

Note 9: Financial investments Financial investments in brief The Group generates cash from its underwriting, trading and 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 Entities are required to recognise an allowance for either 12-month or includes transaction costs for financial investments not classified at lifetime expected credit losses (ECL), depending on whether there fair value through profit or loss. has been a signifcant increase in credit risk since initial recognition. The measurement of ECL refects a probability-weighted outcome, the Financial investments are derecognised when the rights to receive time value of money and the best available forward-looking information. cash flows from the financial investments have expired or where the The ECL should be based on reasonable and supportable information Group has transferred substantially all risks and rewards of ownership. that is available without undue cost or effort. An entity may assume that Financial investments at initial recognition are recorded using trade the credit risk on a fnancial instrument has not increased signifcantly date accounting. since initial recognition if the fnancial instrument is determined to have low credit risk at the reporting date (e.g. it is investment grade). The Group has classified its financial investments into the following categories: at amortised cost, at fair value through profit or loss and As the Group’s fnancial investments at amortised cost or FVOCI are at fair value through other comprehensive income (FVOCI). all either investment grade or short term, 12-month ECL is applied. For fnancial investments, an option pricing probability model is used as IFRS 9 introduces a forward-looking expected credit loss model, the basis for assessing ECL. An analysis of ECL provisions is provided applicable for fnancial assets measured at amortised cost. in Note 24.3.

Financial investments Financial investments are analysed as follows:

Carrying Fair Carrying Fair value value value value 2018 2018 2017 2017 £m £m £m £m Available-for-sale Corporate debt securities – – 307 308 Government debt securities – – 86 86

Fair value through proft or loss Corporate debt securities and secured loans 310 310 198 198 Government debt securities 44 44 62 62 Pooled investment funds 195 195 277 277 Deposits with credit institutions 4 4 8 8 Other loans 9 9 1 1 Equities 20 20 19 19

Amortised cost Corporate debt securities and secured loans 779 778 284 286 Government debt securities 183 185 98 99 Deposits with credit institutions 805 807 886 889 Other loans 1 1 1 1 Total financial investments 2,350 2,353 2,227 2,234 Non-current 1,029 1,029 1,093 1,098 Current 1,321 1,324 1,134 1,136

114 Strategic Report Governance Financial Statements

Classification Criteria and treatment IFRS 9 Criteria and treatment IAS 39 Fair value through Debt and Equity instruments where performance is managed and Debt and Equity instruments where performance is managed and profit or loss evaluated on a fair value basis and the objective is to realise cash fows evaluated on a fair value basis and the objective is to realise cash fows through the sale of the assets. The investments are carried at fair value, through the sale of the assets. The investments are carried at fair value, with gains and losses arising from changes in this value recognised in the with gains and losses arising from changes in this value recognised in the Consolidated Income Statement in the period in which they arise. Consolidated Income Statement in the period in which they arise. Amortised cost Non-derivative debt instruments where the contractual characteristics Held to maturity investments: are non-derivative financial assets which of the fnancial assets represent solely payments of principal and interest are quoted on an active market, with fixed or determinable payments and and the objective is to hold the instrument to collect cash fows over fixed maturity that an entity has the positive intention and ability to hold its life. Any disposals are expected to be infrequent or insignifcant. to maturity. This is assessed at each reporting date. Held to maturity The investments are measured at amortised cost using the effective investments are measured at amortised cost using the effective interest interest method, less any impairment losses. Any discount or premium method, less any impairment losses. Loans and Receivables: Any discount on purchase is amortised over the life of the investment through the or premium on purchase is amortised over the life of the investment Consolidated Income Statement. through the Consolidated Income Statement. Loans and receivables are carried at amortised cost calculated using the effective interest method, less impairment losses. Fair value through Non-derivative debt instruments where the contractual characteristics Available-for-sale assets are non-derivative financial assets classified on other comprehensive of the fnancial assets represent solely payments of principal and interest initial recognition as available for sale or any other instruments that are income and the objective is to hold the instrument to collect cash fows and sell, not classified at amortised cost or fair value through the Consolidated with a greater frequency and value of sales than instruments at amortised Income Statement. cost. The investments are measured at fair value in the balance sheet Available-for-sale assets are measured at fair value. Fair value changes and fair value changes are recognised directly in equity, through the on available-for-sale assets are recognised through other comprehensive Consolidated Statement of Changes in Equity, except for interest and income, except for interest and foreign exchange gains or losses which go foreign exchange gains or losses which go through the Consolidated through the Consolidated Income Statement. The cumulative gain or loss Income Statement. The cumulative gain or loss that was recognised in that was recognised in other comprehensive income is recognised in the equity is recognised in the Consolidated Income Statement when an Consolidated Income Statement when an available-for-sale financial asset available-for-sale fnancial asset is derecognised. is derecognised.

The Group does not hold any investments at FVOCI under IFRS 9. Under These may include reference to the current fair value of other IAS 39, available-for-sale assets (non-derivative financial assets classified investments that are substantially the same and discounted cash on initial recognition as available for sale or any other instruments that are flow analysis. not measured as amortised cost or FVTPL) were measured at FVOCI. Financial investments carried at fair value are measured using different Fair value of financial investments valuation inputs categorised into a three-level hierarchy. The different Fair value is a market-based measurement for assets for observable levels have been defined by reference to the lowest level input that is market transactions where market information might be available. significant to the fair value measurement, as follows: The objective of a fair value measurement is to estimate the price at –– Level 1: quoted prices (unadjusted) in active markets for identical which an orderly transaction to sell the asset or to transfer the asset assets or liabilities would take place between market participants at the measurement date under current market conditions (i.e. an exit price at the measurement –– Level 2: inputs other than quoted prices included within level one that date from the perspective of a market participant that holds the asset). are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) The fair values of quoted investments in active markets are based on current bid prices. The fair values of unlisted securities and quoted –– Level 3: inputs for the asset or liability that are not based on observable investments for which there is no active market are established by market data (unobservable inputs) using valuation techniques corroborated by independent third parties.

115 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

The adoption of IFRS 9 has resulted in the reclassifcation of the Group’s available-for-sale assets to amortised cost, as the business model for these assets is ‘hold to collect’. The reclassifcation and measurement impacts of transition to IFRS 9 are provided below:

At At 31 December Re- Re- 1 January 2017 classifcation measurement ECL 2018 £m £m £m £m £m Available-for-sale (Fair value) Corporate debt securities 307 (307) – – – Government debt securities 86 (86) – – –

Hold to collect (IFRS 9) Held to maturity (IAS 39) Corporate debt securities and secured loans 284 307 (1) – 590 Government debt securities 98 86 – (1) 183

Loans and receivables (IAS 39) Deposits with credit institutions 886 – – (1) 885 Other loans 1 – – – 1 1,662 – (1) (2) 1,659

An analysis of fnancial investments, at fair value, by hierarchy levels are as follows:

Level 1 Level 2 Level 3 Total £m £m £m £m 2018 Fair value through proft or loss Corporate debt securities and secured loans 26 284 – 310 Government debt securities 44 – – 44 Pooled investment funds 98 94 3 195 Deposits with credit institutions 4 – – 4 Other loans – – 9 9 Equities – – 20 20 Amortised cost Corporate debt securities and secured loans 777 1 – 778 Government debt securities 184 1 – 185 Deposits with credit institutions 1 806 – 807 Other loans – 1 – 1 Total financial investments 1,134 1,187 32 2,353

116 Strategic Report Governance Financial Statements

Level 1 Level 2 Level 3 Total £m £m £m £m 2017 Available-for-sale Corporate debt securities 308 – – 308 Government debt securities 86 – – 86 Fair value through proft or loss Corporate debt securities and secured loans 14 184 – 198 Government debt securities 33 29 – 62 Pooled investment funds 177 99 1 277 Deposits with credit institutions 8 – – 8 Other loans – 1 – 1 Unlisted equities – – 19 19 Amortised cost Corporate debt securities and secured loans 280 6 – 286 Government debt securities 98 1 – 99 Deposits with credit institutions – 889 – 889 Other loans – 1 – 1 Total financial investments 1,004 1,210 20 2,234

The Group currently holds level three investments totalling £32m. There have been no significant transfers between the valuation hierarchies. The majority of the investments are unlisted equities that are valued The Group uses a market interest curve as at the balance sheet date to using earnings multiples of comparable companies, which are deemed discount financial instruments, borrowings and derivatives, where the fair to be unobservable inputs. The average multiple applied is 4.6. Reasonably value cannot otherwise be found from quoted market values. The range possible changes to the valuation assumptions applied could result in a of interest rates used is as follows: change in fair value of plus or minus £6m. The table below shows movement in the level three assets measured at 2018 2017 % fair value: % Sterling assets and liabilities 1.1-1.3 0.7-1.0 2018 2017 Australian dollar assets and liabilities 1.9-2.0 1.8-2.2 Level 3 £m £m Euro assets and liabilities (0.6)-(0.4) (0.7)-(0.1) At beginning of year 20 – US dollar assets and liabilities 2.6-2.8 1.7-2.6 Additions 11 22 Foreign exchange 1 (2) At end of year 32 20

117 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

Note 10: Derivatives Derivatives in brief A derivative is a financial instrument whose value is based on one or more underlying variable. 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 fair value hierarchy. subsequently do not qualify for hedge accounting are accounted for at fair value through profit or loss. 2018 2017 £m £m Derivative financial instruments are initially recognised and subsequently Derivative assets measured at fair value. Non-current* 21 35 Fair values are obtained from market observable pricing information Current 7 12 including interest rate yield curves. The value of foreign exchange forward Total derivative assets 28 47 contracts is established using listed market prices. Derivative liabilities Fair values have been calculated for each type of derivative as follows: Non-current (19) (4) –– The fair value of currency forward contracts, swaps and options is Current (28) (15) determined using forward exchange rates derived from market Total derivative liabilities (47) (19) sourced data at the balance sheet date, with the resulting value discounted back to present value. * See fair value hedges in Note 24.2. –– The fair value of interest rate swaps is determined as the present value of the estimated future cash flows based on observable yield curves.

118 Strategic Report Governance Financial Statements

Note 11: Deferred taxation assets and liabilities Deferred taxation assets and liabilities in brief Deferred tax is an amount which recognises the differences between the carrying amounts of assets and liabilities for financial reporting 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 assets and liabilities Deferred taxation is recognised on temporary differences arising on investments in subsidiary companies, except where the timing of the Deferred taxation is recognised in full using the balance sheet liability reversal of the temporary difference is controlled by the Group and method, providing for temporary differences between the carrying it is probable that the temporary difference will not reverse in the amounts of assets and liabilities for financial reporting purposes and foreseeable future. the amounts used for taxation purposes. A deferred taxation asset is recognised only to the extent that it is The following temporary differences are not recognised: goodwill not probable that future taxable profits will be available against which the deductible for taxation purposes and the initial recognition of an asset asset can be utilised. or liability in a transaction that is not a business combination and which, at the time of the transaction, affects neither the accounting profit nor Deferred taxation assets and liabilities are offset when they relate to taxable profit or loss. income taxes levied by the same taxation authority and when the Group can settle its current taxation assets and liabilities on a net basis. The amount of deferred taxation recognised is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using taxation rates enacted or substantively enacted at the balance sheet date.

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

Assets Liabilities Net 2018 2017 2018 2017 2018 2017 £m £m £m £m £m £m Accelerated capital allowances 16 – (60) (77) (44) (77) Post employment beneft liability 1 – (92) (85) (91) (85) Revaluation of properties to fair value – – (94) (92) (94) (92) Employee benefts (other than post employment) 31 34 – – 31 34 Provisions 49 24 – – 49 24 Taxation value of losses carried forward 47 41 – – 47 41 Goodwill and intangible assets 4 – (182) (142) (178) (142) Other 51 – (74) (7) (23) (7) Deferred tax (before allowable netting) 199 99 (502) (403) (303) (304) Allowable netting of deferred tax (147) (93) 147 93 – – Deferred tax – net 52 6 (355) (310) (303) (304)

Recognised deferred taxation assets Unrecognised deferred taxation assets Deferred taxation assets relating to the carry forward of employee As at 31 December 2018, the Group had deductible temporary benefits, other provisions, unused taxation losses and other deferred differences relating to intangible assets of £5m (2017: £5m), trading taxation assets are recognised to the extent that it is probable that future losses of £109m (2017: £57m) and capital losses of £74m (2017: £69m) taxable profits will be available against which the deferred taxation assets for which no deferred taxation asset was recognised due to uncertainty can be utilised. of utilisation of those temporary differences.

119 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

Movement in net deferred taxation (liabilities)/assets

Recognised Recognised Acquisitions in Consolidated in other through Disposal of At beginning Income comprehensive business subsidiary Foreign At end of year Statement income combinations undertakings exchange of year £m £m £m £m £m £m £m 2018 Accelerated capital allowances (77) 32 – – – 1 (44) Post-employment beneft liability (85) (3) (3) – – – (91) Revaluation of properties to fair value (92) 6 (9) (1) – 2 (94) Employee benefts (other than post-employment) 34 (2) – – – (1) 31 Provisions 24 26 – – – (1) 49 Taxation value of losses carried forward 41 4 – 4 (1) (1) 47 Goodwill and intangible assets (142) (26) – (12) – 2 (178) Other (7) (12) (10) – 5 1 (23) Total (304) 25 (22) (9) 4 3 (303)

2017 Accelerated capital allowances (100) 11 2 6 (1) 5 (77) Post-employment beneft liability (67) (3) (16) – – 1 (85) Revaluation of properties to fair value (40) (3) (49) – – – (92) Employee benefts (other than post-employment) 31 3 – – – – 34 Provisions 24 2 – – – (2) 24 Taxation value of losses carried forward 43 (6) – 4 – – 41 Goodwill and intangible assets (109) 33 – (64) – (2) (142) Other (5) 6 (5) – (2) (1) (7) Total (223) 43 (68) (54) (3) 1 (304)

120 Strategic Report Governance Financial Statements

Note 12: Assets arising from insurance business Assets arising from insurance business in brief Financial assets arising from insurance business, excluding reinsurers’ share of insurance provisions, are held at amortised cost. Valuation of reinsurers’ share of insurance provisions is discussed in Note 18.

2018 2017 (b) Insurance debtors Note £m £m Insurance debtors (b) 1,092 1,010 In certain jurisdictions, such as the UK and Spain, where the amount Ceded insurance provisions (c) 23 18 payable under an insurance contract is payable in instalments over the term, a debtor and corresponding unearned premium provision Deferred acquisition costs (a) 139 117 is established at inception for the total premiums receivable over the Medicare rebate (d) 71 69 whole period of cover. Risk Equalisation Special Account recoveries 23 16 Total assets arising from insurance business 1,348 1,230 (c) Reinsurers’ share of insurance provisions Non-current 24 2 The recoverables due from reinsurers are shown within assets arising Current 1,324 1,228 from insurance business and are assessed for impairment at each balance sheet date. Reinsurers’ share of insurance provisions are further analysed The above balance is stated net of provision for impairment losses. in Note 18. Information regarding the ageing of insurance debtors, Medicare rebate and Risk Equalisation Special Account recoveries is shown in Note 24.3. (d) Medicare rebate In Australia, the government provides an income tested rebate to help (a) Deferred acquisition costs people meet the cost of private health insurance. Where customers have Acquisition costs represent commissions payable and other expenses elected to receive the rebate as a premium reduction through the private related to the acquisition of insurance contract revenues written during health insurer, the amounts are recovered from the government. Rebates the financial year. Acquisition costs that have been paid that relate to due from the government but not received at the balance sheet date are subsequent periods are deferred and recognised in the Consolidated recognised in assets arising from insurance business. Income Statement in the relevant period on a straight-line basis. The movement in deferred acquisition costs is as follows:

2018 2017 £m £m At beginning of year 117 106 Acquisition costs deferred 241 383 Acquisition costs released to Consolidated Income Statement (220) (369) Disposal of subsidiary – (1) Foreign exchange 1 (2) At end of year 139 117

121 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

Note 13: Inventories Inventories in brief Inventories comprise drugs, prostheses, consumables and housing stock utilised in the course of our care, health and dental operations.

Inventories are stated at the lower of cost and net realisable value. Inventories relating to drugs, prostheses, consumables and housing stock Cost is determined using the first-in first-out method, or methods that were £109m (2017: £104m). There were no inventory write-downs made approximate this and includes costs incurred in acquiring the inventories during the year (2017: £nil). The Group consumed £151m (2017: £237m) of and in bringing them to their current location and condition. inventories, which are recognised within other operating expenses in the Consolidated Income Statement.

Note 14: Trade and other receivables Trade and other receivables in brief Trade and other receivables arise in the ordinary course of business.

2018 2017 Under a provision matrix, receivables are grouped into customer Note £m £m segments and further divided into categories by age. Historical credit loss Trade receivables (a) 249 236 experience and any relevant forward-looking information is then used to Service concession receivables (b) 69 231 establish the ECL provision for each category. ECL provisions for service Other receivables (a) 144 171 concession receivables are based on 12-month ECL, using a methodology Prepayments 95 79 consistent with that used for fnancial investments. An analysis of ECL Accrued income 13 14 provisions for trade and other receivables is disclosed in Note 24.3. Investment receivables and accrued All impairment losses are recognised in the Consolidated Income investment income 7 7 Statement within net impairment loss on fnancial assets. Impairment Total trade and other receivables 577 738 losses on receivables under IFRS 9 of £7m have been recognised in the Non-current 36 124 period. In prior periods, impairment losses under IAS 39 (2017: £10m) Current 541 614 have been charged to other operating expenses.

Trade and other receivables are carried at amortised cost net of provisions for expected credit losses (ECLs). Trade receivables relate to (b) Service concession receivables consideration due from customer contracts. Other receivables relate to The Group has recognised service concession receivables in respect consideration due from contracts that are outside of the scope of IFRS 15 of the public private partnership arrangements. A financial asset is e.g. rental receivables. Information regarding the ageing of trade and recognised to the extent that Bupa has an unconditional contractual other receivables is shown in Note 24.3. All trade receivables and service right to receive cash at the direction of the grantor for the construction concession receivables are classifed as receivables under IFRS 15, services and the grantor has little, if any, discretion to avoid payment. as a receivable is an entity’s right to consideration that is unconditional This financial asset is carried at amortised cost (with an effective interest i.e. only the passage of time is required before payment is due. rate) less ECL provisions. The fair value of non-current investment receivables and accrued The remaining service concession receivable relates to operational investment income is £7m (2017: £6m). The carrying values of the other revenues, which are recognised in the period. Revenue is recognised non-current receivable balances are a reasonable approximation of the based on the average operating margin for the life of the contract. fair value. The operating margin is based on historic performance plus projections and this margin is reassessed based on changes in expected performance, with an adjustment made to the current year results to bring the contract (a) Impairment of financial assets performance to date in line with the revised margin. As revenue is based Financial assets comprise trade and other receivables and financial on an expected margin, with some potential variability, revenue is only investments. Refer to Note 9 for financial investments. ever recognised to the extent that it is highly probable a signifcant reversal will not occur when the uncertainty is resolved. Service concession receivables are measured net of 12-month ECL, consistent with the approach taken for fnancial investments. All other During 2018, the Group disposed of its holding in Torrejón Salud, a public receivables are measured net of lifetime ECL. Where appropriate, a private partnership with the Madrid Government. provision matrix is used to estimate ECL.

122 Strategic Report Governance Financial Statements

Note 15: Cash and cash equivalents Cash and cash equivalents in brief Cash and cash equivalents comprise cash balances, call deposits and other short term highly liquid investments (including money market funds) with original maturities of three months or less which are subject to an insignificant risk of change in value.

2018 2017 £m £m Cash at bank and in hand 1,147 1,042 Short term deposits 461 479 Total cash and cash equivalents 1,608 1,521

Bank overdrafts of £1m (2017: £1m) that are repayable on demand form part of the Group’s Capital Management Policy (see Note 23). These are reported within Other interest bearing liabilities (Note 17) on the Consolidated Statement of Financial Position, although are considered as a component of cash and cash equivalents for the purpose of the Consolidated Statement of Cash Flows.

Note 16: Assets and liabilities held for sale Assets and liabilities held for sale in brief Non-current assets or disposal groups comprising assets and 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 At 31 December 2017, a portfolio of care homes was classifed as held Assets held for sale are measured at the lower of their carrying amount for sale as active plans to sell were in place. The sale of the portfolio to and fair value less costs to sell. Subsequent to initial classifcation as held Advinia Health Care was completed on 14 February 2018. for sale, any Impairment losses and gains or losses on remeasurement The assets held for sale as at 31 December 2018 relate to a care home, are recognised in proft or loss. a retirement village and land held by Bupa New Zealand. On classification as held for sale, intangible assets and property, plant and equipment are no longer amortised or depreciated.

Assets and liabilities classified as held for sale

2018 2017 £m £m Assets held for sale Property, plant and equipment 3 76 Investment property 4 12 Trade and other receivables – 1 Total assets classified as held for sale 7 89

Liabilities associated with assets held for sale Trade and other payables – (11) Total liabilities classified as held for sale – (11)

Net assets classified as held for sale 7 78

123 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

Note 17: Borrowings Borrowings in brief The Group has various sources of funding including subordinated bonds, senior unsecured bonds and loans.

Borrowings are recognised initially at fair value less attributable on an effective interest basis. The carrying value of borrowings are transaction costs. adjusted for the gain or loss on hedged risk; changes in the fair value of derivatives that mitigate interest rate risk resulting from the fixed interest Subsequent to initial recognition, they are stated at amortised cost, with rate of the bond is recognised in fnancial expenses as an effective fair any difference between cost and redemption value being recognised in value hedge of this exposure. the Consolidated Income Statement over the period of the borrowings

2018 2017 Note £m £m Subordinated liabilities Callable subordinated perpetual guaranteed bonds 336 336 Fair value adjustment in respect of hedged interest rate risk 21 35 Callable subordinated perpetual guaranteed bonds at carrying value (a) 357 371 5.0% subordinated unguaranteed bonds due 2023 and 2026 (b) 898 897 Other subordinated debt (c) – 35 Total subordinated liabilities 1,255 1,303 Other interest bearing liabilities Senior unsecured bonds (d) 698 699 Fair value adjustment in respect of hedged interest rate risk (4) (2) Bank loans and overdrafts (e) 357 466 Finance lease liabilities (f) 4 7 Total interest bearing liabilities 1,055 1,170

Total borrowings 2,310 2,473 Non-current 2,073 2,118 Current 237 355

2018 2017 Other Other 2018 2017 interest interest Subordinated Subordinated bearing bearing 2018 2017 liabilities liabilities liabilities liabilities Total Total £m £m £m £m £m £m At beginning of year (1,303) (1,317) (1,170) (605) (2,473) (1,922) Business combinations 36 – 21 (273) 57 (273) Net repayments/(proceeds) – 3 87 (290) 87 (287) Interest payments 65 54 25 30 90 84 Accrued interest and amortisation (67) (57) (26) (30) (93) (87) Foreign exchange adjustments and other – (1) 6 (4) 6 (5) Fair value adjustment in respect of hedged risk 14 15 2 2 16 17 At end of year (1,255) (1,303) (1,055) (1,170) (2,310) (2,473)

124 Strategic Report Governance Financial Statements

(a) Callable subordinated perpetual guaranteed bonds (e) Bank loans and bank overdrafts In December 2004, Bupa Finance plc issued £330m of callable Bank loans are £357m (2017: £466m). This includes a tri syndicated subordinated perpetual guaranteed bonds, which are guaranteed by loan held in Especializada y Primaria L’Horta-Manises S.A.U. of £22m Bupa Insurance Limited. Interest is payable on the bonds at 6.125% per (2017: £25m) and a portfolio of loans held in Bupa Chile totalling £135m annum. The bonds have no fixed maturity date but a call option is (2017: £148m). exercisable by Bupa Finance plc to redeem the bonds on 16 September The Group maintains an £800m revolving credit facility which was 2020. In the event of the winding up of Bupa Finance plc or Bupa extended for a further year in June 2017 and now matures in August Insurance Limited the claims of the bondholders are subordinated to 2022. The facility was drawn down by £170m at 31 December 2018 the claims of other creditors of these companies. (2017: £226m including outstanding letters of credit of £6m). On 27 June The total hedged fair value of the callable subordinated perpetual 2018, Bupa Finance plc cancelled £6m of outstanding letters of credit guaranteed bonds, net of accrued interest, is £357m (2017: £371m). that were drawn under the £800m revolving credit facility and replaced The valuation adjustment is the change in value arising from interest this with £5m standalone letters of credit. rate risk which is matched by the fair value of swap contracts in place Drawings under the £800m facility are guaranteed by the Company. to hedge this risk. The overdraft facilities are subject to cross guarantees within the Group. (b) 5% subordinated unguaranteed bonds due 2023 and 2026 The bank loans and overdrafts bear interest at commercial rates linked to On 25 April 2013, Bupa Finance plc issued £500m of unguaranteed LIBOR, or EURIBOR, or at a commercial fixed rate. subordinated bonds which mature on 25 April 2023. Interest is payable In January 2017, Bupa Finance plc signed a £650m committed facility on the bonds at 5.0% per annum. In the event of the winding up of Bupa to ensure sufficient funding would be made available to complete the Finance plc the claims of the bondholders are subordinated to the claims acquisition of Oasis Dental Care. This was repaid in full on 17 January 2018 of other creditors of that company. (2017: drawn down by £49m). On 8 December 2016, Bupa Finance plc issued £400m of unguaranteed During the year Bupa Finance plc entered into a new £30m bilateral loan subordinated bonds which mature on 8 December 2026. Interest is facility to increase Group liquidity. The full amount was drawn at year end. payable on the bonds at 5.0% per annum. In the event of winding up of Bupa Finance plc the claims of the bondholders are subordinated to the During 2018, bank loans of £21m were disposed of following the sale of claims of other creditors of that company. Torrejón Salud S.A. (c) Other subordinated debt (f) Obligations under finance leases During 2018, the sale of Torrejón Salud S.A. resulted in the derecognition Future minimum payments under finance leases are as follows: of £36m of subordinated debt. 2018 2018 2017 2017 (d) Senior unsecured bonds Future Present value Future Present value minimum of minimum minimum of minimum On 30 June 2012, Cruz Blanca Salud S.A., now Bupa Chile, issued UF1.6m lease lease lease lease (£51m) (Unidad de Fomento – an inflation-linked currency commonly payments payments payments payments used in Chile) of inflation-linked senior unsecured bonds which mature £m £m £m £m on 30 June 2033. Payable within one year 2 2 3 2 Payable after one year On 17 June 2014, Bupa Finance plc issued £350m of senior unsecured but within fve years 2 2 4 4 bonds, guaranteed by the Company, which mature on 17 June 2021. Payable after fve years – – 1 1 Interest payable on the bonds is 3.375% per annum. Total gross payments 4 4 8 7 On 5 April 2017, Bupa Finance plc issued £300m of senior unsecured Finance charges included bonds, which mature on 5 April 2024. Interest is payable on the bonds in future lease payments – – (1) – at 2.0% per annum. The total hedged fair value of the £300m senior unsecured bonds, including accrued interest, is £295m (2017: £296m). Total payments net of finance charges 4 4 7 7 The valuation adjustment is the change in value arising from interest rate risk which is matched by the fair value of swap contracts in place to hedge this risk.

125 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

Fair value of financial liabilities The fair values of quoted liabilities in active markets are based on current The fair value of a financial liability is defined as the amount for which offer prices. The fair values of financial liabilities for which there is no a financial liability could be exchanged in an arm’s-length transaction active market are established using valuation techniques corroborated by between informed and willing parties. Fair values disclosed in the table independent third parties. These may include reference to the current fair below have been calculated as follows: value of other instruments that are substantially the same and discounted cash flow analysis. –– Subordinated liabilities – quoted price if available or discounted expected future principal and interest cash flows Financial liabilities are categorised into a three-level hierarchy. A description of the different levels is detailed in Note 9 along with –– Senior unsecured bonds – quoted price the market interest rates used to discount financial liabilities, where the –– Secured loans – quoted price. fair value cannot otherwise be found from quoted market values.

An analysis of borrowings by fair value classifcation is as follows:

2018 2017 Level 1 Level 2 Total Level 1 Level 2 Total £m £m £m £m £m £m Subordinated liabilities 1,294 – 1,294 1,416 35 1,451 Senior unsecured bonds 659 51 710 678 54 732 Bank loans and overdrafts – 357 357 – 466 466 Finance lease liabilities – 4 4 – 7 7 Total 1,953 412 2,365 2,094 562 2,656

Currently, the Group does not have any level three fnancial liabilities.

Note 18: Provisions and other liabilities under insurance contracts issued Provisions and other liabilities under insurance The provisions and other liabilities under insurance contracts issued contracts issued in brief 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.

18.1 Provisions under insurance contracts issued Adjustments to the amount of claims provision for prior years are included in the Consolidated Income Statement in the financial year Unearned premiums in which the change is made. In setting the provisions for claims The unearned premium provision represents premiums written that outstanding, a best estimate is determined on an undiscounted basis relate to periods of risk in future accounting periods. It is calculated on and then a margin of prudence is added such that there is confidence a straight line basis, which is not materially different from a calculation that future claims will be met from the provisions. The level of prudence based on the pattern of incidence of risk. set is either one required by regulation or one that provides an Provision for claims appropriate degree of confidence. The gross provision for claims represents the estimated liability arising Provision is made for unexpired risks when unearned premiums, net of from claims episodes in current and preceding financial years which have associated acquisition costs, are insufficient to meet expected claims not yet given rise to claims paid. The provision includes an allowance for and administrative expenses. The expected claims are calculated having claims management and handling expenses. regard only to contracts commencing prior to the balance sheet date. The gross provision for claims is estimated based on current information The methods used and estimates made for claims provisions are and the ultimate liability may vary as a result of subsequent information reviewed regularly. and events.

126 Strategic Report Governance Financial Statements

2018 2017 Gross Reinsurance Net Gross Reinsurance Net £m £m £m £m £m £m General insurance business Provisions for unearned premiums 1,845 (14) 1,831 1,728 (10) 1,718 Provisions for claims 875 (8) 867 877 (7) 870

Long term business Life insurance contract liabilities 33 (1) 32 32 (1) 31 Total insurance provisions 2,753 (23) 2,730 2,637 (18) 2,619 Non-current 33 (1) 32 32 (1) 31 Current 2,720 (22) 2,698 2,605 (17) 2,588

(a) Analysis of movements in provisions for unearned premiums At beginning of year 1,728 (10) 1,718 1,705 (12) 1,693 Premiums deferred 8,913 (66) 8,847 8,991 (58) 8,933 Deferred premiums released to income (8,791) 62 (8,729) (8,941) 61 (8,880) Disposal of subsidiary – – – (31) – (31) Foreign exchange (5) (1) (6) 4 (1) 3 At end of year 1,845 (15) 1,830 1,728 (10) 1,718

(b) Analysis of movements in provisions for claims At beginning of year 877 (7) 870 889 (7) 882 Additions through business combinations 2 – 2 – – – Increase for current year claims 7,020 (45) 6,975 7,190 (44) 7,146 Cash paid to settle claims (6,985) 44 (6,941) (7,182) 46 (7,136) Decrease for prior year claims (25) – (25) (5) (1) (6) Disposal of subsidiary – – – (5) – (5) Transfers (1) – (1) 1 (1) – Foreign exchange (13) – (13) (11) – (11) At end of year 875 (8) 867 877 (7) 870

127 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

Assumptions for general insurance business The following table shows the sensitivities of reasonably possible The process of recognising liabilities arising from general insurance variations: entails the estimation of future payments to settle incurred claims and Increase in Increase in associated claims handling expenses, as well as assessing whether claims expenses additional provisions for unexpired risk are required. The principal 2018 assumptions in the estimation of the liability relate to the expected Change in variable 5% 10% frequency, severity and settlement patterns of insurance claims, which Reduction in proft net of reinsurance are expected to be consistent with recently observed experience and before taxation £73m £19m trends. The aim of claims reserving is to select assumptions and reserving 2017 methods that will produce the best estimate of the future cash outflows Change in variable 5% 10% for the subject claims; it is an uncertain process which also requires Reduction in proft net of reinsurance judgements to be made. The resulting provisions for outstanding before taxation £69m £16m claims incorporate a margin for adverse deviation, over and above the best estimate liability, the quantum of which reflects the level of These variances would reduce the amount of profit that would otherwise this uncertainty. emerge in subsequent periods. Since premium provisions include profit margins and claims provisions include prudence margins, variance from Claims development patterns are analysed in each of the Group’s expectations can be absorbed by these margins. insurance entities. Where distinct sub-portfolios with different claims cost and development characteristics exist, further analysis is undertaken to The Group’s long term insurance business does not form a core part of derive assumptions for reserving that are appropriate and can be applied its operations. to relatively homogeneous groups of policies. Such sub-portfolios may Liability adequacy tests be defined by product line, risk profile, geography or market sector. Liability adequacy tests are performed for the Group’s insurance entities. Various established reserving methods for general insurance are For short-duration contracts, a premium deficiency is recognised if the considered, typically basic chain ladder, Bornhuetter-Ferguson and pure sum of expected costs of future claims and claim adjustment expenses, risk cost methods. Additional consideration is given to the treatment of capitalised deferred acquisition costs, and maintenance expenses large claims, claim seasonality, claims inflation and currency effects, for exceeds the corresponding unearned premiums while considering which appropriate adjustments to assumptions and methods are made. anticipated investment income. Such a deficiency would be immediately While there is some diversity in the development profile of health recognised in the Consolidated Income Statement. insurance claims across the Group, such claims are generally highly predictable in both frequency and average amount, and claims are 18.2 Other liabilities under insurance contracts issued settled quickly following the medical event for which benefit is claimed. Medical expense claims are, typically, substantially fully settled within just Other liabilities under insurance contracts issued consist of payables to a few months. Claims management practices such as preauthorisation insurance creditors other than policyholders. of the claim with the insurer, electronic claims settlement and effective 2018 2017 network provider arrangements can reduce the development period to £m £m four to six months. Reinsurers' deposits 6 6 Insurance provisions are inevitably estimates. Actual experience of claims Reinsurance creditors 77 61 costs and/or administrative expenses may vary from that anticipated in Commissions payable 23 16 the reserving estimates. Other insurance payables 38 34 Total other liabilities under insurance contracts issued 144 117

128 Strategic Report Governance Financial Statements

Note 19: Provisions for liabilities and charges Provisions for liabilities and charges in brief A provision is recognised when the Group is expected to make future payments as a result of a past event.

These payments can result from a legal obligation or a constructive Although provisions are made where payments can be reliably estimated, obligation, where an expectation has been set by the Group. A provision the amounts provided are based on a number of assumptions which are is made where an outflow of resources is probable and where the inherently uncertain and therefore the amount that is ultimately paid payments can be reliably estimated. If the effect is material, provisions could differ from the amount recorded. 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 Deferred and 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 66 23 7 11 2 – 23 132 Acquisitions through business combinations – 17 – – – – – 17 Charge for year 56 – 7 4 – 4 54 125 Released in year (1) (1) – – – (3) (1) (6) Utilised in year – cash (52) (14) (1) (4) (1) (1) (15) (88) Foreign exchange (2) – – – – – – (2) At end of year 67 25 13 11 1 – 61 178 Non-current 21 10 9 8 1 – 6 55 Current 46 15 4 3 – – 55 123

Long service and annual leave Provisions for contingent consideration The long service leave provision relates to territories where employees are Contingent consideration is a financial liability largely related to earn-out legally entitled to substantial paid leave after completing a certain length payable on acquisitions of dental practices in Australia and the UK. of qualifying service. Uncertainty around both the amount and timing In Australia, the provision relates to contingent payments to practice of future outflows arises as a result of variations in employee retention principals. In the UK, the contingent consideration relates to the rates, which may vary based on historical experience. The annual leave acquisition of dental centres. This balance is reviewed at each reporting provision relates to territories where the annual entitlement of leave is period and any fair value adjustments are recorded in the Consolidated not required to be taken within a predetermined time nor does it expire. Income Statement. Therefore, uncertainty exists around the timing of future outflows as well as around the amount of future outflows due to wage inflation.

129 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

Customer remediation and legal provisions Unoccupied property Customer remediation provisions relate to the costs of compensating In prior years, the Group entered into non-cancellable leases for customers for losses or damages associated with a failure to comply with property which it no longer occupies. The Group has provided for regulations or to treat customers fairly. Legal provisions relate to potential lease obligations, net of sub-lease receivables. The lease obligations are and ongoing legal claims and represent the discounted fair value of total payable monthly, quarterly or annually, within a range of one to 13 years, estimated liabilities. Due to the nature of these provisions, the timing and the average being five years. The future net outflows are uncertain and potential cost is uncertain. are affected by the Group’s ability to sub-let unoccupied property.

Insurance provisions Regulatory provisions The insurance provision is in respect of the Group’s self insurance and Regulatory provisions relate to levies payable to customer protection covers the excess that arises on claims made in relation to losses arising bodies by the Group’s various regulated entities. Such levies are generally from damage to property, business interruption and medical, employee determined on a ‘capped percentage of revenues’ basis. Payments are or public liability. Any outflows relating to this provision are dependent normally made annually, although the frequency may be increased or on the frequency and value of claims submitted as well as the excess decreased at the discretion of the customer protection bodies. amount specified within individual policies with insurers. The fund is actuarially assessed twice a year to ensure that the provision is adequate. Other Other provisions include provisions for interest and penalties associated with an in-principle agreement with the Australian Taxation Office (see Note 26(iii) Contingent assets and contingent liabilities).

Note 20: Trade and other payables Trade and other payables in brief Trade and other payables arise in the ordinary course of business.

2018 2017 (b) Deferred revenue from care, health and other customer Note £m £m contract revenue Accruals 635 512 Accommodation bond liabilities (a) 596 617 Deferred income includes £52m of deferred revenue related primarily Trade payables 170 185 to care home government funding received in advance. The liability is released and recognised as revenue as the services are provided and Other payables 394 480 the performance obligations are satisfed. Deferred income (b) 83 88 Social security and other taxes 45 48 Signifcant changes in the contract liabilities balances during the year are Total trade and other payables 1,923 1,930 as follows: Non-current 62 32 Deferred revenue from care, health and other customer Current 1,861 1,898 contract revenue 2018 Trade and other payables (excluding deferred revenue) are carried at £m amortised cost. At beginning of year 48 The carrying value of trade and other payables is a reasonable Revenue recognised in the period (133) approximation of fair value. Information regarding the maturity of trade Deferred revenue in the period 137 payables, other payables, accommodation bond liabilities and accruals At end of year 52 is shown in Note 24.4. Revenue recognised in the period includes £48m of revenue that was deferred at the beginning of the year. All revenue deferred at (a) Accommodation bond liabilities 31 December 2018 will be recognised during 2019 as the performance Accommodation bonds are non-interest bearing deposits paid by some obligations are satisfed. residents of care homes held in Bupa Aged Care Australia as payment for a place in the care home facility. These deposits are repayable when the resident leaves the facility. The bonds are recorded as the proceeds received, net of retention and any other amounts deducted at the election of the bondholder.

130 Strategic Report Governance Financial Statements

Note 21: Non-controlling interests Non-controlling interests in brief Additional information is provided for entities which are consolidated where the Group does not hold a 100% interest.

(i) Consolidation of entities in which the Group holds less (ii) Subsidiary significant restrictions than 50% The ability of the Group’s insurance subsidiaries to transfer funds to Eurocredit Investment Fund 1 plc Group is subject to local solvency requirements. Eurocredit Investment Fund is a structured entity set up for the purpose of investing in primary and secondary secured loans. Bupa is the only (iii) Non-controlling interests (NCI) investor and is exposed to the risks and rewards of the fund. The Group has no subsidiaries whose non-controlling interest is material on the basis of their share of equity or profit or loss.

Note 22: Business combinations and disposals Business combinations and disposals in brief A business combination refers to the acquisition of a controlling interest in a business, which is further defined as an integrated set 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) 2018 acquisitions A number of acquisitions were made in the year ended 31 December Business combinations are accounted for using the acquisition method. 2018, which are detailed below. Identifiable assets and liabilities acquired and contingent liabilities Date of Percentage assumed in a business combination are measured initially at their fair acquisition of holdings values at the acquisition date. Any non-controlling interests are recognised UK as a proportionate share of the acquiree’s net identifable assets. Oasis – dental centres Various 100% Europe and Latin America The identification and valuation of intangible assets arising on business Néctar Seguros de Salud 1 October 2018 100% combinations is subject to a degree of estimation and judgement. We engage independent third parties to assist with the identification INPROSA Investigación y Promoción Sanitaria SA 1 November 2018 100% and valuation process. In valuing these intangible assets, market accepted Ginemed1 13 December 2018 70% methodologies have been applied. Customer relationships are valued using methodologies such as the Multi-period Excess Earnings Method Sanitas Mayores – day care centres Various 100% (where the value of an intangible asset is equal to the present value LUX MED – dental centres, medical imaging, medical centres Various 100% of the after-tax cash fows attributable only to that intangible asset). Brands and trademarks are valued using methodologies such as the International Markets 2 Relief from Royalty method (applying an estimated royalty rate to the Bupa Middle East Holdings Two W.L.L. 15 November 2018 25% projected sales relating to each asset over the economic life). 1. As part of the acquisition of Ginemed, a put/call option exists allowing the existing shareholders to sell/the Group to buy a further 30%. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable assets acquired is recorded as goodwill. 2. Increased shareholding from 50% to 75%. Acquisition accounting must be completed within 12 months of the transaction date. Costs related to the acquisition are expensed as incurred.

131 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

Fair value On 13 December 2018, the Group acquired 70% of Ginemed, Ginemed Other a gynecological and reproductive medical services provider in Spain £m £m for £51m. Intangible assets 12 43 As it is considered virtually certain that a put/call option for the remaining Property, plant and equipment – 14 30% holding, currently valued at £15m will be exercised, the Group has Inventories 5 – recognised 100% ownership under IFRS. On this basis, total consideration Trade and other receivables 1 3 is £66m. As part of the acquisition, brand intangible assets of £12m and Cash and cash equivalents 3 20 goodwill of £52m have been recognised. Deferred taxation liabilities (4) (5) On 1 October 2018 the Group acquired Néctar Seguros de Salud, a Spanish Trade and other payables (3) (2) health insurance company, for consideration of £36m. Customer Current taxation liabilities – (2) relationships of £7m and goodwill of £6m have been recognised. Provisions under insurance contracts issued – (2) 14 69 Goodwill represents synergies expected to arise following integration with the Group’s existing Spanish PMI business. Net assets acquired 14 69 During the year, other minor acquisitions occurred in Poland, where the Goodwill 52 52 Group acquired four ambulatory clinics, one image diagnostic centre, Consideration 66 121 and three dental clinics, which together generated goodwill of £9m. These acquisitions expand the geographic reach of the Group’s activity Consideration satisfed by: in Poland and the resulting goodwill represents expected synergies. Cash 51 104 Other minor acquisitions during the year across the Group generated Fair value of Ginemed put option consideration (30%) 15 – goodwill of £6m. Deferred consideration – 17 Additional shares were purchased in Bupa Middle East Holdings Two Total consideration paid 66 121 W.L.L. for £8m, bringing the Group shareholding to 75% (2017: 50%).

Purchase consideration settled in cash 51 104 If the transaction date of the businesses acquired during the year had been 1 January 2018, revenue of £11,918m and proft before taxation of Additional 25% acquisition of Bupa Middle East Holdings Two W.L.L – 8 £512m would have been recorded by the Group for the period ended Cash acquired on acquisition (3) (20) 31 December 2018. Net cash outflow on acquisition 48 92 Acquisition transaction costs expensed in the period ended 31 December 2018, within other operating expenses, total £4m. Settlement of deferred consideration – 14 Net cash outflow associated with acquisitions 48 106 (b) 2018 disposals During the year, Oasis Dental Care has continued to acquire further In December 2018, the Group completed the sale of Torrejón Salud S.A. dental centres, with 24 dental centres acquired for a total consideration for cash proceeds received of £54m (€61m), realising a net loss on of £61m, of which £16m is deferred. Identifed intangible assets include disposal of £22m (€25m). There were no other material disposals customer relationships of £35m and goodwill of £31m has been during the year ended 31 December 2018. recognised which represents the continued future growth expected to be achieved through the development of Bupa’s dental insurance business. (c) 2017 acquisitions Refer to the fnancial statements for the year ended 31 December 2017 for details of the acquisitions made during 2017, the most signifcant being Oasis Dental Care for £589m.

(d) 2017 disposals On 25 July 2017, Bupa Thailand was sold for cash proceeds of £56m, realising a net gain on disposal of £36m taking into account £19m net assets divested, £5m transaction costs and £4m cumulative foreign exchange gains recycled to the Consolidated Income Statement on disposal.

132 Strategic Report Governance Financial Statements

Note 23: Capital management Capital management in brief Bupa is a company limited by guarantee, has no shareholders and 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.

The Group is subject to the requirements of the Solvency II Directive The Group has target ranges for solvency, leverage and interest cover and must hold sufficient capital to cover its Group Solvency Capital ratios with a view to maintaining an A-/A3 long term senior credit rating Requirement (SCR), which takes account of all the risks in the Group, for Bupa Finance plc. The Bupa Group as a whole is not rated by any including those related to non-insurance businesses. The Group SCR is rating agency. Individual debt issues and certain subsidiaries within the calculated in accordance with the Standard Formula specified in the Group have public ratings. Solvency II legislation. Bupa has obtained approval from the Prudential At least annually, the Group carries out an Economic Capital Assessment Regulation Authority (PRA) to substitute the insurance premium risk (ECA) in which it makes its own quantification of how much capital is parameter in the Standard Formula with a Group Specific Parameter required to support its risks. The ECA is used to assess how well the (GSP) which reflects Bupa’s own loss experience. Standard Formula SCR reflects the Group’s actual risk profile. The capital position of the Group and its main regulated insurance entities The ECA forms part of the Own Risk and Solvency Assessment (ORSA) are kept under constant review and are reported quarterly to the Board. which comprises all the activities by which the Group establishes the level The Group’s capital resources are managed in line with the Group of capital required to meet its solvency needs over the planning period Capital Management Policy. While the Group is subject to the Solvency II given the Group’s strategy and risk appetite. The conclusions from these requirements at a consolidated level, all regulated entities within the activities are summarised in the ORSA report which is reviewed by the Group maintain sufficient capital resources to meet any minimum Risk Committee, approved by the Board and submitted to the PRA at capital requirement required by respective local regulators. In addition, least annually. the Group and individual regulated entities maintain a buffer over the At 31 December 2018, Bupa’s eligible Own Funds, determined in regulatory minimum requirements in line with their capital risk appetites. accordance with the Solvency II valuation rules, were £3.9bn1 (2017: £3.7bn), During the year, the Group and its subsidiaries complied with all externally which was in excess of the Group estimated SCR of £2.1bn1 (2017: £2.1bn). imposed capital requirements to which they were subject. This represented a solvency coverage ratio of 191%1 (2017: 180%). The Group’s capital comprises equity, exclusive of any non-controlling interests of £7,490m, together with eligible subordinated debt. 1. The Solvency II Capital Position (Own Funds and Solvency Capital Requirement) and related disclosures are estimated values and unaudited. The Group has £330m of callable subordinated perpetual guaranteed bonds, a £500m unguaranteed subordinated bond which matures on 25 April 2023 and a £400m unguaranteed subordinated bond which matures on 8 December 2026. These bond issues are accounted for as liabilities in the IFRS financial statements but are treated as capital for regulatory and management purposes.

133 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

Note 24: Risk management Risk management in brief The Bupa Risk Committee has responsibility to the Board for the 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’ approach to the governance 24.1 Insurance risk of risk management. Insurance risk in brief 1. Business management and employees are responsible for the Insurance risk only affects the insurance entities in the Group. It consists identification and assessment of risks and controls. of underwriting and pricing risks which relate to inadequate tariffs of insurance products as well as reserving risk which relates to the potential 2. Risk, compliance and clinical governance functions provide support inadequacy of claims provisions. and challenge the completeness and accuracy of risk assessments and the adequacy of mitigation plans. (i) Underwriting risk Underwriting risk refers to the potential deviation from the actuarial 3. Internal Audit provides independent and objective assurance on assumptions used for setting insurance premium rates which could lead the robustness of the risk management framework, and the to premium inadequacy. Underwriting risk is therefore concerned with appropriateness and effectiveness of internal controls. both the setting of adequate premium rates (pricing risk) and the The operations of the risk management framework and current management of claims (claims risk) for insurance policies underwritten principal risks of the Group and how they are mitigated are described by the Group. on pages 30-34. (ii) Pricing risk The Group has adopted a risk management strategy that endeavours Pricing risk relates to the setting of adequate premium rates taking into to mitigate these risks, which is approved by the Board. In managing consideration the volume and characteristics of the insurance policies these exposures, the Corporate Finance Executive Committee reviews issued. External influences on pricing risk include (but are not limited to) and recommends changes to the management of insurance and competitors’ pricing and product design initiatives, and regulatory investment risks. environments. The level of influence from these external factors can vary The Group has exposure to a number of risks associated with its significantly between regions and largely depend on the maturity of insurance business and from its use of financial instruments. These have health insurance markets and the role of the regulator. Actuarial analysis been categorised into the following types of risk, and details of the performed on a regular basis combined with an understanding of local nature, extent, and how the Group has managed these risks is market dynamics and the ability to change insurance premium rates described below: when necessary are effective risk mitigations. –– Insurance risk In every general insurer in the Group, the dominant product or policy category is an annually renewable health insurance contract. This permits –– Market risk insurance premium rate revisions to respond quickly to changes in –– Credit risk customer risk profiles, claims experience and market considerations. –– Liquidity risk The ability to review premium rates is a significant mitigant to pricing risk. The Group does not underwrite material general insurance business that commits it to cover risks at premiums fixed beyond a 12-month period from inception or renewal.

134 Strategic Report Governance Financial Statements

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

135 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

24.2 Market risk Foreign currency transactions in the Group’s subsidiary companies are measured using the functional currency of the subsidiary company, Market risk in brief which is based on the primary economic environment in which the Market risk is the risk of adverse financial impact due to changes in fair subsidiary operates. The transactions are translated into the functional values or future cash flows of financial instruments from fluctuations in currency at the exchange rate ruling at the date of the transaction. interest rates, foreign exchange rates, commodity prices, credit spreads and equity prices. The focus of the Group’s long term financial strategy Monetary assets and liabilities denominated in foreign currencies are is to facilitate growth without undue balance sheet risk. translated into the functional currency at the exchange rate ruling at the balance sheet date; the resulting foreign exchange gain or loss is In order to reduce the risk of assets being insufficient to meet future recognised in operating expenses, except where the gain or loss arises policyholder obligations, the Group actively manages assets using an on financial assets or liabilities, when it is presented in financial income approach that balances duration, quality, diversification, liquidity and or financial expense as appropriate. investment return. Non-monetary assets and liabilities denominated in a foreign currency at The Group invests in a limited portfolio of return-seeking assets historical cost are translated using the exchange rate at the date of the (principally bonds and loans) via our regulated entities in the UK and transaction; therefore no exchange differences arise. Australia. These assets totalled £452m as at 31 December 2018 (2017: £404m). These entities use value at risk analysis (VaR) to quantify risk, Non-monetary assets and liabilities denominated in a foreign currency at taking account of asset volatility and correlation between asset classes. fair value are translated using the exchange rate ruling at the date that the fair value was determined. Foreign exchange differences that arise In addition to local VaR analysis, the Group’s overall cash and investment on retranslation are recognised in operating expenses. portfolio is managed by limiting the contribution of the combined investment risk charge to a maximum percentage of the Group’s Transactional exposures arise primarily in International Markets businesses solvency capital requirement (SCR). as a result of differences between the currency of local revenues and claims. The currency exposures are deemed to be acceptable but are kept under review by management. 24.2.1 Foreign exchange risk The Group is exposed to foreign exchange risks arising from commercial The following significant exchange rates applied during the year: transactions and from recognising assets, liabilities and investments in overseas operations. The Group is exposed to both transaction and Average rate Closing rate translation risk. The former is the risk that a company’s cash flows and 2018 2017 2018 2017 realised profits may be impacted by movements in foreign exchange Australian dollar 1.7860 1.6807 1.8097 1.7312 rates. The latter arises from translating the financial statements of a Brazilian real 4.8674 4.1148 4.9461 4.4794 foreign operation into the Group’s functional currency. Chilean peso 855.7769 835.9026 884.3577 832.2579 Danish krone 8.4245 8.4902 8.3107 8.3740 The results and financial position of the Group’s foreign entities that do Euro 1.1303 1.1414 1.1131 1.1249 not have a functional currency of sterling are translated as follows: Hong Kong dollar 10.4642 10.0432 9.9831 10.5655 –– assets and liabilities at the exchange rate at the balance sheet date; Mexican peso 25.6624 24.3482 25.0650 26.6255 –– income and expenses at average rates for the period. New Zealand dollar 1.9289 1.8135 1.8990 1.9062 Polish zloty 4.8162 4.8591 4.7743 4.6972 All foreign exchange differences arising on translation are recognised Turkish lira 6.4365 4.7008 6.7417 5.1218 initially in the Consolidated Statement of Comprehensive Income, and US dollar 1.2887 1.3524 only in the Consolidated Income Statement in the period in which the 1.3351 1.2746 entity is eventually disposed.

136 Strategic Report Governance Financial Statements

Foreign exchange hedging activities 2018 2017 The Group manages its exposure to foreign exchange risk by entering £m £m into hedging transactions using derivative financial instruments. The Notional amounts (95) – Group applies fair value, cash flow and net investment hedge accounting. Carrying amount – Assets – – Carrying amount – Liabilities (1) – The hedging relationship between a hedging instrument and a hedged item is formally documented. Documentation includes the risk management Financial statement line item Derivatives Derivatives objectives and the strategy in undertaking the hedge transaction. Change in value used for calculating hedge ineffectiveness (1) – (a) Fair value hedges Hedging losses recognised in other comprehensive Where a derivative financial instrument hedges the change in fair value of income (1) – a recognised asset or liability or an unrecognised firm commitment, any Hedge ineffectiveness recognised in proft or loss – – gain or loss on remeasurement of the hedging instrument at fair value is Income statement line item (for ineffectiveness) Financial Financial recognised in the Consolidated Income Statement. The hedged item is expense expense fair valued for the hedged risk with any adjustment being recognised in Amount reclassifed from cash fow hedge reserve – – the Consolidated Income Statement. Financial statement line item (for reclassifcations) Financial Financial expense expense (b) Cash flow hedges Where a derivative financial instrument hedges the change in cash flows 2018 2017 related to a recognised asset or liability, a firm commitment or a highly £m £m probable forecast transaction, it is accounted for as a cash flow hedge. Change in value used for calculating hedge ineffectiveness (1) – The effectiveness of a cash flow hedge is the degree to which the cash flows attributable to a hedged risk are offset by changes in the cash Amounts in reserves for continuing hedges (1) – flows of the hedging instrument. The effective portion of any gain or loss Amounts in reserves for discontinued hedges – – on the hedging instrument is recognised directly in other comprehensive In 2018, foreign currency swap contracts of USD120m (£95m) were income until the forecast transaction occurs and results in the recognition entered into to hedge the cash outfows in relation to the acquisition of a financial asset or liability which impacts the Consolidated Income of Acıbadem Sigorta, which was completed in 2019. Statement. The ineffective portion of the gain or loss is recognised in the Consolidated Income Statement. In 2018, foreign currency swap contracts of SAR400m (£77m) were entered into to hedge the cash outfows in relation to the acquisition of If the hedged cash flow is no longer expected to take place, all deferred an additional 5% of Bupa Arabia shares. gains and losses are released to the Consolidated Income Statement immediately. If the hedging instrument or hedge relationship is In 2017, foreign currency forward contracts of USD244m (£189m) were terminated but the hedged transaction is still expected to occur, the entered into to hedge the cash outflows in relation to the acquisition of cumulative gain or loss at that point remains in other comprehensive an additional 8% of Bupa Arabia shares. income and is recognised in accordance with the above policy when At 31 December 2018, the cash flow hedge reserve amounts to £20m the transaction occurs. (2017: £22m).

137 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

Net investment hedging In the Consolidated Financial Statements, where a loan between Group The Group applies hedge accounting to its foreign currency exposure entities results in an exchange gain or loss, then it is recognised in the on a net investment basis. By designating opposing instruments in the Consolidated Statement of Comprehensive Income to the extent that it same currency, the net exposure to currency fluctuations is reported. relates to the Group’s net investment in overseas operations. The Group uses foreign currency forward contracts and foreign Bupa has exposure to foreign exchange risk arising from its overseas currency borrowings to hedge its net investment foreign exchange risk. operations. These hedging relationships are documented and tested as required by Currency exposures as at 31 December are as follows: IFRS 9. All foreign currency forward contracts and collar options are accounted for on a fair value basis. Net currency exposure The Group hedges significant exposures in order to manage translation Net currency Currency including risk and reduce the Solvency II foreign currency risk charge. exposure contracts hedges £m £m £m Effect of foreign exchange hedging transactions 2018 The impact of net investment currency hedging activity is set out below. Australian dollar 2,607 (610) 1,997 Euro 875 (644) 231 2018 2017 New Zealand dollar 504 (252) 252 £m £m Polish zloty 493 – 493 Notional amounts 1,488 1,260 Chilean peso 467 – 467 Carrying amount – Assets 7 4 Hong Kong dollar 347 39 386 Carrying amount – Liabilities (20) (2) US dollar 204 (216) (12) Financial statement line item Derivatives Derivatives Brazilian real Change in value used for calculating hedge 105 3 108 ineffectiveness 1 – Singapore dollar 33 35 68 Hedging gains/(losses) recognised in other Bahraini dinar 12 – 12 comprehensive income 1 (7) Other 6 121 127 Hedge ineffectiveness recognised in proft or loss – – Total foreign denominated net assets 5,653 (1,524) 4,129 Income statement line item (for ineffectiveness) Financial Financial Percentage of Group net assets 75% 55% expense expense Amount reclassifed from foreign currency Net currency translation reserve to the Income Statement – – exposure Net currency Currency including Income statement line item (for reclassifcations) Financial Financial exposure contracts hedges expense expense £m £m £m 2017

2018 2017 Australian dollar 2,807 (498) 2,309 £m £m Euro 796 (632) 164 Change in value used for calculating hedge New Zealand dollar 500 (46) 454 ineffectiveness 1 7 Polish zloty 489 (7) 482 Amounts in reserves for continuing hedges 1 7 Chilean peso 453 – 453 Amounts in reserves for discontinued hedges – – Hong Kong dollar 322 26 348 US dollar 197 (178) 19 Brazilian real 101 3 104 Singapore dollar 46 (6) 40 Thai baht 31 28 59 Other 5 3 8 Total foreign denominated net assets 5,747 (1,307) 4,440 Percentage of Group net assets 79% 61%

The impact of a hypothetical strengthening/weakening of sterling against the currencies below, with all other variables constant, would have increased/(decreased) equity and profit by the amounts shown below. This table considers both translation and transaction risk.

138 Strategic Report Governance Financial Statements

Strengthening 10% Weakening 10% The net balance on which the Group is exposed as at 31 December 2018 Gains/ Gains/ was £2,710m (2017: £2,113m). The rate at which maturing deposits (losses) (losses) are reinvested represents a significant potential risk to the Group, included in included in in currencies such as sterling and Australian dollar where the Group Consolidated Losses Consolidated Gains Income included in Income included in has a significant variable rate net asset exposure. Statement Equity Statement Equity £m £m £m £m The Group has also used interest rate swaps to manage interest rate 2018 exposure whereby the requirement to settle interest at fixed rates has Australian dollar (22) (181) 27 222 been swapped for variable rates. This increases the ability to match Euro (12) (21) 14 26 variable rate assets with variable rate liabilities. New Zealand dollar 1 (23) (1) 28 The anticipated repayment profle of interest bearing fnancial liabilities Polish zloty (1) (45) 2 55 is as follows: Chilean peso 2 (43) (2) 52 Variable Fixed Total Hong Kong dollar (2) (35) 2 43 £m £m £m US dollar 3 1 (4) (1) 2018 Brazilian real (1) (10) 1 12 2019 (228) (25) (253) Singapore dollar – (6) – 7 2020 (358) (4) (362) Bahraini dinar – (1) – 1 2021 (8) (350) (358) Other (1) (11) 1 14 2022 (10) (2) (12) Total sensitivity (33) (375) 40 459 2023 (7) (504) (511) 2024-2028 (327) (424) (751) 2017 After 2028 (37) (26) (63) Australian dollar (26) (210) 32 257 Total (975) (1,335) (2,310) Euro (14) (15) 17 18 New Zealand dollar (2) (41) 2 51 2017 Polish zloty – (44) – 54 2018 (339) (17) (356) Chilean peso 1 (41) (1) 50 2019 (5) (3) (8) Hong Kong dollar (1) (32) 1 39 2020 (371) (2) (373) US dollar (2) (2) 2 2 2021 (7) (350) (357) Brazilian real (1) (10) 2 12 2022 (45) – (45) Danish krone (2) (4) 2 4 2023-2027 (330) (927) (1,257) Singapore dollar – (5) – 7 After 2027 (44) (33) (77) Other 1 (9) (1) 11 Total (1,141) (1,332) (2,473) Total sensitivity (46) (413) 56 505 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 24.2.2 Interest rate risk least annually. Interest rate risk is the risk that the fair value or future cash flows of The impact of a hypothetical rise of 100 bps in interest rates at the a financial instrument will fluctuate because of changes in market reporting date, on an annualised basis, would have increased equity interest rates. and profit by £9m (2017: £3m). The impact of a fall of 100 bps in The Group is exposed to interest rate risk arising from fluctuations in interest rates, on an annualised basis, would have the inverse effect. market rates. This affects the return on variable rate assets, the cost of This calculation is based on the assumption that all other variables, variable rate liabilities and the balance sheet value of its investment in in particular foreign exchange rates, remain constant. fixed rate bonds. Variable rate assets represent a natural hedge for variable rate liabilities.

139 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

Interest rate hedging activities 24.3 Credit risk The Group applies fair value hedges and cash flow hedges to hedge its Credit risk in brief exposure to interest rate risk. Credit risk is the risk that those that are in debt to the Group default on Interest rate swaps totalling £630m have been entered into to swap their obligation. Examples of credit risk would be non-payment of a trade the fxed rate coupon on the £330m callable subordinated perpetual receivable or a corporate bond failing to repay the capital sum and guaranteed bonds and the £300m senior unsecured bonds to a variable related interest. rate. These interest rate swaps are designated as fair value hedges of the Investment exposure with external counterparties is managed by underlying interest rate risk on the debt. In the year ended 31 December ensuring that there is a sufficient spread of investments and that all cash 2018, the fair value movement in the bonds attributable to the hedged and investment counterparties are rated at least A by two of the three risk amounted to £17m gain (2017: £17m gain). The fair value movement key rating agencies used by the Group (unless specifically approved by on the interest rate swaps amount to £17m loss (2017: £17m loss). the Corporate Finance Executive Committee, for example as a result of The impact of fair value hedging of interest rate risk is detailed below: local regulatory requirements). (i) Fair value hedges The investment profile (including financial investments, restricted assets 2018 2017 and cash and cash equivalents) at 31 December is as follows: £m £m Notional amounts 630 630 2018 2017 £m Carrying amount – Assets 21 36 £m Investment grade counterparties 3,518 Carrying amount – Liabilities (7) (4) 3,746 Non-investment grade counterparties 306 Financial statement line item Derivatives Derivatives 319 Change in value used for calculating hedge Total 4,065 3,824 ineffectiveness (17) (17) Investment grade counterparties include restricted assets of £107m (2017: £76m). Non-investment grade counterparties are those rated below 2018 2017 BBB-/Baa3, and mainly comprise corporate bonds, government bonds £m £m and pooled investment funds of £210m (2017: £272m), and cash and Carrying amount – Liabilities (630) (630) cash equivalents of £92m (2017: £35m). Accumulated hedge adjustments included in the carrying amount of the hedged item – – Assets pledged as security include £107m (2017: £76m) of cash held in Financial statement line item Borrowings Borrowings restricted access deposits. Change in value used for calculating hedge ineffectiveness 17 17

(ii) Cash flow hedges 2018 2017 £m £m Notional amounts – 33 Carrying amount – Assets – – Carrying amount – Liabilities – – Financial statement line item Derivatives Derivatives Change in value used for calculating hedge ineffectiveness – 1 Hedge ineffectiveness recognised in the Consolidated Income Statement – – Amount reclassifed from cash fow hedge reserve to the Consolidated Income Statement – –

2018 2017 £m £m Change in value used for calculating hedge ineffectiveness – (1)

140 Strategic Report Governance Financial Statements

Information regarding the credit risk exposure for fnancial assets at amortised cost is provided below.

Corporate debt Government securities Deposits Cash and debt and secured with credit Other Restricted cash securities loans institutions loans assets equivalents £m £m £m £m £m £m 2018 AAA 58 164 – – – 13 AA- to AA+ 27 317 341 – 107 871 A- to A+ 64 275 436 – – 582 BBB to BBB+ – 12 5 – – 108 BBB- and below (below investment grade) 35 11 24 1 – 35 Total 184 779 806 1 107 1,609 Loss allowance (1) – (1) – – (1) Carrying amount 183 779 805 1 107 1,608

Information regarding the ageing and impairment of financial and insurance assets is shown below.

6 months- Greater than Financial Not past due 0-3 months 3-6 months 1 year 1 year position £m £m £m £m £m £m 2018 Insurance debtors gross value 995 156 23 20 9 1,203 Bad debt provision – (7) (2) (4) (4) (17) Insurance debtors net value1 995 149 21 16 5 1,186 Trade and other receivables gross value 183 156 65 39 73 516 ECL (6) (3) (1) (3) (28) (41) Trade and other receivables net value2 177 153 64 36 45 475

1. Comprises insurance debtors, Medicare rebate and Risk Equalisation Special Account recoveries detailed in Note 12. 2. Comprises trade receivables, other receivables, service concession receivables and accrued income detailed in Note 14.

141 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

Neither past due or 6 months- Greater than Financial impaired 0-3 months 3-6 months 1 year 1 year Impairment position £m £m £m £m £m £m £m 2017 Debt securities and other loans 1,056 – – – – – 1,056 Pooled investment funds 277 – – – – – 277 Deposits with credit institutions 894 – – – – – 894 Reinsurers’ share of insurance provisions 18 – – – – – 18 Insurance debtors1 962 83 20 17 28 (15) 1,095 Investment receivables and accrued investment income 7 – – – – – 7 Trade and other receivables2 361 117 19 43 125 (27) 638 Total financial and insurance assets 3,575 200 39 60 153 (42) 3,985

1. Comprises insurance debtors, Medicare rebate and Risk Equalisation Special Account recoveries detailed in Note 12. 2. Comprises trade receivables, other receivables, service concession receivables and accrued income detailed in Note 14.

Information regarding the Expected Credit Loss (ECL) allowance by class of fnancial investments at amortised cost is shown below:

Corporate debt Government debt securities and Deposits with Trade and other Other insurance Cash and cash securities secured loans credit institutions Other loans receivables1 debtors2 Restricted assets equivalents

Gross Gross Gross Gross Gross Gross Bad debt Gross Gross carrying ECL carrying ECL carrying ECL carrying ECL carrying ECL carrying provision carrying ECL carrying ECL 2018 £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m At beginning of year 99 (1) 284 – 887 (1) 1 – 680 (37) 1,110 (15) 76 – 1,521 – Recognition and settlement 82 – 488 – (65) ––– (155) (5) 82 (2) 31 – 90 (1) Write offs –––––––– (2) ––––––– Foreign exchange and other movements 3 – 7 – (16) ––– (7) 1 11 ––– (2) – At end of year 184 (1) 779 – 806 (1) 1 – 516 (41) 1,203 (17) 107 – 1,609 (1)

1. Comprises trade receivables, other receivables, service concession receivables and accrued income detailed in Note 14. 2. Comprises insurance debtors, Medicare rebate and Risk Equalisation Special Account recoveries detailed in Note 12.

142 Strategic Report Governance Financial Statements

Offsetting financial assets and financial liabilities The following financial assets and liabilities are subject to offsetting, enforceable master netting arrangements and similar agreements:

Gross Related amounts not set off amounts of Net amounts in the balance sheet recognised of financial Gross financial assets/ amounts of liabilities set liabilities recognised off in the presented in Cash financial balance the balance Financial collateral assets sheet sheet instruments received Net amount 2018 £m £m £m £m £m £m Derivative fnancial assets 28 – 28 (17) – 11 Derivative fnancial liabilities (47) – (47) 17 17 (13) Cash and cash equivalents 2,175 (567) 1,608 – – 1,608 Trade and other receivables 577 – 577 – (17) 560 Trade and other payables (1,923) – (1,923) – – (1,923) Total 810 (567) 243 – – 243

Gross Related amounts not set off amounts of Net amounts in the balance sheet recognised of fnancial Gross fnancial assets/ amounts of liabilities set Liabilities recognised off in the presented in Cash fnancial balance the balance Financial collateral assets sheet sheet instruments received Net amount 2017 £m £m £m £m £m £m Derivative fnancial assets 47 – 47 (9) (3) 35 Derivative fnancial liabilities (19) – (19) 9 4 (6) Cash and cash equivalents 1,690 (169) 1,521 – – 1,521 Trade and other receivables 737 – 737 – (4) 733 Trade and other payables (1,930) – (1,930) – 3 (1,927) Total 525 (169) 356 – – 356

143 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

The Group also mitigates credit risk in derivative contracts by entering The Group’s main source of short term funding is via an £800m revolving into collateral agreements where appropriate. The amount of collateral credit facility which was drawn down by £170m (2017: £226m) at received or posted is shown in the table above. 31 December 2018. This facility matures in 2022. For the financial assets and liabilities subject to enforceable master The Group monitors funding risk as well as compliance with existing netting arrangements or similar arrangements above, each agreement financial covenants within the banking arrangements. There were no between the Group and the counterparty allows for net settlement of the concerns regarding bank covenant coverage in 2018 and that position relevant financial assets and liabilities where both elect to settle on net is not expected to change in the foreseeable future. basis. In the absence of such an election, financial assets and liabilities will The Group enjoys a strong liquidity position and adheres to strict liquidity be settled on a gross basis; however, each party to the master netting management policies as set by the Bupa Risk Committee as well as agreement or similar agreement will have the option to settle all such adhering to liquidity parameters for the Group’s regulated entities. amounts on a net basis in the event of default of the other party. Regular stress testing is conducted to assess liquidity risk. The contractual maturities of financial liabilities and the expected 24.4 Liquidity risk maturities of insurance liabilities including estimated interest payments Liquidity risk in brief of the Group as at 31 December are as follows: Liquidity risk is the risk that the Group will not have available funds to meet its liabilities when they fall due.

Other Provisions liabilities Other under under interest insurance insurance Trade and Subordinated bearing contracts contracts other Derivative liabilities liabilities issued issued payables1 liabilities Total £m £m £m £m £m £m £m 2018 2019 (65) (260) (2,720) (144) (1,258) (28) (4,475) 2020 (395) (29) (33) – (180) (4) (641) 2021 (45) (377) – – (163) – (585) 2022 (45) (18) – – (137) – (200) 2023 (545) (19) – – (12) (15) (591) 2024-2028 (460) (363) – – (40) – (863) After 2028 – (63) – – (5) – (68) Total (1,555) (1,129) (2,753) (144) (1,795) (47) (7,423) Carrying value in the Consolidated Statement of Financial Position (1,255) (1,055) (2,753) (144) (1,795) (47) (7,049)

2017 2018 (65) (366) (2,606) (117) (1,772) (15) (4,941) 2019 (65) (31) (31) – (12) – (139) 2020 (395) (28) – – (5) – (428) 2021 (45) (371) – – (1) – (417) 2022 (92) (18) – – (1) – (111) 2023-2027 (993) (366) – – (2) (4) (1,365) After 2027 – (80) – – (1) – (81) Total (1,655) (1,260) (2,637) (117) (1,794) (19) (7,482) Carrying value in the Consolidated Statement of Financial Position (1,303) (1,170) (2,637) (117) (1,794) (19) (7,040)

1. Comprises trade payables, other payables, accommodation bond liabilities and accruals detailed in Note 20. 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.

144 Strategic Report Governance Financial Statements

Maturity profile of financial assets The maturity profile of financial assets (excluding ECLs) as at 31 December, which are available to fund the repayment of liabilities as they crystallise, is as follows:

Corporate debt Cash Deposits Government securities Pooled and cash with credit debt and other investment equivalents institutions securities loans funds Total £m £m £m £m £m £m 2018 2019 1,609 683 156 432 62 2,942 2020 – 123 8 134 5 270 2021 – – 1 288 1 290 2022 – – 1 57 4 62 2023 – – – 147 13 160 2024-2028 – 4 62 41 75 182 After 2028 – – – 20 35 55 Total 1,609 810 228 1,119 195 3,961

2017 2018 1,521 751 116 227 40 2,655 2019 – 111 46 180 59 396 2020 – 29 23 151 2 205 2021 – – 1 76 1 78 2022 – – 1 122 3 126 2023-2027 – 3 29 11 135 178 After 2027 – – 30 43 37 110 Total 1,521 894 246 810 277 3,748

145 Bupa Annual Report 2018

Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued

Note 25: Related party transactions Related party transactions in brief These are transactions between the Group and individuals or entities related by nature of influence or control. The Group has such relationships with its key management personnel, equity accounted investments and associated pension arrangements. The disclosure of transactions with these parties in this Note enables readers to form a view about the impact of related party relationships on the Group.

All transactions with related parties are conducted on an arm’s-length (ii) Transactions in relation to the non-registered basis. pension 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 for them as such. In this respect, provision for expected claims is made of The Bupa Pension Scheme (see Note 7), maturing after 2022. on an incurred basis. These unfunded benefits are governed by The Law Debenture Pension 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 £42m (2017: £43m) of parties, as defined by IAS 24 Related Party Disclosures, other than those cash deposits (see Note 8). disclosed in this note.

(i) Transactions with key management personnel The key management personnel are the Group’s Executive and Non-Executive Directors and 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 2018 (2017: £nil) or at any time during the year. The remuneration of the Group’s Executive and Non-Executive Directors is disclosed on pages 57-67. The total remuneration of the Market Unit Chief Executive Officers is as follows:

2018 2017 £’000 £’000 Short term employee benefts 4,277 3,563 Long Term Incentive Plan awards 383 978 Post-employment benefts – 246 Total 4,660 4,787

The total remuneration of key management personnel is included in staff costs (see Note 2.3).

146 Strategic Report Governance Financial Statements

Note 26: Commitments and contingencies Commitments and contingencies in brief A commitment is future expenditure that is committed to as at 31 December 2018. 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 2018 payable as follows: but for which no provision has been made in the financial statements, amounted to £176m (2017: £208m), related to aged care facility and 2018 2017 £m £m retirement village project commitments in Australia and New Zealand and care homes in the UK. £66m (2017: £100m) related to property, Less than one year 162 173 plant and equipment, £109m (2017: £104m) related to investment Between one and fve years 531 487 property and £1m (2017: £4m) related to intangible capital expenditure. More than fve years 602 546 Total operating leases 1,295 1,206 (iii) Contingent assets and contingent liabilities The Group leases a number of properties under operating leases. The Group has contingent liabilities arising in the ordinary course of The leases typically run for a period of between 10 and 25 years, with an business, including losses which might arise from litigation, disputes, option to renew the lease after that date. Lease payments are reviewed regulatory compliance (including data protection) and interpretation of regularly in accordance with the terms and conditions of the individual tax law. It is not considered that the ultimate outcome of any contingent lease agreements. None of these leases include contingent rentals. liabilities will have a significant adverse impact on the financial condition Some of the leased properties have been sub-let by the Group. Both the of the Group. leased properties and the sub-leases expire between 2019 and 2024. An in-principle agreement has been reached with the Australian Taxation Sub-lease receipts of £1m (2017: £1m) are expected to be received during Office (ATO) to settle a number of disputed matters. Under the settlement, the next financial year. The Group has an unoccupied property provision Bupa will pay a total of approximately £88m to the ATO, refecting taxes, of £1m (2017: £2m) in respect of these leases (see Note 19). The Group interest, penalties and an offset for overpaid withholding tax, for the 2007 leases out some of its investment properties as a lessor (see Note 5 to 2018 years. for details).

147 Bupa Annual Report 2018

Financial Statements of the Company

Statement of Financial Position as at 31 December 2018 2018 2017 Note £m £m Intangible assets A 65 44 Property, plant and equipment B 19 19 Investment in subsidiaries C 200 200 Post-employment benefit net assets D 599 573 Trade and other receivables E 115 136 Current taxation asset 24 – Cash and cash equivalents 55 16 Total assets 1,077 988

Post-employment benefit net liabilities D (52) (56) Provisions for liabilities and charges F (12) (17) Deferred taxation liabilities G (84) (79) Trade and other payables H (263) (174) Total liabilities (411) (326)

Net assets 666 662

Equity Income and expenditure reserve and other reserves 666 662 Total equity 666 662

Approved by the Board of Directors and signed on its behalf on 13 March 2019 by

Roger Davis Joy Linton Chairman Chief Financial Officer

Notes A-K forms the associated notes to the Company financial statements. The Company accounting policies are aligned with those of the Group, described in Notes 1-26. The adoption of IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers on 1 January 2018 has had no impact on the Company’s financial statements.

148 Strategic Report Governance Financial Statements

Income Statement and Statement of Comprehensive Income for the year ended 31 December 2018 The loss for the financial year recorded within the accounts of the Company, The British United Provident Association Limited (Bupa), is £11m (2017: profit of £4m). 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 1,845 (2017: 1,613).

Statement of Cash Flows for the year ended 31 December 2018 2018 2017 Note £m £m Operating activities Loss before taxation expense (33) (17)

Adjustments for: Depreciation, amortisation and impairment 16 13 Other non-cash items 1 (13)

Changes in working capital and provisions: Funded pension scheme employer contributions D (8) (7) (Decrease)/increase in provisions for liabilities and charges (9) 5 Decrease/(increase) in trade and other receivables, and other assets 21 (43) Increase in trade and other payables, and other liabilities 88 101 Cash generated from operations 76 39

Cash flow from investing activities Purchase of intangible assets A (39) (29) Proceeds from sale of intangible assets – 6 Purchase of property, plant and equipment B (9) (5) Proceeds from sale of property, plant and equipment 11 1 Net cash used in investing activities (37) (27)

Net increase in cash and cash equivalents 39 12 Cash and cash equivalents at beginning of year 16 4 Cash and cash equivalents at end of year 55 16

Notes A-K forms the associated notes to the Company financial statements. The Company accounting policies are aligned with those of the Group, described in Notes 1-26.

149 Bupa Annual Report 2018

Financial Statements of the Company continued

Statement of Changes in Equity for the year ended 31 December 2018 Income and expenditure reserve and other Total reserves equity Note £m £m 2018 At beginning of year 662 662 Loss for the financial year (11) (11)

Other comprehensive income/(expense) Remeasurement gain on pension schemes D 18 18 Taxation charge on income and expense recognised directly in other comprehensive income G (3) (3) Other comprehensive income for the year, net of taxation 15 15

Total comprehensive income for the year 4 4 At end of year 666 666

2017 At beginning of year 585 585 Retained profit for the financial year 4 4

Other comprehensive income/(expense) Remeasurement gain on pension scheme D 88 88 Taxation charge on income and expense recognised directly in other comprehensive income G (15) (15) Other comprehensive income for the year, net of taxation 73 73

Total comprehensive income for the year 77 77 At end of year 662 662

Notes A-K form the associated notes to the Company financial statements. The Company accounting policies are aligned with those of the Group, described in Notes 1-26.

150 Strategic Report Governance Financial Statements

Note A: Intangible assets Intangible assets in brief Intangible assets and goodwill are non-physical assets held by the Company and consist of computer software only.

2018 2017 £m £m Cost At beginning of year 119 97 Additions 39 29 Disposals (13) (7) At end of year 145 119

Amortisation and impairment loss At beginning of year 75 69 Amortisation for year 10 7 Disposals (5) (1) At end of year 80 75

Net book value at end of year 65 44 Net book value at beginning of year 44 28

151 Bupa Annual Report 2018

Financial Statements of the Company continued

Note B: Property, plant and equipment Property, plant and equipment in brief Property, plant and equipment are the physical assets utilised by the 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.

2018 2017 Leasehold Leasehold property and property and improvements Equipment Total improvements Equipment Total £m £m £m £m £m £m Cost or valuation At beginning of year 19 54 73 19 51 70 Additions – 9 9 – 5 5 Disposals – (4) (4) – (1) (1) Other 1 (6) (5) – (1) (1) At end of year 20 53 73 19 54 73

Depreciation and impairment loss At beginning of year 14 40 54 13 36 49 Depreciation charge for year 2 4 6 1 5 6 Disposals – (4) (4) – (1) (1) Other – (2) (2) – – – At end of year 16 38 54 14 40 54

Net book value at end of year 4 15 19 5 14 19 Net book value at beginning of year 5 14 19 6 15 21

The Company had no finance leased properties in the current or prior year.

Note C: Investment in subsidiaries Investment in subsidiaries in brief A list of all investments in subsidiaries held by the Company is disclosed after the Company financial statements.

Carrying value of investment in subsidiaries Investments in subsidiary companies are carried at cost less impairment As at 31 December 2018, the Company held investments in subsidiaries in the Company’s accounts. Dividends received from subsidiaries are of £200m (2017: £200m). In accordance with Section 409 of the recognised in the Income Statement when the right to receive the Companies Act 2006 a full list of subsidiaries, associated undertakings dividend is established. and significant holdings in undertakings other than subsidiary undertakings, the registered addresses and the effective percentage of equity owned, as at 31 December 2018, is disclosed after the Company financial statements.

152 Strategic Report Governance Financial Statements

Note D: Post-employment benefits Post-employment benefits in brief The Company operates a defined benefit and a defined 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 was The Company is the sponsoring employer for The Bupa Pension Scheme, closed to new entrants from 1 October 2002. The principal defined the unfunded pension scheme and post-retirement medical benefit contribution pension scheme is The Bupa Retirement Savings Plan. scheme described in Note 7. The actuarial assumptions underlying the valuation of obligations are detailed in Note 7.2.

(i) Assets and liabilities of schemes The assets and liabilities in respect of the defined benefit funded pension scheme, unfunded pension scheme and post-retirement medical benefit scheme are as follows: Post-retirement medical Pension schemes benefit scheme Total 2018 2017 2018 2017 2018 2017 Note £m £m £m £m £m £m Present value of funded obligations (ii) (1,482) (1,599) – – (1,482) (1,599) Fair value of scheme assets (iii) 2,081 2,171 – – 2,081 2,171 Net assets of funded schemes 599 572 – – 599 572 Present value of unfunded obligations (ii) (42) (45) (10) (10) (52) (55) Net recognised assets/(liabilities) 557 527 (10) (10) 547 517

Represented on the Statement of Financial Position: Net assets 599 573 Net liabilities (52) (56) Net recognised assets 547 517

153 Bupa Annual Report 2018

Financial Statements of the Company continued

(ii) Present value of the schemes’ obligations The movement in the present value of schemes’ obligations are: Post-retirement medical Pension scheme benefit scheme Total 2018 2017 2018 2017 2018 2017 £m £m £m £m £m £m At beginning of year 1,644 1,716 10 11 1,654 1,727 Current service costs 9 10 – – 9 10 Past service costs 1 – – – 1 – Interest on obligations 41 46 – – 41 46 (Gains)/losses arising from changes to financial assumptions (120) 37 – – (120) 37 Losses/(gains) arising from changes to experience assumptions 4 (28) 1 – 5 (28) Losses/(gains) arising from changes to demographic assumptions 5 (59) – – 5 (59) Benefits paid (60) (78) (1) (1) (61) (79) At end of year 1,524 1,644 10 10 1,534 1,654

(iii) Fair value of funded scheme’s assets: The movement in the fair value of the funded scheme’s assets are:

2018 2017 £m £m At beginning of year 2,171 2,137 Interest income 54 57 Return on assets excluding interest income (92) 38 Contributions by employer 8 7 Administration expenses (2) (2) Benefits paid (58) (66) At end of year 2,081 2,171

2018 2017 The market value of the assets of the funded scheme is as follows: £m £m Pooled investment funds 866 890 Corporate bonds 768 813 Government bonds 201 169 Loans 162 158 Cash/other assets 87 140 Derivatives (3) 1 Total market value of the assets of the funded schemes 2,081 2,171

154 Strategic Report Governance Financial Statements

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

2018 2017 £m £m Current service cost 9 10 Past service cost 1 – Net interest on defined benefit liability/asset (13) (11) Administrative expenses 2 2 Total amount (credited)/charged to the Consolidated Income Statement (1) 1

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

2018 2017 £m £m Actual return less expected return on assets 92 (38) (Gain)/loss arising from changes to financial assumptions (120) 37 Loss/(gain) arising from changes to experience assumptions 5 (28) Loss/(gain) arising from changes to demographic assumptions 5 (59) Total remeasurement gains credited directly to equity (18) (88)

Note E: Trade and other receivables Trade and other receivables in brief Trade and other receivables are carried at amortised cost less impairment losses.

2018 2017 £m £m Amounts owed by subsidiary companies 97 102 Other receivables 1 20 Prepayments 17 14 Total trade and other receivables 115 136 Non-current 2 2 Current 113 134

155 Bupa Annual Report 2018

Financial Statements of the Company continued

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

Insurance Other Total £m £m £m At beginning of year 10 7 17 Charge for year 5 – 5 Released in year – (1) (1) Utilised in year – cash (4) (5) (9) At end of year 11 1 12 Non-current 8 – 8 Current 3 1 4

Note G: Deferred taxation assets and liabilities Deferred taxation assets and liabilities in brief Deferred tax is an adjustment to recognise the differences between the carrying amounts of assets and liabilities for financial reporting 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 2018 2017 2018 2017 2018 2017 £m £m £m £m £m £m Accelerated capital allowances 4 5 – – 4 5 Post-employment benefit liability – – (92) (88) (92) (88) Employee benefits (other than post-employment) 4 4 – – 4 4 Deferred taxation (before allowable netting) 8 9 (92) (88) (84) (79) Allowable netting of deferred tax (8) (9) 8 9 – – Net deferred taxation liability – – (84) (79) (84) (79)

156 Strategic Report Governance Financial Statements

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.

Movement in net deferred taxation (liabilities)/assets Recognised Recognised in in other At beginning of income comprehensive year statement income At end of year £m £m £m £m 2018 Accelerated capital allowances 5 (1) – 4 Post-employment benefit liability (88) (1) (3) (92) Employee benefits (other than post-employment) 4 – – 4 Total (79) (2) (3) (84)

2017 Accelerated capital allowances 6 (1) – 5 Post-employment benefit liability (70) (3) (15) (88) Employee benefits (other than post-employment) 4 – – 4 Provisions 1 (1) – – Total (59) (5) (15) (79)

Note H: Trade and other payables Trade and other payables in brief Trade and other payables are carried at amortised cost.

2018 2017 £m £m Amounts owed to subsidiary companies 186 96 Other payables 3 4 Accruals 74 74 Total trade and other payables 263 174 Non-current 13 7 Current 250 167

157 Bupa Annual Report 2018

Financial Statements of the Company continued

Note I: Risk management Risk management in brief The Board is responsible for identifying, evaluating and managing 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 from managing the related risks.

The Group’s risk management strategy is outlined in detail within The maximum credit risk exposure of the Company is £73m (2017: Note 24. The risks of the parent company are considered to be the £37m). The Company believes amounts owed to it by subsidiary same as those of the Group. companies carry no credit risk. The contractual maturity of financial liabilities, held by the Company, fall due within one year.

Note J: Related party transactions Related party transactions in brief These are transactions between the Company and individuals or entities related 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 The total remuneration of key management personnel is included in personnel and with its subsidiary companies (refer to Related staff costs (see Note 2.3). Undertakings on pages 160-166). (ii) Transactions in relation to the non-registered (i) Transactions with key management personnel pension arrangements The key management personnel for the Company are the same as These transactions are disclosed in Note 25. for the Group. These transactions are disclosed in Note 25.

158 Strategic Report Governance Financial Statements

(iii) Transactions and balances with subsidiary companies

Transactions during the year Balance at end of year 2018 2017 2018 2017 £m £m £m £m Income Statement Management charges received 204 244 Interest expense – – Income received – 2 Expenses paid (including rental expense of £2m (2017: £6m)) (11) (7) Dividends received 79 89

Statement of financial position Amounts owed by subsidiary companies 5 24 97 102 Amounts owed to subsidiary companies (90) (72) (186) (96) Loans to subsidiary companies – – – – Loans from subsidiary companies – – – –

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.

Note K: Commitments and contingencies Commitments and contingencies in brief A commitment is future expenditure that is committed to as at 31 December 2018. These commitments primarily consist of contracted capital expenditure. Contingent liabilities include bank loan and bond issue guarantees.

(i) Operating leases The Company has £1m of operating lease obligations (2017: £45m).

(ii) Capital Commitments Capital expenditure for the Company contracted as at 31 December 2018 but for which no provision has been made in the financial statements amounted to £1m (2017: £4m).

(iii) Contingent assets and liabilities The Company has given guarantees in respect of the £350m bond issued in 2014 by Bupa Finance plc. The Company is party to an £800m revolving credit facility. The revolving credit facility was drawn down by £170m at 31 December 2018 (2017: £226m, including outstanding letters of credit £6m). On 27 June 2018, Bupa Finance plc cancelled £6m of outstanding letters of credit that were drawn under the £800m revolving credit facility and replaced this with £5m standalone letters of credit. The Company has joint and several liability for all obligations under the agreement.

159 Bupa Annual Report 2018

Related undertakings

In compliance with Section 409 of the Companies Act 2006, disclosed Name of undertaking Share class below is a list of related undertakings of the Company as at 31 December Bupa Insurance Limited Ordinary 2018, comprising subsidiaries, joint ventures, associated undertakings and Bupa Insurance Services Limited Ordinary other significant holdings, together with the country of incorporation, Bupa International Markets Limited Ordinary registered office address, each share class held by the Company or the Bupa Investments Limited Ordinary Group and the proportion of the nominal value of the shares of that class represented by those shares. Bupa Investments Overseas Limited Ordinary, Redeemable Preference Bupa Limited Ordinary Unless otherwise stated, the related undertakings listed below are wholly Bupa Occupational Health Limited Ordinary owned by the Company with 100% of the nominal value of each share Bupa Pension Scheme Trustees Limited Ordinary class held by Group subsidiaries. Bupa Secretaries Limited Ordinary United Kingdom Bupa Trustees Limited Ordinary Bupa UK Foundation Guarantee Membership Interest Name of undertaking Share class Bupa Wellness Group Limited Ordinary 1 Angel Court, London EC2R 7HJ Andrew Greenwood Ltd Ordinary Calverguild Limited Ordinary ANS 2003 Limited Ordinary Cranbrook Dental Practice Limited Ordinary ANS Limited Ordinary David Row Limited Ordinary Dental Confidence Limited Ordinary Aqua Dental Spa Limited Ordinary Ebbgate Nursing Homes (London) Limited Ordinary-A Bede Village Management Limited Ordinary Ebbgate Nursing Homes Limited Ordinary Belmont Care Limited Ordinary Health Dialog UK Limited Ordinary BHS (Holdings) 2006 Limited Ordinary In Store Dental Limited Ordinary Bridge Health Investments Limited Ordinary K R Postlethwaite Ltd Ordinary Bupa Care Homes (AKW) Limited Ordinary Lab 53 Limited Ordinary Bupa Care Homes (ANS) Limited Ordinary, Special Occupational Health Care Limited Ordinary, Redeemable Preference Bupa Care Homes (Bedfordshire) Limited Ordinary Paul Coulthard Ltd Ordinary Bupa Care Homes (BNH) Limited Ordinary Bupa Care Homes (BNHP) Limited Ordinary Perlan Limited Ordinary Bupa Care Homes (CFCHomes) Limited Ordinary Personal Effectiveness Centre Limited Ordinary Bupa Care Homes (CFG) plc Ordinary Plainprime Limited Ordinary Bupa Care Homes (CFHCare) Limited Ordinary, Redeemable Preference Richmond Care Villages (Property) Limited Ordinary Bupa Care Homes (Developments) Limited Ordinary Richmond Care Villages Holdings Limited Ordinary Bupa Care Homes (GL) Limited Ordinary Richmond Coventry Limited Ordinary Bupa Care Homes (HH Bradford) Limited Ordinary Richmond Letcombe Limited Ordinary Bupa Care Homes (HH Hull) Limited Ordinary Richmond Nantwich Developments Limited Ordinary Bupa Care Homes (HH ) Limited Ordinary Richmond Nantwich Limited Ordinary Bupa Care Homes (HH Northumberland) Limited Ordinary Richmond Nantwich Properties Limited Ordinary Bupa Care Homes (HH Scunthorpe) Limited Ordinary Richmond Northampton Limited Ordinary Bupa Care Homes (HH) Limited Ordinary Richmond Northampton Management Limited Ordinary Bupa Care Homes (Holdings) Limited Ordinary Richmond Painswick Management Company Limited Ordinary Bupa Care Homes (Partnerships) Limited Ordinary Richmond Villages Operations Limited Ordinary Bupa Care Homes (PT Lindsay Prop) Limited Ordinary Stephen E B Jones Ltd Ordinary Bupa Care Homes (PT Lindsay) Limited Ordinary Store Dental Care Limited Ordinary Bupa Care Homes (PT Links Prop) Limited Ordinary The Smile Centres Limited Ordinary Bupa Care Homes (PT Links) Limited Ordinary Ultimate Smile Spa Ltd Ordinary Bupa Care Homes (PT) Limited Ordinary Watertight Investments Limited Ordinary Bupa Care Homes Investments (Holdings) Limited Ordinary Bupa Dental Care, Vantage Office Park, Old Gloucester Road, Hambrook, Bristol, BS16 1GW Bupa Care Services Limited Ordinary A4 Health Group Limited Ordinary Bupa Dental Services Limited Ordinary Aesthetic Dental Laboratory Limited Ordinary Bupa Europe Investments Limited Ordinary Apex Dental Care Limited Ordinary Bupa Europe Limited Ordinary Apex Holding Limited Ordinary Bupa Finance plc Ordinary Avsan Cove Limited Ordinary Bupa Financial Investments Limited Ordinary Avsan Dental Edinburgh Limited Ordinary Bupa Global Holdings Limited Ordinary Avsan Ferryburn Limited Ordinary Bupa Health at Work Limited Ordinary Avsan Fife Limited Ordinary Bupa Healthcare Services Limited Ordinary

160 Strategic Report Governance Financial Statements

United Kingdom continued United Kingdom continued Name of undertaking Share class Name of undertaking Share class Bupa Dental Care, Vantage Office Park, Old Gloucester Road, Hambrook, JDH Holdings Limited Ordinary Bristol, BS16 1GW continued Kidson Orthodontics Limited Ordinary Avsan Fleet Limited Ordinary King Lane Dental Care Limited Ordinary Avsan Gloucester Limited Ordinary Lawrence Street Dental Practice Limited Ordinary Avsan Halstead Limited Ordinary Linden Dental Centre Limited Ordinary Avsan Holdings Limited Ordinary Mark Fazakerley (VHO) Limited Ordinary Avsan Knebworth Limited Ordinary Metrodental Limited Ordinary Avsan Kseat Limited Ordinary Milehouse Dental Care Limited Ordinary Avsan Queenscross Limited Ordinary Mojo-D Limited Ordinary Avsan Queensroad Limited Ordinary Morrison Shenfine Holdings Ltd Ordinary A Avsan Visage Limited Ordinary Nadir Khan Surgical Limited Ordinary B Dental Limited Ordinary Nigel Reynolds Limited Ordinary BASDAC (2011) LLP Partnership Interest North Devon Orthodontic Centre Limited Ordinary BE White Ltd Ordinary North Lakeland Ltd Ordinary Caring Dentistry Ltd Ordinary Oasis Dental Care (Central) Holdings Limited Ordinary Ceracryl Laboratories Limited Ordinary Oasis Dental Care (Central) Limited Ordinary Cheshire Cat Orthodontics Limited Ordinary Oasis Dental Care (Southern) Holdings Limited Ordinary B, Ordinary C, Clive Zane Limited Ordinary Ordinary D, Ordinary E Colchester Dental Referral Centre Limited Ordinary Oasis Dental Care (Southern) Limited Ordinary Creative Designs Dental Laboratory Limited Ordinary Oasis Dental Care Limited Ordinary Croft Dental Care Limited Ordinary Oasis Healthcare Bidco Limited Ordinary Den Dental Group Practice LLP Partnership Interest A Ordinary, B Ordinary, Dencraft (South Yorkshire) Limited Ordinary Oasis Healthcare International Limited Deferred, Preference Dental Excellence – Harewood Practice LLP Partnership Interest Oasis Healthcare Limited Ordinary Dentalign Colwyn Bay Ltd Ordinary, Redeemable Oasis Healthcare Midco 1 Limited Ordinary Preference Oasis Healthcare Midco 2 Limited Ordinary Dentalign Eastbourne Ltd Ordinary Oral Hygiene Innovations Limited Ordinary Dentalign Orthodontics Limited Ordinary Oral Implantology Limited Ordinary Dentalign Orthodontics LLP Partnership Interest Ortho 2008 Limited Ordinary Dentalign Wrexham Ltd Ordinary Orthoscene Limited Ordinary Derwent House Orthodontics Limited Ordinary A Oswestry Dental Laboratory Limited Ordinary Devon Smiles Limited Ordinary Pembury TM Limited Ordinary Deysbrook Dental Surgery Limited Ordinary Peter Baldwin (VHO) Limited Ordinary Dr J.D. Hull & Associates (Physiotherapy & Osteopathy) Ltd Ordinary Priors Croft Dental Practice Limited Ordinary Duke Street Capital Oasis Acquisitions Limited Ordinary Private Dental Services Ltd Ordinary Duke Street Capital Oasis Midco Limited Ordinary Private Dental Services Ltd Ordinary Duke Street Capital Oasis Orthodontics Holdings Limited Ordinary, Preference Quantum Ortho Limited Ordinary Duke Street Capital Oasis Orthodontics Limited Ordinary, Preference Quest Dental Care LLP Partnership Interest Eckington Dental Practice Limited Ordinary Richley Dental Ceramics Limited Ordinary Eurodontic Limited Ordinary Rise Park Dental Practice Limited Ordinary A, Ordinary B FACE (Facial Aesthetic Centres of Excellence) Limited Ordinary Roberts-Harry Clinic Ltd Ordinary Fairfield Dental Surgery Limited Ordinary Smile Dental Care Ltd Ordinary G & M Moynes Ltd Ordinary Smile Lincs Limited Ordinary Goodteeth Dental Surgeries Limited Ordinary Steeple Grange Smiles Limited Ordinary Grosvenor Orthodontic Clinic (Beckenham) Limited A-Ordinary Stob Dearg Limited Ordinary Harbour Way Surgery Limited Ordinary Stop the Clock Dental Care Limited Ordinary Highland Dental Care Limited Ordinary Synergy Ceramics Ltd Ordinary Highwoods and St Johns Limited Ordinary TC Patel Limited Ordinary Hospital Lane Dental Clinic Limited Ordinary TDK Dental Limited Ordinary A J & M Dental Care Ltd Ordinary The Adams and Lee Dental Practice Ltd Ordinary J A Jordan & Associates Limited Ordinary The Dental Solutions Centre Ltd Ordinary J.J. Thompson (Orthodontic Appliances) Limited Ordinary The Exeter Dental Centre Limited Ordinary James Taylor and Partners Limited Ordinary The Oasis Healthcare Group Limited A Ordinary, B Ordinary, C Ordinary, Preference

161 Bupa Annual Report 2018

Related undertakings continued

United Kingdom continued Australia continued Name of undertaking Share class Name of undertaking Share class The Spire Halifax Limited Ordinary Bupa Aged Care Australia Pty Ltd Ordinary The Tutbury Dental Practice Limited Ordinary Bupa Aged Care Holdings Pty Ltd Ordinary Tidge and Lou Limited Ordinary Bupa Aged Care Property No.2 Trust Trust Interest Tooth Fixer Limited Ordinary Bupa Aged Care Property No.3 Trust Trust Interest Total Orthodontics Limited Ordinary Bupa Aged Care Property No.3A Trust Trust Interest Victoria Oral Clinic Limited Ordinary Bupa Aged Care Property Trust Trust Interest Victoria Reese Dental Practice Limited Ordinary Bupa ANZ Finance Pty Ltd Ordinary Wessington Way Limited Ordinary Bupa ANZ Group Pty Ltd Ordinary Wimborne Total Dental Care Limited Ordinary Bupa ANZ Healthcare Holdings Pty Ltd Ordinary Windmill Dental Surgery Limited Ordinary Bupa ANZ Insurance Pty Ltd Ordinary, A Preference Windslade Limited Ordinary Bupa ANZ Property 1 and 2 Limited Ordinary Winning Smiles (Gillingham) Limited Ordinary Bupa ANZ Property 3 and 3A Pty Ltd Ordinary Wylde Green Orthodontics LLP Partnership Interest Bupa Care Villages Australia Pty Ltd Ordinary Wylye Valley Dentistry Limited Ordinary Bupa Dental Corporation Limited Ordinary Xeon Smiles UK Limited Ordinary Bupa Disability Services Pty Ltd Ordinary Bridge House, Outwood Lane, Horsforth, Leeds, LS18 4UP Bupa Foundation (Australia) Limited Guarantee Membership Bupa Care Homes Group Limited (in Liquidation) Ordinary Interest Bupa Health Services Pty Ltd Ordinary Cromwell Hospital, Cromwell Road, London, SW5 0TU Cromwell Health Group Limited A Ordinary Bupa HI Holdings Pty Ltd Ordinary Medical Services International Limited Ordinary Bupa HI Pty Ltd Ordinary Bupa Innovations (ANZ) Pty Ltd Ordinary C/O Shelley Stock Hutter Llp 1st Floor 7 – 10 Chandos Street London W1G 9DQ Luke Barnett Clinic Limited Ordinary Bupa Medical (GP) Pty Ltd Ordinary Luke Barnett Limited Ordinary Bupa Medical Services Pty Limited Ordinary Bupa Telehealth Pty Ltd Ordinary Oasis Healthcare Support Centre, Building E, Vantage Office Park, Old Gloucester Road, Hambrook, Bristol, BS16 1GW Bupa Wellness Pty Limited Ordinary Oasis Group EBT Trustee Limited Ordinary DC Holdings WA Pty Ltd Ordinary 39 Victoria Road, Glasgow, G78 1NQ Dental Care Network Pty Ltd Ordinary Bupa Care Homes (Carrick) Limited Ordinary Dental Corporation Australia Fair Pty Ltd Ordinary 13 Queens Road, Aberdeen, Aberdeenshire, AB15 4YL Dental Corporation Cox Pty Ltd Ordinary Christopher F. Stafford Holdings Limited Ordinary Dental Corporation Gerber Pty Ltd Ordinary Hillington Park Dental Practice Limited Ordinary Dental Corporation Holdings Limited Ordinary Martin and Martin Dental Care Limited Ordinary Dental Corporation Levas Pty.Ltd. Ordinary MFM Community Limited Ordinary Dental Corporation Petrie Pty.Ltd. Ordinary Partick Dental Ltd. Ordinary Dental Corporation Pty Ltd Ordinary Mind Your Business (Ni) Ltd, 1 Elmfield Avenue, Warrenpoint, Newry, Dr Chris Hardwicke Pty.Ltd. Ordinary County Down, BT34 3HQ, Northern Ireland Gerber Dental Group Pty Ltd Ordinary Belfast Orthodontic Clinic Ltd Ordinary Larry Benge Pty Limited Ordinary Blueapple Dental and Implant Team Limited Ordinary Scott Petrie (Dental) Pty Ltd Ordinary, Class E, Class F Cranmore Excellence in Dentistry Limited Ordinary DE (Belmont Road) Ltd Ordinary Bermuda Fortwilliam and Ballymena Specialist Dental Clinics Limited Ordinary Name of undertaking Share class Lisa Creaven Limited Ordinary Crawford House, 4th Floor, 50 Cedar Avenue, Hamilton, HM11 Smiles Dental Practices North Limited Ordinary Amedex Insurance Company (Bermuda) Limited Ordinary

Australia Bolivia Name of undertaking Share class Name of undertaking Share class Level 16, 33 Exhibition Street, VIC 3000 Guapomo Street 2005, Spazio Building, 1st Floor, Offices 201-202-2013, Australia Fair Dental Care Pty Ltd Ordinary Santa Cruz de la Sierra Bupa Aged Care Australasia Pty Limited Ordinary, Preference Bupa Insurance (Bolivia) S.A Ordinary Bupa Aged Care Australia Holdings Pty Ltd Ordinary

162 Strategic Report Governance Financial Statements

Brazil Dominican Republic Name of undertaking Share class Name of undertaking Share class Av. das Nações Unidas, 12,901, Unidade 901, Torre Oeste, Bloco C, Av. Gustavo Melia Ricart, No. 81, Terre Profesional Biltmore II, Suite 1007, Centro Empresarial Nações Unidas, Brooklin Paulista, São Paulo, SP Piantini, Santo Domingo Personal System Serviços Médicos e Odontológicos Ltda Quotas Amedex Medical Group, S.R.L. Quotas Av. Sagitário, 138, 19º andar –, (conjuntos 1905, 1906, 1907, 1908, 1913, 1914) e Av. Winston Churchill, corner with Rafael Augusto Sanchez, Plaza Acropolis, 20º andar, Condomínio Alpha Square Torre 2, The City, Alphaville, Barueri, SP Apt. P2-D, Santo Domingo Care Plus Medicina Assistencial Ltda Quotas Bupa Dominicana, S.A. Ordinary Care Plus Negócios Em Saúde Ltda. Quotas Ecuador British Virgin Islands Name of undertaking Share class Name of undertaking Share class Av. Republica de El Salvador N34-229, 4th Floor, Quito Vistra Corporate Services Centre, Wickhams Cay II, Road Town, Tortola, Bupa Ecuador S.A. Compania de Seguros Capital Stock VG1110, Virgin Islands, British Altai Investments Limited Ordinary Egypt Berkshire Group Limited Ordinary Name of undertaking Share class Dynamic People Group Limited Ordinary Building 55, Street 18, Maadi, Cairo Bupa Egypt Insurance S.A.E. Ordinary Chile Bupa Egypt Services LLC Ordinary Name of undertaking Share class Av. Departamental N° 01455, Comuna La Florida, Region Metropolitana Gibraltar Inmobiliaria Y Constructora CBS S.A. Ordinary Name of undertaking Share class Avenida Departamental 1455, comuna La Florida 5-9 Main Street Bupa Servicios Clínicos S.A. Ordinary Bupa Malta Investments No. 1 Limited Ordinary Servicios De Personal Clinico CBS Dos S.A. Ordinary Bupa Malta Investments No. 2 Limited Ordinary Cerro Colorado N° 5420, Piso 11, Comuna Las Condes, Region Metropolitana Bupa Chile S.A. Ordinary Bupa Compania de Seguros de Vida S.A. Ordinary Guatemala Name of undertaking Share class Grupo Bupa Sanitas Chile Uno, SpA Ordinary Quinta avenida número cinco guión cincuenta y cinco, Zona catorce de esta ciudad, Inversiones Clinicas CBS S.A. Ordinary Edificio Europlaza World Business Center, Torre III, undécimo nivel, área Rivas N°694, Comuna San Joaquin, Region Metropolitana corporativa número un mil Bupa Inversiones Latam S.A. Ordinary Bupa Guatemala, Compania de Seguros, S.A. Ordinary

China Guernsey Name of undertaking Share class Name of undertaking Share class Room 07-08, 3rd floor, Building 1, 21st Century Plaza, 40A Liangmaqiao Road, 1st & 2nd Floors, Elizabeth House, Les Ruettes Brayes, St Peter Port, GY1 1EW Chaoyang District, , 100125 Bupa Guernsey No 2 Limited Ordinary Bupa Consulting (Beijing) Co. Ltd. Ordinary PO Box 34, St Martin’s House, Le Bordage, St Peter Port, Guernsey, Unit 03, 13/F, No.604 RenMin North Road, Yuexiu District, GY1 4AU, Channel Islands Guangzhou Bupa Hospital Management Company Limited Ordinary Bupa Holdings (Guernsey) Limited Ordinary Unit 305A -305, 3/F, GT Land Autumn Plaza, No.11, 13 ZhuJiang East Road, Bupa LeaseCo Holdings Limited Ordinary ZhuJiang New Town, Tianhe District, Guangdong Province Bupa LeaseCo. (Guernsey) Limited Ordinary Guangzhou Bupa Quality HealthCare General Outpatient UK Care No. 1 Limited Ordinary Department Company Limited Ordinary

Jersey Denmark Name of undertaking Share class Name of undertaking Share class IFC 5, St Helier, JE1 1ST Palægade 8, 1261 Copenhagen K Bupa Holdings (Jersey) Limited Ordinary Bupa Denmark Services A/S Ordinary

163 Bupa Annual Report 2018

Related undertakings continued

Hong Kong Panama Name of undertaking Share class Name of undertaking Share class 18/F Berkshire House, 25 Westlands Road, Quarry Bay Prime Time Tower, Floor 25, Office 25 b La Rotonda Ave, Costa del Este Bupa (Asia) Limited Ordinary Bupa Panama S.A. Ordinary Bupa International Limited Ordinary Bupa Limited Ordinary Peru 3rd Floor, Skyline Tower, 39 Wang Kwong Road, Kowloon Bay, Kowloon Name of undertaking Share class Allied Medical Practices Guild Limited Ordinary Av. Guardia Civil N° 664, Comuna San Isidro, Region Lima Case Specialist Limited Ordinary Integramedica Peru S.A.C. Ordinary DB Health Services Limited Ordinary Great Option Limited Ordinary Poland Jadeast Limited Ordinary Name of undertaking Share class Jadefairs International Limited Ordinary 35-068 Rzeszow, Stanislawa Jablonskiego, 2/4 Street Jadison Investment Limited Ordinary Medicor Sp. z.o.o. Ordinary Jadway International Limited Ordinary Broniewskiego 89 Street, 01-876, Warsaw Marvellous Way Limited Ordinary Centrum Edukacji Medycznej CEMED Sp. z.o.o. Ordinary Megafaith International Limited Ordinary (In Liquidation) Quality HealthCare Dental Services Limited Ordinary Czapliniecka 93/95, 97-400, Belchatow Quality HealthCare Medical Centre Limited Ordinary Megamed Sp. z.o.o. Ordinary Quality HealthCare Medical Services Limited Ordinary Grunwaldzka 16/18 Street, 60-780, Poznan Quality HealthCare Nursing Agency Limited Ordinary Diagnostic – Med. Centrum Diagnostyki Radiologicznej Ordinary Quality HealthCare Physiotherapy Services Limited Ordinary Sp. z.o.o. Quality HealthCare Professional Services Limited Ordinary Jagiellonska 26, 10-273, Olsztyn Quality HealthCare Psychological Services Limited Ordinary Poluk Sp. z.o.o. Ordinary Room 901B-03A, 9th Floor, Skyline Tower, 39 Wang Kwong Road, Kuznicka 1 Street, 72-010, Police Kowloon Bay, Kowloon Medika Uslugi Medyczne Sp. z.o.o. Ordinary Quality Healthcare TPA Services Limited Ordinary Pory 78 Street, 02-757, Warsaw Pory 78 Sp. z.o.o. Ordinary Macau Sport Medica S.A. Ordinary-A, Ordinary-B, Ordinary-C, Ordinary-D, Name of undertaking Share class Ordinary-E, Ordinary-F, Rua De Xangai No. 175 Edif., Associacao Comercial De Macau, 11 Andar, K Ordinary-G, Ordinary-I Quality EAP (Macau) Limited Ordinary ul. Elblaska 135, 80-718, Gdansk Quality Healthcare Medical Services (Macau) Limited Ordinary Centrum Opieki Medycznej Comed Sp. z.o.o. Ordinary ul. Gen. Augusta Emila Fieldorfa “Nila” 40, Warszawa, 04-125 Mexico Magodent Sp. z.o.o. Ordinary Name of undertaking Share class ul. Postepu 21 C Street, 02-676, Warsaw Montes Urales, No. 745, Piso 1, Colonia Lomas de Chapultepec I Seccion, Centrum Edukacji Medycznej Sp. z.o.o. Ordinary C.P. 11000, Mexico City Elba 1 Sp. z.o.o. Ordinary Bupa Mexico, Compania de Seguros, S.A. de C.V. Capital Stock Series E (fixed), Elblaska Sp. z.o.o. Ordinary Capital Stock Series M (variable) Lux Med Lodz Sp. z.o.o. (In Liquidation) Ordinary Bupa Servicios Administrativos de Salud, S. de R.L. de C.V. Ordinary LUX MED Sp. z.o.o. Ordinary Bupa Servicios de Evaluacion Medica, S. de R.L. de C.V. Ordinary LUX-MED Investment S.A. Series A, Series B, Series C Bupa Servicios Ejecutivos de Salud, S. de R.L. de C.V. Ordinary ul. Stefana Batorego 17/19, 87-100, Torun Tomograf Sp. z.o.o. Ordinary Wladyslawa Broniewsiego 48, 43-300, Bielsko – Biala New Zealand Nzoz Ultramedic Centrum Medyzcne Sp. z.o.o. Ordinary Name of undertaking Share class Bupa House, Level 2, 109 Carlton Gore Road, Newmarket, Auckland, 1023 Bupa Care Services NZ Limited Ordinary Bupa Retirement Villages Limited Ordinary Level 4, 1 Walton Leigh Avenue, Porirua, 5022 Dental Corporation (NZ) Limited Ordinary

164 Strategic Report Governance Financial Statements

Republic of Ireland United States Name of undertaking Share class Name of undertaking Share class 25-28 North Wall Quay, Dublin 1, Ireland 17901 Old Cutler Road, Suite 400, Palmetto Bay FL 33157 Bupa Global Designated Activity Company Ordinary Bupa Insurance Company Capital Stock 1st Floor, 9 Exchange Place, I.F.C.S, Ireland Bupa Investment Corporation, Inc. Capital Stock Hugh Bradley Limited Ordinary Bupa U.S. Holdings, Inc. Common Stock Oasis Healthcare Holdings Ireland Limited Ordinary Bupa Worldwide Corporation Capital Stock Xeon Dental Services Limited Ordinary U.S.A. Medical Services Corporation Capital Stock

Saint Kitts and Nevis The related undertakings listed below are not wholly owned by the Name of undertaking Share class Company. The proportion of the nominal value of each share class held Amory Building, Victoria Road, Basseterre, St. Kitts indirectly by the Company is shown below. Amedex Services Ltd. (St Kitts) Capital Stock United Kingdom Name of undertaking Share class Actual % held Singapore 1 Angel Court, London, EC2R 7HJ Name of undertaking Share class Fulford Grange Medical Centre Limited 'A' Ordinary 100.00 600, North Bridge Road, #05-01 Parkview Square, 188778 Ground Floor, Bury House, 31 Bury Street, London, EC3A 5AR Bupa Singapore Holdings Pte Ltd Ordinary Healthbox Europe 1 LP Partnership 37.00 Interest Spain Swan Court, Waterman’s Business Park , Kingsbury Crescent, Staines, Surrey, England, TW18 3BA Name of undertaking Share class Healthcode Limited A Ordinary 100.00 Avda Marcelo Celayeta, 144 – Pamplona (31014) E Ordinary 20.00 Sanitas Mayores Navarra S.L. Ordinary Avenida Generalitat Valenciana no 50, Valencia Especializada y Primaria L'Horta-Manises, S.A.U. Ordinary Australia Name of undertaking Share class Actual % held c/Eguskiaguirre no.8, 48902, Baracaldo, Bilbao Level 16, 33 Exhibition Street, Melbourne VIC 3000 Sanitas Mayores Pais Vasco S.A. Ordinary Mobile Dental Pty Ltd Ordinary 49.00 Calle Ribera Del Loira, 52, 28042, Madrid Level 3, 60-62 Clarence Street, NSW 2000 Clinica Londres, S.L. Ordinary Whitecoat Holdings Pty Ltd Ordinary 18.15 Elegimosalud S.L.U Ordinary Whitecoat Operating Pty Ltd Ordinary 100.00 Grupo Bupa Sanitas S.L.U. Ordinary Investigacion Y Promocion Sanitaria S.A. Ordinary Sanitas Emision S.L.U. Ordinary Bahrain Sanitas Holding, S.L.U. Ordinary Name of undertaking Share class Actual % held Sanitas Mayores S.L. Ordinary Flat 207, Building No. 743, Road 831, Block 408, Sanabis Sanitas Nuevos Negocios S.L.U. Ordinary Bupa Middle East Holdings Two W.L.L. Ordinary 75.00 Sanitas S.L. de Diversificacion S.U. Ordinary Sanitas, S.A. de Hospitales S.U. Ordinary Chile Name of undertaking Share class Actual % held Sweden Anabaena N° 336, Comuna Viña del Mar, Region Valparaiso Clinica Renaca S.A. Ordinary 100.00 Name of undertaking Share class Desarrollo E Inversiones Medicas S.A. Ordinary 96.97 Box 27093, 102 51, Stockholm LMG Forsakrings AB Ordinary Promotora De Salud S.A. Ordinary 67.03 Sociedad Medica Imageneologia Clinica Renaca Limitada Social Rights 80.00 Augusto D’halmar N° 1369, Comuna Arica, Region Arica y Parinacota United Arab Emirates Centro De Diagostico Avanzado San Jose S.A. Ordinary 100.00 Name of undertaking Share class Av Libertador Bernardo O’Higgins N° 654, Comuna Santiago, Region Metropolitana Unit C1204, Level 12, Burj Daman, DIFC, PO Box 507019, Dubai Examenes De Laboratorio S.A. Ordinary 100.00 Bupa Global Middle East (DIFC) Limited Ordinary Integramedica S.A. Ordinary 99.99 Av. Vicuña Mackenna N° 7255, Comuna La Florida, Region Metropolitana Sonorad II S.A. Ordinary 100.00

165 Bupa Annual Report 2018

Related undertakings continued

Chile Poland Name of undertaking Share class Actual % held Name of undertaking Share class Actual % held Baquedano N° 298, Comuna Antofagasta, Region Antofagasta Al. Niepodleglosci 18, 02-653, Warsaw Sociedad Medico Quirurgica De Antofagasta S.A. Ordinary 100.00 Endoterapia PFG Sp. z.o.o. Ordinary 40.00 Bernarda Morin N° 495, Comuna Providencia, Region Metropolitana Marszalkowska 99 A lok. 5B Street, 00-693, Warsaw Recaumed S.A. Ordinary 58.40 Centrum Edukacyjne Medycyny Sportowej Sp. z.o.o. Ordinary 50.00 Cerro Colorado N° 5420, Piso 4,5,7, Comuna Las Condes, Region Metropolitana Porebskiego 9 Street, 81-185, Gdynia Isapre Cruz Blanca S.A. Ordinary 99.69 Niepubliczny Zaklad Opieki Zdrowotnej Przychodnia Ordinary 88.15 Lekarska "POGORZE" Sp. z.o.o. Coyancura N° 2270, Oficina 910, Comuna Providencia, Region Metropolitana Bupa Servicios de Salud SpA Ordinary 100.00 ul. Dluga 43, 05-510 Konstancin Jeziorna Lux Med Tabita Sp. z.o.o. Ordinary 88.00 Dr. Juan Noe N° 1370, Comuna Arica, Region Arica y Parinacota Corporacion Medica de Arica S.A. Ordinary 68.97 Sociedad De Inversiones Pacasbra S.A. Ordinary 100.00 Saudi Arabia Las Bellotas N° 200, Comuna Providencia, Region Metropolitana Name of undertaking Share class Actual % held Sonorad I S.A. Ordinary 100.00 Al-Khalidiyah-Nour Al Ehsan 3538, Unit 1 Jeddah 7505-23423, P.O. Box 23807, Jeddah, 21436 Manuel Antonio Matta N° 1868, Comuna Antofagasta, Region Antofagasta Bupa Arabia For Cooperative Insurance Company Ordinary 39.25 Inmobiliaria Centro Medico Antofagasta S.A. Ordinary 99.99 Prince Sultan St, Al Mohammediyah Dist., PO Box 260, Jeddah, 21411 Inmobiliaria Somequi S.A. Ordinary 100.00 Nazer Bupa Medical Equipment Company Limited Ordinary 50.00 Manuel Antonio Matta N° 1945, Comuna Antofagasta, Region Antofagasta Centro Medico Antofagasta S.A. Ordinary 100.00 Inversiones Clinicas Pukara S.A. Ordinary 85.88 Spain Servicios Y Abastecimiento A Clinicas S.A. Ordinary 100.00 Name of undertaking Share class Actual % held Sociedad De Resonancia Magnetica Del Norte S.A. Ordinary 100.00 Avenida República Argentina, Número 6, Entreplanta, Seville Sociedad Instituto De Cardiologia Del Norte Limitada Social Rights 50.00 Clinicas Ginemed S.L. Ordinary 70.00 Pedro Aguirre Cerda N° 843, Comuna Arica, Region Arica y Parinacota Calle Arenal Numero 22, 3 Derecha, Madrid Centro De Imagenes Medicas Avanzadas San Jose S.A. Ordinary 70.00 Foren Project S.L. Ordinary 20.00 Calle Ribera Del Loira, 52, 28042, Madrid Fundacion Sanitas Contribution 100.00 Hong Kong Sahna-E, Servicios Integrales de Salud, S.A. de Seguros y Ordinary 100.00 Name of undertaking Share class Actual % held Reaseguros (Unipersonal) 3rd Floor, Skyline Tower, 39 Wang Kwong Road, Kowloon Bay, Kowloon Sanitas S.A. de Seguros Ordinary 99.91 Alpha Medical MRI (TST) Limited Ordinary 65.00 Central Medical Diagnostic Centre Limited Ordinary 74.49 United States of America Central MRI Centre Limited Ordinary 100.00 Name of undertaking Share class Actual % held Central PET/CT Scan Centre Limited Ordinary 100.00 One Radnor Corporate Center, Suite 100, Radnor, PA 19087 Highway to Health, Inc Ordinary 49.00 India HTH Re, Ltd Ordinary 100.00 Name of undertaking Share class Actual % held HTH Worldwide, LLC Ordinary 100.00 Max House, 1, Dr Jha Marg, Okhla, , 110020 Worldwide Insurance Services, LLC Ordinary 100.00 Max Bupa Health Insurance Company Limited Ordinary 49.00

Peru Name of undertaking Share class Actual % held Av. Guardia Civil N° 664, Comuna San Isidro, Region Lima Anglolab S.A Ordinary A 100.00 MediPeru S.A.C Ordinary 99.97

166 Strategic Report Governance Financial Statements

Five-year financial summary

Five-year financial summary in brief The five-year financial summary provides a five-year time summary in order to better understand trends.

2018 2017 2016 2015 2014 £m £m £m £m £m Revenue – segmental analysis Australia and New Zealand 4,656 4,927 4,360 3,648 3,760 Europe and Latin America 3,041 2,869 2,475 2,027 2,036 United Kingdom 2,537 2,807 2,786 2,858 2,711 International Markets 1,626 1,647 1,428 1,296 1,272 Net reclassifications to other expenses or financial income and expenses (1) (1) (1) (1) (1) Consolidated total revenues 11,859 12,249 11,048 9,828 9,778

Claims and expenses Operating expenses (including claims) (11,224) (11,505) (10,436) (9,250) (9,144) Impairment of goodwill (35) (1) – (114) – Impairment of other intangible assets arising on business combinations (4) (16) (21) – (1) Other income and charges (53) (99) (39) (41) 13 Total claims and expenses (11,316) (11,621) (10,496) (9,405) (9,132)

Profit before financial income and expenses 543 628 552 423 646 Financial income and expenses (41) (8) (29) (49) (37) Profit before taxation expense 502 620 523 374 609

Taxation expense (190) (134) (136) (96) (86)

Profit for the financial year 312 486 387 278 523

Attributable to: Bupa 306 482 382 278 516 Non-controlling interests 6 4 5 – 7 Profit for the financial year 312 486 387 278 523

Equity Property revaluation reserve 700 796 706 632 708 Income and expense reserve 6,306 5,882 5,230 4,798 4,591 Cash flow hedge reserve 20 22 15 21 20 Foreign exchange translation reserve 464 558 595 (97) 71 Equity attributable to Bupa 7,490 7,258 6,546 5,354 5,390 Equity attributable to non-controlling interests 20 30 31 70 78 Total equity 7,510 7,288 6,577 5,424 5,468

167 Bupa Annual Report 2018

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 12 Service Concession Arrangements Operations IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding IFRS 7 Financial Instruments: Disclosures Requirements and their Interaction IFRS 8 Operating Segments IFRIC 16 Hedges of a Net Investment in a Foreign Operation IFRS 9 Financial Instruments IFRIC 21 Levies IFRS 10 Consolidated Financial Statements IFRIC 22 Foreign Currency Transactions and Advanced Consideration IFRS 11 Joint Arrangements SIC 15 Operating Leases – Incentives IFRS 12 Disclosure of Interests in Other Entities SIC 27 Evaluating the Substance of Transactions Involving the Legal IFRS 13 Fair Value Measurement Form of a Lease IFRS 15 Revenue from Contracts with Customers SIC 29 Service Concession Arrangements: Disclosures SIC 32 Intangible Assets – Website Costs International Accounting Standards (IAS) IAS 1 Presentation of Financial Statements IAS 2 Inventories IAS 7 Statement of Cash Flows IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors IAS 10 Events After the Reporting Date IAS 12 Income Taxes IAS 16 Property, Plant and Equipment IAS 17 Leases IAS 19 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 Separate Financial Statements IAS 28 Investments in Associates and Joint Ventures IAS 32 Financial Instruments: Presentation IAS 36 Impairment of Assets IAS 37 Provisions, Contingent Liabilities and Contingent Assets IAS 38 Intangible Assets IAS 40 Investment Property

168 Designed and produced by Friend www.friendstudio.com Print Pureprint Group This report has been printed on Image Indigo 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. Bupa Registered office For further copies of this document Registered in England No. 432511. [email protected]

1 Angel Court Annual Report 2018 Corporate affairs London EC2R 7HJ ‘Bupa’ and our logo (as displayed [email protected] on this page) are registered trade marks of The British United Provident The British United Provident Association Limited. Association Limited is a company limited by guarantee.

The awards and certifications we achieved in 2018

AMY Award Seven Stars Awards Cover Magazine Health for promotion of Awards and Insurance sports, Regional COVER Customer Awards Government of Madrid Care Awards

‘Inclusive Sports ‘Best Private Medical ‘Best Healthcare Provider’ ‘Best Digital Team’ programme’ Insurance’ and ‘Best Group PMI’ Bupa (Australia) Sanitas Foundation (Spain) Bupa UK Insurance Bupa UK Insurance

BREEAM Excellent Teraz Polska Bloomberg MercoTalento (Poland Now) Financial Institution Award Awards 2018

Bupa Place, Manchester, UK ‘Oncological patient ‘Excellence in Medical ‘Top companies Bupa Angel Court, City of care model, awarded Care, Health & Protection, to work for in Spain London, UK best service in Poland’ and Claims Management’ and Chile’ Sanitas headquarters, Spain LUX MED (Poland) Bupa Hong Kong Sanitas (Spain) Bupa Chile

Dentistry National International Merco Empresas Awards Happiness Adviser Global Awards Financial Services Awards

‘Top companies with ‘Best Dental Care practice, ‘International Private Health best Corporate Governance Gloucester Road, Bristol’ ‘Happiest Workplace’ Insurer of the Year’ in Spain and Chile’ Bupa Dental Care, UK Bupa Place, UK Bupa Global Sanitas (Spain) Bupa Chile

Saudi Corporate International Great Place Marketing Magazine Governance Index Organisation for to Work, Asia eCommerce (CGI) 2018 Standardisation (ISO) Saudi Arabia Awards

Gold Award ‘Best Mobile Ecommerce Campaign’ and ‘No.1 Company based Bupa’s global headquarters, ‘Focus on equality Sliver Award ‘Best App on CGI Public Disclosure UK care homes and office and women’s Experience’ and Transparency’ sites certified ISO 14001:2015 empowerment’ Quality HealthCare Medical Bupa Arabia Bupa Bupa Arabia Services Mobile App, Hong Kong

Key: Customer excellence Great employer Corporate citizen Digital Environment

Cover photo Our cover photo was taken at Bupa Health Centre Basinghall, London. Our musculoskeletal (MSK) physicians specialise in diagnosing and treating problems with muscles, bones and joints. This is one of the main services we provide to our 2.2m health insurance customers in the UK. Photographer: Alice Dix.